ENERGY SERVICES OF AMERICA CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended September 30, 2012
OR
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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) | ||
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Delaware
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20-4606266
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification Number)
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100 Industrial Lane, Huntington, West Virginia
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25702
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(Address of Principal Executive Office)
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(Zip Code)
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| (304) 399-6300 | ||
| (Registrant’s Telephone Number including area code) | ||
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Each Exchange
On Which Registered
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Common Stock, par value $0.0001 per share
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NYSE Amex Equities
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Securities Registered Pursuant to Section 12(g) of the Act:
| None | ||
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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
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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
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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
x
NO
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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):
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
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| (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, 2012, as reported by the NYSE Amex Equities, was $ 33,766,881.
As of December 28, 2012, there were issued and outstanding 14,458,836 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, 2012
Table of Contents
PART I
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ITEM 1.
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Business
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1
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ITEM 1A.
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Risk Factors
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6
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ITEM 1B.
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Unresolved Staff Comments
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9
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ITEM 2.
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Properties
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9
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ITEM 3.
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Legal Proceedings
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9
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ITEM 4.
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Mine Safety Disclosures
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9
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PART II
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ITEM 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
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10
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ITEM 6.
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Selected Financial Data
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11
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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11
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ITEM 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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21
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ITEM 8.
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Financial Statements and Supplementary Data
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21
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ITEM 9.
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Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
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21
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ITEM 9A.
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Controls and Procedures
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22
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ITEM 9B.
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Other Information
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23
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PART III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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23
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ITEM 11.
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Executive Compensation
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28
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
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35
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ITEM 13.
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Certain Relationships and Related Transactions, and Director Independence
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36
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ITEM 14.
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Principal Accountant Fees and Services
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37
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PART IV
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ITEM 15.
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Exhibits and Financial Statement Schedules
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38
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Signatures
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40
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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.
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ITEM 1.
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Business
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Overview
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.
On September 28, 2011, we completed an exchange offer pursuant to which we exchanged 8 ½ warrants for one share of common stock. Following the completion of the exchange offer any warrants which were not exchanged expired on October 12, 2011. On November 14, 2011, we delisted from the NYSE AMEX the warrants and units. Following the completion of the exchange offer and expiration of the warrants that were not tendered, we had 14,446,836 shares of common stock issued and outstanding and no warrants or units outstanding.
On November 6, 2012 the New York Stock Exchange advised us that we had failed to satisfy certain NYSE continuing listing standards and would be subject to immediate delisting proceedings. Trades in common stock are now reported on the Over the Counter market.
On November 28, 2012, we entered into a Forbearance Agreement with our lenders related to our revolving line of credit and term debt. The Forbearance Agreement, among other things, requires that we close our S T Pipeline subsidiary and dispose of its assets. We are also required to prepare recommendations relating to the on-going operations of Nitro Electric Company, Inc, C.J. Hughes Construction Company, and Contractors Rental Corporation, including refinancing, sale or liquidation of the companies. Under the terms of the agreement we cannot make additional draws on the revolving line of credit. Although we can request the establishment of a forbearance line of credit, the lenders are under no obligation to approve it. The limitations on our working capital could have a severe impact on our ability to obtain and perform additional work. The forbearance agreement may be terminated upon certain events and in any case on May 31, 2013. See “Risk Factors” and Note 10 of the Consolidated Financial Statements.
A goodwill impairment charge was recorded in the fourth fiscal quarter of the current year in the amount of $36.9 million, representing all of the goodwill on our balance sheet. Based on our continued operating losses and management’s forecasts of future cash flows our goodwill impairment test indicated that the goodwill of the Company had no value. See Note 4 of the Consolidated Financial Statements.
In connection with their audit of our 2012 financial statements, Arnett Foster Toothman our independent public auditing firm as part of its audit report on our financial statements expressed substantial doubt about the ability of the Company to continue as a “going concern”. The financial difficulties giving rise to Arnett Foster Toothman
’
s conclusion include the significant and sustained losses that the Company has incurred over recent years as well as our inability to secure loans and lines of credit to fund our business in a manner deemed adequate to conduct our business. Although pursuant to the terms of the Forbearance Agreement we are exploring all avenues to return to profitability, there can be no assurance that we will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman’s decision to render its “going concern” opinion.
1
We have engaged a restructuring agent to aid us in the development of our restructuring plan, and intend to explore alternative financing options as well as the ability to raise equity capital.
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:
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The installation, replacement and repairs of pipelines for the oil and natural gas industries.
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General electrical services for both power companies and various other industrial applications.
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The installation of water and sewer lines for various governmental agencies.
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Various other ancillary services related to the other services.
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Our Consolidated Revenues for the year ended September 30, 2012 were approximately $158 million, of which 72% was attributable to gas work, 19% to electrical services, and 9% to water and sewer installations and other ancillary services. Our consolidated revenues for the year ended September 30, 2011 were $143 million, of which 74% was attributable to gas work, 18% to electrical services, and 8% to water and sewer installations and other ancillary services
ESA operates primarily in the Mid-Atlantic region of the United States though our projects can be nationwide. The work includes a combination of both interstate and intrastate pipelines that move natural gas from the producing regions to consumption regions. 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.
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.
2
Backlog/New Business
Our Company’s backlog represents contracts for services that have been entered into but which have not yet commenced. At September 30, 2012, Energy Services had a backlog of $57.4 million on work to be completed on existing contracts. At September 30, 2011, the Company had a backlog of $128.5 million. 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 of the Company’s projects 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. As a general rule, work starts shortly after the signing of the contract. During the past fiscal year, adverse weather conditions have resulted in significant delays in the start and completion of contracts. These delays and other factors, including inefficient management of labor and materials and execution of certain contracts, resulted in higher costs to the Company adversely affecting our net results from operations. Our backlog and our ability to obtain and perform work in the future will be affected by the constraints of the Forbearance Agreement between the Company and our lenders. See “Risk Factors” and Note 10 of the Notes to Consolidated Financial Statements.
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
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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, changes in the tax code that affect the energy industry, 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.
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 four financial institutions and has lines of credit and borrowing facilities with these institutions. We are currently operating under the terms of the Forbearance Agreement with our lenders. Under the terms of the agreement we cannot make additional draws on our revolving line of credit. We can apply for a separate forbearance line of credit, but the lenders are not obligated to approve it. The Forbearance Agreement may be terminated upon certain events and in any case on May 31, 2013. The limits on our ability to obtain funds for working capital will severely impact our ability to obtain and perform future services.
3
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, Brown 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 damage to 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 the profitability of the gas industry 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.
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 regulatory concerns, 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 determined to be caused by its actions. It has insurance that it believes is adequate to cover any such occurrences.
4
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 the 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 has issued the Hazard Communication Standard. This standard applies to all private-sector employers, including the natural gas exploration and producing industry. The Hazard Communication Standard requires that employers assess their chemical hazards, obtain and maintain certain written descriptions of these hazards, develop a hazard communication program and train employees to work safely with the chemicals on site. Failure to comply with the requirements of the standard may result in administrative, civil and criminal penalties. 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 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, 2012, 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 $24,300 per month. The Company’s management believes that its properties are adequate for the business it conducts.
Employees
As of September 30, 2012, the Company had approximately 601 employees including management. A number of the Company’s employees are represented by trade unions represented by various collective bargaining units.
5
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ITEM 1A.
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Risk Factors
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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 we may face. 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 Independent Registered Auditing Firm has expressed substantial doubt as to our ability to continue as a going concern.
In connection with their audit of our 2012 financial statements, Arnett Foster Toothman our independent public auditing firm as part of its audit report on our financial statements expressed substantial doubt about the ability of the Company to continue as a “going concern”. The financial difficulties giving rise to Arnett Foster Toothman’s conclusion include the significant and sustained losses that the Company has incurred over recent years as well as our inability to secure loans and lines of credit to fund our business in a manner deemed adequate to conduct our business. Although pursuant to the terms of the Forbearance Agreement we are exploring all avenues to return to profitability, there can be no assurance that we will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman
’
s decision to render its “going concern” opinion. See Note 3 and Note 10 of Notes to the Consolidated Financial 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:
Adverse weather
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
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. We are currently subject to a forbearance agreement with our lenders covering our revolving line of credit and term debt. Under the terms of the agreement we are currently unable to make additional draws on the line of credit. Unless we are able to find alternative financing and / or raise capital through an equity offering, we will be severely constrained in our ability to obtain and perform future work.
6
Economic downturns and financial crisis can impact the level of volumes of our customers spending
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The lack of a significant recovery from 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 2010, 2011 and 2012.
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.
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 weak 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 are beyond our control.
Our industry is highly competitive.
Our industry has been and remains competitive with competitors ranging from small owner operated companies to large public companies. Within that group there may be companies with lower overhead who may be able to price their services at lower levels than we can. Accordingly, if that occurs, our business opportunities could be severely limited.
The type of contracts we obtain could adversely affect our profitability.
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 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 a serious impact on the industries we serve, it could lead to the curtailment of 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 reduce our revenue as well.
7
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 trade union members. Should we encounter problems associated with our union employees or if we are unable to employ sufficient available operators, welders, or other skilled labor, our production could be significantly curtailed.
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. Additionally, we are currently limited in the working capital available to us under the terms of the forbearance agreement with our lenders, and this could affect our ability to perform the contracts under our current backlog.
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 downturn our customers’ inability to pay us would be compromised, and this may curtail our operations and ability to operate profitably.
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.
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 limitation on the 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 contracts with them. Because our services in certain instances may be integral to the operation and performance of our customers’ 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.
8
A portion of our business depends on our ability to provide surety bonds. We may be unable to compete 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 or 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 are unable to replace the bonded business with work that does not require bonding or if we are unable to provide 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.
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ITEM 1B.
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Unresolved Staff Comments
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None.
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ITEM 2.
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Properties
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We maintain our executive offices at 100 Industrial Lane, Huntington, West Virginia 25702.
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ITEM 3.
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Legal Proceedings
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At September 30, 2012, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.
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ITEM 4.
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Mine Safety Disclosures
|
None.
9
|
ITEM 5.
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
(a) Our common stock is traded on the Over the Counter market under the symbol ESOA. Prior to our notice of delisting by the NYSE on November 6, 2012 we were listed on the NYSE Amex Equities under the symbol ESA. On September 28, 2011 we completed an exchange offer whereby we exchanged 8.5 warrants for one share of common stock. As a result of the exchange offer our outstanding common stock totalled 14,446,836 shares. On October 12, 2011 the term of the remaining warrants expired. Prior to their expiration our warrants and our units were listed on the NYSE AMEX Equities under the symbols ESA.U and ESA.W, 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.
