Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
Pro Forma Condensed Combined Consolidated Balance Sheet
at June 30, 2008
(undaudited)
Energy Services Pro Forma
of America ST Pro Forma CJ Hughes Pro Forma Redemption Pro Forma
Corporation Pipeline Adjustments Construction Adjustments Adjustments Combined
ASSETS
Cash $ 253,327 $ 501,286 $ (501,286)(1) $4,473,120 (1,768,257(5) $7,282,291(10) $10,090,481
(150,000)(12)
Cash and Cash Equivalents
in trust 50,401,926 (16,299,615)(4) (17,083,169)(7) (17,019,142)(10) -
Cash held in trust from
Underwriter 1,032,000 (1,032,000)(11) -
Accounts Receivable, including
retainage - 19,935,242 18,495,916 38,431,158
Costs and estimated earnings in
excess of billings on
uncompleted contracts 2,623,840 3,113,251 5,737,091
Prepaid expenses and inventory 499,072 662,670 (231,885)(4) 2,601,414 (231,885)(7) 3,299,386
---------- ---------- ----------- ---------- ----------- ----------- -----------
Total Current Assets 52,186,325 23,723,038 (17,032,786) 28,683,701 (19,083,311) (10,918,851) 57,558,116
Total fixed assets
(net of accumulated
depreciation - 5,672,193 4,649,257(3) 9,414,941 4,582,845(6) 24,319,236
Goodwill and other intangibles - - 6,050,628(4) 1,957,982 25,678,083(7) 33,686,693
Other Assets 77,516 839 78,355
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total Assets $52,186,325 $29,472,747 $(6,332,901) $40,057,463 11,177,617 $(10,918,851) $115,642,400
=========== =========== =========== =========== ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - $ 502,291 $ 5,246,102 $ 5,748,393
Accrued Expenses $ 109,611 1,651,974 5,080,677 6,842,262
Lines of credit - 4,141,320 5,700,000 9,841,320
Current maturities of long
term debt - 575,953 $1,000,000(4) 1,959,961 3,535,914
Short term notes payable
non-interest bearing 10,004,623(1) - (5) 10,004,623
Billings in excess of costs and
estimated earnings on
uncompleted contracts - 776,699 776,699
Advances from Stockholders 150,000 - - $(150,000)(12) -
Due to Underwriter 1,032,000 - (1,032,000)(11) -
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total current liablities 1,291,611 6,871,538 11,004,623 18,763,439 - (1,182,000) 36,749,211
Deferred Taxes 1,833,138(6) 1,833,138
Long-term debt, less current
maturities 3,263,685 2,000,000(4) 7,625,503 12,889,188
Advances from Stockholders
long term 6,013,000 6,013,000
----------- ----------- ----------- ----------- ---------- ------------ -------------
Total Liabilities 1,291,611 10,135,223 13,004,623 32,401,942 1,833,138 (1,182,000) 57,484,537
----------- ----------- ----------- ----------- ---------- ------------ -------------
Common Stock subject to Possible
redemption 1,719,140 shares at
redemption value 10,281,642 - - (10,281,642)(8) -
Commitments
Stockholders' Equity
Preferred stock - - -
Common Stock Par Value 903 75,000 (75,000)(4) 5,000 (4,704)(7) 9(8) 1,208
Additional paid-in capital 38,426,068 - 4,724,551 12,275,15(7) 544,782 (855,970,554)
Retained Earnings 2,186,101 20,218,214 (10,505,909)(1) 3,272,071 (1,768,257)(5) 2,186,101
- 2,749,707(6)
4,649,257(3) (4,253,521)(7)
(14,361,562)(4)
Less: cost of treasury stock - (955,690) 955,690(4) (346,101) 346,101 (7) -
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total Stockholders' Equity 40,613,072 19,337,524 (19,337,524) 7,655,521 9,344,479 544,791 58,157,863
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total Liabilities and
Stockholders $52,186,325 $29,472,747 $(6,332,901) $40,057,463 11,177,617 $(10,918,851) $115,642,400
=========== =========== =========== =========== ========== ============ ============
<page>
Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
Nine months ended June 30, 2008
(Unaudited)
Energy Services ST Pipeline CJ Hughes
of America Pro Forma Pro Forma Redemption Pro Forma
Corporation ST Pipeline Adjustments C J Hughes Adjustments Adjustments Combined
Contract Revenues $ 64,359,881 $ 85,460,591 1 $149,820,472
Cost of Revenues 45,355,545 $ 697,389(1) 76,044,002 $ 687,427(1) 122,784,362
----------- ------------- ----------- ----------- ----------- ----------- ------------
Gross Profit 19,004,336 (697,389) 9,416,589 (687,427) - 27,036,110
General and administrative expenses $ 237,574 1,349,480 3,296,147 4,883,201
-
----------- ------------- ----------- ----------- ----------- ----------- -----------
Net income( loss) from operations
before taxes (237,574) 17,654,856 (697,389) 6,120,442 (687,427) - 22,152,908
Interest Income 1,412,193 41,739 (450,554)(2) 80,672 (476,824)(2) (358,861) 248,365
Interest Expense (170,713) (168,750)(3) (905,823) (1,245,286)