Units
|
Fiscal 2011
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2010
|
$ | 6.24 | $ | 3.00 | $ | — | ||||||
|
Quarter ended March 31, 2011
|
6.05 | 4.20 | — | |||||||||
|
Quarter ended June 30, 2011
|
4.50 | 3.01 | — | |||||||||
|
Quarter ended September 30, 2011
|
3.45 | 2.43 | — | |||||||||
|
Fiscal 2012
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2011
|
$ |
NA
|
$ |
NA
|
$ | — | ||||||
|
Quarter ended March 31, 2012
|
NA
|
NA
|
— | |||||||||
|
Quarter ended June 30, 2012
|
NA
|
NA
|
— | |||||||||
|
Quarter ended September 30, 2012
|
NA
|
NA
|
— | |||||||||
|
Common Stock
|
||||||||||||
|
Fiscal 2011
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2010
|
$ | 5.20 | $ | 3.21 | $ | — | ||||||
|
Quarter ended March 31, 2011
|
5.32 | 3.16 | — | |||||||||
|
Quarter ended June 30, 2011
|
3.77 | 2.66 | — | |||||||||
|
Quarter ended September 30, 2011
|
2.99 | 1.70 | — | |||||||||
|
Fiscal 2012
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2011
|
$ | 3.25 | $ | 1.78 | $ |
—
|
||||||
|
Quarter ended March 31, 2012
|
3.83 | 2.65 |
—
|
|||||||||
|
Quarter ended June 30, 2012
|
3.63 | 2.15 |
—
|
|||||||||
|
Quarter ended September 30, 2012
|
2.33 | 1.08 |
—
|
|||||||||
|
Warrants
|
||||||||||||
|
Fiscal 2011
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2010
|
$ | 0.79 | $ | 0.41 | $ | — | ||||||
|
Quarter ended March 31, 2011
|
0.73 | 0.36 | — | |||||||||
|
Quarter ended June 30, 2011
|
0.52 | 0.27 | — | |||||||||
|
Quarter ended September 30, 2011
|
0.37 | 0.07 | — | |||||||||
|
Fiscal 2012
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2011
|
$ |
NA
|
$ |
NA
|
$ |
—
|
||||||
|
Quarter ended March 31, 2012
|
NA
|
NA
|
—
|
|||||||||
|
Quarter ended June 30, 2012
|
NA
|
NA
|
—
|
|||||||||
|
Quarter ended September 30, 2012
|
NA
|
NA
|
—
|
|||||||||
As of September 30, 2012, there were twenty holders of record of our common stock.
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.
10
(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.
11
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.
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.
On November 6, 2012, the New York Stock Exchange advised us that we had failed to satisfy certain NYSE continuing listing standards and would be subject to immediate delisting proceedings. Trades in our common stock are reported in Over the Counter market under the symbol ESOA.
On November 28, 2012, we entered into a Forbearance Agreement with our lenders related to our revolving line of credit and term debt. The Forbearance Agreement, among other things, requires that we close our S T Pipeline subsidiary and dispose of its assets. We are also required to prepare recommendations relating to the on-going operations of Nitro Electric Company, Inc, C.J. Hughes Construction Company, and Contractors Rental Corporation, including refinancing, sale or liquidation of the companies. Under the terms of the agreement we cannot make additional draws on the revolving line of credit. Although we can request the establishment of a Forbearance line of credit, the lenders are under no obligation to approve it. The limitations on our working capital could have a severe impact on our ability to obtain and perform additional work. The forbearance agreement may be terminated upon certain events but in any case on May 31, 2013. See “Risk Factors” and Note 10 of the Consolidated Financial Statements.
A goodwill impairment charge was recorded in the fourth fiscal quarter of the current year in the amount of $36.9 million, representing all of the goodwill on our balance sheet. Based on our continued operating losses and management’s forecasts of future cash flows our goodwill impairment test indicated that the goodwill of the Company was zero. See Note 4 of the Consolidated Financial Statements.
In connection with their audit of our 2012 financial statements, Arnett Foster Toothman our independent public auditing firm as part of its audit report on our financial statements expressed substantial doubt about the ability of the Company to continue as a “going concern”. The financial difficulties giving rise to Arnett Foster Toothman’s conclusion include the significant and sustained losses that the Company has incurred over recent years as well as our inability to secure loans and lines of credit to fund our business in a manner deemed adequate to conduct our business. Although pursuant to the terms of the forbearance agreement we are exploring all avenues to return to profitability, there can be no assurance that we will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman’s decision to render its “going concern” opinion.
We have engaged a restructuring agent to aid us in the development of our restructuring plan, and intend to explore alternative financing options as well as the ability to raise equity capital.
Energy Services is engaged in providing 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. Our consolidated operating revenues for the year ended September 30, 2012 were $157.7 million which 72% was attributable to gas contract work, 19% to electrical contract services and 9% to water and sewer contract installations and other ancillary services. The Company had consolidated operating revenues of $143.4 million for the year ended September 30, 2011 of which 74% was attributable to gas contract work, 18% to electrical contract services customers, and 8% for water and sewer contract installation and other ancillary services.
12
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 at completion. Many contracts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.
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 slowest 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.
13
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 greater 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 lower 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.
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.
14
Results of Operations
The following table sets forth the Consolidated Statement of Operations for the years ended September 30, 2012 and 2011.
|
Year Ended September 30,
|
||||||||||||||||
|
2012
|
2011
|
|||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Contract Revenues
|
$ | 157,739 | 100.0 | % | $ | 143,426 | 100.0 | % | ||||||||
|
Cost of Revenues
|
156,057 | 98.9 | 136,585 | 95.2 | ||||||||||||
|
Gross Profit
|
1,682 | 1.1 | 6,841 | 4.8 | ||||||||||||
|
Selling, general and administrative expenses
|
12,084 | 7.7 | 13,269 | 9.3 | ||||||||||||
|
Asset Impairment
|
36,914 | 23.4 | - | - | ||||||||||||
|
Loss from operations before taxes
|
(47,316 | ) | (30.0 | ) | (6,428 | ) | (4.5 | ) | ||||||||
|
Interest Income
|
3 | 0.0 | 3 | 0.0 | ||||||||||||
|
Interest Expense
|
(1,932 | ) | (1.2 | ) | (1,821 | ) | (1.3 | ) | ||||||||
|
Other Income
|
186 | 0.1 | 24 | 0.0 | ||||||||||||
|
Loss before Income Taxes
|
(49,059 | ) | (31.1 | ) | (8,222 | ) | (5.7 | ) | ||||||||
|
Income tax benefit
|
(536 | ) | (0.3 | ) | (2,946 | ) | (2.1 | ) | ||||||||
|
Net Loss
|
$ | (48,523 | ) | (30.8 | )% | $ | (5,276 | ) | (3.7 | )% | ||||||
|
Loss Per Share-Basic
|
(3.36 | ) | (0.44 | ) | ||||||||||||
|
Loss Per Share-Diluted
|
(3.36 | ) | (0.44 | ) | ||||||||||||
2012 compared to 2011
Revenues
. Revenue increased by $14.3 million or 10.0% to $157.7 million for the year ended September 30, 2012. The increase was primarily driven by an increase in capital projects performed for two of the Company’s major customers.
Costs of Revenues
. Cost of revenues increased by $19.5 million or 14.3% to $156.1 million for the year ended September 30, 2012. The increase was primarily driven by two major projects which incurred significant losses. The losses on the projects were the result of two major factors: unexpected adverse conditions that were not properly accounted for in the original estimate, as well as ineffective project management and costs controls on the projects.
Gross Profit
. Gross profits decreased by $5.2 million or 75.4% to $1.7 million for the year ended September 30, 2012. The decrease was due to the items mentioned above.
Selling, general and administrative expenses
. Selling, general and administrative expenses decreased by $1.2 million or 8.9% to $12.1 million for the year ended September 30, 2012. The decrease was primarily driven by a significant reduction in administrative and executive personnel.
Asset Impairment.
In the fourth fiscal quarter of 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. See Note 4 of the Notes to Consolidated Financial Statements.
Loss from operations
. Loss from operations increased by $40.9 million or 636.1% to a loss of $47.3 million for the year ended September 30, 2012. The decrease in net income reflects a $36.9 million write down of impaired goodwill as well as the effects of the items mentioned above. See Note 4 of the Consolidated Financial Statements.
Interest Expense
. Interest expense increased by $111,000 or 6.1% to $1.9 million for the year ended September 30, 2012. The increase was due to higher borrowings needed to fund operating costs.
15
Income Taxes
. Income tax benefit for the period ending September 30, 2012 was $536,000 as compared to a benefit of $2.9 million for the period ending September 30, 2011. The Company’s effective tax rate was 1.09% for the period ending September 30, 2012 and 35.8% for the period ending September 30, 2011. The 2012 effective tax rate was driven by the Company establishing a valuation allowance against its deferred tax assets to offset a significant portion of the Company’s federal and state tax benefits that are not expected to be used in future years.
Net Loss
. The Company incurred a net loss of $48.5 million for the year ended September 30, 2012 compared with a net loss of $5.3 million in fiscal 2011.
Comparison of Financial Condition
The Company had total assets of $59.8 million at September 30, 2012, a decrease of $51.2 million from the prior fiscal year end balance. A write-down of impaired goodwill accounts for $36.9 million of the decrease in total assets. Some primary components of the balance sheet were accounts receivable which totaled $18.5 million, a decrease of $660,000 from the prior year end balances, retainages receivable of $2.5 million, a decrease of $8.0 million and estimated earnings in excess of billings of $11.3 million, a decrease of $1.4 million from the prior year end. Other major categories of assets at September 30, 2012 included cash of $2.7 million, a decrease $303,000 from the prior year balance as well as net fixed assets of $19.1 million, a decrease of $4.7 million from prior year balance.
Liabilities totaled $53.3 million, a decrease of $2.8 million from the prior year balance. Current maturities of long-term debt increased by $5.3 million due to the reclassification of the long term debt to current maturities of long-term debt, which decreased $10.8 million. Line of credit and short term borrowings increased by $4.6 million. Overall, the long-term and short-term debt of the company decreased by $838,000 during the year. Accounts payable and accrued expenses decreased by $367,000. Stockholders’ equity was $6.4 million, a decrease of $48.5 million from the prior year due to the net loss generated by the Company in 2012.
Liquidity and Capital Resources
Cash Requirements
On November 28, 2012 we entered into a Forbearance Agreement with our lenders. The Forbearance Agreement, among other things, does not allow for additional draws on our revolving line of credit. We can apply for a separate forbearance line of credit, but approval by our lenders is at their discretion. We prepare weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables will be adequate for our cash needs for the next few months. However, starting with the commencement of our more active work period in the spring, we will be limited in our ability to fund contract work. We are currently working with a restructuring agent to determine the best course of action for the company and its shareholders, including any refinancing opportunities. We are also exploring any opportunities to raise equity capital that may exist. The Forbearance Agreement may be terminated upon certain events and in any case on May 31, 2013. Also see Note 10 of the Notes to Consolidated Financial Statements.
Sources and Uses of Cash
As of September 30, 2012, we had $2.7 million in cash, a working capital deficiency of $2.7 million, due in part to the reclassification of our long-term debt to a short-term status, and long term debt net of current maturities of $2.8 million. The maturities of the total long term debt are as follows.
|
2013
|
$28,118,907 | |||
|
2014
|
2,054,247 | |||
|
2015
|
497,978 | |||
|
2016
|
172,904 | |||
|
2017
|
88,482 | |||
|
Thereafter
|
33,485 | |||
|
Total
|
$30,966,003 | |||
16
Line of Credit
The Company has established an eighteen million ($18,000,000) Line of Credit agreement with a regional bank. The line of credit is subject to the terms of the Forbearance Agreement discussed above. Interest during the forbearance period will be at 6.5%. 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, 2012 the Company had borrowed $18.0 million on the line of credit. The following are the major covenants of the line:
|
|
1.
|
Current Ratio must be not less than 1.5. As of September 30, 2012, our current ratio was 0.94 to 1.
|
|
|
2.
|
Debt to tangible net worth must not exceed 3.5. As of September 30, 2012 this ratio was 8.28 to 1.
|
|
|
3.
|
Capital Expenditures (CAPEX) must not exceed $7.5 million per year. CAPEX from the loan date was approximately $1.7 million.
|
|
|
4.
|
Dividends shall not exceed 50% of taxable income without prior bank approval. No dividends have been declared.
|
In accordance with the terms of the Forbearance Agreement, the lenders have agreed to forbear from exercising and enforcing its default-related rights under the notes.
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 agreement calls for monthly rental payments of $5,000 and extends through August 15, 2014. 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 October 2013 with options to renew. This 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 $6,000 per month and extends to December 2012. The shop rental is $5,800 monthly and extends to May 2014.
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, 2012,
the Company had one letter of credit outstanding in the amount of $953,340.