Other Income (Expense) 148,115 62,126 210,241
----------- ------------- ----------- ----------- ---------- ----------- -----------
Net Income before tax 1,174,619 17,673,997 (1,316,693) 5,357,417 (1,164,251) (358,861) 21,366,228
Income taxes 457,000 - 6,542,922(4) 102,415 1,701,607(4) (107,658) 8,696,286
----------- ------------- ----------- ----------- ---------- ----------- -----------
Income (loss) before variable
interest entity 717,619 17,673,997 (7,859,615) 5,255,002 (2,865,858) (251,203) 12,669,942
Income(loss) attributable to variable
interest entity (15,818) (15,818)
----------- ------------- ----------- ----------- ----------- ----------- -----------
Net Income $ 717,619 $ 17,673,997 $(7,859,615) $ 5,239,184 $(2,865,858) $(251,203) $12,654,124
=========== ============= =========== =========== =========== =========== ===========
Weighted average shares outstanding
- basic 10,750,000 2,964,763 (1,622,456) 12,092,307
----------- ----------- ----------
Weighted average shares- diluted 13,160,643 2,964,763 (1,622,456) 14,502,950
=========== ----------- ----------
Net income per share- basic $ 0.07 $ 1.05
=========== ==========
Net income per share- diluted $ 0.05 $ 0.87
=========== ==========
<page>
Energy Services of America Corporation
ST Pipeline, Inc./C.J. Hughes
Notes to Pro Forma Financial Statements
Note 1 - Description of Transactions and Basis of Presentation
The proforma information reflects the transactions as if they were
completed as of June 30, 2008 and for the nine months then ended. The
acquisitions will be accounted for as acquisitions by Energy Services of ST
Pipeline and of C.J. Hughes. Accordingly, the assets and liabilities of ST
Pipeline and C.J. Hughes will be recorded at their respective fair values on the
date the acquisitions are completed. The pro forma adjustments included herein
are subject to change as additional information becomes available and additional
analyses are performed.
The unaudited pro forma condensed combined consolidated financial
statements have been prepared to reflect the 1,622,456 shares of stock redeemed
in accordance with shareholder elections.
Note 2 - Purchase Price and Preliminary Purchase Price Allocation
ST Pipeline
The total consideration paid for ST Pipeline is up to $19.0 million in
cash, less $400,000 of assets to be distributed, and plus $600,000 in purchase
price adjustment for taxes due by ST Pipeline shareholders attributable to the
tax election made by ST Pipeline and Energy Services, for a total purchase price
of $19.2 million.
For purposes of these pro forma financial statements, Energy Services
is allocating, of the total purchase price of $19.2 million plus $315,000 of
acquisition costs, $23.2 million to current assets, $10.3 million to fixed
assets, $100,000 to other assets and $6.1 million to goodwill. Energy Services
will also assume $20.1 million of liabilities of ST Pipeline.
The estimated goodwill of $6.1 million resulting from the $19.2 million
purchase of ST Pipeline is a result of the analysis of the historical operating
performance of ST Pipeline as an indication of future cash flows, and also the
risks associated with those cash flows. The operating results for 2007 were the
result of one large contract totaling $92 million, which was 3.8 times larger
than any previous contract performed, and accounted for 92% of 2007 revenue. It
is not anticipated that either contracts of this size or the level of revenue
realized in 2007 will recur. Factors contributing to the determination of
goodwill include the historical operating performance of the company in 2006 and
prior years and the outlook for future earnings and ST Pipeline's reputation and
existing workforce. Mitigating factors that were considered include the fact
that ST Pipeline primarily services one segment of the pipeline business,
concentrating in the repair and construction of transmission lines that carry
natural gas from location to location rather than to the ultimate consumer. The
demand for transmission lines is dependent on the demand for increased
production and delivery capacity, which can vary greatly. Additional mitigating
factors included dependency on its owner for management. The dividends payable
to the owner prior to closing of a significant portion of 2007 earnings and
substantially all of 2008 earnings is not considered a negative factor. ST
Pipeline will continue to have equity in excess of $9 million, which together
with its access to credit and cash flow generated should be adequate for its
anticipated level of operations.