17
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. Effective October 19, 2012, the Company’s bonding company discontinued issuing the Company any new bonds until further notice. The Company is actively searching for a new bonding company.
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, 2012, we had $25.9 million in performance bonds issued by the insurer outstanding.
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 or receivables for the year ended September 30, 2012. One customer represented 10.3% of revenues and 19.8% of accounts receivable. The other represented 31.8% of revenue and 23.4% of accounts receivable at September 30, 2012.
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 personal 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, 2012 and 2011, inflation did not have a significant effect on our results.
New Accounting Pronouncements
In July 2012, the FASB issued Accounting Standards Update (ASU) No. 2012-02,
Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30,
Intangibles--Goodwill and Other, General Intangibles Other than Goodwill.
18
Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of the new guidance, in itself, will not have an impact on the Company’s statements of income and financial position.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based on our 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 federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ending prior to September 30, 2008.
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
. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a portion of the deferred tax asset will not be realized.
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.
At September 30, 2012 the Company increased the valuation allowance against its deferred tax asset by $6.1 million, decreasing the tax benefit of the current year losses to $536,000. The net deferred tax asset on the Company’s balance sheet is $3.7 million. The amount considered more likely than not to be realized is based on management’s projection of future taxable income, including projected tax basis gain on the sale of the assets of S T Pipeline.
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”), Contractors Rental Corp (a subsidiary of CJ Hughes-”CRC”), 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.
19
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.
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.
In the fourth fiscal quarter of 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. Step 2 of the goodwill impairment test indicated that there was no residual goodwill of the Company. 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. Therefore the goodwill impairment test was conducted at the Company level. See Note 4 of the Notes to the Consolidated Financial Statements.
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 at completion. 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 $1.4 million as of September 30, 2012. Should the captive experience severe losses over an extended period, it could have a detrimental effect 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, 2012, the management review deemed that the allowance for doubtful accounts was adequate.
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, 2012 was $57.4 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.
The Company’s ability to complete the existing backlog and to obtain and perform additional work will be dependent on the Company complying with the terms of the forbearance agreement with our lenders and finding alternative funding, possibly including an infusion of equity capital. See the “Liquidity and Capital Resources” section for further discussion.
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ITEM 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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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.
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ITEM 8.
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Financial Statements and Supplementary Data
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Financial Statements are included as Exhibit 13 to this Annual Report on Form 10-K.
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ITEM 9.
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Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
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None.
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ITEM 9A.
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Controls and Procedures
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(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 rules of the SEC that permit the Company to provide only Management’s report in this Annual Report.
| /s/ Douglas V. Reynolds | ||
| Douglas V. Reynolds | ||
| Chief Executive Officer | ||
| /s/ Larry A. Blount | ||
| Larry A. Blount | ||
| Chief Financial Officer |
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The report set forth under this Item 9A (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 2012 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.
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ITEM 9B.
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Other Information
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None.
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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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 the Pullman Plaza Hotel in Huntington, West Virginia; and Chairman of the Board of Directors of McCorkle Machine and Engineering Company in Huntington, West Virginia. Mr. Reynolds is also 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 varied career as a business leader and experience in a number of industries qualifies him to be on the Board of Directors.
Douglas V. Reynolds
was appointed President and Chief Executive Officer of the Company on December 6, 2012. Mr. 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. 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’ varied experience and senior management roles with other companies make Mr. Reynolds a valuable member of the Board.
Jack M. Reynolds
served as President and Chief Financial Officer from our inception until September 2008 and has been a member of our Board of Directors since our inception. 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 lengthy service at Pritchard Electric and knowledge of the contracting industry provides hands on expertise to the Board of Directors.
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Neal W. Scaggs
has been a Director since our inception. Mr. Scaggs has been president of Basiden Brothers, Inc. (retail and wholesale hardware) from 1963 to the present. Mr. Scaggs is on the Boards of Directors of Premier Financial Bancorp, Inc. and Champion Industries, Inc. Mr. Scaggs also serves as Chairman of the Board of Directors of Bucane, Inc. Mr. Scaggs business experience in sales, marketing and capital markets provides a broad business perspective to the Board of Directors.
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 was Chairman, President and Chief Executive Officer of Consolidated Bank & Trust Co., in Richmond, Virginia from 2007 until it merged with Premier Financial Bancorp, Inc. in 2009. Mr. Williams is a former 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 former member of its Institutional Board of Governors. Mr. Williams’ investment and management experience provides the board of directors and important perspective in business development.
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 of 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’s experience provides insights in the industrial aspects of the Company’s business.
Nester S. Logan
is the owner of S.S. Logan Packing Co. located in Huntington, Virginia. Mr. Logan is a Director of First Sentry Bank. Mr. Logan’s experience in the Company’s market area provides the Board with knowledge of business conditions in West Virginia and Ohio.
Samuel G. Kapourales
is a Board Member of the West Virginia Health Care Authority and Kapourales Properties, LLC. Mr. Kapourales serves as a Director of First National Bank of Williamson and First Bank of Charleston. Mr. Kapourales’ varied business experience makes him a valuable member of the Board.
Larry A. Blount
was appointed as Chief Financial Officer and Secretary of the Company. 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.
Board Independence
The Board of Directors consists of a majority of “independent directors” within the meaning of the NYSE Amex corporate governance listing standards. The Board of Directors has determined that Messrs. Scaggs, Williams, Molihan, Logan and Kapourales 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. No executive session was held during the fiscal year ended September 30, 2012.
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Board Leadership Structure and Risk Oversight
Our board of directors is chaired by Mr. Marshall T. Reynolds, who is a non-executive director. We separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between the two roles. The Chief Executive Officer is responsible for overseeing the day to day operations of the Company. The Chairman provides guidance to the Chief Executive Officer and, together with the entire board of directors helps develop the strategic plan for the Company.
The role of the board of directors in the Company’s risk oversight process includes receiving reports from senior management on areas of material risk to the Company, including operational, financial, legal, regulatory, strategic and reputational risk. The full board reviews such reports and follows up with senior management to best determine how to address such risks.
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, 2012, 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 2012, the Board of Directors held twelve regular meetings and no special meetings. 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 2012. Although not required, attendance of Board members at the Annual Meeting of Stockholders is encouraged. All members of our Board of Directors attended the 2012 Annual Meeting of Stockholders.
Board Committees
The Board of Directors has an audit committee. Our audit committee charter is available for inspection at
www.energyservicesofamerica.com
.
Audit Committee.
The Audit Committee consisted of Messrs. Scaggs, Williams, and Molihan with Mr. Scaggs acting as chairman of the committee in fiscal 2012. The audit committee met four times during the fiscal year ended September 30, 2012. All of the 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 corporate governance listing standards. Each member of the audit committee is financially literate, and the Board of Directors has determined that Mr. Molihan qualifies as audit committee financial expert, 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.
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The Audit Committee approved the appointment of Arnett Foster Toothman to be our independent registered public accounting firm for the 2013 fiscal year. A representative of Arnett Foster Toothman is expected to attend the Annual Meeting.
Nominating Committees.
The Board has determined that the independent members of the Board of Directors will perform the duties of the nominating committee of the Board of Directors. The nominating committee does not have a written charter. The nominating committee 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; and (iii) identify individuals to fill any vacancies on the Board of Directors. The nominating committee met one time during the fiscal year ended September 30, 2012.
The nominating committee of the Board identifies 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:
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has the highest personal and professional ethics and integrity and whose values are compatible with ours;
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has experiences and achievements that have given him or her the ability to exercise and develop good business judgment;
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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;
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is familiar with the communities in which we operate and/or is actively engaged in community activities;
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is involved in other activities or interests that do not create a conflict with his or her responsibilities to us and our stockholders; and
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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.
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The nominating committee will also take into account whether a candidate satisfies the criteria for “independence” under Securities and Exchange Commission rules 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.” The nominating committee will consider diversity in identifying nominees for director, but has no specific policy or established criteria in this regard. The nominating committee seeks candidates who have a broad range of business experience when considering nominees to the Board of Directors.
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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:
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a statement that the writer is a stockholder and is proposing a candidate for consideration by our independent directors;
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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);
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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);
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a statement of the candidate’s business and educational experience;
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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;
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a statement detailing any relationship between the candidate and Energy Services of America Corporation;
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a statement detailing any relationship between the candidate and any customer, supplier or competitor of Energy Services of America Corporation;
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detailed information about any relationship or understanding between the proposing stockholder and the candidate; and
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a statement that the candidate is willing to be considered and willing to serve as a director if nominated and elected.
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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.
Stockholder Communications with the Board
A stockholder who wants to communicate with the Board of Directors or with any individual director can write to the Corporate Secretary at 100 Industrial Lane, Huntington, West Virginia 25702, Attention: Corporate Secretary. The letter should indicate that the author is a stockholder and if shares are not held of record, should include appropriate evidence of stock ownership. Depending on the subject matter, management will:
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forward the communication to the director or directors to whom it is addressed;
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attempt to handle the inquiry directly, i.e. where it is a request for information about us or it is a stock-related matter; or
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not forward the communication if it is primarily commercial in nature, relates to an improper or irrelevant topic, or is unduly hostile, threatening, illegal or otherwise inappropriate.
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At each board meeting, management shall present a summary of all communications received since the last meeting that were not forwarded and make those communications available to the directors.
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The Compensation Committee
The compensation committee consists of directors Joseph L. Williams, Keith Molihan and Nester S. Logan. Each member of the compensation committee is considered “independent” as defined in the NYSE Amex corporate governance listing standards. The Board of Directors has adopted a written charter for the Committee.
The compensation committee is appointed by the Board of Directors to assist the Board in developing compensation philosophy, criteria, goals and policies for our executive officers that reflect our values and strategic objectives. The committee reviews the performance of our executive officers and annually recommends to the full Board the compensation and benefits for our executive officers (including the Chief Executive Officer). The committee administers our compensation plans. The committee establishes the terms of employment and severance agreements/arrangements for executive officers. The committee recommends to the full Board the compensation to be paid to our directors and any affiliates for their service on the Board. Finally, the committee establishes annual compensation percentage increases for all employees.
For 2012, in making compensation decisions, the compensation committee did not use numerical formulas to determine changes in compensation for the named executive officers. The committee considered a variety of factors in its deliberations over executive compensation, emphasizing the profitability and scope of our operations, the experience, expertise and management skills of the named executive officers and their role in our future success, as well as compensation surveys prepared by professional firms to determine compensation paid to executives performing similar duties for similarly sized institutions. While the quantitative and non-quantitative factors described above were considered by the committee, such factors were not assigned a specific weight in evaluating the performance of the named executive officers. In determining the Chief Executive Officer’s bonus, the Chairman of the Board also considers the above factors and makes a recommendation to the committee which authorizes such bonus. For the other named executive officers, the Chief Executive Officer considers the above factors and makes a recommendation to the committee which authorized their bonuses.
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.
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ITEM 11.
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Executive Compensation
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Executive and Director Compensation
We have adopted a compensation committee policy that reflects the compensation philosophy and objectives of the compensation committee.
Compensation Philosophy and Objectives
The compensation committee believes that an effective executive compensation program rewards the achievement of pre-established short term, long-term and strategic goals, and aligns executives’ interests with those of our stockholders. The committee regularly evaluates both performance and compensation relative to other comparable publicly traded companies. We also manage our named executive officers’ compensation to align with the time horizon of our growth and development. As we grow, we strive to ensure that our compensation programs and practices remain consistent with our philosophy to provide competitive, performance-based, and risk appropriate compensation that enables us to attract, motivate and retain top performers who are essential to our successful growth and performance.
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The primary objectives of our executive compensation program are to:
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provide pay for performance utilizing short and long-term incentives;
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align executive interests with those of stockholders through appropriate focus on stock based compensation;
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be competitive with the marketplace within which we compete for talent;
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ensure compensation programs reward performance while appropriately managing risk; and
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enable us to attract, motivate, and retain top talent.
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We accomplish all these objectives through a total compensation program that balances fixed and variable (i.e. incentive) compensation with a focus on providing rewards to named executive officers for their contributions to achieving core business objectives and furthering our short and long-term performance. We balance our desire for superior performance with safeguards so that our programs do not result in excessive risk taking that can threaten our long-term value and stability.
We also recognize that our ability to attract and retain top talent has become even more critical as we grow.
Our executive compensation philosophy provides competitive ranges for each component and in the aggregate. The starting point targets market median but by using performance-based instruments, actual compensation varies widely depending on our performance against our stated objectives and our industry peers. We meet this objective for our named executive officers through the following components of their total compensation:
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Base salaries are targeted at market median, but allow for recognition of each individual’s role, contribution, performance, and experience.
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Short-term incentive targets reflect market median although actual payouts will vary based on our performance relative to company-wide, team and individual contributions toward our strategic plan.
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Long-term incentive awards are intended to provide significant focus on long-term performance through stock-based compensation. Long-term compensation is designed to balance multiple objectives: (1) reward for long-term, sustained performance and stock price growth; (2) align executive interests with stockholders through stock ownership; and (3) provide powerful retention of our highest performers through vesting periods. During 2010, the committee made grants in the form of stock options, restricted stock and performance shares to support these objectives.
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Retirement, health, life insurance, disability, severance and other perquisites and benefits are provided, but their focus and value are intentionally set to be conservatively competitive in order to attract and retain talented individuals.
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Executive total compensation is expected to vary each year, and evolve over the long-term to reflect our performance relative to our peers and the industry, and to correspond with stockholder returns.
We review our executive compensation philosophy and programs annually to ensure that they are achieving desired objectives and supporting our needs as we grow to be a more complex organization.
29
Summary Compensation Table for Executives
. The following table shows the compensation of Edsel R. Burns, our principal executive officer until August 27, 2012, Harley F. Mooney, who replaced Mr. Burns as of August 27, 2012, and Larry Blount, the only other executive officer who received total compensation of $100,000 during the past fiscal year for services to the company or any of its subsidiaries during the years ended September 30, 2012 and 2011.
|
Summary Compensation Table
|
||||||||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards (1)
|
All other compensation (2)
|
Total
|
||||||||||||||||
|
Edsel R. Burns
|
2012
|
$ | 151,000 | $ | — | $ | — | $ | 20,260 | $ | 171,260 | |||||||||||
|
President and Chief Executive
Officer |
2011
|
$ | 151,000 | $ | — | $ |
__
|
$ | 22,558 | $ | 173,558 | |||||||||||
|
Harley F. Mooney
|
2012
|
$ | 5,769 | $ | — | $ | — | $ | — | $ | 5,769 | |||||||||||
|
President and Chief Executive
Officer
|
||||||||||||||||||||||
|
Larry Blount
|
2012
|
$ | 125,000 | $ | — | $ | — | $ | 9,504 | $ | 134,504 | |||||||||||
|
Secretary/Treasurer and
Chief Financial Officer
|
2011
|
$ | 125,000 | $ | — | $ | — | $ | 8,526 | $ | 133,526 | |||||||||||
|
(1)
|
This is the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
|
|
(2)
|
Other compensation includes Director fees of $11,000 for Mr. Burns, 401(k) match of $2,352 for Mr. Burns and $1,968 for Mr. Blount and vehicle rental of $6,908 for Mr. Burns and $7,536 for Mr. Blount.
|
Benefit Plans
Stock Benefit Plans
Long Term Incentive Plan
.
In 2010, the Board of Directors adopted, and our shareholders approved, the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”), to provide our employees and directors with additional incentives to promote our growth and performance. The LTIP gives 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.
The LTIP is administered by our compensation committee. The committee may determine the type of award and the terms and conditions of each award under the LTIP, which shall be set forth in an award agreement delivered to each participant. The LTIP authorizes the issuance of up to 1,200,000 shares of Company 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.
The committee is authorized to grant awards, the vesting of which may be subject to the satisfaction of performance-based conditions. The vesting date of performance-based awards is the date on which all the performance measures are attained and the performance period is concluded. Any unvested performance-based awards for which the performance measures are not satisfied will be forfeited without consideration. If the right to become vested in an award under the LTIP is conditioned on the completion of a specified period of service with the Company or its subsidiaries, without the achievement of performance measures or objectives, then the required period of service for full vesting shall be determined by the committee and evidenced in the award agreement. In general, no awards may vest at a rate exceeding one-third per year commencing one year after the date of grant.
Unless otherwise provided in an award agreement, in the event of a participant’s termination of service for any reason other than disability, retirement, death or termination for cause, then (i) any stock options and stock appreciation rights shall be exercisable only as to those awards that were vested on the date of termination of service and only for a period of three months following termination, and (ii) any restricted stock awards or restricted stock units that have not vested as of the date of termination of service shall expire and be forfeited. In the event of termination for cause, any awards that have not vested, or have vested but have not been exercised (in the case of stock options and stock appreciation rights) shall expire and shall be forfeited.
30
Upon termination of service due to death or disability, all stock options and stock appreciation rights shall be exercisable as to all shares subject to an outstanding award, whether or not then exercisable, and all restricted stock and restricted stock unit awards shall become fully vested at the date of termination of service. Stock options and stock appreciation rights may be exercised for a period of one year following such termination of service.
Unless otherwise provided in an award agreement, upon termination of service due to retirement, all stock options and stock appreciation rights shall be exercisable as to all shares subject to an outstanding award, whether or not then exercisable. Unless otherwise provided in an award agreement, all other awards, except performance-based awards subject to Section 162(m) of the Internal Revenue Code, shall become fully vested on retirement.
Unless otherwise provided in an award agreement, upon the occurrence of an involuntary termination of employment (or, as to a director, termination of service as a director) following a “change in control” of the Company (as defined in the LTIP), all outstanding options and stock appreciation rights then held by a participant will become fully exercisable and all restricted stock and restricted stock unit awards shall be fully earned and vested. In the event of a change in control, any performance measure attached to an award shall be deemed satisfied as of the date of the change in control.
If the committee determines that a present or former participant has (i) used for profit or disclosed to unauthorized persons, our confidential information or trade secrets; (ii) breached any contract with or violated any fiduciary obligation to us; or (iii) engaged in any conduct which the committee determines is injurious to the Company, the committee may cause that participant to forfeit his or her outstanding awards under the Plan.
If we are required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any participant who is an executive officer shall (i) reimburse the Company the amount of any
bonus or incentive compensation paid to such participant that were subsequently reduced due to the restatement; (ii) have outstanding awards granted under the LTIP cancelled; and/or
(iii) reimburse the Company for any gains realized in the exercise of options, vesting of or open market sales of vested, restricted stock awards or performance share awards, payment of any restricted stock units, performance share units or stock appreciation rights granted to such participant, regardless of when issued, but only if, and to the extent that (A) the amount of the bonus or incentive compensation was calculated based on achievement of the original financial results; (B) the executive officer engaged in intentional misconduct that caused or partially caused the need for the restatement; and (C) the amount of the bonus or incentive compensation, as calculated under the restated financial results, is less than the amount actually paid or awarded under the original financial results.
The Board of Directors may, at any time, amend or terminate the LTIP or any award granted under the LTIP, provided that, except as provided in the LTIP, no amendment or termination may adversely impair the rights of an outstanding award without the participant’s (or affected beneficiary’s) written consent.
31
Outstanding Equity Awards at Year End
. The following table sets forth information with respect to outstanding equity awards as of September 30, 2012 for the named executive officers.
|
OUTSTANDING EQUITY AWARDS AT SEPTEMBER 30, 2012
|
|||||||||||||||||||||||||||
|
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
|
Market value of
shares or units of
stock that have not
vested ($)
|
Equity incentive
plan awards:
number of
unearned shares,
units or other
rights that have
not vested (1)
|
Equity
incentive plan
awards:
market or
payout value
of unearned
shares, units
or other rights
that have not
vested (2)
|
||||||||||||||||||
|
Edsel R. Burns
|
— | — | — | — | — | — | — | — | — | ||||||||||||||||||
|
Harley F. Mooney
|
— | — | — | — | — | — | — | — | — | ||||||||||||||||||
|
Larry Blount
|
— | — | — | — | — | — | — | 3,000 | $3,300 | ||||||||||||||||||
|
(1)
|
Remaining unvested shares will vest 3,000 shares per year on August 11, 2013.
|
|
(2)
|
The fair market value of the Company’s common stock at the end of the fiscal year was $1.10 per share.
|
32
Energy Services 401(k) Plan
401(k) Retirement Plans
We maintain the Energy Services of America Staff 401(k) Retirement Plan. Our 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. 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 $17,000 for 2012. 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 2012. The Company matches $0.25 on each dollar contributed up to 6% of eligible wages. Additionally, each plan year, the Company may make discretionary profit-sharing contributions for participants who are actively employed on the last day of the plan year. The discretionary contributions 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 2012. Participants direct the investment of their account in the Plan, selecting from investment funds provided under the Plan. 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 $1,000.
Energy Services of America Corporation 2009 Employee Stock Purchase Plan
The plan enables eligible employees to purchase common stock through payroll deductions. The plan is intended to qualify under Section 423 of the Internal Revenue Code and its regulations. During 2012 we did not utilize the plan.
Directors’ Compensation
Director Compensation
.
The table
set forth below shows the compensation of our non-executive directors for the fiscal year ended September 30, 2012. We did not make any non-equity incentive plan awards to directors and there were no preferential earnings on nonqualified deferred compensation.
|
Director Compensation
|
||||
|
Name
|
Fees earned or
paid in cash
($)
|
Stock Awards
($)
|
All other
compensation ($)
|
Total
($)
|
|
Jack M. Reynolds
|
11,000
|
—
|
—
|
11,000
|
|
Neal W. Scaggs
|
11,000
|
—
|
—
|
11,000
|
|
Joseph L. Williams
|
11,000
|
—
|
—
|
11,000
|
|
Keith Molihan
|
11,000
|
—
|
—
|
11,000
|
|
Douglas Reynolds
|
11.000
|
—
|
—
|
11.000
|
|
Nester S. Logan
|
11,000
|
—
|
—
|
11,000
|
|
Samuel G. Kapourales
|
11,000
|
—
|
—
|
11,000
|
|
Marshall T. Reynolds
|
10,000
|
—
|
—
|
10,000
|
|
James Shafer
|
5,000
|
—
|
—
|
5,000
|
|
Richard M. Adams, Jr.
|
10,000
|
—
|
—
|
10,000
|
|
Eric Dosch
|
11,000
|
—
|
—
|
11,000
|
33
Compensation Committee Interlocks and Insider Participation
The compensation committee is comprised of our independent directors. Under the board’s policies, Mr. Marshall Reynolds 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
The compensation committee consists of directors Joseph L. Williams, Keith Molihan and Nester S. Logan. Each member of the compensation committee is considered “independent” as defined in the NYSE Amex corporate governance listing standards. The Board of Directors has adopted a written charter for the Committee.
The compensation committee is appointed by the Board of Directors to assist the Board in developing compensation philosophy, criteria, goals and policies for our executive officers that reflect our values and strategic objectives. The committee reviews the performance of our executive officers and annually recommends to the full Board the compensation and benefits for our executive officers (including the Chief Executive Officer). The committee administers our compensation plans. The committee establishes the terms of employment and severance agreements/arrangements for executive officers. The committee recommends to the full Board the compensation to be paid to our directors and any affiliates for their service on the Board. Finally, the committee establishes annual compensation percentage increases for all employees.