<page>
The purchase price allocation did not result in the recognition of
other identifiable intangible assets. ST Pipeline was not determined to have
trademarks or other marketing related intangible assets. Additionally, no
customer related or contract related intangible assets were identified. It is
not anticipated that any material identifiable intangible assets will be
recorded in the final purchase price allocation.
C.J. Hughes
The total consideration paid for C.J. Hughes is $34.0 million plus
$315,000 of acquisition costs, payable in $17.0 million of cash and 2,964,763
shares of Energy Services common stock valued at $17.0 million.
For purposes of these pro forma financial statements, Energy Services
is allocating, of the total purchase price of $34.0 million, $26.9 million to
current assets, $14.0 million to fixed assets and $27.6 million to goodwill.
Energy Services also assumed $32.4 million of liabilities of C.J. Hughes and
recorded $1.8 million in deferred tax liabilities related to the purchase
accounting adjustments.
The estimated goodwill of $27.6 million resulting from the $34.0
million purchase of C.J. Hughes is a result of the analysis of the historical
operating performance of C.J. Hughes as an indication of future cash flows, and
also the risks associated with those cash flows. The operating results for 2007
were considered to be indicative of future operating performance, and contained
only partial year results for Nitro Electric. In contrast to ST Pipeline, C.J.
Hughes services both the distribution and transmission segments of the pipeline
industry. C.J. Hughes installs water, sewer, and gas lines, as well as performs
pipeline work at industrial plants. Although the average contract size is
smaller than that for transmission lines, the demand is steadier and contracts
are considered to have less risk. Similarly, the Nitro Electric division
provides electrical contracting services to both industrial and commercial
customers. Their services include the installation and repair of electrical
systems for their customers and include wiring, piping, testing and equipment
installation. Other factors considered in the determination of the purchase
price and resultant goodwill were the experienced management team at C.J.
Hughes, the seasoned workforce and the length of time that C.J. Hughes has
served its markets, as well as its reputation in the market. C.J. Hughes has
developed an infrastructure (people and equipment) that has enabled it to manage
its recent substantial growth, and is well positioned to continue that growth in
the future.
C.J. Hughes purchased certain assets of Nitro Electric, principally
fixed assets and the franchise base, in May 2007 for $2.7 million. At that time
the ownership of Nitro Electric had ceased to pursue new work and was in the
process of terminating the business. The management of C.J. Hughes, together
with the retained management of Nitro Electric, was able to recapture the
markets previously serviced by Nitro Electric as well as expand into new areas,
including working in conjunction with C.J. Hughes' customer base and on joint
projects with C.J. Hughes. This aggressive strategy greatly enhanced the overall
value of C.J. Hughes and its prospects for future earnings.
The debt of C.J. Hughes is a result of the expansion of the business
and the funding of greatly increased accounts receivable levels, and is not
considered excessive considering the company's cash flow and resources. The
dividends to be paid of 50% of the profits of C.J. Hughes prior to closing are
largely in lieu of payments for income taxes and are not considered a negative
factor.
<page>
The purchase price allocation did not result in the recognition of
other identifiable intangible assets. C.J. Hughes was not determined to have
trademarks or other marketing related intangible assets. Additionally, no
customer related or contract related intangible assets were identified. It is
not anticipated that any material identifiable intangible assets will be
recorded in the final purchase price allocation.
Note 3- Pro Forma Balance Sheet Entries
ST Pipeline
(1) This entry is to reflect the withdrawal by the shareholders of ST
Pipeline prior to closing of (a) the income of ST Pipeline for 2007,
net of $4.2 million retained and (b) 95% of the 2008 net income of ST
Pipeline through the month end prior to closing, and net of $18.4
million of previous withdrawals, of $10.5 million. Should there not be
enough cash in the in the company at the time of closing, the
deficiency would become a notes payable of the company to be paid as
accounts receivables are collected and therefore would be of a short
term nature. Since the anticipated withdrawal would exceed the amount
of cash of $0.5 million at June 30, 2008, the remaining $10.0 million
is treated as a short-term noninterest bearing note payable.