For 2012, in making compensation decisions, the compensation committee did not use numerical formulas to determine changes in compensation for the named executive officers. The committee considered a variety of factors in its deliberations over executive compensation, emphasizing the profitability and scope of our operations, the experience, expertise and management skills of the named executive officers and their role in our future success, as well as compensation surveys prepared by professional firms to determine compensation paid to executives performing similar duties for similarly sized institutions. While the quantitative and non-quantitative factors described above were considered by the committee, such factors were not assigned a specific weight in evaluating the performance of the named executive officers. In determining the Chief Executive Officer’s bonus, the Chairman of the Board also considers the above factors and makes a recommendation to the committee which authorizes such bonus. For the other named executive officers, the Chief Executive Officer considers the above factors and makes a recommendation to the committee which authorized their bonuses.
34
|
ITEM 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
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 the record date, 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, nominees and executive officers as a group.
|
Name and Address of
Beneficial Owners
|
Amount of Shares
Owned and Nature
of Beneficial
Ownership
(1)
|
Percent of Shares
of Common Stock
Outstanding
|
||||||
|
All Directors, Nominees and Executive Officers
as a Group (10 persons)
|
4,489,513 | 31.05 | % | |||||
|
Principal Stockholders:
|
||||||||
|
Marshall T. Reynolds
100 Industrial Lane,
Huntington, West Virginia 25702
|
1,712,773 | 11.86 | % | |||||
|
Edsel R. Burns
47 Private Drive 4350
Chesapeake, OH 45619
|
793,540 | 5.49 | % | |||||
|
Douglas V. Reynolds
100 Industrial Lane,
Huntington, West Virginia 25702
|
1,216,940 | 8.42 | % | |||||
|
(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.
|
35
The table below sets forth certain information regarding the composition of 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 Record Date
(3)
|
Percent of Class
|
|||||||||||||||
|
Directors/Nominees:
|
|||||||||||||||||||||
|
Marshall T. Reynolds
|
76 |
Chairman and Director
|
2006 | 2013 | 1,712,773 | 11.84% | |||||||||||||||
|
Harley Mooney
|
84 |
President, Chief
Executive officer and
Director, Resigned
December 6, 2012
|
2012 | 2013 | 11,117 | 0.08 | |||||||||||||||
|
Larry A. Blount
|
63 |
Secretary/Treasurer,
Chief Financial
Officer
|
n/a | 2013 | 6,000 | 0.04 | |||||||||||||||
|
Jack M. Reynolds
|
47 |
Director
|
2006 | 2013 | 439,049 | 3.04 | |||||||||||||||
|
Neal W. Scaggs
|
76 |
Director
|
2006 | 2013 | 363,540 | 2.51 | |||||||||||||||
|
Joseph L. Williams
|
67 |
Director
|
2006 | 2013 | 116,549 | 0.81 | |||||||||||||||
|
Keith Molihan
|
70 |
Director
|
2008 | 2013 | |||||||||||||||||
|
Douglas V. Reynolds
|
36 |
Director appointed
Chief Executive
Officer December 6,
2012
|
2008 | 2013 | 1,216,940 | 8.42 | |||||||||||||||
|
Nester S. Logan
|
73 |
Director
|
2010 | 2013 | 298,111 | 2.06 | |||||||||||||||
|
Samuel G. Kapourales
|
77 |
Director
|
2010 | 2013 | 325,434 | 2.25 | |||||||||||||||
|
All Directors and Executive Officers as a Group (10 persons)
|
4,489,513 | 31.05% | |||||||||||||||||||
|
*
|
Less than 1%.
|
|
(1)
|
The mailing address for each person listed is 100 Industrial Lane, Huntington, West Virginia 25702.
|
|
(2)
|
As of June 4, 2012.
|
|
(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)
|
Does not include 3,000 shares of unvested restricted shares each issued to Mr. Blount.
|
|
ITEM 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
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, and Molihan are “independent directors” within the meaning of such standards. There were no transactions that were 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. No executive session was held during the fiscal year ended September 30, 2012.
36
We intend that all transactions between us and our executive officers, directors, holders of 10% or more of the shares of any class of our common stock and affiliates thereof, will be on terms no less favorable than those terms given to unaffiliated third parties and will be approved by a majority of our independent outside directors not having any interest in the transaction.
There were no transactions or series of transactions since the beginning of our last fiscal year or any currently proposed transaction where we were or are a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest.
|
ITEM 14.
|
Principal Accountant Fees and Services
|
Audit Fees
We paid our principal accountant $125,855 and $173,450 for the services they have performed in connection with the audit of our financial statements included in our Annual Report for fiscal 2012 and 2011, respectively.
Audit-Related Fees
During fiscal 2012 and 2011 we incurred $0 and $11,920, respectively, for services, our independent registered public accounting firm rendered related to review of comments from, and responses to, Securities and Exchange Commission comments.
Tax Fees
During the fiscal year ended September 30, 2012, we paid our principal accountant $41,628 for tax compliance services. During the fiscal year ended September 30, 2011, we paid our principal accountant $48,343 for tax compliance services.
All Other Fees
During fiscal 2012 and 2011, there were no fees billed for products and services provided by our independent registered public accounting firm other than those set forth above.
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.
Changes in Independent Registered Public Accountants
None.
37
|
ITEM 15.
|
Exhibits and Financial Statement Schedules
|
|
The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
|
|||
| (a)(1) | Consolidated Financial Statements | ||
| Energy Services of America Corporation | |||
| Report of Independent Registered Public Accounting Firm | F-1 | ||
| Balance Sheets, September 30, 2011 and September 30, 2012 | F-2 | ||
|
Statements of Income, Years Ended September 30, 2011
and September 30, 2012
|
F-3 | ||
|
Statements of Changes in Shareholders’ Equity, Years Ended September 30, 2011
and September 30, 2012
|
F-4 | ||
|
Statements of Cash Flows, Years Ended September 30, 2011
and September 30, 2012
|
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. | |||
| (a)(3) | Exhibits | ||
38
|
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)
|
|
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)
|
|
10.8
|
Employment Agreement between James E. Shafer and the Registrant (2)
|
|
10.9.1
|
Energy Services of America Corporation Employee Stock Purchase Plan (3)
|
|
10.9.2
|
Energy Services of America Corporation Long Term Incentive Plan (4)
|
|
10.10
|
Change in Control Agreement between Registrant and Larry Blount (5)
|
|
10.11
|
Management Incentive Plan (5)
|
|
|
Forebearance Agreement (6)
|
|
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.
|
|
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
|
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
(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)
|
I
ncorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2008.
|
|
(3)
|
Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on October 16, 2008.
|
|
(4)
|
Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on July 2, 2010.
|
|
(5)
|
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2010.
|
|
(6)
|
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities Exchange Commission on November 29, 2012.
|
|
(b)
|
The exhibits listed under (a)(3) above are filed herewith.
|
|
(c)
|
Not applicable.
|
39
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 28, 2012 | By: | /s/ Douglas V. Reynolds | |
| Douglas V. Reynolds | |||
| 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 28, 2012
|
||
|
Marshall T. Reynolds
|
|||||
|
By
|
/s/ Jack Reynolds
|
Director
|
December 28, 2012
|
||
|
Jack R. Reynolds
|
|||||
|
By
|
/s/ Larry A. Blount
|
Secretary/Treasurer, Chief
Financial Officer
|
December 28, 2012
|
||
|
Larry A. Blount
|
|||||
|
By
|
/s/ Neal W. Scaggs
|
Director
|
December 28, 2012
|
||
|
Neal W. Scaggs
|
|||||
|
By
|
/s/ Joseph L. Williams
|
Director
|
December 28, 2012
|
||
|
Joseph L. Williams
|
|||||
|
By
|
/s/ Keith Molihan
|
Director
|
December 28, 2012
|
||
|
Keith Molihan
|
|||||
|
By
|
/s/ Nester S. Logan
|
Director
|
December 28, 2012
|
||
|
Nester S.Logan
|
|||||
|
By
|
/s/ Samuel G. Kapourales
|
Director
|
December 28, 2012
|
||
|
Samuel G. Kapourales
|
|||||
|
By
|
/s/ Douglas V. Reynolds
|
President and Chief
Executive Officer, and
Director |
December 28, 2012
|
||
|
Douglas V. Reynolds
|
40
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, 2012 and 2011, 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 audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 3 and 10 to the financial statements, the Company has suffered recurring losses from operations and has entered into a forbearance arrangement with its lenders as a result of continued noncompliance with certain debt covenants, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to those matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
ARNETT FOSTER TOOTHMAN PLLC
|
|
| /s/ Arnett Foster Toothman PLLC |
Charleston, West Virginia
December 28, 2012
101 Washington Street East | P.O. Box 2629
Charleston, WV 25329
304.346.0441 | 800.642.2601
F-1
ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and 2011
|
Assets
|
2012
|
2011
|
||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 2,661,721 | $ | 2,965,296 | ||||
|
Accounts receivable-trade
|
18,485,166 | 19,144,821 | ||||||
|
Allowance for doubtful accounts
|
(240,071 | ) | (278,339 | ) | ||||
|
Retainages receivable
|
2,477,903 | 10,483,663 | ||||||
|
Other receivables
|
340,876 | 315,335 | ||||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
11,260,254 | 12,624,588 | ||||||
|
Deferred tax asset
|
3,690,409 | 3,193,586 | ||||||
|
Prepaid expenses and other
|
2,026,514 | 1,911,445 | ||||||
|
Total Current Assets
|
40,702,772 | 50,360,395 | ||||||
|
Property, plant and equipment, at cost
|
42,440,135 | 41,941,933 | ||||||
|
less accumulated depreciation
|
(23,387,158 | ) | (18,186,798 | ) | ||||
| 19,052,977 | 23,755,135 | |||||||
|
Goodwill
|
- | 36,914,021 | ||||||
|
Total Assets
|
$ | 59,755,749 | $ | 111,029,551 | ||||
|
Liabilities and Stockholders
’
Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Current maturities of long-term debt
|
$ | 10,118,907 | $ | 4,823,076 | ||||
|
Lines of credit and short term borrowings
|
18,516,276 | 13,875,723 | ||||||
|
Accounts payable
|
9,917,085 | 8,600,211 | ||||||
|
Accrued expenses and other current liabilities
|
3,518,481 | 5,202,694 | ||||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
1,368,559 | 2,923,542 | ||||||
|
Total Current Liabilities
|
43,439,308 | 35,425,246 | ||||||
|
Long-term debt, less current maturities
|
1,623,771 | 11,221,186 | ||||||
|
Long-term debt, payable to shareholder
|
1,223,325 | 2,400,000 | ||||||
|
Deferred income taxes payable
|
7,027,980 | 7,067,403 | ||||||
|
Total Liabilities
|
53,314,384 | 56,113,835 | ||||||
|
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 14,458,836
|
||||||||
|
shares
|
1,446 | 1,445 | ||||||
|
Additional paid in capital
|
56,107,650 | 56,059,825 | ||||||
|
Retained earnings (deficit)
|
(49,667,731 | ) | (1,145,554 | ) | ||||
|
Total Stockholders
’
equity
|
6,441,365 | 54,915,716 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 59,755,749 | $ | 111,029,551 | ||||
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, 2012 and 2011
|
2012
|
2011
|
|||||||
|
Revenue
|
$ | 157,738,736 | $ | 143,426,097 | ||||
|
Cost of revenues
|
156,056,529 | 136,584,903 | ||||||
|
Gross profit
|
1,682,207 | 6,841,194 | ||||||
|
Selling and administrative expenses
|
12,083,793 | 13,269,129 | ||||||
|
Asset Impairment
|
36,914,021 | - | ||||||
|
Loss from operations
|
(47,315,607 | ) | (6,427,935 | ) | ||||
|
Other income (expense)
|
||||||||
|
Interest income
|
3,034 | 2,569 | ||||||
|
Other nonoperating income
|
140,115 | 11,382 | ||||||
|
Interest expense
|
(1,931,897 | ) | (1,821,319 | ) | ||||
|
Gain on sale of equipment
|
45,930 | 13,630 | ||||||
| (1,742,818 | ) | (1,793,738 | ) | |||||
|
Loss before income taxes
|
(49,058,425 | ) | (8,221,673 | ) | ||||
|
Income tax benefit
|
(536,248 | ) | (2,945,903 | ) | ||||
|
Net loss
|
$ | (48,522,177 | ) | $ | (5,275,770 | ) | ||
|
Weighted average shares outstanding-basic
|
14,448,336 | 12,113,488 | ||||||
|
Weighted average shares-diluted
|
14,448,336 | 12,113,488 | ||||||
|
Loss per share basic
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
|
Loss per share diluted
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
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, 2012 and 2011
|
Total
|
||||||||||||||||||||
|
Common Stock
|
Additional Paid
|
Retained
|
Stockholders’
|
|||||||||||||||||
|
Shares
|
Amount
|
in Capital
|
Earnings (Deficit)
|
Equity
|
||||||||||||||||
|
Balance at September 30, 2010
|
12,092,307 | $ | 1,209 | $ | 55,988,324 | $ | 4,130,216 | $ | 60,119,749 | |||||||||||
|
Warrant Redemption
|
2,337,529 | 234 | (234 | ) | - | - | ||||||||||||||
|
Vested stock grants
|
17,000 | 2 | (2 | ) | - | - | ||||||||||||||
|
Share-based compensation expense
|
- | - | 71,737 | - | 71,737 | |||||||||||||||
|
Net loss
|
- | - | - | (5,275,770 | ) | (5,275,770 | ) | |||||||||||||
|
Balance at September 30, 2011
|
14,446,836 | $ | 1,445 | $ | 56,059,825 | $ | (1,145,554 | ) | $ | 54,915,716 | ||||||||||
|
Vested stock grants
|
12,000 | 1 | (1 | ) | - | - | ||||||||||||||
|
Share-based compensation expense
|
- | - | 47,826 | - | 47,826 | |||||||||||||||
|
Net loss
|
- | - | - | (48,522,177 | ) | (48,522,177 | ) | |||||||||||||
|
Balance at September 30, 2012
|
14,458,836 | $ | 1,446 | $ | 56,107,650 | $ | (49,667,731 | ) | $ | 6,441,365 | ||||||||||
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, 2012 and 2011
|
2012
|
2011
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (48,522,177 | ) | $ | (5,275,770 | ) | ||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||
|
Depreciation expense
|
5,848,045 | 5,893,973 | ||||||
|
Gain on sale/disposal of equipment
|
(45,930 | ) | (13,630 | ) | ||||
|
Provision for deferred taxes
|
(536,248 | ) | (3,023,334 | ) | ||||
|
Share-based compensation expense
|
47,826 | 71,737 | ||||||
|
Goodwill Impairment
|
36,914,021 | - | ||||||
|
Decrease in contracts receivable
|
621,387 | 6,722,702 | ||||||
|
Decrease in retainage receivable
|
8,005,760 | 3,448,857 | ||||||
|
(Increase) decrease in other receivables
|
(25,541 | ) | 84,539 | |||||
|
Decrease in cost and estimated earnings in excess of billings on uncompleted contracts
|
1,364,334 | 7,676,487 | ||||||
|
(Increase) decrease in prepaid expenses
|
(115,069 | ) | 796,283 | |||||
|
Increase (decrease) in accounts payable
|
1,316,874 | (6,473,112 | ) | |||||
|
Decrease in accrued expenses
|
(1,684,213 | ) | (6,879,450 | ) | ||||
|
Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts
|
(1,554,983 | ) | 939,444 | |||||
|
Net cash provided by operating activities
|
1,634,086 | 3,968,726 | ||||||
|
Cash flows from investing activities:
|
||||||||
|
Investment in property & equipment
|
(1,341,811 | ) | (1,132,560 | ) | ||||
|
Proceeds from sales of property and equipment
|
241,856 | 27,856 | ||||||
|
Net cash used in investing activities
|
(1,099,955 | ) | (1,104,704 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Repayment of loans from shareholders
|
(1,176,675 | ) | (2,300,000 | ) | ||||
|
Borrowings on lines of credit and short term debt, net of (repayments)
|
4,640,553 | (380,194 | ) | |||||
|
Proceeds from long term debt
|
- | 11,300,000 | ||||||
|
Principal payments on long term debt
|
(4,301,584 | ) | (11,095,083 | ) | ||||
|
Net cash used in financing activities
|
(837,706 | ) | (2,475,277 | ) | ||||
|
Increase (decrease) in cash and cash equivalents
|
(303,575 | ) | 388,745 | |||||
|
Cash beginning of period
|
2,965,296 | 2,576,551 | ||||||
|
Cash end of period
|
$ | 2,661,721 | $ | 2,965,296 | ||||
|
Supplemental schedule of noncash investing and financing activities:
|
||||||||
|
Insurance premiums financed
|
$ | 2,867,738 | $ | 581,782 | ||||
|
Purchases of property & equipment under financing agreements
|
$ | 499,870 | $ | 1,470,366 | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$ | 1,834,277 | $ | 1,769,686 | ||||
|
Insurance premiums financed
|
$ | 2,351,462 | $ | 651,060 | ||||
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. On November 28, 2012
,
the Company committed to the closing and subsequent disposition of the assets of S T Pipeline under the terms of a Forbearance Agreement of that date concerning the Company’s short term and long-term debt. See Note 9, Long-Term Debt, for further information.
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
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 materially 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
Fair Value Measurements and Disclosures Topic
of the Financial Accounting Standards Board (FASB) Accounting Standards Codification
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1
— Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Level 2
— Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.
Level 3
— Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.
F-7
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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
.
The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $11
.
7
million at September 3
0
, 2012 was $11
.
8
million.
The Company uses fair value measurements on a non-recurring basis in its assessment of goodwill and long-lived assets held and used. In accordance with its annual impairment test during the quarter ended September 30, 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. The fair value measurements were calculated using unobservable inputs, using a weighted average of the discounted cash flow approach and two market approach analyses, all of which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows was based on our most recent operational budgets. The Company uses the assistance of third party specialists to develop valuation assumptions
.
Refer to Note
4, Goodwill and Intangible Assets, for further information.
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
.
F-8
Goodwill and Other Intangibles
The Company’s goodwill was acquired in two separate purchase transactions that were consummated on August 15, 2008
.
The Company 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 Principles
,
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. An impairment charge of $36.9 million was recorded in the fourth fiscal quarter of 2012 as further disclosed in Note 4 to the financial statements.
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.
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 at completion. 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.
F-9
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 $1.4 million as of September 30, 2012
.
Should the captive experience severe losses over an extended period, it could have a detrimental effect on the Company.
Advertising
All advertising costs are expensed as incurred. Total advertising expense was $20,664 and $28,528 for the years ended September 30, 2012 and 2011, respectively.
Stock Compensation Plans
The Company has issued restricted stock under its Long-Term Incentive Plan. 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 and is recognized over the service period, which is usually the vesting period. As a result, compensation expense relating to stock compensation plans will be reflected in net income as part of “Salaries and employee benefits” on the Consolidated Statements of Income.
For the year ending September 30, 2012 and 2011 respectively
,
$47,826 and $71,737 was recognized as compensation expense
.
Income Taxes
The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the company is no longer subject to U.S. federal, state, or local income tax examinations for years ending prior to September 30, 2008
.
The Company follows the liability method of accounting for income taxes in accordance with U.S. Generally Accepted Accounting Principles
.
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. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
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
anti
-
dilutive.
F-10
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.
Reclassifications
Certain reclassifications have been made to prior year end financial statements to conform to the classification adopted of the current year.
New Accounting Pronouncements
In July 2012, the FASB issued Accounting Standards Update (ASU) No. 2012-02,
Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required
to take further action. However, if an entity concludes otherwise, then it is required to determine the
fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30,
Intangibles--Goodwill and Other, General Intangibles Other than Goodwill.
Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period.
The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of the new guidance, in itself, will not have an impact on the Company’s statements of income and financial position.
F-11
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the accompanying financial statements, the Company sustained a loss of $48.5 million for the year-end September 30, 2012, which included a write-down for impairment of goodwill of $36.9 million. On November 28, 2012
,
the Company entered into a Forbearance Agreement with its lenders. The Forbearance Agreement, among other things, requires the closing and subsequent sale of our S T Pipeline subsidiary and also requires formulation of recommendations relating to the on-going operations of Nitro Electric, C. J. Hughes and Contractors Rental Corporation including refinancing, sale or liquidation of the companies. The Forbearance Agreement also prohibits the Company from making any addition draws on its revolving line of credit, which will make funding of future contract work difficult. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
While the Company is attempting to find alternative sources of debt as well as exploring options to raise equity, the Company’s cash position may not be sufficient enough to support the Company’s operations. Management intends to raise additional funds by way of a private or public offering. Management believes that the actions presently being taken to secure alternative funding sources and limit the exposure to losses on future contracts provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to find alternative funding sources and execute construction contracts in an efficient and profitable manner.
The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
4
.
GOODWILL AND INTANGIBLE ASSETS
A summary of changes in the Company’s goodwill is as follows:
| Year Ended September 30, | ||||||||
|
2012
|
2011
|
|||||||
|
Balance at beginning of year
|
$ | 36,914,021 | $ | 36,914,021 | ||||
|
Impairment
|
36,914,021 | -0- | ||||||
|
Balance at end of year
|
$ | -0- | $ | 36,914,021 | ||||
F-12
In the fourth fiscal quarter of 2012
,
the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. The Company determined that its goodwill was impaired largely due to lower revenue and profitability associated with the Company’s long term financial forecasts. The Company measured the amount of impairment by calculating the amount by which the carrying value exceeded the estimated fair value which was based on projected discounted cash flows (level 3).
The fair value measurements were calculated using unobservable inputs, using a weighted average of the discounted cash flow approach and two market approach analyses. The amount and timing of future free cash flows was based on current operational budgets and long range strategic plans. The Company uses the assistance of third party specialists to develop valuation assumptions
.
The Company’s recent operating losses and the prospects for additional bank funding of operations at historical levels were factors considered in the cash flow analysis.
5
.
ACCOUNTS RECEIVABLE
Activity in the Company’s allowance for doubtful accounts consists of the
following:
|
Year Ended September 30,
|
||||||||
|
2012
|
2011
|
|||||||
|
Balance at beginning of year
|
$ | 278,339 | $ | 283,191 | ||||
|
Charged to expense
|
-0- | -0- | ||||||
|
Deductions for uncollectible receivables written off, net of recoveries
|
(38,268 | ) | (4,852 | ) | ||||
|
Balance at end of year
|
$ | 240,071 | $ | 278,339 | ||||
6
.
UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:
|
Year Ended September 30,
|
||||||||
|
2012 |
2011
|
|||||||
|
Costs incurred on contracts in progress
|
$ | 216,026,172 | $ | 256,161,710 | ||||
|
Estimated earnings, net of estimated losses
|
5,104,059 | 7,693,079 | ||||||
| 221,130,231 | 263,854,789 | |||||||
|
Less Billings to date
|
211,238,536 | 254,153,743 | ||||||
| $ | 9,891,695 | $ | 9,701,046 | |||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
$ | 11,260,254 | $ | 12,624,588 | ||||
|
Less Billings in excess of costs and estimated earnings on uncompleted contracts
|
1,368,559 | 2,923,542 | ||||||
| $ | 9,891,695 | $ | 9,701,046 | |||||
F-13
7
.