(2) [Intentionally omitted]
(3) This entry is to reflect the anticipated $4.6 million markup to fair
value of equipment at ST Pipeline based upon an evaluation of current
market prices for replacement equipment of similar age and condition.
As a result of the tax election to treat the acquisition of ST
Pipeline as a purchase of assets, Energy Services will have a tax
basis in the assets acquired and liabilities assumed equal to their
fair value. Therefore, no deferred tax assets or liabilities are
created.
(4) This entry is to reflect the elimination of the existing equity
accounts for ST Pipeline, to reflect the payment of $16.2 million out
of the Trust account to the shareholders of ST Pipeline and $83,000
for transaction costs as well as setting up a note payable for $3.0
million for the remaining balance due the shareholders of ST Pipeline
and to recognize projected goodwill of $6.1 million to be created from
this transaction. The note payable to ST Pipeline Shareholders
includes the $1.0 million of contingent payments as the project
involving that payment is now completed and the conditions for payment
have been satisfied.
C.J. Hughes
(5) This entry is to reflect the anticipated withdrawal of $1.8 million
from retained earnings of C.J. Hughes to distribute to shareholders of
C.J. Hughes for payment of estimated 2007 and 2008 S-Corporation
taxes. At June30, 2008, the cash available for distribution is $4.4
million. Therefore, the entire distribution is reflected as a
reduction in cash.
(6) This entry is to reflect the anticipated $4.6 million adjustment to
fair value of the fixed assets at C.J. Hughes based upon an assessment
of the value of the majority of the equipment and the estimated value
of the remaining equipment two years old or less based on purchase
price. An adjustment has been made to record the deferred tax
liability of $1.8 million related to this fixed asset adjustment.
<page>
(7) This entry is to reflect the elimination of existing equity accounts
at C.J. Hughes, the payment of $17,000,000 in cash to those
shareholders out of the trust account, the payment of $83,000 in
transaction costs, the anticipated issuance of 2,964,763 shares of
Energy Services stock valued at $17.0 million to the shareholders of
C.J. Hughes and to reflect the anticipated goodwill of $27.6 million
to be created from this transaction.
Other Pro Forma Adjustments
(8) This entry is to reflect the 1,622,456 shares redeemed per the election
of those shareholders.
(9) [Intentionally omitted]
(10) This entry reflects the anticipated removal of the remaining cash from
the trust of $7.3 million.
(11) This entry is to reflect the payment to the underwriter of the
deferred fees, net of pro rata payment for shareholder redemption, of
$1.0 million.
(12) This entry is to reflect the repayment of the $150,000 advance by
Marshall T. Reynolds.
Note 4- Pro Forma Income Statement Entries
(1) These entries are to reflect the adjustment to depreciation expense
based on depreciating the fair value of the equipment over its estimated
remaining life of 5 years. These amounts were determined by dividing the
adjustments to fixed assets number 3 on the pro forma balance sheet for
ST Pipeline ($4,649,257) and number 6 on the pro forma balance sheet
adjustments for C.J. Hughes ($4,582,845) by the remaining life of 5
years. For the nine-months ended June 30, 2008, the proportionate amount
of the yearly total was used.
(2) These entries reflect the loss of investment income on the anticipated
cash payments to be made to the shareholders of ST Pipeline of
$16,299,615 (see Pro Forma Balance Sheet adjustment 4) and C.J. Hughes
of $17,083,169 (see Pro Forma Balance Sheet adjustment 7). These amounts
also include $83,169 for each company in unpaid transaction costs. Rates
used for that calculation were based upon actual yields on the fund of
3.69% for the nine-months ended June 30, 2008.
(3) These entries are to reflect the added interest costs relating to the
$3.0 million notes anticipated to be issued to the shareholders of ST
Pipeline. Those notes will carry an interest rate of 7.50%.
(4) These entries are to reflect the anticipated added tax liabilities that
would have been created had ST Pipeline and C.J. Hughes been C
Corporations for tax purposes. The calculations were made using a
projected combined Federal and State income tax rate of 40% as applied
to the pre tax income for each entity for the appropriate periods.
(5) These entries are to reflect the lost investment income from the
1,622,456 Energy Services shares redeemed per the election of those
shareholders. The amounts for this adjustment are calculated by
multiplying the redemption values times the trust fund yields for the
nine months ended June 30, 2008. Taxes were calculated on these amounts
at a combined Federal and State rate of 40%.