CLAIMS
The Company reported $3.5 million in estimated claim revenue for the period ending September 30, 2011. 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. On November 2, 2011 the Company reached an agreement on one of the outstanding claims for $1.5 million which will result in an immaterial revenue adjustment in 2012. The remaining claims are valued at $2.5 million for September 30, 2012.
At September 30, 2012, the Company is seeking an arbitration proceeding to resolve the collection of the remaining amount. Claims receivable is a component of cost and estimated earnings in excess of billing. The Company considers collection of these claims highly probable.
8
.
PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
| Year Ended September 30, | ||||||||
|
2012
|
2011
|
|||||||
|
Land
|
$ | 777,231 | $ | 752,000 | ||||
|
Buildings and leasehold improvements
|
512,528 | 446,580 | ||||||
|
Operating equipment and vehicles
|
40,710,349 | 40,332,126 | ||||||
|
Office equipment, furniture and fixtures
|
440,027 | 411,227 | ||||||
| 42,440,135 | 41,941,933 | |||||||
|
Less Accumulated Depreciation and Amortization
|
23,387,158 | 18,186,798 | ||||||
|
Property and equipment net
|
$ | 19,052,977 | $ | 23,755,135 | ||||
Short-term debt consists of the following:
A line of credit of $18 million has been established with a regional bank. The interest rate on the original line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 6%. Cash available under the line is calculated based on a percentage of the accounts receivable with certain exclusions. Major items excluded from the 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, 2012 the Company had borrowed $18 million against the line. The line of credit originally matured on July 25, 2012 and was extended to October 25, 2012 by the third omnibus agreement dated July 25, 2012. The Company entered into a Forbearance Agreement with the lenders on November 28, 2012. The Forbearance Agreement changed the interest rate on the line of credit to 6.5% along with several other restrictions more fully explained on Note 10
.
F-14
10. LONG-TERM DEBT
A summary of long-term debt as of September 30, 2012 and 2011 is as follows:
|
2012
|
2011
|
|||||||
|
Notes payable to various finance companies, payable in monthly installments totaling $16,130, including interest at rates ranging between 0% and 8%, with various maturity dates through April 2012, secured by vehicles and equipment acquired with the notes.
|
- | 299,232 | ||||||
|
Note payable to bank, due in monthly installments of $5,000, including interest at 6.75%, final payment due September 2013, secured by real estate, vehicles, and equipment.
|
249,497 | 291,046 | ||||||
|
Notes payable to finance companies, due in monthly installments totaling $181,096, including interest ranging from 1.0% to 7.92%, final payments due December 2010 through July 2015, secured by equipment.
|
2,610,841 | 3,752,733 | ||||||
|
Notes payable to banks, due in monthly installments totaling $3,573, including interest at prime plus .5% to 8.75%, final payments due April 2010 through April 2012, secured by equipment, receivables, and intangibles.
|
- | 22,880 | ||||||
|
Notes payable to individuals, due in monthly installments of $100,000 dollars with interest at 7.5%, final payment due April 2012.
|
- | 700,000 | ||||||
|
Notes payable to shareholder, interest rate at prime, note matures in August of 2014.
|
1,223,325 | 2,400,000 | ||||||
|
Line of credit payable to bank, monthly interest at 6.5%, final payment due by May 31, 2013, secured by accounts receivable and equipment.
|
18,000,000 | 13,875,723 | ||||||
|
Note payable to bank, due in monthly installments of $221,000, Including interest at 6.5%, final payment due July 2016, secured by equipment.
|
8,882,340 | 10,978,371 | ||||||
| 30,966,003 | 32,319,985 | |||||||
|
Less Current Maturities
|
28,118,907 | 18,698,799 | ||||||
|
Total Long term debt
|
$ | 2,847,096 | $ | 13,621,186 | ||||
F-15
Maturities of debt for the next five years are as follows:
|
2013
|
$ | 28,118,907 | |||
|
2014
|
2,054,247 | ||||
|
2015
|
497,978 | ||||
|
2016
|
172,904 | ||||
|
2017
|
88,482 | ||||
|
Thereafter
|
33,485 | ||||
| $ | 30,966,003 |
On July 25, 2012, the Company entered into a Third Omnibus Amendment with United Bank, Inc. for the purpos
e
of amending an $18.0 million revolving line of credit and $11.3 million term loan agreement. The amendment waived the Company’s compliance obligations with respect to the required debt to tangible net worth ratio and current ratio until October 25, 2012. The amendment also extended the term of the revolving line of credit to October 25, 2012. The amendment required the Company to seek additional sources of capital and take actions to enable it to repay its obligations to United Bank under the revolving line of credit and term loan. The amendment required the Company to establish a plan to repay United Bank in the event it is unable to secure additional sources of capital. The amendment also stated that the Lender shall have the right to engage at Borrower’s expense a consultant, acceptable to Lender, to evaluate and advise the Lender regarding the operations of the Borrower and Guarantors, and Borrower and Guarantors further agree to provide such information and access to the consultant on a timely basis as the consultant may request.
On November 28, 2012, the Company and its subsidiary corporations entered into a forbearance agreement with United Bank, Inc., whereby the Company acknowledges that they are in default under the terms of two credit facilities between United Bank, Inc. and the Company. United Bank, Inc. has agreed to forbear from exercising certain of its rights and remedies under the loan agreements and related documents.
The loan agreements consist of an $18.0 million revolving line of credit and an $11.3 million term loan. At November 20, 2012 the outstanding balances on the revolving line of credit and term loan were $18,081,100 and $8,744,152, respectively. The Company acknowledges defaulting on the loan agreements by failing to maintain the debt to tangible net worth covenant and current ratio covenant as set forth in each loan note. United Bank, Inc. agrees to forbear from exercising and enforcing its default related rights against the companies resulting from the default so long the companies comply with the terms of the Forbearance Agreement.
During the forbearance period the outstanding balances of the borrowings will bear interest at a fixed rate of 6.5% per annum. During the forbearance period the Registrant must continue to make monthly loan payments, but will be unable to take further advances on the line of credit.
F-16
As part of the Forbearance Agreement
,
the Company agrees to take specific actions including the retention of a Chief restructuring agent and providing to United Bank, Inc. on-going reports regarding its business operations and cash flow, among other matters. The Chief Restructuring Agent must prepare a restructuring plan for the Registrant that provides for the closure of S.T. Pipeline and subsequent sale of its assets and must prepare recommendations relating to the on-going operations of Nitro Electric Company, Inc., C.J. Hughes Construction Company and Contractors Rental Corporation, including refinancing, sale or liquidation of the companies.
The Forbearance Agreement may be terminated upon certain events, and in any case by May 31, 2013. As a result, the full amount of the related long –term debt has been classified as a current liability in the
accompanying balance sheet at September 30, 2012, representing $8.9 million in term debt. Regardless of the non-compliance with financial covenants, the Company has made every scheduled payment of principal and interest due on the long-term debt
.
On December 18, 2012, the Company’s Board of Directors approved a restructuring plan, which included various options for each of the Company’s contract services. The Company and its lenders have engaged an external party, restructuring agent, to assist with a plan of restructure to take the necessary operational steps to achieve a reasonable level of profitability during fiscal year 2013. The Company desires to secure alternate sources of cash either through debt or equity once targeted financial results have been achieved and sustained.
On December 17, 2012, ST Pipeline completed its last project for the Company. The Board of Directors is currently contemplating two strategies with respect to ST Pipeline. The first strategy targets the sale of ST Pipeline to a single strategic purchaser, while the second strategy would result in a liquidation of ST Pipeline’s assets. The objective of the Board of Directors is to complete the sale of the assets of ST Pipeline during the second or third fiscal quarter of 2013. The restructuring plan as is relates to ST Pipeline was approved by the Board of Directors on December 18, 2012. Due to the timing of the approval of the restructuring plan with respect to ST Pipeline, the Company is evaluating the financial effects of the discontinuance of the subsidiary. ST Pipeline comprises a significant portion of the Company’s assets and operations at September 30, 2012 and September 30, 2011 for the years then ended. ST Pipeline had revenues of $48.7 million and $48.6 million, which comprises 31% and 34% of the Company’s consolidated revenues for the years ended September 30, 2012 and 2011, respectively. ST Pipeline had assets of $22.2 million and $33.1 million, which comprises 33% and 28% of the Company’s consolidated assets at September 30, 2012 and 2011, respectively. ST Pipeline had liabilities of $4.8 million and $8.5 million, which comprises 8% and 14% of the Company’s consolidated liabilities at September 30, 2012 and 2011, respectively. The Company’s future filings will be updated and adjusted accordingly.
With respect to CJ Hughes, Nitro Electric, and Contractors Rental, the Company and its restructuring agent have developed a strategic plan to rehabilitate the subsidiaries so that positive cash flow can be generated and sustained to fund the necessary operations and debt service of ESA. The Company and its restructuring agent believe there exists business opportunities to revive the performance of the remaining subsidiaries to propel the Company to a profitable status.
F-17
Effective October 19, 2012, the Company
’
s bonding company has ceased issuing the Company new bonds. The ability of the Company to obtain surety bonds for future contracts is a significant factor in the contracting industry with respect to the type and amount of contracts that can be bid. The Company is actively searching for a new bonding company, including remedies with the current bonding company.
There exist many risks and potential outcomes from the various options that the Company is exploring with respect to its restructuring plan. The ability of the Company to operate as a going concern is dependent upon the participation of the Company’s lenders, obtaining a bonding agent, and realization of the restructuring plan to generate cash flows and maintain liquidity sufficient to service our debt.
11
.
INCOME TAXES
The components of income taxes are as follows:
|
Year Ended September 30,
|
||||||||||
|
2012
|
2011
|
|||||||||
|
Federal
|
Current
|
$ | -0- | $ | -0- | |||||
|
Deferred
|
(455,811 | ) | (2,508,584 | ) | ||||||
|
Total
|
(455,811 | ) | (2,508,584 | ) | ||||||
|
State
|
Current
|
-0- | -0- | |||||||
|
Deferred
|
(80,437 | ) | (437,319 | ) | ||||||
|
Total
|
(80,437 | ) | (437,319 | ) | ||||||
|
Total income tax
|
benefit
|
$ | (536,248 | ) | (2,945,903 | ) | ||||
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, | ||||||||
|
2012
|
2011
|
|||||||
|
Statutory rate
|
(34.00 | ) % | (34.00 | )% | ||||
| Goodwill | 19.57 | --- | ||||||
|
Meals
|
.73 | .14 | ||||||
|
Valuation allowance
|
12.72 | 4.03 | ||||||
|
State Income Taxes
|
(.11 | ) | (6.00 | ) | ||||
|
Effective tax rate
|
(1.09 | ) % | (35.83 | )% | ||||
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.
F-18
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
|
2012
|
2011
|
||||||
|
Net operating loss carryover
|
$ | 7,831,368 | $ | 4,177,385 | ||||
|
Other deferred assets
|
3,246,856 | 759,350 | ||||||
|
Less valuation allowance
|
(6,387,815 | ) | (338,500 | ) | ||||
| 4,690,409 | 4,598,235 | |||||||
|
Current Deferred Tax Liabilities
|
||||||||
|
Contract Claims
|
$ | 1,000,000 | $ | 1,404,649 | ||||
|
Long Term Deferred Tax Liabilities
|
||||||||
|
Property, Plant and Equipment
|
$ | 6,095,336 | $ | 6,335,661 | ||||
|
Others
|
932,644 | 731,742 | ||||||
| 7,027,980 | 7,067,403 | |||||||
The deferred tax asset valuation allowance recognized at September 30, 2012 and 2011 was $(6,387,815) and $(338,500), respectively. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating our ability to realize deferred tax assets, we considered all available positive and negative evidence. As of September 30, 2012, we maintained a valuation allowance against the net deferred tax assets of $6,387,815 due to the uncertainty regarding utilization. Adjustments to the valuation allowances are recorded as a component of income tax expense.
The Company does not believe that it has any unrecognized tax benefits included in its consolidated financial statements that require recognition
.
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, 2012 and 2011 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, 2011 of $10,752
,
701 available to offset future taxable income. In 2012
,
$8,353,085 of loss carryover was incurred increasing the carryover to $19,105,786 with a valuation allowance to offset $16,056,182 of the carryover. The carryovers expire beginning in the year ended September 30, 2024
.
F-19
12. EARNINGS PER SHARE:
Shares not included in the calculation of diluted earnings per share because they are anti-dilutive were restricted stock grants of 9,000 at September 30, 2012
.
The amounts used to compute the basic and diluted earnings per share for the years ended
2012 and 2011 is illustrated below:
| Year Ended September 30, | ||||||||
|
2012
|
2011
|
|||||||
|
|
||||||||
|
Net loss from continuing operations available
to common shareholders
|
$ | ( 48,522,177 | ) | $ | (5,275,770 | ) | ||
|
Weighted average shares outstanding basic
|
14,448,336 | 12,113,488 | ||||||
|
Effect of dilutive securities:
|
||||||||
|
Restricted stock grants
|
-0- | -0- | ||||||
|
Weighted average shares outstanding diluted
|
14,448,336 | 12,113,488 | ||||||
|
Net loss per share-basic
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
|
Net loss per share-diluted
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
13. 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.
There have been no agreements with any employees made under this plan as of the year ended September 30, 2012
.
F-20
14
.
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, 2011 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, 2012 and 2011 respectively $47,826 and $71,737 was recognized as compensation expense and $19,130 and $28,695 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.
The following table represents unvested restricted stock activity for the years ended September 30, 2012 and 2011:
|
Number of
|
Weighted Average
|
|||||||
|
Stock Grants
|
Exercise Price
|
|||||||
|
Outstanding at 10/01/10
|
-0- | -0- | ||||||
|
Granted
|
51,000 | 4.22 | ||||||
|
Forfeited
|
-0- | -0- | ||||||
|
Earned and & issued
|
(17,000 | ) | -0- | |||||
|
Outstanding at 9/30/11
|
34,000 | 4.22 | ||||||
|
Granted
|
-0- | -0- | ||||||
|
Forfeited
|
(13,000 | ) | 4.22 | |||||
|
Earned and & issued
|
(12,000 | ) | 4.22 | |||||
|
Outstanding at 9/30/12
|
9,000 | 4.22 | ||||||
We expect to recognize additional compensation expense of approximately $32,000 over the remaining vesting periods of the stock awards.
15. RELATED PARTY TRANSACTIONS:
Total long-term debt including short term portion at September 30, 2012 was $13
.0
million, of which, $1
.
2
million was a note payable to a certain director, which is due in August 2014. The Company also purchased and rented various pieces of equipment and materials from a former director who was also a former owner of one of the acquired subsidiaries. Those transactions totaled approximately $1.4 million through March 9, 2012, the date of separation between the Company and the former director.
F-21
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.
16. 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
.
The future minimum lease payments under operating leases as of September 30, 2012, are as follows:
|
2013
|
$ | 297,765 | ||
|
2014
|
126,813 | |||
|
2015
|
-0- | |||
|
2016
|
-0- |
17. MAJOR CUSTOMERS
Revenues for the period ending September 30, 2012 were $157.7 million. Two major customers made up 31.8% and 10.3% respectively of the total
.
Receivables from major customers at September 30, 2012 were $8.0 million, which represented 43.2% of the total receivables at September 30, 2012. Virtually all work performed for major customers was awarded under competitive bid fixed price or unit price arrangements. 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.
18. RETIREMENT AND EMPLOYEE BENEFIT PLANS
In 2012 and 2011, 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 $17
,0
00 for 2012 and $16,500 for 2011. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages. C. J. Hughes contributed $13,220 for the fiscal year ended September 30, 2012 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 2012 or 2011 plan year.
F-22
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 $17
,0
00 for 2012 and $16,500 for 2011. 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 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 2012 or 2011 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 $17
,0
00 for 2012 and $16,500 for 2011. Nitro Electric may make annual discretionary matching contributions and/or profit sharing contributions to the plan. The matching contribution formula for the 2012 and 2011 plan year was $0.25 on each dollar contributed up to 6% of eligible wages. No profit sharing contribution was made for the 2012 or 2011 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 $17
,0
00 for 2012 and $16,500 for 2011. 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 2012 or 2011 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 $78,161 for the fiscal year ended September 30, 2012
.
F-23
19. 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, 2012, 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.
2
0
. 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.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2012 and 2011 is summarized below:
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Annual
|
||||||||||||||||
|
2012 Millions of dollars, except per share amounts
|
||||||||||||||||||||
|
Total operating revenues
|
$ | 49.6 | $ | 37.1 | $ | 40.9 | $ | 30.1 | $ | 157.7 | ||||||||||
|
Operating income (loss)
|
2.4 | (5.8 | ) | (2.8 | ) | (41.1 | ) | (47.3 | ) | |||||||||||
|
Net income (loss)
|
1.1 | (3.9 | ) | (2.0 | ) | (43.7 | ) | (48.5 | ) | |||||||||||
|
Basic earnings (loss) per share
|
$ | 0.08 | $ | (0.03 | ) | $ | (0.14 | ) | $ | (3.27 | ) | $ | (3.36 | ) | ||||||
|
Diluted earnings (loss) per share
|
$ | 0.08 | $ | (0.03 | ) | $ | (0.14 | ) | $ | (3.27 | ) | $ | (3.36 | ) | ||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Annual
|
||||||||||||||||
|
2011 Millions of dollars, except per share amounts
|
||||||||||||||||||||
|
Total operating revenues
|
$ | 34.0 | $ | 14.8 | $ | 46.1 | $ | 48.5 | $ | 143.4 | ||||||||||
|
Operating income (loss)
|
0.4 | (5.1 | ) | (0.6 | ) | (1.1 | ) | (6.4 | ) | |||||||||||
|
Net income (loss)
|
(0.1 | ) | (3.4 | ) | (0.7 | ) | (1.1 | ) | (5.3 | ) | ||||||||||
|
Basic earnings (loss) per share
|
$ | 0.01 | $ | (0.28 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.44 | ) | ||||||
|
Diluted earnings (loss) per share
|
$ | 0.01 | $ | (0.28 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.44 | ) | ||||||
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
F-24
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
BALANCE SHEETS
As of September 30, 2012 and 2011
|
Assets
|
2012
|
2011
|
||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 563,893 | $ | 50,989 | ||||
|
Other receivables
|
1,834 | 1,300 | ||||||
|
Deferred tax asset
|
246,395 | 74,281 | ||||||
|
Prepaid expenses and other
|
1,824,198 | 1,736,174 | ||||||
|
Total Current Assets
|
2,636,320 | 1,862,744 | ||||||
|
Property, plant and equipment, at cost
|
363,049 | 352,818 | ||||||
|
less accumulated depreciation
|
(250,177 | ) | (179,614 | ) | ||||
| 112,872 | 173,204 | |||||||
|
Due from affiliates
|
25,584,177 | 26,225,969 | ||||||
|
Investment in subsidiaries
|
6,095,128 | 52,715,490 | ||||||
|
Total Assets
|
$ | 34,428,497 | $ | 80,977,407 | ||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Current maturities of long-term debt
|
$ | 8,882,340 | $ | 2,698,349 | ||||
|
Lines of credit and short term borrowings
|
18,516,276 | 13,875,723 | ||||||
|
Accounts payable
|
267,924 | 57,492 | ||||||
|
Accrued expenses and other current liabilities
|
242,742 | 270,089 | ||||||
|
Total Current Liabilities
|
27,909,282 | 16,901,653 | ||||||
|
Long-term debt, less current maturities
|
- | 8,980,022 | ||||||
|
Deferred income taxes payable
|
77,850 | 180,016 | ||||||
|
Total Liabilities
|
27,987,132 | 26,061,691 | ||||||
|
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 14,458,836
|
||||||||
|
shares
|
1,446 | 1,445 | ||||||
|
Additional paid in capital
|
56,107,650 | 56,059,825 | ||||||
|
Retained earnings (deficit)
|
(49,667,731 | ) | (1,145,554 | ) | ||||
|
Total Stockholders’ equity
|
6,441,365 | 54,915,716 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 34,428,497 | $ | 80,977,407 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-25
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
STATEMENTS OF INCOME
For the years ended September 30, 2012 and 2011
|
2012
|
2011
|
|||||||
|
General and administrative expenses
|
$ | - | $ | - | ||||
|
Net loss from operations before taxes
|
- | - | ||||||
|
Other nonoperating expense
|
(119,064 | ) | (3,151 | ) | ||||
|
Interest expense
|
(1,628,309 | ) | (1,138,367 | ) | ||||
|
Net loss before tax
|
(1,747,373 | ) | (1,141,518 | ) | ||||
|
Income tax expense (benefit)
|
154,502 | (455,392 | ) | |||||
|
Equity in undistributed loss
|
||||||||
|
of subsidiaries
|
(46,620,302 | ) | (4,589,644 | ) | ||||
|
Net loss
|
$ | (48,522,177 | ) | $ | (5,275,770 | ) | ||
|
Weighted average shares outstanding- basic
|
14,448,336 | 12,113,488 | ||||||
|
Weighted average shares- diluted
|
14,448,336 | 12,113,488 | ||||||
|
Net loss per share- basic
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
|
Net loss per share- diluted
|
$ | (3.36 | ) | $ | (0.44 | ) | ||
The accompanying notes are an integral part of these financial statements
F-26
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2012 and 2011
|
2012
|
2011
|
|||||||
|
Cash flows form operating activities:
|
||||||||
|
Net loss
|
$ | (48,522,177 | ) | $ | (5,275,770 | ) | ||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||
|
Provision for current tax (benefit)
|
428,782 | (661,933 | ) | |||||
|
Provision for deferred income tax (benefit)
|
(274,280 | ) | 206,541 | |||||
|
Depreciation expense
|
70,563 | 70,563 | ||||||
|
Equity in undistributed loss of subsidiaries
|
46,620,302 | 4,589,644 | ||||||
|
Share-based compensation expense
|
47,826 | 71,737 | ||||||
|
Changes in:
|
||||||||
|
Increase decrease in prepaid expenses
|
(88,024 | ) | (1,229,271 | ) | ||||
|
Increase in other receivable
|
(534 | ) | - | |||||
|
Increase in account payable
|
210,432 | 49,182 | ||||||
|
Decrease in accrued expenses and other current liabilities
|
(6,524 | ) | (639,730 | ) | ||||
|
Net cash used in operating activities
|
(1,513,634 | ) | (2,819,037 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Investment in property & equipment
|
(10,231 | ) | - | |||||
|
Advances to subsidiaries
|
213,010 | (7,275,672 | ) | |||||
|
Net cash provided by (used in) investing activities
|
202,779 | (7,275,672 | ) | |||||
|
Cash flows from financing activities:
|
||||||||
|
Borrowings on lines of credit, net of (repayments)
|
4,640,553 | 381,863 | ||||||
|
Principal payments on long term debt
|
(2,816,794 | ) | (1,622,039 | ) | ||||
|
Proceeds of issuance of debt
|
- | 11,300,000 | ||||||
|
Net cash provided by financing activities
|
1,823,759 | 10,059,824 | ||||||
|
Increase (decrease) in cash and cash equivalents
|
512,904 | (34,885 | ) | |||||
|
Cash beginning of period
|
50,989 | 85,874 | ||||||
|
Cash end of period
|
$ | 563,893 | $ | 50,989 | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$ | 1,615,568 | $ | 1,145,887 | ||||
|
Insurance premiums financed
|
$ | 2,351,462 | $ | 581,782 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-27
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules