Notice & Proxy
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SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

 

 

Filed by the Registrant x   Filed by a Party other than the Registrant ¨

 

Check the appropriate box:

 

x  Preliminary Proxy Statement

 

¨  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

¨  Definitive Proxy Statement

 

¨  Definitive Additional Materials

 

¨  Soliciting Material Under Rule 14a-12

 

 

 

ARPEGGIO ACQUISITION CORPORATION


(Name of Registrant as Specified in Its Charter)

 

 

 


(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

 

Payment of Filing Fee (Check the appropriate box):

 

¨  No fee required.

 

x  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1)  Title of each class of securities to which transaction applies:

 

      Common stock of Arpeggio Acquisition Corporation

 
  (2)  Aggregate number of securities to which transaction applies:

 

      14,500,000

 
  (3)  Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

      Average of high and low prices for common stock on February 8, 2006 ($5.665)

 
  (4)  Proposed maximum aggregate value of transaction:

 

      $82,142,500

 
  (5)  Total fee paid:

 

      $8,789.25

 

 

¨  Fee paid previously with preliminary materials:

 

¨  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

  (1)  Amount previously paid:

 

 
  (2)  Form, Schedule or Registration Statement No.:

 

 
  (3)  Filing Party:

 

 
  (4)  Date Filed:

 

 

 

 


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Arpeggio Acquisition Corporation

10 East 53rd Street, 35th Floor

New York, New York 10022

 

To the Stockholders of Arpeggio Acquisition Corporation:

 

You are cordially invited to attend a special meeting of the stockholders of Arpeggio Acquisition Corporation (“Arpeggio”) relating to the proposed merger of Hill International, Inc. into Arpeggio and related matters. The meeting will be held at 10:00 a.m., eastern time, on                     , 2006, at the offices of Graubard Miller, our counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.

 

At this meeting, you will be asked to consider and vote upon the following proposals:

 

(1) to adopt the Agreement and Plan of Merger, dated as of December 5, 2005, as amended on December 30, 2005, among Arpeggio, Hill International, Inc., a Delaware corporation (“Hill”), and the stockholders of Hill (the “Signing Stockholders”) and the transactions contemplated thereby – we refer to this proposal as the merger proposal;

 

(2) to approve an amendment to the certificate of incorporation of Arpeggio to change the name of Arpeggio from “Arpeggio Acquisition Corporation” to “Hill International, Inc.” - we refer to this proposal as the name change amendment;

 

(3) to approve an amendment to the certificate of incorporation of Arpeggio to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000 – we refer to this proposal as the capitalization amendment;

 

(4) to approve an amendment to the certificate of incorporation of Arpeggio to remove the preamble and sections A through D, inclusive, of Article Sixth from the certificate of incorporation from and after the closing of the merger, as these provisions will no longer be applicable to Arpeggio, and to redesignate section E of Article Sixth as Article Sixth – we refer to this proposal as the Article Sixth amendment; and

 

(5) to approve the 2006 Employee Stock Option Plan – we refer to this proposal as the stock option plan proposal.

 

The affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date is required to approve each of the merger proposal, the name change amendment, the capitalization amendment and the Article Sixth Amendment. The approval of the stock option plan will require the affirmative vote of the holders of a majority of the shares of Arpeggio’s common stock represented in person or by proxy and entitled to vote at the meeting.

 

The adoption of the merger proposal is conditioned on the adoption of the name change amendment and the capitalization amendment, and neither the name change amendment nor the capitalization amendment will be presented to the meeting for adoption unless the merger is approved. The adoption of the Article Sixth amendment and the stock option plan proposal are not conditions to the merger proposal or to the adoption of either of the name change amendment or the capitalization amendment but, if the merger is not approved, neither will be presented at the meeting for adoption.


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Each Arpeggio stockholder who holds shares of common stock issued in Arpeggio’s initial public offering (“IPO”) has the right to vote against the merger proposal and at the same time demand that Arpeggio convert such stockholder’s shares into cash equal to a pro rata portion of the funds held in the trust account into which a substantial portion of the net proceeds of Arpeggio’s IPO was deposited. As of                      , 2006, the record date for the meeting of stockholders, the conversion price was approximately $              in cash for each share of Arpeggio common stock. These shares will be converted into cash only if the merger agreement is consummated. However, if the holders of 20% or more shares (1,360,000 shares) of common stock issued in Arpeggio’s IPO vote against the merger proposal and demand conversion of their shares, Arpeggio will not consummate the merger. Prior to exercising conversion rights, Arpeggio stockholders should verify the market price of Arpeggio’s common stock, as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights. Shares of Arpeggio’s common stock are currently quoted on the Over-the-Counter Bulletin Board under the symbol APGO. On the record date, the last sale price of Arpeggio’s common stock was $            .

 

Arpeggio’s initial stockholders who purchased their shares of common stock prior to its IPO, and presently own an aggregate of approximately 18.1% of the outstanding shares of Arpeggio common stock, have agreed to vote all of their shares on the merger proposal in accordance with the vote of the majority of the votes cast by the holders of shares issued in connection with the IPO. The initial stockholders have also indicated that they intend to vote “FOR” the adoption of the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal.

 

After careful consideration, Arpeggio’s board of directors has determined that the merger proposal is fair to and in the best interests of Arpeggio and its stockholders. Arpeggio’s board of directors has also determined that the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal are also in the best interests of Arpeggio’s stockholders. Arpeggio’s board of directors unanimously recommends that you vote or give instruction to vote “FOR” the adoption of the merger proposal, the name change amendment proposal, the capitalization amendment, the Article Sixth amendment and the stock option plan.

 

Enclosed is a notice of special meeting and proxy statement containing detailed information concerning the merger proposal and the transactions contemplated thereby, as well as detailed information concerning the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal. Whether or not you plan to attend the special meeting, we urge you to read this material carefully.

 

Your vote is important. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided.

 

I look forward to seeing you at the meeting.

 

Sincerely,
Eric S. Rosenfeld
Chairman of the Board,
Chief Executive Officer and President


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Neither the Securities and Exchange Commission nor any state securities commission has determined if this proxy statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

SEE “RISK FACTORS” FOR A DISCUSSION OF VARIOUS

FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE MERGER.

 

This proxy statement is dated                     , 2006 and is first being mailed to Arpeggio stockholders on or about                     , 2006.


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Arpeggio Acquisition Corporation

10 East 53rd Street, 35th Floor

New York, New York 10022

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON                          , 2006

 

TO THE STOCKHOLDERS OF ARPEGGIO ACQUISITION CORPORATION:

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Arpeggio Acquisition Corporation (“Arpeggio”), a Delaware corporation, will be held at 10:00 a.m. eastern time, on                     , 2006, at the offices of Graubard Miller, our counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor New York, New York 10174 for the following purposes:

 

(1) to consider and vote upon the adoption of the Agreement and Plan of Merger, dated as of December 5, 2005, as amended on December 30, 2005, among Arpeggio, Hill International, Inc., a Delaware corporation (“Hill”), and the stockholders of Hill (the “Signing Stockholders”), and the transactions contemplated thereby. Hill’s board of directors and the Signing Stockholders have already approved and adopted the Merger Agreement;

 

(2) to consider and vote upon an amendment to the certificate of incorporation of Arpeggio to change the name of Arpeggio from “Arpeggio Acquisition Corporation” to “Hill International, Inc.;”

 

(3) to consider and vote upon an amendment to the certificate of incorporation of Arpeggio to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000;

 

(4) to consider and vote upon an amendment to the certificate of incorporation of Arpeggio to remove the preamble and sections A through D, inclusive, of Article Sixth from the certificate of incorporation from and after the closing of the merger, as these provisions will no longer be applicable to Arpeggio, and to redesignate section E of Article Sixth as Article Sixth; and

 

(5) to consider and vote upon the approval of the 2006 Employee Stock Option Plan.

 

These items of business are described in the attached proxy statement, which we encourage you to read in its entirety before voting. Only holders of record of Arpeggio’s common stock at the close of business on                          , 2006 are entitled to notice of the special meeting and to vote at the special meeting and any adjournments or postponements of the special meeting. Only the holders of record of Arpeggio common stock on that date are entitled to have their votes counted at the Arpeggio special meeting and any adjournments or postponements of it. Arpeggio will not transact any other business at the special meeting except for business properly brought before the special meeting or any adjournment or postponement of it by Arpeggio’s board of directors.

 

A complete list of Arpeggio stockholders of record entitled to vote at the special meeting will be available for 10 days before the special meeting at the principal executive offices of Arpeggio for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting.

 

Your vote is important regardless of the number of shares you own. The first, second, third and fourth proposals must be approved by the holders of a majority of the outstanding shares of Arpeggio common stock. The fifth proposal must be approved by the holders of a majority of the shares of Arpeggio common stock present in person or represented by proxy and entitled to vote at the meeting.

 

All Arpeggio stockholders are cordially invited to attend the special meeting in person. However, to ensure your representation at the special meeting, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of Arpeggio common stock, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the merger, the name change amendment, the capitalization amendment and the Article Sixth amendment.

 

The board of directors of Arpeggio unanimously recommends that you vote “FOR” each of the proposals, which are described in detail in the accompanying proxy statement.

 

By Order of the Board of Directors

 

                         , 2006


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TABLE OF CONTENTS

 

Section Heading


   Page

SUMMARY OF MATERIAL TERMS OF THE MERGER

   1

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

   2

SUMMARY OF THE PROXY STATEMENT

   11

The Parties

   11

The Merger

   13

Arpeggio’s Recommendations to Stockholders; Reasons for the Merger

   13

The Certificate of Incorporation Amendments

   14

The Proposed Arpeggio Employee Stock Option Plan

   14

Management of Arpeggio and Hill

   14

Voting Agreement

   15

Arpeggio Inside Stockholders

   15

Merger Consideration

   15

Fairness Opinion

   15

Escrow Agreement - Indemnification of Arpeggio

   16

Lock-Up Agreements

   17

Date, Time and Place of Special Meeting of Arpeggio’s Stockholders

   17

Voting Power; Record Date

   17

Approval of the Hill stockholders

   17

Quorum and Vote of Arpeggio Stockholders

   17

Relation of Proposals

   18

Proxies

   19

Interests of Arpeggio Directors and Officers in the Merger

   19

Conditions to the Closing of the Merger

   20

Termination, Amendment and Waiver

   21

Quotation or Listing

   22

Tax Consequences of the Merger

   22

Accounting Treatment

   23

Regulatory Matters

   23

Risk Factors

   23

SELECTED SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

   23

Hill’s Summary of Selected Financial Data

   24

Arpeggio’s Selected Historical Financial Information

   25

Selected Unaudited Pro Forma Combined Financial Information of Arpeggio and Hill

   25

Comparative Per Share Data

   26

Market Price and Dividend Data for Arpeggio Securities

   27

Holders

   27

Dividends

   27

RISK FACTORS

   28

FORWARD-LOOKING STATEMENTS

   35

SPECIAL MEETING OF ARPEGGIO STOCKHOLDERS

   36

General

   36

Date, Time and Place

   36

Purpose of the Arpeggio Special Meeting

   36


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Recommendation of Arpeggio Board of Directors

   37

Record Date; Who is Entitled to Vote

   37

Quorum

   38

Abstentions and Broker Non-Votes

   38

Vote of Our Stockholders Required

   38

Voting Your Shares

   39

Revoking Your Proxy

   39

Who Can Answer Your Questions About Voting Your Shares

   39

No Additional Matters May Be Presented at the Special Meeting

   39

Conversion Rights

   40

Appraisal Rights

   40

Proxy Solicitation Costs

   40

Arpeggio Inside Stockholders

   40

THE MERGER PROPOSAL

   41

General Description of the Merger

   41

Background of the Merger

   41

Arpeggio’s Board of Directors’ Reasons for the Approval of the Merger

   44

Satisfaction of 80% Test

   45

Interests of Arpeggio’s Directors and Officers in the Merger

   45

Recommendation of Arpeggio’s Board of Directors

   46

Fairness Opinion

   46

Material Federal Income Tax Consequences of the Merger

   55

Anticipated Accounting Treatment

   56

Regulatory Matters

   56

THE MERGER AGREEMENT

   56

General; Structure of Merger

   56

Closing and Effective Time of the Merger

   57

Name; Headquarters; Stock Symbols

   57

Merger Consideration

   57

Escrow Agreement

   58

Lock-Up Agreements

   58

Employment Agreement

   58

Election of Directors; Voting Agreement

   58

Representations and Warranties

   59

Covenants

   60

Conditions to Closing of the Merger

   63

Indemnification

   65

Termination

   66

Effect of Termination

   66

Fees and Expenses

   66

Confidentiality; Access to Information

   67

Extension; Waiver

   67

Public Announcements

   68

Arbitration

   68

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   68

NAME CHANGE AMENDMENT PROPOSAL

   72

CAPITALIZATION AMENDMENT PROPOSAL

   73

ARTICLE SIXTH AMENDMENT PROPOSAL

   74


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2006 EMPLOYEE STOCK OPTION PLAN PROPOSAL

   75

Summary of the Stock Option Plan

   75

Recommendation and Vote Required

   77

OTHER INFORMATION RELATED TO ARPEGGIO

   78

Business of Arpeggio

   78

Offering Proceeds Held in Trust

   78

Fair Market Value of Target Business

   78

Stockholder Approval of Business Combination

   78

Liquidation If No Business Combination

   78

Facilities

   79

Employees

   79

Periodic Reporting and Audited Financial Statements

   80

Legal Proceedings

   80

Plan of Operations

   80

Off-Balance Sheet Arrangements

   81

BUSINESS OF HILL

   81

General

   81

Construction Industry Background

   81

Project Management Group

   82

Construction Claims Group

   83

Clients

   84

Geographic Regions

   84

Contracts

   84

Backlog

   85

Acquisitions

   85

Competition

   85

Management

   85

Employees

   85

Facilities

   85

Insurance

   86

Legal Proceedings

   86
HILL’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    87

DIRECTORS AND EXECUTIVE OFFICERS OF ARPEGGIO FOLLOWING THE MERGER

   104

Meetings and Committees of the Board of Directors of Arpeggio

   106

Independence of Directors

   106

Audit Committee

   106

Code of Ethics

   108

Compensation Committee Information

   108

Nominating Committee Information

   108

Election of Directors; Voting Agreement

   108

Executive Compensation

   109

Employment Agreements

   109

BENEFICIAL OWNERSHIP OF SECURITIES

   110

Security Ownership of Certain Beneficial Owners and Management

   110

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   114

Arpeggio Related Party Transactions

   114

Hill Related Party Transactions

   115

Section 16(a) Beneficial Ownership Reporting Compliance

   115

DESCRIPTION OF ARPEGGIO COMMON STOCK AND OTHER SECURITIES

   116


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General

   116

Common Stock

   116

Preferred Stock

   116

Warrants

   117

PRICE RANGE OF ARPEGGIO SECURITIES AND DIVIDENDS

   119

Holders

   120

Dividends

   120

STOCKHOLDER PROPOSALS

   120

EXPERTS

   120

WHERE YOU CAN FIND MORE INFORMATION

   121

INDEX TO FINANCIAL STATEMENTS

    

 

ANNEXES

 

A. Agreement and Plan of Merger, as amended
B. Amended and Restated Certificate of Incorporation
C. Form of Arpeggio 2006 Employee Stock Option Plan
D. Fairness Opinion issued to Arpeggio
E. Form of Voting Agreement
F. Form of Escrow Agreement
G. Form of Irvin E. Richter Employment Agreement
H. Form of David L. Richter Employment Agreement
I. Form of Stuart S. Richter Employment Agreement


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SUMMARY OF THE MATERIAL TERMS OF THE MERGER

 

    The parties to the merger are Arpeggio Acquisition Corporation and Hill International, Inc. See the section entitled “The Merger Proposal.”

 

    Hill is a privately-owned independent construction consulting firm headquartered in Marlton, NJ. Hill provides both fee-based project management and construction claims consulting services to clients worldwide. Hill is organized into two key operating divisions: the Project Management Group and the Construction Claims Group. See the section entitled “Business of Hill.”

 

    On closing of the merger, Hill will merge into Arpeggio, with Arpeggio continuing as the surviving corporation. See the section entitled “The Merger Proposal.”

 

    In return for all of their stock in Hill, the stockholders of Hill will receive from Arpeggio, at the closing, 14,500,000 shares of Arpeggio common stock. Hill’s stockholders will also receive up to an additional 6,600,000 shares of Arpeggio common stock, contingent upon the combined companies meeting specified earnings targets. See the section entitled “The Merger Agreement – Merger Consideration.”

 

    As a result of the merger and assuming that no Arpeggio stockholder demands that Arpeggio convert its shares to cash, as permitted by Arpeggio’s certificate of incorporation, immediately after the closing, the stockholders of Hill will own approximately 63.6% of the outstanding Arpeggio common stock and the present stockholders of Arpeggio (or their transferees) will own approximately 36.4% of the outstanding Arpeggio common stock. The percentage ownership of the Hill stockholders will be increased and that of Arpeggio’s stockholders will be decreased upon issuances of the contingent shares to be issued by Arpeggio if the combined companies meet some or all of the earnings targets. See the section entitled “The Merger Agreement – Merger Consideration.”

 

    12.0% of the Arpeggio shares to be received by the Hill stockholders at the closing of the merger will be placed in escrow as a fund for the payment of indemnification claims that may be made by Arpeggio as a result of breaches of Hill’s covenants, representations and warranties in the merger agreement. See the section entitled “The Merger Agreement – Escrow Agreement.”

 

    In addition to voting on the merger, the stockholders of Arpeggio will vote on proposals to change its name to Hill International, Inc., to increase the number of shares of common stock it is authorized to issue to 75,000,000 from 30,000,000, to amend its charter to delete certain provisions that will no longer be applicable after the merger and to approve a stock option plan. See the sections entitled “Name Change Amendment Proposal”, “Capitalization Amendment Proposal”, “Article Sixth Amendment Proposal” and “Stock Option Plan Proposal.”

 

    The stockholders of Hill have agreed not to sell any of the shares of Arpeggio common stock they receive in the merger until December 31, 2007, subject to certain exceptions, including the right to use their shares to secure margin loans not to exceed 20% of the value of the shares at the time the loans are made. See the section entitled “The Merger Agreement – Lock-Up Agreement.”

 

    After the merger, the directors of Arpeggio will be five persons who will be designated by Irvin E. Richter, David L. Richter and Brady H. Richter (“Signing Stockholders”), on the one hand, and two persons who will be designated by Eric S. Rosenfeld, chairman, chief executive officer and president of Arpeggio, and Arnaud Ajdler, chief financial officer, secretary and a director of Arpeggio, on the other hand, in accordance with a voting agreement to be entered into at the closing. The voting agreement will provide that the Signing Stockholders and Messrs. Rosenfeld and Ajdler will vote their shares of Arpeggio stock in favor of their respective designees to serve as directors of Arpeggio through the annual meeting of stockholders of Arpeggio to be held in 2007. See the section entitled “The Merger Agreement – Election of Directors; Voting Agreement.”

 

    After the merger, all of the officers of Arpeggio will be persons who presently hold similar positions with Hill, including Irvin E. Richter as chairman and chief executive officer and David L. Richter as president and chief operating officer. Irvin Richter and David Richter will enter into three-year employment agreements with Arpeggio, effective upon the consummation of the merger. None of the present officers of Arpeggio will continue in their positions after the merger. See the section entitled “The Merger Agreement – Employment Agreements.”

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

 

Q.    Why am I receiving this proxy statement?    A.   

Arpeggio and Hill have agreed to a business combination under the terms of the agreement and plan of merger dated December 5, 2005, as amended on December 30, 2005, that is described in this proxy statement. This agreement is referred to as the merger agreement. A copy of the merger agreement, as amended, is attached to this proxy statement as Annex A, which we encourage you to review.

 

In order to complete the merger, Arpeggio stockholders must vote to approve (i) the merger agreement, (ii) an amendment to Arpeggio’s certificate of incorporation to change the name of Arpeggio from “Arpeggio Acquisition Corporation” to “Hill International, Inc.” and (iii) an amendment to Arpeggio’s certificate of incorporation to increase the number of shares of authorized common stock from 30,000,000 to 75,000,000. Arpeggio stockholders will also be asked to vote to approve (i) an amendment to Arpeggio’s certificate of incorporation to make certain modifications to Article Sixth thereof and (ii) the stock option plan, but such approvals are not conditions to the merger. The stock option plan has been approved by Arpeggio’s board of directors and will be effective upon consummation of the merger, if approved by stockholders. Arpeggio’s amended and restated certificate of incorporation, as it will appear if all amendments to its certificate of incorporation are approved, is annexed as Annex B hereto. The stock option plan is annexed as Annex C hereto.

 

Arpeggio is holding a special meeting of its stockholders to obtain these approvals. This proxy statement contains important information about the proposed merger, the other proposals and the special meeting of Arpeggio stockholders. You should read it carefully.

 

Your vote is important. We encourage you to vote as soon as possible after carefully reviewing this proxy statement.

Q.    Why is Arpeggio proposing the merger?    A.    Arpeggio was organized to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Hill is a privately-owned, independent construction management firm, providing both fee-based project management and construction claims consulting services to clients worldwide. Arpeggio believes that Hill, with its recent acquisitions, high profile and complex projects, is positioned for significant growth in present and future construction markets and believes that a business combination with Hill will provide Arpeggio stockholders with an opportunity to participate in a company with significant growth potential.

 

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Q.    What is being voted on?    A.   

There are five proposals on which the Arpeggio stockholders are being asked to vote. The first proposal is to adopt and approve the merger agreement and the transactions contemplated thereby. We refer to this proposal as the merger proposal.

 

The second proposal is to approve an amendment to the certificate of incorporation to change the name of Arpeggio from “Arpeggio Acquisition Corporation” to “Hill International, Inc.” We refer to this proposal as the name change amendment.

 

The third proposal is to approve an amendment to the certificate of incorporation to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000. We refer to this proposal as the capitalization amendment.

 

The fourth proposal is to approve an amendment to the certificate of incorporation to remove the preamble and sections A through D, inclusive, of Article Sixth from the Certificate of Incorporation from and after the closing and to redesignate section E of Article Sixth as Article Sixth. The items being removed will no longer be operative upon consummation of the merger; therefore, this amendment is being proposed to revise the certificate of incorporation on a going-forward basis. We refer to this proposal as the Article Sixth amendment.

 

The fifth proposal is to approve Arpeggio’s Stock Option Plan. We refer to this proposal as the stock option plan proposal.

Q.    What vote is required in order to adopt the merger proposal?    A.    The approval of the merger will require the affirmative vote of holders of a majority of the outstanding shares of Arpeggio’s common stock. If the holders of 20% or more of the shares of the common stock issued in Arpeggio’s initial public offering (the “IPO”) pursuant to its prospectus, dated June 24, 2004, vote against the merger and demand that Arpeggio convert their shares into a pro rata portion of Arpeggio’s trust account as of the record date, then the merger will not be consummated. No vote of the holders of Arpeggio’s warrants is necessary to adopt the merger proposal or other proposals and Arpeggio is not asking the warrant holders to vote on the merger proposal or the other proposals. Arpeggio will not consummate the merger transaction unless both the name change amendment and the capitalization amendment are also approved. The approvals of the Article Sixth amendment and the stock option plan proposal are not conditions to the consummation of the merger. The stock option plan has been approved by Arpeggio’s Board of Directors and will be effective upon consummation of the merger, subject to stockholder approval of the plan. If the merger proposal is not approved, none of the other proposals will be presented for approval.
Q.    What vote is required in order to adopt the name change amendment?    A.    The approval of the name change amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio’s common stock. The approval of the name change amendment is a condition to the consummation of the merger.

 

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Q.    What vote is required in order to adopt the capitalization amendment?    A.    The approval of the capitalization amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio’s common stock. The approval of the capitalization amendment is a condition to the consummation of the merger.
Q    What vote is required in order to adopt the Article Sixth amendment?    A.    The approval of the Article Sixth amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio’s common stock. The approval of the Article Sixth amendment is not a condition to the consummation of the merger or to the effectuation of the name change amendment or the capitalization amendment.
Q.    What vote is required in order to adopt the stock option plan proposal?    A.    The approval of the stock option plan proposal will require the affirmative vote of the holders of a majority of the shares of Arpeggio common stock represented in person or by proxy and entitled to vote at the special meeting. The approval of the stock option plan proposal is not a condition to the approval of the merger or to the effectuation of the name change amendment or the capitalization amendment.
Q.    Why is Arpeggio proposing the stock option plan?    A.    Arpeggio is proposing the stock option plan to enable it to attract, retain and reward its directors, officers, employees and consultants using equity-based incentives. The stock option plan has been approved by Arpeggio’s board of directors and will be effective upon consummation of the merger, subject to stockholder approval of the plan.

 

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Q.    Does the Arpeggio board recommend voting in favor of the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal?    A.   

Yes. After careful consideration of the terms and conditions of the merger agreement, the amendments to the certificate of incorporation and the stock option plan, the board of directors of Arpeggio has determined that the merger and the transactions contemplated thereby are fair to and in the best interests of Arpeggio and its stockholders. The Arpeggio board of directors recommends that Arpeggio stockholders vote FOR each of (i) the merger proposal, (ii) the name change amendment, (iii) the capitalization amendment, and (iv) the Article Sixth amendment and (v) the stock option plan proposal. The members of Arpeggio’s board of directors have interests in the merger that are different from, or in addition to, your interests as a stockholder. For a description of such interests, please see the section entitled “Summary of the Proxy Statement – Interests of Arpeggio Directors and Officers in the Merger.”

 

For a description of the factors considered by Arpeggio’s board of directors in making its determination, see the section entitled “Arpeggio Board of Directors’ Reasons for Approval of the Merger.

 

Arpeggio has obtained an opinion from Capitalink, L.C. that the merger is fair, from a financial perspective, to the stockholders of Arpeggio. For a description of the fairness opinion and the assumptions made, matters considered and procedures followed by Capitalink in rendering such opinion, see the section entitled “Fairness Opinion.

Q.    What will happen in the proposed merger?    A.    As a consequence of the merger, Hill will be merged with and into Arpeggio and Arpeggio will continue as the surviving corporation. Stockholders of Hill will become stockholders of Arpeggio and will own approximately 63.6% of the shares of Arpeggio common stock outstanding immediately after the merger assuming that no shares are converted into their pro rata share of the trust fund.
Q.    How do the Arpeggio insiders intend to vote their shares?    A.    All of the Arpeggio insiders (including all of Arpeggio’s officers and directors) have agreed to vote the shares held by them that they acquired prior to the IPO on the merger proposal in accordance with the vote of the majority of the shares of common stock issued in the IPO. They have indicated that they will vote the shares held by them in favor of the certificate of incorporation amendments and the stock option plan proposal.
Q.    What will I receive in the proposed merger?    A.    Arpeggio stockholders will receive nothing in the merger. Arpeggio stockholders will continue to hold the shares of Arpeggio common stock that they owned prior to the merger.

 

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Q.    What will Hill security holders receive in the proposed merger?    A.    The persons who are stockholders of Hill at the time of the merger will receive 14,500,000 shares of Arpeggio common stock at the closing of the merger. Of the shares to be issued to the Hill stockholders at the closing, 1,740,000 shares, or 12%, will be placed in escrow to secure Arpeggio’s indemnity rights under the merger agreement. The Hill stockholders will receive up to an additional 6,600,000 shares of Arpeggio common stock, contingent upon the combined companies attaining certain Earnings Before Interest and Taxes (“EBIT”) targets. See the section entitled “Merger Consideration.”
Q.    How much of Arpeggio will existing Arpeggio stockholders own after the merger?    A.    Immediately after the merger, if no Arpeggio stockholder demands that Arpeggio convert its shares into a pro rata portion of the trust account, then existing Arpeggio’s stockholders will own approximately 36.4% of the outstanding common stock of Arpeggio. Existing Arpeggio stockholders would own less than that percentage of shares if one or more Arpeggio stockholders vote against the merger proposal and demand conversion of their shares into a pro rata portion of the trust account. The ownership percentages of existing Arpeggio stockholders will also be reduced to the extent that contingent shares are issued to the Hill stockholders as a result of the combined companies meeting specified earnings targets after the merger.
Q.    Do I have conversion rights?    A.    If you hold shares of common stock issued in Arpeggio’s IPO, then you have the right to vote against the merger proposal and demand that Arpeggio convert such shares into a pro rata portion of the trust account in which a substantial portion of the net proceeds of Arpeggio’s IPO are held. We sometimes refer to these rights to vote against the merger and demand conversion of the shares into a pro rata portion of the trust account as conversion rights.

 

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Q.    How do I exercise my conversion rights?    A.    If you wish to exercise your conversion rights, you must affirmatively vote against the merger proposal and at the same time demand that Arpeggio convert your shares into cash. You may demand conversion either by checking the box on the proxy card or by submitting your request in writing to Arpeggio at the address listed below. You may remedy an improperly executed demand for conversion at any time until the stockholder meeting. If, notwithstanding your negative vote, the merger is completed, then you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon through the record date. As of the record date, there was approximately $                      in trust, so you will be entitled to convert each share of common stock that you hold into approximately $                     . If you exercise your conversion rights, then you will be exchanging your shares of Arpeggio common stock for cash and will no longer own these shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger, properly demand conversion, continue to hold these shares through the closing of the merger and then tender your stock certificate. Exercise of your conversion rights does not result in either the conversion or loss of your warrants. Your warrants will continue to be outstanding and exercisable following the conversion of your common stock. However, in the event that Arpeggio does not consummate a business combination by June 30, 2006, Arpeggio will be required to liquidate and your Arpeggio warrants will become worthless.
Q.    What if I object to the proposed merger? Do I have appraisal rights?    A.    Arpeggio Stockholders do not have appraisal rights in connection with the merger under applicable Delaware corporation law.
Q.    What happens to the funds deposited in the trust account after consummation of the merger?    A.    Upon consummation of the merger, Arpeggio stockholders electing to exercise their conversion rights will receive their pro rata portion of the funds in the trust account. The balance of the funds in the trust account will be paid to Arpeggio to be used for working capital.
Q.    Who will manage Arpeggio?    A.    Irvin E. Richter and David L. Richter, currently members of the board of directors of Hill, Eric S. Rosenfeld and Arnaud Ajdler, currently members of the board of directors of Arpeggio, and                     ,                      and                      will be appointed to serve on Arpeggio’s board of directors after the merger. After the merger, Irvin Richter will serve as chairman and chief executive officer of Arpeggio and David Richter will serve as its president and chief operating officer. It is expected that all of Hill’s other officers will continue in their positions after the merger. None of Arpeggio’s current officers will continue in his position after the merger.

 

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Q.    What happens if the merger is not consummated?    A.    Arpeggio must liquidate if it does not consummate a business combination by June 30, 2006. Therefore, if the merger is not consummated and if Arpeggio does not otherwise consummate a business combination by June 30, 2006, it will be required to liquidate. In any liquidation, the funds held in the trust account, plus any interest earned thereon, together with any remaining out-of-trust net assets, will be distributed pro rata to the holders of Arpeggio’s common stock acquired in Arpeggio’s IPO. Holders of Arpeggio common stock acquired prior to the IPO, including all of Arpeggio’s officers and directors, have waived any right to any liquidation distribution with respect to those shares. In a liquidation, holders of Arpeggio’s outstanding warrants would not receive any value for their warrants.
Q.    When do you expect the merger to be completed?    A.   

It is currently anticipated that the merger will be consummated promptly following the Arpeggio special meeting on                     , 2006.

 

For a description of the conditions to completion of the merger, see the section entitled “Conditions to the Completion of the Merger.

Q.    What do I need to do now?    A.    Arpeggio urges you to read carefully and consider the information contained in this proxy statement, including the annexes, and to consider how the merger will affect you as a stockholder of Arpeggio. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement and on the enclosed proxy card.
Q.    How do I vote?    A.    If you are a holder of record of Arpeggio common stock, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you must provide the record holder of your shares with instructions on how to vote your shares.
Q.    What will happen if I abstain from voting or fail to vote?    A.    An abstention or failure to vote by an Arpeggio stockholder will have the same effect as a vote against the merger, but will not have the effect of converting your shares of common stock into a pro rata portion of the trust account. An abstention or failure to vote will also have the effect of voting against the certificate of incorporation amendments. An abstention will have the effect of voting against the stock option plan proposal, but failures to vote will have no effect on the stock option plan proposal.
Q.    If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?    A.    No. Your broker, bank or nominee cannot vote your shares unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee.

 

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Q.    Can I change my vote after I have mailed my signed proxy or direction form?    A.    Yes. Send a later-dated, signed proxy card to Arpeggio’s secretary at the address of Arpeggio’s corporate headquarters prior to the date of the special meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Arpeggio’s secretary.
Q.    Do I need to send in my stock certificates?    A.   

Arpeggio stockholders who do not elect to have their shares converted into a pro rata share of the trust account should not submit their stock certificates now or after the merger, because their shares will not be converted or exchanged in the merger.

 

Arpeggio stockholders who elect to have their shares converted should continue to hold their shares through the closing of the merger and then tender their stock certificates to Arpeggio. See the section entitled “Special Meeting of Arpeggio Stockholders – Conversion Rights.

Q    What should I do if I receive more than one set of voting materials?    A.    You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your Arpeggio shares.

 

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Q    What are the federal income tax consequences of the merger?        

The merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and no gain or loss will be recognized by Arpeggio as a result of the merger.

 

A stockholder of Arpeggio who exercises conversion rights and effects a termination of the stockholder’s interest in Arpeggio will generally be required to recognize capital gain or loss upon the exchange of that stockholder’s shares of common stock of Arpeggio for cash, if such shares were held as a capital asset on the date of the merger. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of Arpeggio common stock. No gain or loss will be recognized by non-converting stockholders of Arpeggio as a result of the merger.

 

For a description of the material federal income tax consequences of the merger, please see the information set forth in “Material Federal Income Tax Consequences of the Merger.

Q.    Who can help answer my questions?    A.   

If you have questions about the merger or if you need additional copies of the proxy statement or the enclosed proxy card you should contact:

 

Mr. Eric S. Rosenfeld

Arpeggio Acquisition Corporation

10 East 53rd Street, 35th Floor

New York, New York 10022

Tel: (212) 319-7676

 

You may also obtain additional information about Arpeggio from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find More Information.

 

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SUMMARY OF THE PROXY STATEMENT

 

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the merger, you should read this entire document carefully, including the merger agreement, as amended, attached as Annex A to this proxy statement. We encourage you to read the merger agreement carefully. It is the legal document that governs the merger and the other transactions contemplated by the merger agreement. It is also described in detail elsewhere in this proxy statement.

 

The Parties

 

Arpeggio

 

Arpeggio is a blank check company organized as a corporation under the laws of the State of Delaware on April 2, 2004. It was formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. On June 30, 2004, it consummated an IPO of its equity securities from which it derived net proceeds of approximately $36,772,000. The Arpeggio common stock, warrants to purchase common stock and units (each unit consisting of one share of common stock and two warrants to purchase common stock) are currently quoted on the Over-the-Counter Bulletin Board (OTCBB) under the symbols APGO for the common stock, APGOW for the warrants and APGOU for the units. Approximately $35,352,000 of the net proceeds of the IPO were placed in a trust account. Such funds, with the interest earned thereon, will be released to Arpeggio upon consummation of the merger, less any amount payable to Arpeggio stockholders that vote against the merger and elect to exercise their conversion rights. The balance of the net proceeds of the IPO, or approximately $1,420,000, has been and will be used by Arpeggio to pay the expenses incurred in its pursuit of a business combination. As of                     , 2006, Arpeggio had spent approximately $                     of that amount. Other than its IPO and the pursuit of a business combination, Arpeggio has not engaged in any business to date. If Arpeggio does not consummate a business combination by June 30, 2006, then, pursuant to Article Sixth of its certificate of incorporation, Arpeggio’s officers must take all actions necessary to dissolve and liquidate Arpeggio within 60 days of such date.

 

The mailing address of Arpeggio’s principal executive office is 10 East 53rd Street, 35th Floor, New York, New York 10022, and its telephone number is (212) 319-7676.

 

Hill

 

Hill is a privately-owned independent construction consulting firm headquartered in Marlton, New Jersey, that provides both fee-based project management and construction claims consulting services to clients worldwide. Hill is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

 

Hill was originally founded in 1976 as a Massachusetts corporation and was subsequently merged with and into Hill International, Inc., a Delaware corporation formed for the purpose of changing Hill’s state of incorporation, as of September 8, 1981. The mailing address of Hill’s principal executive offices is 303 Lippincott Centre, Marlton, New Jersey 08053, and its telephone number is (856) 810-6200.

 

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Project Management Group

 

Hill’s Project Management Group offers fee-based or “agency” construction management services to its clients, leveraging its construction claims expertise to identify potential problems, difficulties and sources of delay on a construction project before they develop into costly problems. Hill is a fee-based consultant and does not assume project completion risk. Clients are typically billed a negotiated multiplier of the actual direct cost of each consultant assigned to a project, and Hill is reimbursed for all out-of-pocket expenses. As construction manager, Hill has managed all phases of the construction process from pre-design through completion. Services include program management, project management, project management oversight, troubled project turnaround, staff augmentation, estimating and cost management, project labor agreements and management consulting. Since its inception, Hill has managed more than 1,000 projects at an aggregate construction cost of more than $100 billion. The Project Management Group accounted for approximately 82% of Hill’s revenue less reimbursable expenses during the three quarters ended October 1, 2005.

 

Hill has received nine Project Achievement Awards from the Construction Management Association of America honoring its performance as construction manager on various projects. Engineering News-Record, an industry publication, ranked Hill as the 18th largest construction management firm in the United States in its June 13, 2005 issue.

 

Recent project management clients include:

 

    City of Philadelphia Division of Aviation

 

    Dubai International Properties

 

    Illinois State Toll Highway Authority

 

    Liberty Property Trust

 

    Merck & Co.

 

    Nakheel Corporation

 

    National Institutes of Health

 

    New Jersey Schools Construction Corp.

 

    New York City Department of Design and Construction

 

    Port Authority of New York and New Jersey

 

    Romanian Ministry of Finance

 

    Smithsonian Institution

 

    Sunoco

 

    U. S. Army Corps of Engineers

 

    U. S. Department of Energy

 

Construction Claims Group

 

Hill’s Construction Claims Group advises clients in order to assist them in preventing or resolving claims and disputes based upon schedule delays, cost overruns and other problems on major construction projects worldwide. Hill’s claims consulting services include claims preparation, analysis and review, litigation support, expert witness testimony, cost and damages assessment and delay/disruption analysis. Clients are typically billed based on an hourly rate for each consultant assigned to the project and Hill is reimbursed for its out-of-pocket expenses. The Construction Claims Group accounted for approximately 18% of Hill’s revenue less reimbursable expenses during the three quarters ended October 1, 2005.

 

Hill has helped resolve over 5,000 disputes involving claims in excess of $50 billion. Hill’s claims consulting clients include participants on all sides of a construction project, including owners, contractors, subcontractors, architects, engineers, attorneys, lenders and insurance companies.

 

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Hill has been involved in resolving construction claims for many major construction projects worldwide, including for the Channel Tunnel connecting the United Kingdom and France and the Petronas Twin Towers in Kuala Lumpur, Malaysia.

 

Recent construction claims clients include:

 

    Abu Dhabi Public Works Dept.

 

    Bear Stearns

 

    Bechtel Group

 

    Bombardier Transportation

 

    Dubai Dept. of Civil Aviation

 

    General Electric Co.

 

    Honeywell

 

    Lexington Insurance Co.

 

    U.S. Federal Bureau of Prisons

 

    U. S. General Services Administration

 

The Merger

 

The merger agreement provides for a business combination transaction by means of a merger of Hill into Arpeggio. This will be accomplished through an exchange of all the issued and outstanding shares of capital stock of Hill for shares of common stock of Arpeggio. Shares of Arpeggio common stock, representing 12% of the shares of Arpeggio common stock to be issued to the Hill stockholders at the closing, will be held in escrow to provide the sole remedy for Arpeggio’s rights to indemnity set forth in the merger agreement.

 

Arpeggio and Hill plan to complete the merger promptly after the Arpeggio special meeting, provided that:

 

    Arpeggio’s stockholders have approved the merger proposal, the name change amendment and capitalization amendment;

 

    holders of 20% or more of the shares of common stock issued in Arpeggio’s IPO have not voted against the merger proposal and demanded conversion of their shares into cash; and

 

    the other conditions specified in the merger agreement have been satisfied or waived.

 

Arpeggio’s Recommendations to Stockholders; Reasons for the Merger

 

After careful consideration of the terms and conditions of the merger agreement, the certificate of incorporation amendments and the stock option plan, the board of directors of Arpeggio has determined that the merger and the transactions contemplated thereby, each certificate of incorporation amendment and the stock option plan are fair to and in the best interests of Arpeggio and its stockholders. In reaching its decision with respect to the merger and the transactions contemplated thereby, the board of directors of Arpeggio reviewed various industry and financial data and the due diligence and evaluation materials provided by Hill in order to determine that the consideration to be paid to the Hill stockholders was reasonable. Further, Arpeggio has received an opinion from Capitalink that, in its opinion, the merger and the transactions contemplated thereby are fair to Arpeggio’s stockholders from a financial point of view. Accordingly, Arpeggio’s board of directors recommends that Arpeggio stockholders vote:

 

    FOR the merger proposal;

 

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    FOR the name change amendment;

 

    FOR the capitalization amendment;

 

    FOR the Article Sixth amendment; and

 

    FOR the stock option plan proposal.

 

The Certificate of Incorporation Amendments

 

The amendments to Arpeggio’s certificate of incorporation are being proposed, upon consummation of the merger, to change Arpeggio’s name, increase the number of shares of common stock it is authorized to issue, and eliminate certain provisions which are applicable to Arpeggio only prior to its completion of a business combination. As a result of the amendments, after the merger, Arpeggio will be named “Hill International, Inc.,” the number of shares of common stock it will be authorized to issue will be increased from 30 million to 75 million and Article Sixth of its certificate of incorporation will address only its classified board of directors, with existing provisions that relate to it as a blank check company being deleted.

 

The Proposed Arpeggio 2006 Employee Stock Option Plan

 

The Arpeggio 2006 Employee Stock Option Plan reserves 1,140,000 shares of Arpeggio common stock for issuance in accordance with the plan’s terms. The purpose of the plan is to create incentives designed to motivate our employees to significantly contribute toward our growth and profitability, to provide Arpeggio executives, directors and other employees, and persons who, by their position, ability and diligence are able to make important contributions to our growth and profitability, with an incentive to assist us in achieving our long-term corporate objectives, to attract and retain qualified executives and other employees, and to provide such persons with an opportunity to acquire an equity interest in Arpeggio. The plan is attached as Annex C to this proxy statement. We encourage you to read the plan in its entirety.

 

Management of Arpeggio and Hill

 

As a result of the merger, Hill will be merged into Arpeggio and will no longer survive as a corporate entity. Arpeggio will continue its existence as the surviving corporation. After the consummation of the merger, the board of directors of Arpeggio will consist of Irvin E. Richter,                      , and                     (each in the class to stand for election in 2006), David L. Richter and Eric S. Rosenfeld (in the class to stand for election in 2007), and Arnaud Ajdler and                     (in the class to stand for election in 2008). Messrs. Irvin E. Richter and David L. Richter are currently directors of Hill and along with                     ,                      and                      are designees of the Signing Stockholders under the voting agreement. Messrs. Ajdler and Rosenfeld are currently directors of Arpeggio and are their own designees under the voting agreement.

 

After the consummation of the merger, the primary executive officers of Arpeggio will be Irvin E. Richter, chairman and chief executive officer, and David L. Richter, president and chief operating officer, who now hold such positions with Hill. It is expected that Hill’s other officers will continue in similar positions with Arpeggio after the merger. None of Arpeggio’s current officers will continue in his position after the merger.

 

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Voting Agreement

 

Upon consummation of the merger, the Signing Stockholders, on the one hand, and Messrs. Rosenfeld and Ajdler, on the other hand, which groups together will own approximately 69% of Arpeggio’s outstanding stock, and Arpeggio will enter into a voting agreement. The voting agreement will require each individual member of a group to vote for the designees of the other group as directors of Arpeggio until immediately following the election that will be held in 2007. Arpeggio will be obligated to provide for its board of directors to be comprised of seven members and to enable the election to the board of directors of the persons designated by the other parties to the voting agreement. The voting agreement is attached as Annex E hereto. We encourage you to read the voting agreement in its entirety.

 

Arpeggio Inside Stockholders

 

On the record date, directors and executive officers of Arpeggio and their affiliates (the “Arpeggio Inside Stockholders”) beneficially owned and were entitled to vote 1,500,000 shares, or approximately 18.1% of Arpeggio’s outstanding common stock. These shares were issued to the Arpeggio Inside Stockholders prior to Arpeggio’s IPO. In connection with its IPO, Arpeggio and EarlyBirdCapital, Inc., the managing underwriter of the IPO, entered into agreements with each of the Arpeggio Inside Stockholders pursuant to which each Arpeggio Inside Stockholder agreed to vote these shares of Arpeggio common stock on the merger proposal in accordance with the majority of the votes cast by the holders of shares issued in connection with the IPO. The Arpeggio Inside Stockholders also agreed, in connection with the IPO, to place these shares in escrow until June 24, 2007.

 

Merger Consideration

 

The holders of the outstanding shares of common stock of Hill immediately before the merger will receive from Arpeggio 14,500,000 shares of Arpeggio common stock at the closing of the merger. Immediately following the Merger, the Hill stockholders will own approximately 63.6% of the total issued and outstanding Arpeggio common stock, assuming that no Arpeggio stockholders seek conversion of their Arpeggio stock into their pro rata share of the trust fund. Of the shares to be issued to the Hill stockholders, 1,740,000 shares, or 12%, will be placed in escrow to secure Arpeggio’s indemnity rights under the merger agreement.

 

The merger agreement also provides for the Hill stockholders to receive up to an additional 6,600,000 shares of Arpeggio common stock, contingent upon the combined companies attaining the following Earnings before Interest and Taxes (EBIT) targets:

 

Fiscal Year Ending 12/31


   Earnings Before
Interest and Taxes


   Contingent Shares

2006

   $ 9.9 million    2.3 million

2007

   $ 13.5 million    2.3 million

2008

   $ 18.4 million    1.0 million

2009

   $ 24.9 million    1.0 million

 

Fairness Opinion

 

Pursuant to an engagement letter dated November 23, 2005, we engaged Capitalink, L.C. to render an opinion that our merger with Hill on the terms and conditions set forth in the merger agreement is fair to our stockholders from a financial perspective and that the fair market value of Hill is at least equal to 80% of our net assets. Capitalink is an investment banking firm that, as part of its investment

 

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banking business, regularly is engaged in the evaluation of businesses and their securities in connection with mergers, acquisitions, corporate restructuring, private placements and for other purposes. Our board of directors determined to use the services of Capitalink because it is a recognized investment banking firm that has substantial experience in similar matters. The engagement letter provides that we will pay Capitalink a fee of $75,000 (which has been paid) and will reimburse Capitalink for its reasonable out-of-pocket expenses, including attorneys’ fees. We have also agreed to indemnify Capitalink against certain liabilities that may arise out of the rendering of the opinion.

 

Capitalink delivered its written opinion to our board of directors on December 4, 2005, which stated that, as of such date, and based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in the opinion, (i) the consideration to be paid by us in the merger is fair to our stockholders from a financial point of view, and (ii) the fair market value of Hill is at least equal to 80% of our net assets. The amount of such consideration was determined pursuant to negotiations between us and Hill and not pursuant to recommendations of Capitalink. The full text of Capitalink’s written opinion, attached hereto as Annex D, is incorporated by reference into this proxy statement. You are urged to read the Capitalink opinion carefully and in its entirety for a description of the assumptions made, matters considered, procedures followed and limitations on the review undertaken by Capitalink in rendering its opinion. The summary of the Capitalink opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion. Capitalink’s opinion is addressed to our board of directors only and does not constitute a recommendation to any of our stockholders as to how such stockholders should vote with respect to the merger proposal and the transactions contemplated thereby.

 

Escrow Agreement - Indemnification of Arpeggio

 

As the sole remedy for the obligation of the stockholders of Hill to indemnify and hold harmless Arpeggio for any damages, whether as a result of any third party claim or otherwise, and which arise as a result of or in connection with the breach of representations and warranties and agreements and covenants of Hill, at the closing, 12% of the shares of Arpeggio common stock to be issued to the Hill stockholders upon consummation of the merger will be deposited in escrow. Of the shares placed in escrow, five-sixths will be available for the satisfaction of all indemnification claims other than those relating to taxes and one-sixth will be available solely for the satisfaction of tax indemnification claims. Any indemnification payments shall be paid solely from the shares placed in escrow or, at the election of a holder of the escrow shares, in cash paid by such holder in substitution for such shares. Claims for indemnification may be asserted by Arpeggio once the damages exceed $500,000 and are indemnifiable to the extent that damages exceed that amount. However, claims with respect to taxes and certain other matters are not subject to such threshold. The shares available for indemnification claims other than those relating to taxes, less any of the shares applied in satisfaction of a claim for indemnification and the shares related to a claim for indemnification that is then unresolved, will be released on the first business day following the date that is 30 days after the date on which Arpeggio files its Report on Form 10-K pursuant to the Exchange Act of 1934, as amended, for its 2006 fiscal year, to such persons in the same proportions as initially deposited in escrow. Shares still in escrow on December 30, 2010, will be released on the next business day, even if claims to which they relate are not then resolved. For purposes of satisfying an indemnification claim, shares of Arpeggio common stock will be valued at the average reported last sales price for the ten trading days ending on the last day prior to the day that the claim is paid. The escrow agreement is attached as Annex F hereto. We encourage you to read the escrow agreement in its entirety.

 

The determination to assert a claim for indemnification by Arpeggio against the escrow shares will be made by Eric S. Rosenfeld, who is a current member of Arpeggio’s board of directors. Irvin E. Richter has been designated under the merger agreement to represent the interests of the Hill stockholders with respect to claims for indemnification by Arpeggio against such shares.

 

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Lock-Up Agreements

 

At the closing of the merger, the Signing Stockholders will enter into lock-up agreements that provide that they not sell or otherwise transfer any of the shares of common stock of Arpeggio that they receive in the merger until December 31, 2007, subject to certain exceptions, including the right to use their shares to secure margin loans not to exceed 20% of the value of the shares at the time the loans are made. The lock-up agreements are to be entered into to ensure that the shares of Arpeggio received by the Signing Stockholders in the merger will not offer the potential to impact upon the market price during the period the restrictions apply.

 

Date, Time and Place of Special Meeting of Arpeggio’s Stockholders

 

The special meeting of the stockholders of Arpeggio will be held at 10:00 a.m., eastern time, on                     , 2006, at the offices of Graubard Miller, our counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York, 10174 to consider and vote upon the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal.

 

Voting Power; Record Date

 

You will be entitled to vote or direct votes to be cast at the special meeting if you owned shares of Arpeggio common stock at the close of business on                     , 2006, which is the record date for the special meeting. You will have one vote for each share of Arpeggio common stock you owned at the close of business on the record date. On the record date, there were 8,300,000 shares of Arpeggio common stock outstanding. Arpeggio warrants do not have voting rights.

 

Approval of the Hill stockholders

 

The Signing Stockholders, who held all currently outstanding shares of Hill capital stock at the time the merger agreement was signed, have approved the merger and the transactions contemplated thereby by consent action. Accordingly, no further action by the Hill stockholders is needed to approve the merger.

 

Quorum and Vote of Arpeggio Stockholders

 

A quorum of Arpeggio stockholders is necessary to hold a valid meeting. A quorum will be present at the Arpeggio special meeting if a majority of the outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum.

 

    The approval of the merger proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date. The merger will not be consummated if the holders of 20% or more of the common stock issued in Arpeggio’s IPO (1,360,000 shares or more) exercise their conversion rights.

 

    The approval of the name change amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

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    The approval of the capitalization amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

    The approval of the Article Sixth amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

    The approval of the stock option plan proposal will require the affirmative vote of the holders of a majority of the shares of Arpeggio common stock represented in person or by proxy and entitled to vote at the meeting.

 

Abstentions will have the same effect as a vote “AGAINST” the merger proposal and the proposals to amend the certificate of incorporation and the stock option plan. Broker non-votes, while considered present for the purposes of establishing a quorum, will have the effect of votes against the merger proposal and the proposals to amend the certificate of incorporation, but will have no effect on the stock option plan proposal. Please note that you cannot seek conversion of your shares unless you affirmatively vote against the merger.

 

Relation of Proposals

 

The merger will not be consummated unless each of the name change amendment and the capitalization amendment is approved and neither of the name change amendment nor the capitalization amendment will be presented to the meeting for adoption unless the merger proposal is approved. The approvals of the Article Sixth amendment and the stock option plan proposal are not conditions to the consummation of the merger or to the adoption of either of the name change amendment or the capitalization amendment but, if the merger proposal is not approved, neither will be presented at the meeting for adoption. The stock option plan has been approved by Arpeggio’s Board of Directors and will take effect upon consummation of the merger, subject to stockholder approval of the stock option plan proposal.

 

Conversion Rights

 

Pursuant to Arpeggio’s certificate of incorporation, a holder of shares of Arpeggio’s common stock issued in its IPO may, if the stockholder affirmatively votes against the merger, demand that Arpeggio convert such shares into cash. This demand must be made in writing at the same time that the stockholder votes against the merger proposal. Demand may be made by checking the box on the proxy card provided for that purpose and returning the proxy card in accordance with the instructions provided. Demand may also be made in any other writing that clearly states that conversion is demanded and is delivered so that it is received by Arpeggio at any time up to the stockholder meeting. If properly demanded, Arpeggio will convert each share of common stock into a pro rata portion of the trust account as of the record date. This would amount to approximately $             per share of Arpeggio’s common stock. An improperly made demand for conversion may be remedied at any time until the stockholder meeting. If you exercise your conversion rights, then you will be exchanging your shares of Arpeggio common stock for cash and will no longer own the shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger, properly demand conversion, continue to hold these shares through the effective time of the merger and then tender your stock certificate to Arpeggio. If the merger is not completed, these shares will not be converted into cash. However, if we are unable to complete the merger or another business combination by June 30, 2006, we will be forced to liquidate and all public

 

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stockholders will receive at least the amount they would have received if they sought conversion of their shares and we did consummate the merger.

 

The merger will not be consummated if the holders of 20% or more of the common stock issued in Arpeggio’s IPO (1,360,000 shares or more) exercise their conversion rights.

 

Appraisal Rights

 

Arpeggio stockholders do not have appraisal rights in connection with the merger.

 

Proxies

 

Proxies may be solicited by mail, telephone or in person. We have engaged Mackenzie Partners, Inc. to assist us in the solicitation of proxies.

 

If you grant a proxy, you may still vote your shares in person if you revoke your proxy at or before the special meeting.

 

Interests of Arpeggio Directors and Officers in the Merger

 

When you consider the recommendation of Arpeggio’s board of directors in favor of adoption of the merger proposal, you should keep in mind that Arpeggio’s executive officers and members of Arpeggio’s board have interests in the merger transaction that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

 

    if the merger is not approved and Arpeggio is unable to complete another business combination by June 30, 2006, Arpeggio will be required to liquidate. In such event, the 1,500,000 shares of common stock held by Arpeggio’s officers and directors that were acquired prior to the IPO will be worthless because Arpeggio’s initial stockholders are not entitled to receive any liquidation proceeds with respect to such shares. Such shares had an aggregate value of $8,955,000 based on the last sale price on the OTCBB on February 7, 2006. Additionally, the 1,010,500 warrants (allowing for the purchase of 1,010,500 shares of Arpeggio’s common stock) held by such persons and our special advisor will expire without value in the event of liquidation;

 

    after the completion of the merger, Eric S. Rosenfeld and Arnaud Ajdler will serve as members of the board of directors of Arpeggio. As such, in the future each may receive certain cash fees, stock options and stock awards that the Arpeggio board of directors may determine to pay its non-executive directors; and

 

    if Arpeggio liquidates prior to the consummation of a business combination, Eric S. Rosenfeld, our current chairman of the board, chief executive officer and president, will be personally liable to pay debts and obligations, if any, to vendors and other entities that are owed money by Arpeggio for services rendered or products sold to Arpeggio, or to any target business, to the extent such debts and obligations are not covered by Arpeggio’s assets, excluding amounts in the trust fund. This arrangement was entered into to ensure that, in the event of liquidation, the trust fund is not reduced by claims of creditors. Based on Arpeggio’s estimated debts and obligations, it is not currently expected that Mr. Rosenfeld will have any exposure under this arrangement in the event of liquidation.

 

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Conditions to the Closing of the Merger

 

Consummation of the merger agreement and the related transactions is conditioned on the Arpeggio stockholders (i) adopting the merger proposal, (ii) approving the name change amendment, and (iii) approving the capitalization amendment. The Arpeggio stockholders will also be asked to adopt the stock option plan and to approve the removal of all of the provisions of Article Sixth of Arpeggio’s certificate of incorporation other than the paragraph relating to Arpeggio’s staggered board of directors. The transaction is not dependent on the approval of either of such actions. The stock option plan has been approved by our Board of Directors and will be effective upon consummation of the merger if approved by the Arpeggio stockholders. If stockholders owning 20% or more of the shares sold in the IPO vote against the transaction and exercise their right to convert their shares purchased in the IPO into a pro-rata portion of the funds held in trust by Arpeggio for the benefit of the holders of shares purchased in the IPO, then the merger cannot be consummated.

 

In addition, the consummation of the merger is conditioned upon the following, among other things:

 

    no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions;

 

    the delivery by each party to the other party of a certificate to the effect that the representations and warranties of the delivering party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by the delivering party; and

 

    Arpeggio’s common stock being quoted on the OTCBB or listed for trading on Nasdaq and there being no action or proceeding pending or threatened against Arpeggio by the National Association of Securities Dealers, Inc. (NASD) to prohibit or terminate the quotation of Arpeggio’s common stock on the OTCBB or the trading thereof on Nasdaq.

 

Hill’s Conditions to Closing of the Merger

 

The obligations of Hill to consummate the transactions contemplated by the merger agreement, in addition to the conditions described above, are conditioned upon each of the following, among other things:

 

    there shall have been no material adverse effect with respect to Arpeggio since the date of the merger agreement;

 

    Hill shall have received a legal opinion substantially in the form annexed to the merger agreement, which is customary for transactions of this nature, from Graubard Miller, counsel to Arpeggio; and

 

    Arpeggio shall have made appropriate arrangements with Continental Stock Transfer & Trust Company to have the trust fund disbursed to Arpeggio immediately upon the Closing.

 

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Arpeggio’s Conditions to Closing of the Merger

 

The obligations of Arpeggio to consummate the transactions contemplated by the merger agreement, in addition to the conditions described above in the second paragraph of this section, are conditioned upon each of the following, among other things:

 

    there shall have been no material adverse effect with respect to Hill since the date of the merger agreement;

 

    employment agreements between Arpeggio and each of Irvin E. Richter, David L. Richter and Stuart S. Richter shall be in full force and effect;

 

    Arpeggio shall have received a legal opinion substantially in the form annexed to the merger agreement, which is customary for transactions of this nature, from McCarter & English, LLP, counsel to Hill;

 

    Arpeggio shall have received “comfort” letters from BDO Seidman, LLP and Amper, Politziner & Mattia P.C., dated the date of distribution of this proxy statement and the date of consummation of the merger, in forms customary for transactions of this nature, confirming that certain financial data in this proxy statement, other than the numbers in the actual financial statements, are derived from the financial statements and/or accounting records of the respective company;

 

    the voting agreement and the lock-up agreements shall be in full force and effect; and

 

    (i) all outstanding loans to insiders from Hill shall have been repaid in full; (ii) all outstanding guaranties and similar arrangements pursuant to which Hill has guaranteed the payment or performance of any obligations of any insider to a third party shall have been terminated; and (iii) no Hill insider shall own any direct equity interests in any subsidiary of Hill or in any other person that utilizes the name “Hill International.”

 

Termination, Amendment and Waiver

 

The merger agreement will terminate if the merger has not been consummated by June 30, 2006. In addition, the merger agreement may be terminated at any time, but not later than the closing, as follows:

 

    by mutual written consent of Arpeggio and Hill;

 

    by either party if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, ruling or other action is final and nonappealable;

 

    by either party if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within 30 days of the notice of an intent to terminate, provided that the terminating party is itself not in breach;

 

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    by either party if, at the Arpeggio stockholders’ meeting, the merger agreement and the transactions contemplated thereby shall fail to be approved and adopted by the affirmative vote of the holders of a majority of Arpeggio’s outstanding common stock; or

 

    by either party if the holders of 20% or more of the shares issued in Arpeggio’s IPO (1,360,000 shares or more) exercise their conversion rights.

 

The merger agreement does not specifically address the rights of a party in the event of a refusal or wrongful failure of the other party to consummate the merger. In such event, the non-wrongful party would be entitled to assert its legal rights for breach of contract against the wrongful party.

 

If permitted under applicable law, either Hill or Arpeggio may waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement and waive compliance with any agreements or conditions for its benefit contained in the merger agreement. We cannot assure you that any or all of the conditions will be satisfied or waived. However, the condition that the holders of fewer than 20% of the shares of Arpeggio common stock issued in its IPO demand conversion cannot be waived.

 

Quotation or Listing

 

Arpeggio’s outstanding common stock, warrants and units are quoted on the OTCBB. Arpeggio and Hill will use their reasonable best efforts to obtain the listing for trading on Nasdaq of Arpeggio common stock, warrants and units. In the event Arpeggio’s common stock, warrants and units are listed on Nasdaq at the time of the closing of the merger, the symbols will change to ones determined by the board of directors of Arpeggio and Nasdaq that are reasonably representative of the corporate name or business of Arpeggio. If the listing on Nasdaq is not approved, it is expected that Arpeggio’s common stock, warrants and units will continue to be quoted on the OTCBB.

 

Tax Consequences of the Merger

 

Arpeggio has received an opinion from its tax counsel that, for federal income tax purposes, the merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and no gain or loss will be recognized by Arpeggio as a result of the merger.

 

Arpeggio has also received an opinion of its counsel that:

 

    A stockholder of Arpeggio who exercises conversion rights and effects a termination of the stockholder’s interest in Arpeggio will generally be required to recognize capital gain or loss upon the exchange of that stockholder’s shares of common stock of Arpeggio for cash, if such shares were held as a capital asset on the date of the merger. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of Arpeggio common stock; and

 

    No gain or loss will be recognized by non-converting stockholders of Arpeggio.

 

For a description of the material federal income tax consequences of the merger, please see the information set forth in “Material Federal Income Tax Consequences of the Merger.”

 

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Accounting Treatment

 

The merger will be accounted for under the purchase method of accounting as a reverse acquisition in accordance with accounting principles generally accepted in the United States of America for accounting and financial reporting purposes. Under this method of accounting, Arpeggio will be treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, the merger will be considered to be a capital transaction in substance. Accordingly, for accounting purposes, the merger will be treated as the equivalent of Hill issuing stock for the net monetary assets of Arpeggio, accompanied by a recapitalization. The net monetary assets of Arpeggio will be stated at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The retained earnings of Hill will be carried forward after the merger. Operations prior to the merger will be those of Hill.

 

Regulatory Matters

 

The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, except for filings with the State of Delaware necessary to effectuate the transactions contemplated by the merger agreement.

 

Risk Factors

 

In evaluating the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal, you should carefully read this proxy statement and especially consider the factors discussed in the section entitled “Risk Factors.

 

SELECTED SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL

INFORMATION

 

We are providing the following selected financial information to assist you in your analysis of the financial aspects of the merger. Hill’s consolidated balance sheet data as of January 1, 2005 and December 27, 2003 and the consolidated statement of operations data for the years then ended and for the year ended December 28, 2002 are derived from Hill’s consolidated financial statements audited by Amper, Politziner, & Mattia, P.C., independent registered public accountants, which are included elsewhere in this proxy statement. Hill’s consolidated balance sheet data as of December 28, 2002, December 31, 2001 and December 31, 2000 and the statement of operations data for the years ended December 31, 2001 and 2000 are derived from Hill’s unaudited consolidated financial statements, which are not included in this proxy statement.

 

Hill’s consolidated balance sheet as of October 1, 2005 and the consolidated statements of operations data for the nine months ended October 1, 2005 and October 2, 2004 are derived from Hill’s unaudited interim consolidated financial statements which are included elsewhere in this proxy statement. In the opinion of Hill’s management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of such consolidated financial statements.

 

The Arpeggio historical financial data are derived from the Arpeggio financial statements included elsewhere in this proxy statement.

 

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The selected financial information of Hill and Arpeggio is only a summary and should be read in conjunction with each company’s historical consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein. The historical results included below and elsewhere in this proxy statement may not be indicative of the future performance of Hill, Arpeggio or the combined company resulting from the merger.

 

Hill’s Summary of Selected Financial Data

(In thousands, except per share data)

 

     Years Ended

    Nine Months Ended

 
     January 1,
2005


    December 27,
2003


    December 28,
2002


    December 31,
2001


    December 31,
2000


    October 1,
2005


    October 2,
2004


 

Income Statement Data:

                                                        

Revenue

   $ 84,107     $ 78,731     $ 73,090     $ 68,776     $ 58,732     $ 80,372     $ 61,284  

Reimbursable expenses

     21,068       22,619       24,966       30,963       28,808       21,427       14,369  
    


 


 


 


 


 


 


Revenue, less reimbursable expenses

     63,039       56,112       48,124       37,813       29,924       58,945       46,915  

Direct expenses

     34,365       29,004       23,931       19,346       15,580       30,981       25,391  
    


 


 


 


 


 


 


Gross profit

     28,674       27,108       24,193       18,467       14,344       27,964       21,524  

Selling, general and administrative expenses

     29,231       27,428       23,681       17,135       13,499       22,577       22,512  

Equity in earnings of affiliate

     458       —         —         —         —         559       37  
    


 


 


 


 


 


 


Operating (loss) income

     (99 )     (320 )     512       1,332       845       5,946       (951 )

Interest expense, net

     (597 )     (562 )     (483 )     (298 )     (335 )     (420 )     (436 )

Other income

     —         —         —         —         1,255       —         —    
    


 


 


 


 


 


 


(Loss) income before provision for income tax

     (696 )     (882 )     29       1,034       1,765       5,526       (1,387 )

(Benefit) provision for income tax

     (272 )     (353 )     12       473       716       1,560       (483 )
    


 


 


 


 


 


 


Net (loss) income

   $ (424 )   $ (529 )   $ 17     $ 561     $ 1,049     $ 3,966     $ (904 )
    


 


 


 


 


 


 


Net (loss) income per share

                                                        

Basic

   $ (0.07 )   $ (0.09 )   $ 0.00     $ 0.09     $ 0.17     $ 0.66     $ (0.15 )
    


 


 


 


 


 


 


Diluted

   $ (0.07 )   $ (0.09 )   $ 0.00     $ 0.09     $ 0.17     $ 0.58     $ (0.15 )
    


 


 


 


 


 


 


 

     As of

     October 1,
2005


   January 1,
2005


   December 27,
2003


   December 28,
2002


   December 31,
2001


   December 31,
2000


Balance Sheet Data:

                                         

Total assets

   $ 39,577    $ 33,331    $ 28,057    $ 23,149    $ 21,404    $ 13,754

Total long-term debt and capital lease obligations, net of current maturities

   $ 61    $ 9,576    $ 9,345    $ 4,170    $ 3,169    $ 2,112

Stockholders’ equity

   $ 6,479    $ 2,041    $ 2,458    $ 3,326    $ 3,093    $ 2,428

 

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Arpeggio’s Selected Historical Financial Information

(in thousands, except per share data)

 

     For the Period From
April 2, 2004
(Inception) to
December 31, 2004


    Nine Months Ended
September 30, 2005


   

For the Period From

April 2, 2004
(Inception) to
September 30, 2005


 

Revenue

   $ —       $ —       $ —    

Interest income

     297       730       1,027  

Net income

     71       176       247  

Accretion of Trust Fund related to common stock subject to possible conversion

     (58 )     (143 )     (201 )

Net income attributable to common stockholders

     13       33       46  

Net income per share

     0.01       0.00          

 

    

As of

December 31, 2004


   As of
September 30, 2005


Total assets (including US Government Securities deposited in Trust Fund)

   $ 36,903    $ 37,093

Common stock subject to possible conversion

     7,125      7,268

Stockholders’ equity

     29,743      29,776

 

Selected Unaudited Pro Forma Combined Financial Information of Arpeggio and Hill

 

The merger will be accounted for as a reverse acquisition under the purchase method of accounting. Hill will be treated as the continuing reporting entity for accounting purposes. The assets and liabilities of Arpeggio will be recorded, as of the completion of the merger, at fair value, which is considered to approximate historical cost and added to those of Hill. Since Arpeggio had no operations, the merger has been accounted for as a recapitalization of Hill. For a more detailed description of purchase accounting, see “The Merger Proposal – Anticipated Accounting Treatment.”

 

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We have presented below the unaudited pro forma combined financial information that reflects the merger as a recapitalization of Hill. The following selected unaudited pro forma combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma combined balance sheet and related notes thereto included elsewhere in this proxy statement.

 

     At October 1, 2005

     Assuming No
Conversions (1)


   Assuming Maximum
Conversions (2)


Total assets

   $ 75,404    $ 68,136
    

  

Long-term debt

   $ 9,107    $ 9,107

Other current and long-term liabilities

     24,020      24,020

Common stock subject to conversion

     —        —  

Stockholders’ equity

     42,277      35,009
    

  

     $ 75,404    $ 68,136
    

  


Notes:

 

(1) Assumes that no Arpeggio stockholders seek conversion of their Arpeggio stock into pro rata shares of the trust fund.
(2) Assumes that 1,359,320 shares of Arpeggio common stock were converted into their pro rata share of the trust fund.

 

Comparative Per Share Data

 

The following table sets forth historical information of Hill and Arpeggio and unaudited pro forma combined per share information for Hill and Arpeggio after giving effect to the merger, assuming both no conversions and maximum conversions by Arpeggio stockholders. You should read this information in conjunction with the selected historical financial information, included elsewhere in this proxy statement. The unaudited Hill and Arpeggio pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed balance sheets and related notes included elsewhere in this proxy statement.

 

The unaudited pro forma combined book value per share information below does not purport to represent what the value of Hill and Arpeggio would have been had the companies been combined.

 

     In thousands, except per share data

     Hill

   Arpeggio

   Combined
Company


Number of shares of common stock outstanding upon consummation of merger:

                    

Assuming no conversions

     14,500      8,300      22,800

Assuming maximum conversions

     14,500      6,941      21,441

Book value – historical at October 1, 2005

   $ 6,479    $ 29,776       

Book value – pro forma October 1, 2005

                    

Assuming no conversions

                 $ 42,277

Assuming maximum conversions

                 $ 35,009

Book value per share– pro forma October 1, 2005

                    

Assuming no conversions

                 $ 1.85

Assuming maximum conversions

                 $ 1.63

 

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Market Price and Dividend Data for Arpeggio Securities

 

Arpeggio consummated its IPO on June 30, 2004. In the IPO, Arpeggio sold 6,800,000 units, including 800,000 units that were subject to the underwriters’ over allotment option. Each unit consists of one share of the Company’s common stock and two redeemable common stock purchase warrants, each to purchase one share of Arpeggio’s common stock. Arpeggio common stock, warrants and units are quoted on the OTCBB under the symbols APGO, APGOW and APGOU, respectively. Arpeggio’s units commenced public trading on June 25, 2004, and its common stock and warrants commenced separate public trading on July 7, 2004. The closing price for each share of common stock, warrant and unit of Arpeggio on December 2, 2005, the last trading day before announcement of the execution of the merger agreement, as amended, was $5.31, $0.54 and $6.45, respectively.

 

Arpeggio and Hill will use their reasonable efforts to obtain the listing for trading on Nasdaq of Arpeggio common stock, warrants and units. In the event Arpeggio’s common stock, warrants and units are listed on Nasdaq at the time of the closing of the merger, the symbols will change to ones determined by Arpeggio and Nasdaq that are reasonably representative of the corporate name or business of Arpeggio. Arpeggio’s management anticipates that the Nasdaq listing will be concurrent with the consummation of the merger. If the listing on Nasdaq is not approved, it is expected that the common stock, warrants and units will continue to be quoted on the OTCBB.

 

Holders

 

As of             , 2006, there were          holders of record of the units,          holders of record of the common stock and              holders of record of the warrants. Arpeggio believes the beneficial holders of the units, common stock and warrants to be in excess of              persons each.

 

Dividends

 

Arpeggio has not paid any cash dividends on its common stock to date and does not intend to pay dividends prior to the completion of the merger. It is the present intention of the board of directors to retain all earnings, if any, for use in the business operations, and accordingly, the board does not anticipate declaring any dividends in the foreseeable future. The payment of any dividends subsequent to the merger will be within the discretion of the then board of directors and will be contingent upon revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination.

 

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RISK FACTORS

 

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement, before you decide whether to vote or instruct your vote to be cast to adopt the merger proposal.

 

Risks Relating to Our Business and Operations Following the Merger with Hill

 

The value of your investment in Arpeggio following consummation of the merger will be subject to the significant risks inherent in the construction management and claims consulting business. You should carefully consider the risks and uncertainties described below and other information included in this proxy statement. If any of the events described below occur, Arpeggio’s post-merger business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly, and you therefore may lose all or part of your investment.

 

An economic downturn could cause Hill’s revenues, profits and overall financial condition to deteriorate.

 

Demand for Hill’s services is vulnerable to economic downturns, which may result in clients delaying, curtailing or canceling proposed and existing projects. Hill’s clients may demand better pricing terms and their ability to pay its invoices may be affected by the economy. Hill’s government clients may face decreased funding or budget deficits that prohibit them from funding proposed and existing projects. Following a downturn, its business may not recover immediately when the economy improves. If the current economy worsens, then Hill’s revenues, profits and overall financial condition may deteriorate.

 

Hill depends on long-term government contracts, many of which are funded on an annual basis. If appropriations are not made in subsequent years of a multiple-year contract, Hill will not realize all of its potential revenue and profit from that project.

 

A majority of Hill’s revenues is derived from contracts with agencies and departments of national, state and local governments, as well as foreign governments. During the fiscal years ended December 27, 2003, January 1, 2005 and during the nine months ended October 1, 2005, approximately 67.4%, 74.4% and 70.2%, respectively, of Hill’s revenues were derived from contracts with government entities.

 

Most government contracts are subject to the continuing availability of legislative appropriation. Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by, among other things, the state of the economy, competing priorities for appropriation, the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on government contracts, then Hill will not realize all of its potential revenue and profit from that contract.

 

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Because Hill depends on government contracts for a significant portion of its revenue, Hill’s inability to win profitable government contracts could harm its operations and adversely affect its net income.

 

Revenues from federal government contracts and state and local government contracts represented approximately 17.1% and 36.3%, respectively, of Hill’s revenues for the nine months ended October 1, 2005 and revenues from foreign government contracts represented approximately 16.8% of such nine-month revenues. Hill’s inability to win profitable government contracts could harm its operations and adversely affect its net income. Government contracts are typically awarded through a heavily regulated procurement process. Some government contracts are awarded to multiple competitors, causing increases in overall competition and pricing pressure. The competition and pricing pressure, in turn, may require Hill to make sustained post-award efforts to reduce costs in order to realize revenues under these contracts. If Hill is not successful in reducing the amount of costs it anticipates, its profitability on these contracts may be negatively impacted. Also, some of Hill’s federal government contracts require U.S. government security clearances. If Hill or certain of its personnel were to lose these security clearances, Hill’s ability to continue performance of these contracts or to win new contracts requiring a clearance may be negatively impacted.

 

Hill depends on government contracts that may be terminated by the government, which may affect its ability to recognize all of its potential revenue and profit from the project.

 

Most government contracts are subject to termination by the government either at its convenience or upon the default of the contractor. If the government terminates a contract at its convenience, then Hill typically is able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent Hill from recognizing all of its potential revenue and profit from that contract. If the government terminates the contract due to Hill’s default, Hill could be liable for excess costs incurred by the government in re-procuring services from another source, as well as other costs.

 

Hill’s contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if Hill is charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.

 

Hill’s books and records are subject to audit by the various governmental agencies it serves and by their representatives. These audits can result in adjustments to reimbursable contract costs and allocated overhead. In addition, if as a result of an audit, Hill or one of its subsidiaries is charged with wrongdoing or the government agency determines that Hill or one of its subsidiaries is otherwise no longer eligible for federal contracts, then Hill or, as applicable, that subsidiary, could be temporarily suspended or, in the event of convictions or civil judgments, could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a U.S. government contractor, Hill is subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which non-government contractors are not, the results of which could have a material adverse effect on Hill’s operations.

 

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Hill submits change orders to its customers for work it performs beyond the scope of some of its contracts. If Hill’s customers do not approve these change orders, its net income and results of operations could be adversely impacted.

 

Hill typically submits change orders under some of its contracts for payment of work performed beyond the initial contractual requirements. The applicable customers may not approve or may contest these change orders and Hill cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, Hill’s net income and results of operations could be adversely impacted.

 

Hill’s business and operating results could be adversely affected by losses under fixed-price contracts.

 

Hill sometimes enters into fixed-price contracts that require it to either perform all work under the contract for a specified lump-sum or to perform an estimated number of units of work at an agreed price per unit, with the total payment determined by the actual number of units performed. A significant portion of Hill’s revenues comes from fixed-price contracts. Fixed-price contracts expose Hill to a number of risks not inherent in cost-plus contracts, including underestimation of costs, ambiguities in specifications, unforeseen costs or difficulties, delays beyond Hill’s control, failures of subcontractors to perform and economic or other changes that may occur during the contract period. Losses under fixed-price contracts could have a material adverse effect on Hill’s business.

 

Hill’s backlog of uncompleted projects under contract or awarded is subject to unexpected adjustments and cancellations, including future appropriations by the applicable contracting government agency, and is, therefore, an uncertain indicator of its future revenues and profits.

 

At December 31, 2005, Hill’s backlog of uncompleted projects under contract or awarded was approximately $281 million. Neither we nor Hill’s management can assure you that the revenues attributed to uncompleted projects under contract will be realized or, if realized, will result in profits. Many projects may remain in Hill’s backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time projects are scaled back or cancelled. These types of backlog reductions adversely affect the revenue and profit that Hill ultimately receives from contracts reflected in its backlog. Included in Hill’s backlog is the maximum amount of all indefinite delivery/indefinite quantity (“ID/IQ”), or task order, contracts, or a lesser amount if Hill does not reasonably expect to be issued task orders for the maximum amount of such contracts. Neither we nor Hill’s management can provide any assurance that Hill will in fact be awarded the maximum amount of such contracts.

 

Hill is dependent upon its key personnel.

 

Hill is dependent upon the efforts of its executive officers, particularly Irvin Richter. Mr. Richter has served as Hill’s only Chief Executive Officer since its founding in 1976, and the loss of Mr. Richter’s services could have an adverse effect on Hill’s operations. On or prior to the consummation of the merger, Hill and Mr. Richter intend to enter into an employment agreement for a term of three years, commencing on the effective date of the merger. Hill maintains key-man life insurance coverage for Mr. Richter.

 

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Hill’s ability to grow and compete in its industry will be harmed if it does not retain the continued service of its key management, sales and technical personnel and identify, hire and retain additional qualified personnel.

 

There is intense competition for qualified management, sales and technical personnel in the industry sectors in which Hill competes. Hill may not be able to continue to attract and retain qualified personnel who are necessary for the development of its business or to replace qualified personnel. Any growth Hill experiences is expected to place increased demands on its resources and will likely require the addition of personnel and the development of additional expertise by existing personnel. Also, some of Hill’s personnel hold security clearance levels required to obtain government projects and, if Hill were to lose some or all of these personnel, they may be difficult to replace. Loss of the services of, or failure to recruit, key personnel could limit Hill’s ability to complete existing projects successfully and to compete for new projects.

 

Hill’s dependence on subcontractors, partners and specialists could adversely affect its business.

 

Hill relies on third-party subcontractors as well as third-party strategic partners and specialists to complete its projects. To the extent that Hill cannot engage such subcontractors, partners or specialists or cannot engage them on a competitive basis, its ability to complete a project in a timely fashion or at a profit may be impaired. If Hill is unable to engage appropriate strategic partners or specialists in some instances, it could lose the ability to win some contracts. In addition, if a subcontractor or specialist is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, Hill may be required to purchase the services from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services were needed.

 

If Hill’s partners fail to perform their contractual obligations on a project, Hill could be exposed to legal liability, loss of reputation or reduced profits.

 

Hill sometimes enters into subcontracts and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects depends on the satisfactory performance of the contractual obligations of Hill’s partners. If any of its partners fails to satisfactorily perform its contractual obligations, Hill may be required to make additional investments and provide additional services to complete the project. If Hill is unable to adequately address its partner’s performance issues, then its client could terminate the joint project, exposing Hill to legal liability, loss of reputation or reduced profits.

 

Hill’s services expose it to significant risks of liability and its insurance policies may not provide adequate coverage.

 

Hill’s services involve significant risks of professional and other liabilities that may substantially exceed the fees that it derives from its services. In addition, Hill sometimes contractually assumes liability under indemnification agreements. Hill cannot predict the magnitude of potential liabilities from the operation of its business.

 

Hill currently maintains comprehensive general liability, umbrella and professional liability insurance policies. Professional liability policies are “claims made” policies. Thus, only claims made during the term of the policy are covered. Additionally, Hill’s insurance policies may not protect it against potential liability due to various exclusions and retentions. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse affect on Hill’s business.

 

Also, the terrorist attacks that occurred on September 11, 2001 have had a material adverse effect on the insurance industry as a whole. Consequently, along with its competition, Hill has experienced, and expects to continue to experience, a significant increase in its insurance premiums.

 

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International operations expose Hill to legal, political and economic risks in different countries and currency exchange rate fluctuations could adversely affect its financial results.

 

During the fiscal years ending December 27, 2003 and January 1, 2005, and during the nine months ended October 1, 2005, revenues attributable to Hill’s international operations were 21.9%, 28.1% and 36.3%, respectively. Hill’s management expects the percentage of revenues attributable to its international operations to increase. There are risks inherent in doing business internationally, including:

 

    lack of developed legal systems to enforce contractual rights;

 

    greater risk of uncollectible accounts and longer collections cycles;

 

    currency exchange rate fluctuations;

 

    imposition of governmental controls;

 

    political and economic instability;

 

    changes in U.S. and other national government policies affecting the markets for Hill’s services;

 

    changes in regulatory practices, tariffs and taxes;

 

    potential non-compliance with a wide variety of non-U.S. laws and regulations; and

 

    general economic and political conditions in these foreign markets.

 

Any of these factors could have a material adverse effect on Hill’s business, results of operations or financial condition.

 

Changes to the laws of the foreign countries in which Hill operates may adversely affect its international operations.

 

Hill has contracts to perform services for projects located in a number of foreign countries, including, among others, the United Kingdom, Romania, Macedonia, Serbia, Croatia, Latvia, Iraq, Kuwait, Bahrain, Qatar, Egypt, Senegal, Morocco and the United Arab Emirates. Hill expects to have additional similar contracts in the future. In addition, Hill has offices in eleven foreign countries. The laws and regulations in the countries in which Hill is working on projects or in which it has offices might change in a manner that negatively impacts Hill’s business. Such changes could have a material adverse effect on Hill’s business.

 

Hill’s business sometimes requires its employees to travel to and work in high security risk countries, which may result in employee injury, repatriation costs or other unforeseen costs.

 

Many of Hill’s employees often travel to and work in high security risk countries around the world that are undergoing or that may undergo political, social and economic upheavals resulting in war, civil unrest, criminal activity or acts of terrorism. For example, Hill has employees working in Iraq, a high security risk country with substantial civil unrest and acts of terrorism. As a result, Hill may be subject to costs related to employee injury, repatriation or other unforeseen circumstances.

 

Hill has acquired and may continue to acquire businesses as strategic opportunities arise and may be unable to realize the anticipated benefits of those acquisitions.

 

Since 1998, Hill has acquired seven companies and its strategy is to continue to expand and diversify its operations with additional acquisitions as strategic opportunities arise. Some of the risks that may affect Hill’s ability to realize any anticipated benefits from companies that it acquires include:

 

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    unexpected losses of key personnel or clients of the acquired business;

 

    difficulties arising from the increasing scope, geographic diversity and complexity of its operations;

 

    diversion of management’s attention from other business concerns; and

 

    adverse effects on existing business relationships with clients.

 

In addition, managing the growth of Hill’s operations will require Hill to continually improve its operational, financial and human resources management systems and other internal systems and controls. If Hill is unable to manage any growth effectively or to successfully integrate any acquisitions, that could have a material adverse effect on Hill’s business.

 

Risks Related to the Merger

 

There will be a substantial number of shares of Arpeggio’s common stock available for sale in the future that may increase the volume of common stock available for sale in the open market and may cause a decline in the market price of our common stock.

 

The consideration to be issued in the merger to the Hill stockholders will include 14,500,000 shares of Arpeggio common stock that will be issued at the closing and up to an additional 6,600,000 shares that may be issued if certain earnings targets are met subsequent to the closing. These shares will be restricted and cannot be sold publicly until the expiration of the restricted period under the lock-up agreements (December 31, 2007) and under Rule 144 promulgated under the Securities Act of 1933. However, upon expiration of the restricted period, the presence of such additional shares eligible for trading in the public market may have an adverse effect on the market price of our common stock.

 

Our outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of the common stock.

 

Outstanding redeemable warrants to purchase an aggregate of 13,600,000 shares of common stock issued in the IPO will become exercisable after the consummation of the merger. These will be exercised only if the $5.00 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of such shares.

 

Our working capital will be reduced if Arpeggio stockholders exercise their right to convert their shares into cash. This would reduce our cash reserve after the merger.

 

Pursuant to our certificate of incorporation, holders of shares issued in our IPO may vote against the merger and demand that we convert their shares into a pro rata share of the trust account where a substantial portion of the net proceeds of the IPO are held. We and Hill will not consummate the merger if holders of 1,360,000 or more shares of common stock issued in our IPO exercise these conversion rights. To the extent the merger is consummated and holders have demanded to so convert their shares, there will be a corresponding reduction in the amount of funds available to the combined company following the merger. As of             , 2006, the record date, assuming the merger proposal is adopted, the maximum amount of funds that could be disbursed to our stockholders upon the exercise of their conversion rights is approximately $            , or approximately 20% of the funds then held in the trust account. Any payment upon exercise of conversion rights will reduce our cash after the merger, which may limit our ability to implement our business plan.

 

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If Arpeggio stockholders fail to vote or abstain from voting on the merger proposal, they may not exercise their conversion rights to convert their shares of common stock of Arpeggio into a pro rata portion of the trust account as of the record date.

 

Arpeggio stockholders holding shares of Arpeggio stock issued in our IPO who affirmatively vote against the merger proposal may, at the same time, demand that we convert their shares into a pro rata portion of the trust account as of the record date. Arpeggio stockholders who seek to exercise this conversion right must affirmatively vote against the merger. Any Arpeggio stockholder who fails to vote or who abstains from voting on the merger proposal may not exercise his conversion rights and will not receive a pro rata portion of the trust account for conversion of his shares.

 

If we are unable to obtain a listing of our securities on Nasdaq or any stock exchange, it may be more difficult for our stockholders to sell their securities.

 

Arpeggio’s units, common stock and warrants are currently traded in the over-the-counter market and quoted on the OTCBB. We have applied for listing on Nasdaq. Generally, Nasdaq requires that a company applying for listing on the Nasdaq SmallCap Market have stockholders’ equity of not less than $5.0 million or a market value of listed securities of $50 million or net income from continuing operations of not less than $750,000, at least 1,000,000 publicly held shares, and a minimum bid price of $4.00 with over 300 round lot stockholders. There is no assurance that such listing will be obtained and listing is not a condition to closing the merger. If we are unable to obtain a listing or approval of trading of our securities on Nasdaq, then it may be more difficult for stockholders to sell their securities.

 

Our current directors and executive officers own shares of common stock and warrants and have other interests in the merger that are different from yours. If the merger is not approved the securities held by them will become worthless. Consequently, they may have a conflict of interest in determining whether particular changes to the business combination with Hill or waivers of the terms thereof are appropriate.

 

All of our officers and directors own stock in Arpeggio, which they purchased prior to our IPO. Additionally, such persons (including our special advisor) purchased 1,010,500 warrants in the aftermarket after our IPO. Our executives and directors are not entitled to receive any of the cash proceeds that may be distributed upon our liquidation with respect to shares they acquired prior to our IPO. Therefore, if the merger is not approved and we are forced to liquidate, such shares held by our officers and directors will be worthless, as will the warrants, which cannot be sold by them prior to the consummation of the merger. Also, after the completion of the merger, Eric S. Rosenfeld and Arnaud Ajdler will serve as members of the board of directors of Arpeggio. As such, in the future each may receive certain cash fees and stock awards that the Arpeggio board of directors may determine to pay its non-executive directors. In addition, if Arpeggio liquidates prior to the consummation of a business combination, Eric S. Rosenfeld, our current chairman of the board, chief executive officer and president, will be personally liable to pay debts and obligations, if any, to vendors and other entities that are owed money by Arpeggio for services rendered or products sold to Arpeggio, or to any target business, to the extent such debts and obligations are not covered by Arpeggio’s assets, excluding amounts in the trust fund.

 

These personal and financial interests of our directors and officers may have influenced their decision to approve our business combination with Hill. In considering the recommendations of our board of directors to vote for and our special advisor to support the merger proposal and other proposals, you should consider these interests. Additionally, the exercise of our directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the business combination may result in a conflict of interest when determining whether such changes or waivers are appropriate and in our stockholders’ best interest.

 

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Voting control by our executive officers, directors and other affiliates may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.

 

Upon consummation of the merger, the persons who are parties to the voting agreement (Irvin Richter, David Richter, Brady Richter, Eric Rosenfeld and Arnaud Ajdler) will own approximately 63.6% of our voting stock. These persons have agreed to vote for each other’s designees to our board of directors through director elections in 2007. Accordingly, they will be able to control the election of directors and, therefore, our policies and direction during the term of the voting agreement. This concentration of ownership and voting agreement could have the effect of delaying or preventing a change in our control or discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.

 

FORWARD-LOOKING STATEMENTS

 

We believe that some of the information in this proxy statement constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. However, the safe-harbor provisions of that act do not apply to statements made in this proxy statement. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

 

    discuss future expectations;

 

    contain projections of future results of operations or financial condition; or

 

    state other “forward-looking” information.

 

We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in this proxy statement provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us or Hill in such forward-looking statements, including among other things:

 

    the number and percentage of our stockholders voting against the merger proposal and seeking conversion;

 

    outcomes of government reviews, inquiries, investigations and related litigation;

 

    continued compliance with government regulations;

 

    legislation or regulatory environments, requirements or changes adversely affecting the business in which Hill is engaged;

 

    fluctuations in customer demand;

 

    management of rapid growth;

 

    general economic conditions;

 

    Hill’s business strategy and plans; and

 

    the results of future financing efforts.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement.

 

All forward-looking statements included herein attributable to any of us, Hill or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, Arpeggio and Hill undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement or to reflect the occurrence of unanticipated events.

 

Before you grant your proxy or instruct how your vote should be cast or vote on the adoption of the merger agreement, you should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this proxy statement could have a material adverse effect on Arpeggio and/or Hill.

 

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SPECIAL MEETING OF ARPEGGIO STOCKHOLDERS

 

General

 

We are furnishing this proxy statement to Arpeggio stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting of Arpeggio stockholders to be held on                  , 2006, and at any adjournment or postponement thereof. This proxy statement is first being furnished to our stockholders on or about                  , 2006 in connection with the vote on the proposed merger, the certificate of incorporation amendments and stock option plan. This document provides you with the information we believe you should know to be able to vote or instruct your vote to be cast at the special meeting.

 

Date, Time and Place

 

The special meeting of stockholders will be held on                  , 2006, at          a.m., eastern standard time at the offices of Graubard Miller, our counsel, The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.

 

Purpose of the Arpeggio Special Meeting

 

At the special meeting, we are asking holders of Arpeggio common stock to:

 

    approve the merger agreement and the transactions contemplated thereby (merger proposal);

 

    approve an amendment to our certificate of incorporation to change our name from “Arpeggio Acquisition Corporation” to “Hill International, Inc.” (name change amendment);

 

    approve an amendment to our certificate of incorporation to increase the number of authorized shares of our common stock from 30,000,000 to 75,000,000 (capitalization amendment);

 

    approve an amendment to our certificate of incorporation to remove the preamble and sections A through D, inclusive, of Article Sixth from the certificate of incorporation from and after the closing of the merger, as these provisions will no longer be applicable to us, and to redesignate section E of Article Sixth, which relates to the staggered board, as Article Sixth (Article Sixth amendment); and

 

    approve the adoption of the Employee Stock Option Plan (stock option plan proposal).

 

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Recommendation of Arpeggio Board of Directors

 

Our board of directors:

 

    has unanimously determined that each of the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal is fair to and in the best interests of us and our stockholders;

 

    has unanimously approved the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal;

 

    unanimously recommends that our common stockholders vote “FOR” the merger proposal;

 

    unanimously recommends that our common stockholders vote “FOR” the proposal to adopt the name change amendment;

 

    unanimously recommends that our common stockholders vote “FOR” the proposal to adopt the capitalization amendment;

 

    unanimously recommends that our common stockholders vote “FOR” the proposal to adopt the Article Sixth amendment; and

 

    unanimously recommends that our common stockholders vote “FOR” the proposal to approve the stock option plan proposal.

 

Record Date; Who is Entitled to Vote

 

We have fixed the close of business on                  , 2006, as the “record date” for determining Arpeggio stockholders entitled to notice of and to attend and vote at the special meeting. As of the close of business on                  , 2006, there were 8,300,000 shares of our common stock outstanding and entitled to vote. Each share of our common stock is entitled to one vote per share at the special meeting.

 

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Pursuant to agreements with us, the 1,500,000 shares of our common stock held by stockholders who purchased their shares of common stock prior to our IPO will be voted on the merger proposal in accordance with the majority of the votes cast at the special meeting.

 

Quorum

 

The presence, in person or by proxy, of a majority of all the outstanding shares of common stock constitutes a quorum at the special meeting.

 

Abstentions and Broker Non-Votes

 

Proxies that are marked “abstain” and proxies relating to “street name” shares that are returned to us but marked by brokers as “not voted” will be treated as shares present for purposes of determining the presence of a quorum on all matters. The latter will not be treated as shares entitled to vote on the matter as to which authority to vote is withheld by the broker. If you do not give the broker voting instructions, under the rules of the NASD, your broker may not vote your shares on the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal. Since a stockholder must affirmatively vote against the merger proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their conversion rights. Beneficial holders of shares held in “street name” that are voted against the merger may exercise their conversion rights. See the information set forth in “Special Meeting of Arpeggio Stockholders – Conversion Rights.”

 

Vote of Our Stockholders Required

 

The approval of the adoption of the merger, the name change amendment, the capitalization amendment and the Article Sixth amendment will require the affirmative vote of the holders of a majority of Arpeggio common stock outstanding on the record date. Because each of these proposals requires the affirmative vote of a majority of the shares of common stock outstanding and entitled to vote, abstentions and shares not entitled to vote because of a broker non-vote will have the same effect as a vote against these proposals; however, you cannot seek conversion unless you affirmatively vote against the merger proposal.

 

In order to consummate the merger, each of the name change amendment and the capitalization amendment proposals must be approved by the stockholders. For both of the name change amendment and the capitalization amendment to be implemented, the merger proposal must be approved by the stockholders.

 

The approval of the stock option plan proposal will require the affirmative vote of the holders of a majority of our common stock represented and entitled to vote at the meeting. Abstentions are deemed entitled to vote on the proposal. Therefore, they have the same effect as a vote against the proposal. Broker non-votes are not deemed entitled to vote on the proposal and, therefore, they will have no effect on the vote on the proposal.

 

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Voting Your Shares

 

Each share of Arpeggio common stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of our common stock that you own.

 

There are two ways to vote your shares of Arpeggio common stock at the special meeting:

 

    You can vote by signing and returning the enclosed proxy card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by our board “FOR” the adoption of the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal.

 

    You can attend the special meeting and vote in person. We will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares.

 

IF YOU DO NOT VOTE YOUR SHARES OF OUR COMMON STOCK IN ANY OF THE WAYS DESCRIBED ABOVE, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE ADOPTION OF THE MERGER PROPOSAL, BUT WILL NOT HAVE THE EFFECT OF A DEMAND OF CONVERSION OF YOUR SHARES INTO A PRO RATA SHARE OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE PROCEEDS OF OUR IPO ARE HELD.

 

Revoking Your Proxy

 

If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

 

    you may send another proxy card with a later date;

 

    you may notify Eric S. Rosenfeld, our chairman, chief executive officer and president, in writing before the special meeting that you have revoked your proxy; or

 

    you may attend the special meeting, revoke your proxy, and vote in person, as indicated above.

 

Who Can Answer Your Questions About Voting Your Shares

 

If you have any questions about how to vote or direct a vote in respect of your shares of our common stock, you may call Mackenzie Partners, Inc., our proxy solicitor, at (800) 322-2885 or Eric S. Rosenfeld, our chairman, chief executive officer and president, at (212) 319-7676.

 

No Additional Matters May Be Presented at the Special Meeting

 

This special meeting has been called only to consider the adoption of the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal. Under our by-laws, other than procedural matters incident to the conduct of the meeting, no other matters may be considered at the special meeting if they are not included in the notice of the meeting.

 

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Conversion Rights

 

Any of our stockholders holding shares of Arpeggio common stock issued in our IPO who affirmatively votes against the merger proposal may, at the same time, demand that we convert his shares into a pro rata portion of the trust account as of the record date. If demand is made and the merger is consummated, we will convert these shares into a pro rata portion of funds held in a trust account plus interest, as of the record date. Arpeggio stockholders who seek to exercise this conversion right must affirmatively vote against the merger. Abstentions and broker non-votes do not satisfy this requirement.

 

The last sale price of our common stock on                      , 2006 (the record date) was $             and the per-share, pro-rata cash held in the trust account on that date was approximately $                    . Prior to exercising conversion rights, our stockholders should verify the market price of our common stock as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights if the market price per share is higher than the conversion price.

 

If the holders of at least 1,360,000 or more shares of common stock issued in our IPO (an amount equal to 20% or more of those shares), vote against the merger and demand conversion of their shares, we will not be able to consummate the merger.

 

If you exercise your conversion rights, then you will be exchanging your shares of our common stock for cash and will no longer own those shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger, properly demand conversion, continue to hold those shares through the effective time of the merger and then tender your stock certificate to us. If you hold the shares in street name, you will have to coordinate with your broker to have your shares certificated.

 

Appraisal Rights

 

Stockholders of Arpeggio do not have appraisal rights in connection with the merger.

 

Proxy Solicitation Costs

 

We are soliciting proxies on behalf of our board of directors. This solicitation is being made by mail but also may be made by telephone or in person. We and our directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means.

 

We have engaged Mackenzie Partners, Inc. to assist in the proxy solicitation process. We will pay Mackenzie Partners, Inc. a fee of $4,000 plus reasonable out-of-pocket charges and a flat fee of $3.50 per outbound proxy solicitation call. Such costs will be paid with non-trust funds.

 

We will ask banks, brokers and other institutions, nominees and fiduciaries to forward our proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. We will reimburse them for their reasonable expenses.

 

Arpeggio Inside Stockholders

 

At the close of business on the record date, Eric S. Rosenfeld, Arnaud Ajdler, Leonard B. Schlemm, Jon Bauer, Colin D. Watson and James G. Dinan, who we collectively refer to as the Arpeggio Inside Stockholders, beneficially owned and were entitled to vote 1,500,000 shares or approximately 18.1% of the then outstanding shares of our common stock, which includes all of the shares held by our directors and executive officers and their affiliates. Eric S. Rosenfeld is currently chairman of our board of directors and our chief executive officer and president, Arnaud Ajdler is currently our chief financial officer, secretary and a director, and Messrs. Schlemm, Bauer, Watson and Dinan are currently directors. All of the Arpeggio Inside Stockholders agreed to vote the 1,500,000 shares they purchased prior to our IPO on the merger proposal in accordance with the majority of the votes cast by the holders of shares issued in our IPO. The Arpeggio Inside Stockholders also agreed, in connection with the IPO, to place these shares in escrow until June 24, 2007.

 

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THE MERGER PROPOSAL

 

The discussion in this document of the merger and the principal terms of the merger agreement, dated as of December 5, 2005, as amended, by and among Arpeggio, Hill International, Inc. and the Hill stockholders is subject to, and is qualified in its entirety by reference to, the merger agreement. A copy of the merger agreement, as amended, is attached as Annex A to this proxy statement and is incorporated in this proxy statement by reference.

 

General Description of the Merger

 

Pursuant to the merger agreement, Hill will merge with and into Arpeggio. The separate corporate existence of Hill shall cease. Arpeggio will be renamed Hill International, Inc. after completion of the merger. Holders of all the issued and outstanding shares of common stock of Hill will receive 14,500,000 shares of Arpeggio common stock at the closing. Immediately after the completion of the merger, the Hill stockholders will own approximately 63.6% of Arpeggio’s common stock, assuming that no Arpeggio stockholders seek conversion of their Arpeggio stock into their pro rata share of the trust fund. The merger agreement also provides for the Hill stockholders to receive up to an additional 6,600,000 shares of Arpeggio common stock, contingent upon the combined companies attaining certain EBIT targets.

 

Background of the Merger

 

The terms of the merger agreement are the result of arm’s-length negotiations between representatives of Arpeggio and Hill. The following is a brief discussion of the background of these negotiations, the merger agreement and related transactions.

 

Arpeggio was formed on April 2, 2004 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Arpeggio completed its IPO on June 30, 2004, raising net proceeds of approximately $36,772,000. Of these net proceeds, $35,352,000 was placed in a trust account immediately following the IPO and, in accordance with Arpeggio’s certificate of incorporation, will be released either upon the consummation of a business combination or upon the liquidation of Arpeggio. Arpeggio must liquidate unless it has consummated a business combination by June 30, 2006. As of September 30, 2005, approximately $36,357,327 was held in deposit in the trust account.

 

Promptly following Arpeggio’s IPO, we contacted several investment bankers, private equity firms, consulting firms, legal and accounting firms, as well as numerous other business relationships. Through these efforts, we identified and reviewed information with respect to more than 75 target companies.

 

By October 2005, we had entered into substantial discussions with several companies, including the type and amount of consideration to be provided relative to a potential transaction. Four of these

 

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companies were provided with a preliminary letter of intent. For a number of reasons, including an inability to agree on valuation and perceived issues with the overall structure of a transaction, all but one of these opportunities did not prove to be satisfactory candidates for an acquisition. Negotiations advanced with one of the companies, a manufacturer of solar energy products, that had requested bids from us and a number of other potential acquirers. We submitted a bid after extensive due diligence review of it and its operations, but our bid was not accepted. We understand that the company had determined that it did not want to be a publicly owned entity.

 

In October 2005, Arpeggio was introduced to Hill by Messrs. Scott Isherwood and David Boris, two investment bankers at Morgan Joseph & Co., Inc. (“Morgan Joseph”). Mr. Boris had previously worked for Eric Rosenfeld, our chairman and CEO, at Oppenheimer & Co. late 1980s, where Mr. Rosenfeld was a Managing Director and Mr. Boris was a Senior Vice President. Mr. Boris had also previously brought to our attention another potential target to which we sent a letter of intent. We did not reach agreement with that target because it was acquired by another company. Prior to this introduction, none of our directors or officers was familiar with Hill. On October 19, 2005, a confidentiality agreement was executed and Arpeggio received a Confidential Executive Summary prepared by Morgan Joseph. On October 21, 2005, Mr. Rosenfeld, our Chairman and CEO, and Mr. Sgro, an employee of Crescendo Advisors II LLC (an investment firm of which Eric Rosenfeld is the president and chief executive officer), met in Arpeggio’s offices with Mr. David L. Richter, President and COO of Hill, Mr. Isherwood and Mr. Boris as well as Mr. Clarke and Mr. Taylor, two other investment bankers at Morgan Joseph. Mr. Ajdler, one of our directors and CFO, participated in the meeting by telephone. Both Arpeggio and Hill described their respective companies and answered questions for the other party. Following this meeting, Mr. Rosenfeld had a phone conversation with Mr. Isherwood during which he gave an oral indication of interest in Hill.

 

On October 28, 2005, Messrs. Rosenfeld, Ajdler and Sgro met with Mr. Irvin Richter, Chairman and CEO of Hill, Mr. David Richter and Mr. Isherwood at Hill’s headquarters in Marlton, New Jersey. During this meeting, Messrs. Irvin and David Richter described Hill’s business and provided additional information regarding Hill and its prospects. Messrs. Rosenfeld, Ajdler and Sgro asked numerous questions regarding the business. Arpeggio and Hill also discussed the valuation parameters of a potential transaction. Subsequent to this meeting, Arpeggio sent a preliminary term sheet to Hill. After that, Messrs. Rosenfeld, Ajdler and Sgro had several conversations with Mr. Isherwood and Mr. Clarke regarding the term sheet.

 

On November 3, 2005, we held a telephonic meeting of our board of directors to approve our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and to review Arpeggio’s discussions with various companies. Messrs. Rosenfeld, Ajdler, Watson, Bauer and Schlemm, constituting five out of our six directors, were present at the meeting. During the meeting, the directors discussed a number of potential target businesses, including Hill. Messrs. Rosenfeld and Ajdler described the potential Hill transaction in detail at this meeting.

 

On November 11, 2005, Mr. Rosenfeld and Mr. Ajdler had a telephonic conversation with Messrs. Irvin and David Richter regarding the valuation of Hill. On November 12, 2005, Mr. Rosenfeld had another telephonic conversation with Mr. Irvin Richter regarding valuation. On November 12, 2005 a letter of intent was sent to Hill. Over the next few days, there were a number of conversations among Hill, Arpeggio and Morgan Joseph. During the course of these conversations, the final merger consideration was agreed to. On November 16, 2005, we entered into a letter of intent with Hill.

 

On the day the letter of intent was executed, we delivered to Hill an extensive due diligence request list. We also hired BDO Seidman, LLP, to assist us with accounting and tax due diligence. Our attorneys began to compile and to review the due diligence materials received from Hill. Simultaneously, we worked with our counsel to prepare a first draft of the merger agreement. We also retained Capitalink to

 

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render an opinion that the consideration to be paid in the merger is fair to our stockholders and to opine that the fair market value of Hill is at least 80% of our net assets.

 

On November 21, 2005, Messrs. Rosenfeld, Ajdler and Sgro spent the day at Hill’s headquarters to continue their due diligence. Messrs. Ajdler and Sgro, as well as our representative from BDO Seidman, LLP, also visited Hill’s headquarters on November 22, 2005. During these two days, we met with the key senior managers of Hill. Mr. Clarke was present on November 21, 2005. During this visit, we delivered the first draft of the merger agreement to Hill, which resulted in additional discussions and negotiations of various aspects of the proposed business combination. Succeeding drafts of the transaction documents were prepared in response to comments and suggestions of the parties and their counsel, with management and counsel for both companies engaging in numerous telephonic conferences and negotiating sessions. Included in the various transaction documents were an Escrow Agreement, Voting Agreement, Lock-Up Agreement, and Employment Agreements for Messrs. Irvin Richter, David Richter and Stuart Richter.

 

On November 25, 2005, we held a telephonic meeting of our board of directors to discuss the proposed business combination with Hill. Messrs. Rosenfeld, Ajdler, Watson, Bauer and Schlemm, constituting five out of our six directors, were present at the meeting. Joel Greenblatt, our special advisor was also present by invitation. Prior to the meeting, the executed letter of intent as well as financial, operational and descriptive information about Hill was sent to the directors and to Mr. Greenblatt. Messrs. Rosenfeld and Ajdler described Hill and the deal structure and a discussion among the directors and our special advisor ensued. On November 30, 2005, we held a telephonic meeting of our board of directors to further discuss the proposed business combination with Hill and to update the board members as to the status of the negotiations. Messrs. Rosenfeld, Ajdler, Watson, Bauer, Dinan and Schlemm, constituting all of our directors, were present at the meeting. Copies of the most recent drafts of the significant transaction documents were delivered to the directors in connection with their consideration of the proposed business combination with Hill, including the merger agreement, escrow agreement, voting agreement, lock-up agreement and the employment agreements for Messrs. Irvin Richter, David Richter and Stuart Richter.

 

On December 4, 2005, another telephonic meeting of the board of directors was held. All directors attended, as did, by invitation, Joel Greenblatt, our special advisor, Noah Scooler of Graubard Miller, and representatives of Capitalink. Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were delivered to the directors and Mr. Greenblatt. Messrs. Salpeter, Cassel and Wai of Capitalink made a presentation regarding the fairness of the consideration to be paid in the merger. Mr. Salpeter advised the board that it was the opinion of Capitalink that the consideration to be paid in the merger was fair to our stockholders from a financial point of view, and that the fair market value of Hill is at least 80% of our net assets. Mr. Salpeter and Wai detailed for the board the analysis performed by Capitalink and made a presentation concerning how Capitalink had arrived at its opinion. Mr. Salpeter and Wai discussed at length with our board the different analyses used to determine whether or not the merger consideration to be paid by us was fair from a financial point of view to our stockholders, as well as to determine the fair market value of Hill. After considerable review and discussion, the merger agreement and related documents were unanimously approved, subject to final negotiations and modifications, and the board and our special advisor determined to recommend the approval of the merger agreement. For a more detailed description of the Capitalink fairness opinion, see the section entitled “The Merger Proposal – Fairness Opinion.”

 

The merger agreement was signed on December 5, 2005. Immediately thereafter, Arpeggio issued a press release and filed a Current Report on Form 8-K announcing the execution of the merger agreement and discussing the terms of the merger agreement.

 

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The merger agreement was amended on December 30, 2005 to amend the voting agreement to fix the number of directors to be designated by the Signing Stockholders and Messrs. Rosenfeld and Ajdler at seven and to amend Schedule 5.2 to the Merger Agreement to reflect such change.

 

Arpeggio’s Board of Directors’ Reasons for the Approval of the Merger

 

The final agreed-upon consideration in the merger agreement was determined by several factors. Arpeggio’s board of directors reviewed various industry and financial data, including certain valuation analyses and metrics compiled by members of the board in order to determine that the consideration to be paid to Hill was reasonable and that the merger was in the best interests of Arpeggio’s stockholders.

 

Arpeggio conducted a due diligence review of Hill that included an industry analysis, a description of Hill’s existing business model, a valuation analysis and financial projections in order to enable the board of directors to ascertain the reasonableness of this range of consideration. During its negotiations with Hill, Arpeggio did not receive services from any financial advisor because its officers and directors believe that their experience and backgrounds, together with the experience and background of Arpeggio’s special advisor, Joel Greenblatt, were sufficient to enable them to make the necessary analyses and determinations.

 

The Arpeggio board of directors concluded that the merger agreement with Hill is in the best interests of Arpeggio’s stockholders. The Arpeggio board of directors obtained a fairness opinion prior to approving the merger agreement.

 

The Arpeggio board of directors considered a wide variety of factors in connection with its evaluation of the merger. In light of the complexity of those factors, the Arpeggio board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the Arpeggio board may have given different weight to different factors.

 

In considering the merger, the Arpeggio board of directors gave considerable weight to the following factors:

 

Hill’s record of growth and expansion and high potential for future growth

 

Important criteria to Arpeggio’s board of directors in identifying an acquisition target were that the company has established business operations, that it was generating current revenues, and that it has what the board believes to be a potential to experience rapid growth. Arpeggio’s board of directors believes that Hill has in place the infrastructure for strong business operations both domestically and internationally to achieve growth both organically and through acquisitions. Recent investments in infrastructure should allow Hill to grow both organically and through acquisitions with minimal additional overhead. Since 1998, Hill has completed seven acquisitions, three of which involved project management firms and four of which were focused on construction claims, located in the United States and the United Kingdom. Arpeggio’s board believes that Hill’s successful integration of these firms demonstrates its ability to add value through acquisitions.

 

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The experience of Hill’s management

 

Another important criteria to Arpeggio’s board of directors in identifying an acquisition target was that the company have a seasoned management team with specialized knowledge of the markets within which it operates and the ability to lead a company in a rapidly changing environment. Arpeggio’s board of directors believes that Hill’s management has significant experience in the construction management and construction claims industry. Mr. Irvin E. Richter has more than 30 years of experience advising clients regarding construction contracts and claims and Mr. David L. Richter has over 10 years experience at Hill.

 

Hill’s ability to execute its business plan after the merger using its own available cash resources since part of the cash held in our trust account may be used to pay Arpeggio’s public stockholders who vote against the merger and exercise their conversion rights

 

Arpeggio’s board of directors considered the risk that the current public stockholders of Arpeggio would vote against the merger and demand to convert their shares for cash upon consummation of the merger, thereby reducing the amount of cash available to Arpeggio following the merger or cause a condition of the merger agreement not to be met. Arpeggio’s board of directors deemed this risk to be no worse with regard to Hill than it would be for other target companies and believes that Hill will still be able to implement its business plan, even if the full amount of the funds deposited in the trust account is not available at closing.

 

Satisfaction of 80% Test

 

It is a requirement that any business acquired by Arpeggio have a fair market value equal to at least 80% of Arpeggio’s net assets at the time of acquisition, which assets shall include the amount in the trust account. Based on the financial analysis of Hill generally used to approve the transaction, the Arpeggio board of directors determined that this requirement was met. The board determined that consideration being paid in the merger, which amount was negotiated at arms-length, was fair to and in the best interests of Arpeggio and its stockholders and appropriately reflected Hill’s value. The Arpeggio board of directors believes because of the financial skills and background of several of its members, it was qualified to conclude that the acquisition of Hill met this requirement. However, Arpeggio has also received an opinion from Capitalink that the 80% test has been met.

 

Interests of Arpeggio’s directors and officers in the merger

 

In considering the recommendation of the board of directors of Arpeggio to vote for the proposals to approve the merger agreement, the certificate of incorporation amendments and the equity stock plan proposal, you should be aware that certain members of the Arpeggio board have agreements or arrangements that provide them with interests in the merger that differ from, or are in addition to, those of Arpeggio stockholders generally. In particular:

 

    if the merger or another business combination is not consummated by June 30, 2006, Arpeggio will be liquidated. In such event, the shares of common stock held by Arpeggio’s directors and officers that were acquired before the IPO would be worthless because Arpeggio’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $                     based upon the last sale price of $             on the OTCBB on                     , 2006. Moreover, the Arpeggio officers, directors and special advisor have purchased 1,010,500 warrants in the public market, for an aggregate purchase price of $652,145, all of which will become worthless if the merger is not consummated (as will the remainder of the public warrants);

 

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    the transactions contemplated by the merger agreement provide that Eric S. Rosenfeld will be a director of Arpeggio (in the class to stand for reelection in 2007) and Arnaud Ajdler will be a director of Arpeggio (in the class to stand for reelection in 2008). As such, each may receive certain cash fees and stock awards if the Arpeggio board of directors determines to pay such fees and awards to its non-executive directors; and

 

    if Arpeggio liquidates prior to the consummation of a business combination, Eric S. Rosenfeld, Arpeggio’s chairman, chief executive officer and president, will be personally liable to pay debts and obligations to vendors and other entities that are owed money by Arpeggio for services rendered or products sold to Arpeggio, or to any target business, to the extent such debts and obligations are not covered by Arpeggio’s assets, excluding amounts in the trust fund. Based on Arpeggio’s estimated debts and obligations, it is not currently expected that Mr. Rosenfeld will have any exposure under this arrangement in the event of a liquidation.

 

Recommendation of Arpeggio’s Board of Directors

 

After careful consideration, Arpeggio’s board of directors determined unanimously that each of the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal is fair to and in the best interests of Arpeggio and its stockholders. Arpeggio’s board of directors has approved and declared advisable the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal and unanimously recommends that you vote or give instructions to vote “FOR” each of the proposals to adopt the merger proposal, the name change amendment, the capitalization amendment, the Article Sixth amendment and the stock option plan proposal. Mr. Greenblatt, our special advisor, also supported the proposals.

 

The foregoing discussion of the information and factors considered by the Arpeggio board of directors is not meant to be exhaustive, but includes the material information and factors considered by the Arpeggio board of directors.

 

Fairness Opinion

 

In connection with its determination to approve the merger, Arpeggio’s board of directors engaged Capitalink, L.C. to provide it with a “fairness opinion” as to whether (i) the merger consideration to be paid by Arpeggio is fair, from a financial point of view, to Arpeggio’s stockholders and (ii) the fair market value of Hill is at least equal to 80% of Arpeggio’s net assets. Capitalink, which was founded in 1998 and is headquartered in Coral Gables, Florida, provides publicly and privately held businesses and emerging growth companies with a broad range of investment banking and advisory services. As part of its business, Capitalink regularly is engaged in the evaluation of businesses and their securities in connection with mergers, acquisitions, corporate restructurings, private placements, and for other purposes. Arpeggio selected Capitalink on the basis of Capitalink’s experience, recommendations from other companies that had engaged Capitalink for similar purposes, its ability to do the research and provide the fairness opinion within the required timeframe and the competitiveness of its fee, which was specified by Capitalink in its proposal to the board. Capitalink does not beneficially own any interest in either Arpeggio or Hill and has not provided either company with any other services.

 

Arpeggio has paid Capitalink a fee of $75,000 in connection with the preparation and issuance of its opinion and will reimburse Capitalink for its reasonable out-of-pocket expenses, including attorneys’ fees. In addition, we have also agreed to indemnify and hold Capitalink, its officers, directors, principals,

 

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employees, affiliates, and members, and their successors and assigns, harmless from and against any and all loss, claim, damage, liability, deficiencies, actions, suits, proceedings, costs and legal expenses (collectively the “Losses”) or expense whatsoever (including, but not limited to, reasonable legal fees and other expenses and reasonable disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever, or in appearing or preparing for appearance as witness in any proceeding, including any pretrial proceeding such as a deposition) arising out of, based upon, or in any way related or attributed to, (i) any breach of a representation, or warranty made by us in our agreement with Capitalink; or (ii) any activities or services performed under that agreement by Capitalink, unless such Losses were the result of the intentional misconduct or gross negligence of Capitalink.

 

Capitalink made a presentation to our board of directors on December 4, 2005 and subsequently delivered its written opinion to the board of directors, which stated that, as of December 4, 2005, and based upon and subject to the assumptions made, matters considered and limitations on its review as set forth in the opinion, (i) the merger consideration is fair, from a financial point of view, to our stockholders, and (ii) the fair market value of Hill is at least equal to 80% of our net assets. The amount of the merger consideration was determined pursuant to negotiations between us and Hill and not pursuant to recommendations of Capitalink.

 

The full text of the written opinion of Capitalink is attached as Annex D and is incorporated by reference into this proxy statement. You are urged to read the Capitalink opinion carefully and in its entirety for a description of the assumptions made, matters considered, procedures followed and limitations on the review undertaken by Capitalink in rendering its opinion. The summary of the Capitalink opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion. The Capitalink opinion is not intended to be and does not constitute a recommendation to you as to how you should vote or proceed with respect to the merger. Capitalink was not requested to opine as to, and the opinion does not in any manner address, the relative merits of the merger as compared to any alternative business strategy that might exist for us, our underlying business decision to proceed with or effect the merger and other alternatives to the merger that might exist for us. Capitalink has consented to the use of its opinion in this proxy statement.

 

In arriving at its opinion, Capitalink took into account an assessment of general economic, market and financial conditions, as well as its experience in connection with similar transactions and securities valuations generally. In so doing, among other things, Capitalink:

 

  Reviewed the merger agreement.

 

  Reviewed publicly available financial information and other data with respect to Arpeggio, including the Annual Report on Form 10-KSB for the year ended December 31, 2004, the Quarterly Report on Form 10-QSB for the nine months ended September 30, 2005 and the Registration Statement on Form S-1 filed on April 23, 2004, and amendments thereto.

 

  Reviewed financial and other information with respect to Hill, including the audited financial statements for the 52/53 week fiscal periods ended nearest to December 31, 2002, 2003 and 2004, the unaudited financial statements for the 39 weeks ended nearest to September 30, 2004 and 2005, and other financial information and projections prepared by Hill management.

 

  Considered the historical financial results and present financial condition of both Arpeggio and Hill.

 

  Reviewed certain publicly available information concerning the trading of, and the market for, the common stock of Arpeggio.

 

  Reviewed and analyzed the indicated value range of the merger consideration.

 

  Reviewed and analyzed the free cash flows of Hill and prepared a discounted cash flow analysis.

 

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  Reviewed and analyzed certain financial characteristics of companies that were deemed to have characteristics comparable to Hill.

 

  Reviewed and analyzed certain financial characteristics of target companies in transactions where such target company was deemed to have characteristics comparable to that of Hill.

 

  Reviewed and compared the net asset value of Arpeggio to the indicated fair market value of Hill.

 

Capitalink also performed such other analyses and examinations as it deemed appropriate and held discussions with Arpeggio and Hill management in relation to certain financial and operating information furnished to Capitalink, including financial analyses with respect to their respective businesses and operations.

 

In arriving at its opinion, Capitalink relied upon and assumed the accuracy and completeness of all of the financial and other information that was used without assuming any responsibility for any independent verification of any such information. Further, Capitalink relied upon the assurances of Arpeggio and Hill management that they were not aware of any facts or circumstances that would make any such information inaccurate or misleading. With respect to the financial information and projections utilized, Capitalink assumed that such information has been reasonably prepared on a basis reflecting the best currently available estimates and judgments, and that such information provides a reasonable basis upon which it could make an analysis and form an opinion. Capitalink did not make a physical inspection of the properties and facilities of Arpeggio and Hill and did not make or obtain any evaluations or appraisals of either company’s assets and liabilities (contingent or otherwise). In addition, Capitalink did not attempt to confirm whether Arpeggio and Hill had good title to their respective assets. Capitalink assumed that the merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations. Capitalink assumed that the merger will be consummated substantially in accordance with the terms set forth in the merger agreement, without any further amendments thereto, and that any amendments, revisions or waivers thereto will not be detrimental to the stockholders of Arpeggio. In addition, based upon discussions with Arpeggio management, Capitalink assumed that the merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code.

 

Capitalink’s opinion is necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, December 4, 2005. Accordingly, although subsequent developments may affect its opinion, Capitalink has not assumed any obligation to update, review or reaffirm its opinion.

 

In connection with rendering its opinion, Capitalink performed certain financial, comparative and other analyses as summarized below. Each of the analyses conducted by Capitalink was carried out to provide a different perspective on the merger and to enhance the total mix of information available. Capitalink did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to the fairness, from a financial point of view, of the merger consideration to Arpeggio’s stockholders. Further, the summary of Capitalink’s analyses described below is not a complete description of the analyses underlying Capitalink’s opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Capitalink made qualitative judgments as to the relevance of each analysis and factor that it considered. In addition, Capitalink may have given various analyses more or less weight than other analyses and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described above

 

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should not be taken to be Capitalink’s view of the value of Hill’s assets. The estimates contained in Capitalink’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets neither purports to be appraisals nor do they necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, Capitalink’s analyses and estimates are inherently subject to substantial uncertainty. Capitalink believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete and misleading view of the process underlying the analyses performed by Capitalink in connection with the preparation of its opinion.

 

The analyses performed were prepared solely as part of Capitalink’s analysis of the fairness, from a financial point of view, of the merger consideration to our stockholders, and were provided to our board of directors in connection with the delivery of Capitalink’s opinion. The opinion of Capitalink was just one of the many factors taken into account by our board of directors in making its determination to approve the merger, including those described elsewhere in this proxy statement.

 

Hill Financial Review

 

Capitalink undertook a review of Hill’s historical financial data in order to understand and interpret its operating and financial performance and strength. As part of this analysis, Hill’s revenue and earnings are adjusted to remove any unusual or extraordinary sources of revenue and expenses. The adjustments provide a more accurate portrayal of Hill’s underlying operating earnings and financial performance. Capitalink noted the following:

 

  Hill’s revenue, which excludes reimbursable expenses, ranged from $48.1 million in fiscal year (“FY”) 2002, to approximately $75.2 million for the latest twelve month (“LTM”) period ended September 30, 2005. The compound average annual growth rate (“CAGR”) for revenue over this period was approximately 17.6%.

 

  While the Company had completed six acquisitions since 1998, approximately 90% of its growth has been organic as a result of overall growth in the engineering and construction sector both domestically and overseas and the increase in project outsourcing by major corporations.

 

  Normalized earnings before interest, taxes, depreciation and amortization (“EBITDA”) has fluctuated over the review period and decreased from approximately $3.3 million in FY2002 to approximately $2.8 million in FY2004. However, in line with the increase in revenues, total EBITDA for the LTM period increased to approximately $7.3 million.

 

  EBITDA margins (calculated as a percentage of revenues) decreased from 6.8% in FY2002 to 4.5% in FY2004 and then increased to 9.6% in the LTM period, reaching their highest level over the review period. The increase in margins is attributable to improved efficiencies within the organization in addition to economies of scale benefits as revenue continues to increase.

 

  As of October 1, 2005, Hill had approximately $9.3 million in total debt, primarily relating to its debt revolver. Hill management expects this loan to be repaid after completion of the merger.

 

  Over the review period, the 12-month backlog has significantly increased from approximately $46.5 million as of December 31, 2002, to approximately $86.1 million as of October 1, 2005. Capitalink noted that net revenue as a percentage of the prior year backlog ranged from 139.6% in FY2002 to approximately 125.1% for the LTM period ended October 1, 2005.

 

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Merger Consideration Analysis

 

The merger consideration consists of the immediate issuance of 14.5 million shares of our common stock and up to 6.6 million additional shares of our common stock to be paid in the future (and contingent on Hill achieving certain EBIT targets). Capitalink utilized this range of shares issued (of between 14.5 million and 21.1 million shares) in determining the range of indicated value of the merger consideration.

 

Capitalink determined an indicated value of our common stock by using Arpeggio management’s estimation of the liquidation value per share as of March 31, 2006 of approximately $5.45. Based on these assumptions, Capitalink arrived at an indicated value range for the merger consideration of approximately $79.0 million (14.5 million shares multiplied by $5.45) to approximately $115.0 million (21.1 million shares multiplied by $5.45).

 

Valuation Overview

 

Based upon a review of the historical and projected financial data and certain other qualitative data for Hill, Capitalink utilized several valuation methodologies and analyses to determine ranges of values. Capitalink utilized the discounted cash flow, the comparable company and the comparable transaction analyses (all of which are discussed in more detail hereinafter) to derive an indicated equity value of Hill.

 

Based upon the low and high range of the analyses, Capitalink determined a range of indicated equity value of approximately $79.0 million to approximately $134.0 million. Capitalink noted that the low end of the range is a more representative of Hill’s indicated value if it does not meet its projections, and the high end of the range is more representative of Hill’s value if it does achieve its projections.

 

Capitalink noted that the Hill indicated equity value range of approximately $79.0 million to approximately $134.0 million is wider than the merger consideration range of approximately $79.0 million to approximately $115.0 million.

 

Discounted Cash Flow Analysis

 

A discounted cash flow analysis estimates value based upon a company’s projected future free cash flow discounted at a rate reflecting risks inherent in its business and capital structure. Unlevered free cash flow represents the amount of cash generated and available for principal, interest and dividend payments after providing for ongoing business operations.

 

While the discounted cash flow analysis is the most scientific of the methodologies used, it is dependent on projections and is further dependent on numerous industry-specific and macroeconomic factors.

 

Capitalink utilized the forecasts provided by Hill management, which project strong growth in revenues from FY2004 to FY2008. The projections assume net revenue growth of 25.0% each year, of which between 15-20% will be from organic growth, and 5-10% will be from future acquisitions. In addition, Hill’s projections assume that its net operating profit margins will expand from 8.4% in the LTM period to 12.1% by fiscal year 2008. The above projections were solely used in connection with the rendering of Capitalink’s fairness opinion. Investors should not place reliance upon such projections, as they are not necessarily an indication of what our revenues and profit margins will be in the future. The projections used by Capitalink were prepared by Hill management and are not to be interpreted as projections of future performance (or “guidance”) by Arpeggio.

 

In order to arrive at a present value, Capitalink utilized discount rates ranging from 14.5% to 15.5%. This was based on an estimated weighted average cost of capital (“WACC”) of 15.2% (based on

 

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Hill’s estimated weighted average cost of debt of 7.5% and a 16.1% estimated cost of equity). The cost of equity calculation was derived utilizing the Ibbotson build up method utilizing appropriate industry risk and size premiums and a company specific risk factor of 2.0%, reflecting the risk of continuing to generate 25% revenue growth and increasing margins throughout the projection period.

 

Capitalink presented a range of terminal values at the end of the forecast period by applying a range of terminal exit multiples based on revenue and EBITDA as well as using long term perpetual growth rates.

 

Utilizing terminal revenue multiples of between 1.10 times and 1.30 times, terminal EBITDA multiples of between 9.0 times and 11.0 times, and long-term perpetual growth rates of between 8.0% and 9.0%, Capitalink calculated a range of indicated enterprise values.

 

The total enterprise values above were then decreased by Hill’s net debt of approximately $9.6 million (which includes approximately $9.3 million in interest bearing debt and approximately negative $0.3 million in cash balances as of October 1, 2005), to derive an indicated equity value range of approximately $101.1 million to $134.3 million.

 

Comparable Company Analysis

 

A selected comparable company analysis reviews the trading multiples of publicly traded companies that are similar to Hill with respect to business and revenue model, operating sector, size, and target customer base.

 

Because of the difficulty of finding publicly listed companies that are involved in both the construction management and claims consulting businesses, Capitalink examined two sets of comparable companies:

 

  Construction Management – Publicly listed companies that are involved in the management of construction projects and/or the provision of construction engineering services (the “Project Comparable Companies”).

 

  Claims Consulting – Publicly listed companies that are involved in the provision of litigation consulting and arbitration services (the “Claims Comparable Companies”, and, together with the Project Comparable Companies, the “Comparable Companies”).

 

Project Comparable Companies

 

Capitalink located five Project Comparable Companies including Jacobs Engineering Group, URS Corp., Washington Group International, Perini Corporation and Sweco AB. All of these companies are much larger than Hill and most provide other ancillary services such as architectural services, operations and maintenance services and construction services. The LTM revenue for the Project Comparable Companies ranged from approximately $407.7 million to approximately $5.6 billion, compared with approximately $75.2 million for Hill.

 

Hill was more profitable than all of the Project Comparable Companies with respect to EBITDA margins. The LTM EBITDA margin for Hill was 9.6%, compared with a range of 3.4% to 9.1% for the Project Comparable Companies. Hill management also estimates a steady increase in Hill’s margin to 11.2% in FY2006.

 

Compared to the Project Comparable Companies, Hill is in the top end of the range with approximately 30.2% and 33.3% projected growth for EBITDA and net income, respectively for FY2006.

 

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In comparison, the Project Comparable Companies’ projected mean EBITDA and net income growth was 15.3% and 17.3%, respectively.

 

Multiples utilizing share price, market value and enterprise value were used in the analyses. For comparison purposes, all operating profits including EBITDA were normalized to exclude unusual and extraordinary expenses and income.

 

Capitalink generated a number of multiples worth noting with respect to the Project Comparable Companies:

 

  The share price to CY2005 EPS multiple ranged from 18.8 times to 26.9 times with a mean of 23.3 times.

 

  The share price to CY2006 EPS multiple ranged from 17.3 times to 21.7 times, with a mean of 19.8 times.

 

  The enterprise value to CY2005 EBITDA multiple ranged from 9.6 times to 12.4 times, with a mean of 11.0 times.

 

  The enterprise value to CY2006 EBITDA multiple ranged from 8.8 times to 11.1 times, with a mean of 9.6 times.

 

Claims Comparable Companies

 

Capitalink located three Claims Comparable Companies including FTI Consulting, Navigant Consulting and Charles Taylor Consulting. All of these companies are much larger than Hill and all of them provide other ancillary consulting services such as economic and corporate finance consulting services. The LTM revenue for the Claims Comparable Companies ranged from approximately $108.5 million to approximately $554.3 million, compared with approximately $75.2 million for all of Hill.

 

The Claims Comparable Companies were more profitable than Hill with respect to EBITDA margins. The LTM EBITDA margin for Hill was 9.6%, compared with a range of 19.5% to 23.9% for the Claims Comparable Companies.

 

Hill’s projected growth for FY 2006 (30.2% EBITDA and 33.3% net income growth) is higher than that of the Claims Comparable Companies. In comparison, the Claims Comparable Companies’ projected mean EBITDA and net income growth were 13.3% and 15.7%, respectively.

 

Capitalink generated a number of multiples worth noting with respect to the Claims Comparable Companies:

 

  The share price to CY2005 EPS multiple ranged from 20.7 times to 20.9 times with a mean of 20.8 times.

 

  The share price to CY2006 EPS multiple ranged from 17.4 times to 18.6 times, with a mean of 18.0 times.

 

  The enterprise value to CY2005 EBITDA multiple ranged from 9.0 times to 10.2 times, with a mean of 9.6 times.

 

  The enterprise value to CY2006 EBITDA multiple ranged from 7.8 times to 9.2 times, with a mean of 8.5 times.

 

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Capitalink also reviewed the historical multiples generated for the Comparable Companies, and noted that the mean enterprise value to LTM EBITDA multiple over the last ten years was 9.1 times. Capitalink also noted that most of the Comparable Companies were trading close to their 12-month share price highs, and many, including Jacobs Engineering Group, Inc., URS Corp., Perini Corp., FTI Consulting and Navigant Consulting, have made recent acquisitions and/or recently raised additional capital.

 

Capitalink selected an appropriate multiple range for Hill by examining the range provided by the Comparable Companies and taking into account certain company-specific factors. Capitalink expects Hill to be valued slightly above the average of the EBITDA and EPS multiples because of its higher historical and projected earnings growth and significant backlog, offset by its smaller size and limited range of services.

 

Based on the above factors, Capitalink applied a selected multiple range to Hill’s CY2005 and CY2006 net income and EBITDA to determine a range of indicated equity and enterprise values. Capitalink deducted net debt of approximately $9.6 million to derive an indicated equity value range of approximately $96.8 million to approximately $109.4 million for Hill.

 

None of the Comparable Companies has characteristics identical to Hill. An analysis of publicly traded comparable companies is not mathematical; rather it involves complex consideration and judgments concerning differences in financial and operating characteristics of the Comparable Companies and other factors that could affect the public trading of the Comparable Companies.

 

Comparable Transaction Analysis

 

A comparable transaction analysis is based on a review of merger, acquisition and asset purchase transactions involving target companies that are in industries related to Hill. The comparable transaction analysis generally provides the widest range of value due to the varying importance of an acquisition to a buyer (i.e., a strategic buyer willing to pay more than a financial buyer) in addition to the potential differences in the transaction process (i.e., competitiveness among potential buyers).

 

Because of the difficulty of finding transactions involving targets that are involved in both the construction management and claims consulting businesses, Capitalink examined two sets of comparable transactions:

 

  Construction Management – Transactions involving target companies that are involved in the management of construction projects and/or the provision of construction engineering services (the “Project Comparable Transactions”).

 

  Claims Consulting – Transactions involving target companies that are involved in the provision of litigation consulting and arbitration services (the “Claims Comparable Transactions”, and, together with the Project Comparable Transactions, the “Comparable Transactions”).

 

Based on the information disclosed with respect to the targets in each of the Comparable Transactions, Capitalink calculated and compared total enterprise value as a multiple of LTM revenue and LTM EBITDA.

 

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Project Comparable Transactions

 

Capitalink located five Project Comparable Transactions announced since January 2003 and for which detailed financial information was available. Capitalink noted the following with respect to the multiples generated:

 

  The enterprise value to LTM revenue multiple ranged from 0.23 times to 1.49 times, with a mean of 0.66 times.

 

  The enterprise value to LTM EBITDA multiple ranged from 7.5 times to 9.4 times, with a mean of 8.4 times.

 

Claims Comparable Transactions

 

Capitalink located two Claims Comparable Transactions announced since January 2003 and for which detailed financial information was available. Capitalink noted the following with respect to the multiples generated:

 

  The enterprise value to LTM revenue multiple ranged from 1.43 times to 1.86 times, with a mean of 1.64 times.

 

  The enterprise value to LTM EBITDA multiple ranged from 6.2 times to 14.1 times, with a mean of 10.1 times.

 

Capitalink expects Hill to be valued above the average of the Comparable Transactions, due to its recent historical earnings growth and significant projected future growth.

 

Based on the above factors, Capitalink applied a selected multiple range to Hill’s LTM revenue and LTM EBITDA to determine a range of indicated enterprise values. Capitalink then deducted net debt of approximately $9.6 million to derive an indicated equity value range of approximately $79.0 million to approximately $97.5 million.

 

None of the target companies in the Comparable Transactions has characteristics identical to Hill. Accordingly, an analysis of comparable business combinations is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the target companies in the Comparable Transactions and other factors that could affect the respective acquisition values.

 

80% Test

 

Arpeggio’s initial business combination must be with a target business whose fair market value is at least equal to 80% of Arpeggio’s net assets at the time of such acquisition.

 

Capitalink reviewed and estimated Arpeggio’s net assets at the close of the merger in comparison to Hill’s indicated range of fair market value. For the purposes of this analysis, Capitalink assumed (i) that Hill’s fair market value is equivalent to its equity value; and (ii) that Arpeggio’s net asset value is its stockholders’ equity as of September 30, 2005. Since 80% of Arpeggio’s net asset value is approximately $37.4 and the range of equity value of Hill is approximately $79.0 million to $134.0 million, Capitalink determined that the 80% test was met.

 

Conclusion

 

Based on the information and analyses set forth above, Capitalink delivered its written opinion to our board of directors, which stated that, as of December 4, 2005, based upon and subject to the assumptions made, matters considered, and limitations on its review as set forth in the opinion, (i) the merger consideration is fair, from a financial point of view, to our stockholders, and (ii) the fair market value of Hill is at least equal to 80% of our net assets.

 

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Material Federal Income Tax Consequences of the Merger

 

The following section is a summary of the material United States federal income tax consequences of the merger to holders of Arpeggio common stock and is based on an opinion given to Arpeggio by its tax counsel. This discussion addresses only those Arpeggio security holders that hold their securities as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the Code), and does not address all the United States federal income tax consequences that may be relevant to particular holders in light of their individual circumstances or to holders that are subject to special rules, such as:

 

    financial institutions;

 

    investors in pass-through entities;

 

    tax-exempt organizations;

 

    dealers in securities or currencies;

 

    traders in securities that elect to use a mark to market method of accounting;

 

    persons who hold Arpeggio common stock as part of a straddle, hedge, constructive sale or conversion transaction;

 

    persons who are not citizens or residents of the United States; and

 

    holders of Hill common stock, including persons who acquired their shares of Hill common stock through the exercise of an employee stock option or otherwise as compensation.

 

The following is based upon the Code, applicable treasury regulations thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax, are not addressed.

 

Neither Arpeggio nor Hill intends to request any ruling from the Internal Revenue Service as to the United States federal income tax consequences of the merger.

 

Tax Consequences of the Merger to Arpeggio stockholders

 

No gain or loss will be recognized by stockholders of Arpeggio if their conversion rights are not exercised.

 

A stockholder of Arpeggio who exercises conversion rights and effects a termination of the stockholder’s interest in Arpeggio will generally be required to recognize gain or loss upon the exchange of that stockholder’s shares of common stock of Arpeggio for cash. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of Arpeggio common stock. This gain or loss will generally be a capital gain or loss if such shares were held as a capital asset on the date of the merger and will be a long-term capital gain or loss if the holding period for the share of Arpeggio common stock is more than one year.

 

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Tax Consequences of the Merger Generally to Arpeggio

 

No gain or loss will be recognized by Arpeggio as a result of the merger.

 

This discussion is intended to provide only a general summary of the material United States federal income tax consequences of the merger, and is not a complete analysis or description of all potential United States federal tax consequences of the merger. This discussion does not address tax consequences which may vary with, or are contingent on, your individual circumstances. In addition, the discussion does not address any non-income tax or any foreign, state or local tax consequences of the merger. Accordingly, you are strongly urged to consult with your tax advisor to determine the particular United States federal, state, local or foreign income or other tax consequences to you of the merger.

 

Anticipated Accounting Treatment

 

The merger will be accounted for under the purchase method of accounting as a reverse acquisition in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for accounting and financial reporting purposes. Under this method of accounting, Arpeggio will be treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, the merger will be considered to be a capital transaction in substance. Accordingly, for accounting purposes, the merger will be treated as the equivalent of Hill issuing stock for the net monetary assets of Arpeggio, accompanied by a recapitalization. The net monetary assets of Arpeggio will be stated at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The retained earnings of Hill will be carried forward after the merger. Operations prior to the merger will be those of Hill.

 

Regulatory Matters

 

The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, except for filings with the State of Delaware necessary to effectuate the transactions contemplated by the merger proposal.

 

THE MERGER AGREEMENT

 

The following summary of the material provisions of the merger agreement is qualified by reference to the complete text of the merger agreement, as amended, a copy of which is attached as Annex A to this proxy statement and is incorporated by reference. All stockholders are encouraged to read the merger agreement in its entirety for a more complete description of the terms and conditions of the merger.

 

General; Structure of Merger

 

On December 5, 2005, Arpeggio entered into a merger agreement with Hill and the Signing Stockholders. Hill will effectuate the merger by merging with and into Arpeggio. Arpeggio will be the surviving corporation in the merger through an exchange of all the issued and outstanding shares of capital stock of Hill for shares of common stock of Arpeggio.

 

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The merger agreement was amended on December 30, 2005 to amend the voting agreement to fix the number of directors to be designated by the Signing Stockholders and Messrs. Rosenfeld and Ajdler at seven and to amend Schedule 5.2 to the Merger Agreement to reflect such change.

 

The Hill stockholders approved and adopted the merger agreement, as amended, and the transactions contemplated thereby by virtue of the execution of the merger agreement and the amendment. Accordingly, no further action is required to be taken by Hill stockholders to approve the merger.

 

Closing and Effective Time of the Merger

 

The closing of the merger will take place promptly following the satisfaction of the conditions described below under “The Merger Agreement — Conditions to the Closing of the Merger,” unless Arpeggio and Hill agree in writing to another time. The merger is expected to be consummated in the second quarter of 2006.

 

Name; Headquarters; Stock Symbols

 

After completion of the merger:

 

    the name of Arpeggio will be Hill International, Inc.;

 

    the corporate headquarters and principal executive offices will be located at 303 Lippincott Centre, Marlton, New Jersey 08053, which is Hill’s corporate headquarters; and

 

    Arpeggio and Hill will cause the common stock, warrants and units outstanding prior to the merger, which are quoted on the OTCBB, to continue being quoted on the OTCBB or listed on Nasdaq. In the event Arpeggio’s common stock, warrants and units are quoted on Nasdaq at the time of the closing, the symbols will change to ones determined by the board of directors and the trading medium that are reasonably representative of the corporate name or business of Arpeggio.

 

Merger Consideration

 

Pursuant to the merger agreement, the holders of securities of Hill outstanding immediately before the merger will receive, in exchange for such securities, 14,500,000 shares of Arpeggio common stock at the closing. Immediately following the merger, the Hill stockholders will own approximately 63.6% of the total issued and outstanding Arpeggio common stock, assuming that no Arpeggio stockholders seek conversion of their Arpeggio stock into their pro rata share of the trust fund.

 

The merger agreement also provides for the Hill stockholders to receive up to an additional 6,600,000 shares of Arpeggio common stock, contingent upon the combined companies attaining the following EBIT targets:

 

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Fiscal Year Ending 12/31

  Earnings Before
Interest and Taxes


  Contingent Shares

2006   $ 9.9 million   2.3 million
2007   $ 13.5 million   2.3 million
2008   $ 18.4 million   1.0 million
2009   $ 24.9 million   1.0 million

 

Escrow Agreement

 

Of the shares to be issued to the Hill stockholders at the closing, 1,740,000 shares, or 12%, will be placed in escrow to secure the indemnity rights of Arpeggio under the merger agreement and will be governed by the terms of an escrow agreement. The escrow agreement is attached as Annex F hereto. We encourage you to read the escrow agreement in its entirety.

 

Lock-Up Agreements

 

A condition to the closing of the merger is that the Signing Stockholders shall have entered into lock-up agreements that provide that they not sell or otherwise transfer any of the shares of common stock of Arpeggio that they receive in the merger until December 31, 2007, subject to certain exceptions, including the right to use their shares to secure margin loans not to exceed 20% of the value of the shares at the time the loans are made.

 

Employment Agreements

 

A condition to the closing of the merger agreement is that Irvin E. Richter, Hill’s current chairman and chief executive officer, David L. Richter, Hill’s current president and chief operating officer, and Stuart S. Richter, one of Hill’s current senior vice presidents, shall enter into employment agreements with Arpeggio upon the consummation of the merger. Copies of each form of employment agreement are attached as Annex G, H and I hereto. For a summary of the employment agreements, see the section entitled “Employment Agreements.” We encourage you to read the employment agreements in their entirety.

 

Election of Directors; Voting Agreement

 

A condition to the closing of the merger is that the Signing Stockholders, on the one hand, and Messrs. Rosenfeld and Ajdler, on the other hand, shall enter into a voting agreement pursuant to which they agree to vote for the other’s designees to Arpeggio’s board of directors through the election in 2008 as follows:

 

    in the class to stand for reelection in 2006 — Irvin E. Richter,             , and             ;

 

    in the class to stand for reelection in 2007 — David L. Richter and Eric S. Rosenfeld;

 

    in the class to stand for reelection in 2008 — Arnaud Ajdler and             .

 

Pursuant to the merger agreement, upon consummation of the merger, the directors of Arpeggio shall be Irvin E. Richter, David L. Richter, Eric S. Rosenfeld, Arnaud Ajdler and three other persons designated by Hill. Under the voting agreement, the Signing Stockholders will designate five directors and Messrs. Rosenfeld and Ajdler will designate two directors. Irvin E. Richter, David L. Richter, currently directors of Hill,                     ,                      and                      will be the initial designees of the Signing Stockholders. Messrs. Rosenfeld and Ajdler, currently directors of Arpeggio, will be their own initial designees. The voting agreement is attached as Annex E hereto. We encourage you to read the voting agreement in its entirety.

 

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Arpeggio’s directors do not currently receive any cash compensation for their services as members of the board of directors. However, in the future, non-employee directors may receive certain cash fees and stock awards that the Arpeggio board of directors may determine to pay.

 

Representations and Warranties

 

The merger agreement contains representations and warranties of each of Hill and Arpeggio relating, among other things, to:

 

    proper corporate organization and similar corporate matters;

 

    subsidiaries;

 

    capital structure of each constituent company;

 

    the authorization, performance and enforceability of the merger agreement;

 

    no conflict; required filings and consents;

 

    licenses and permits;

 

    taxes;

 

    financial information and absence of undisclosed liabilities;

 

    holding of leases and ownership of other properties, including intellectual property;

 

    restrictions on business activities;

 

    contracts;

 

    title to properties;

 

    environmental matters;

 

    absence of certain changes;

 

    litigation;

 

    employee benefit plans; and

 

    labor matters.

 

The Signing Stockholders have represented and warranted, among other things, as to their accredited investor status.

 

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Covenants

 

Arpeggio and Hill have each agreed to take such actions as are necessary, proper or advisable to consummate the merger. They have also agreed, subject to certain exceptions, to continue to operate their respective businesses in the ordinary course prior to the closing and not to take the following actions without the prior written consent of the other party:

 

    waive any stock repurchase rights, accelerate, amend or (except as specifically provided for in the merger agreement) change the period of exercisability of options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;

 

    grant any severance or termination pay to any officer or employee except pursuant to applicable law, written agreements outstanding, or policies existing on the date of the merger agreement and as previously or concurrently disclosed in writing or made available to the other party, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement;

 

    transfer or license to any person or otherwise extend, amend or modify any material rights to any intellectual property of Hill or Arpeggio, as applicable, or enter into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices provided that in no event will Hill or Arpeggio license on an exclusive basis or sell any intellectual property of Hill or Arpeggio, as applicable;

 

    declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;

 

    purchase, redeem or otherwise acquire, directly or indirectly, any shares of capital stock of Hill and Arpeggio, as applicable, including repurchases of unvested shares at cost in connection with the termination of the relationship with any employee or consultant pursuant to stock option or purchase agreements in effect on the date hereof;

 

    issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of capital stock or any securities convertible into or exchangeable for shares of capital stock, or subscriptions, rights, warrants or options to acquire any shares of capital stock or any securities convertible into or exchangeable for shares of capital stock, or enter into other agreements or commitments of any character obligating it to issue any such shares or convertible or exchangeable securities;

 

    amend its certificate of incorporation or bylaws;

 

    acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Arpeggio or Hill, as applicable to the extent that the aggregate consideration to be paid with respect thereto is in excess of $1,000,000, or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to offer or sell any products or services;

 

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    sell, lease, license, encumber or otherwise dispose of any properties or assets, except (i) sales of inventory in the ordinary course of business consistent with past practice, and (ii) the sale, lease or disposition (other than through licensing) of property or assets that are not material, individually or in the aggregate, to the business of such party;

 

    incur any indebtedness for borrowed money in excess of $1,000,000 in the aggregate or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Arpeggio or Hill, as applicable, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing;

 

    adopt or amend any employee benefit plan, policy or arrangement, any employee merger or employee stock option plan, or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”), pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past practices;

 

    pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation (whether or not commenced prior to the date of this Agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their terms, or liabilities previously disclosed in financial statements to the other party in connection with the merger agreement or incurred since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce any confidentiality or similar agreement to which Hill is a party or of which Hill is a beneficiary or to which Arpeggio is a party or of which Arpeggio is a beneficiary, as applicable;

 

    except in the ordinary course of business consistent with past practices, modify, amend or terminate any material contract of Hill or Arpeggio, as applicable, or waive, delay the exercise of, release or assign any material rights or assign any material rights or claims thereunder;

 

    except as required by U.S. GAAP, revalue any of its assets or make any change in accounting methods, principles or practices;

 

    except in the ordinary course of business consistent with past practices, incur or enter into any agreement, contract or commitment requiring such party to pay in excess of $250,000 in any 12 month period;

 

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    engage in any action that could reasonably be expected to cause the merger to fail to qualify as a “reorganization” under Section 368(a) of the Code;

 

    settle any litigation to which an officer, director, stockholder or holder of derivative securities of Hill is a party or where the consideration given by Hill is other than monetary;

 

    make or rescind any tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the tax liability or tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for tax purposes or prepare or file any return in a manner inconsistent with past practice;

 

    permit any person to exercise any of its discretionary rights under any plan to provide for the automatic acceleration of any outstanding options, the termination of any outstanding repurchase rights or the termination of any cancellation rights issued pursuant to such plans;

 

    make capital expenditures except in accordance with prudent business and operational practices consistent with prior practice;

 

    make or omit to take any action which would be reasonably anticipated to have a material adverse effect;

 

    enter into any transaction with or distribute or advance any assets or property to any of its officers, directors, partners, stockholders or other affiliates other than the payment of salary and benefits in the ordinary course of business consistent with prior practice; or

 

    agree in writing or otherwise agree, commit or resolve to take any of the foregoing actions.

 

The merger agreement also contains additional covenants of the parties, including covenants providing for:

 

    the parties to use commercially reasonable efforts to obtain all necessary approvals from stockholders, governmental agencies and other third parties that are required for the consummation of the transactions contemplated by the merger agreement;

 

    the protection of confidential information of the parties and, subject to the confidentiality requirements, the provision of reasonable access to information;

 

    Arpeggio to prepare and file this proxy statement;

 

    the Signing Stockholders to release and forever discharge Hill and its directors, officers, employees and agents, from any and all rights, claims, demands, judgments, obligations, liabilities and damages arising out of or resulting from such Signing Stockholder’s status as a holder of an equity interest in Hill, and employment, service, consulting or other similar agreement entered into with Hill prior to the consummation of the merger agreement;

 

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    Hill and the Signing Stockholders to waive their rights to make claims against Arpeggio to collect from the trust fund established for the benefit of the Arpeggio stockholders who purchased their securities in Arpeggio’s IPO for any moneys that may be owed to them by Arpeggio for any reason whatsoever, including breach by Arpeggio of the merger agreement or its representations and warranties therein;

 

    each officer and director of Hill and the Signing Stockholders to agree that he shall not, after the consummation of the merger and prior to December 31, 2007, sell, transfer or otherwise dispose of an interest in any of the shares of Arpeggio common stock he receives as a result of the merger other than as permitted pursuant to his lock-up agreement;

 

    each Signing Stockholder, at or prior to the consummation of the merger, to (i) repay to Hill any loan by Hill to such Signing Stockholder and any other amount owed by the Signing Stockholder to Hill; (ii) cause any guaranty or similar arrangement pursuant to which Hill has guaranteed the payment or performance of any obligations of such Signing Stockholder to a third party to be terminated; and (iii) cease to own any direct equity interests in any subsidiary of Hill or in any other person that utilizes the name “Hill International.” Hill shall use its best efforts to enable the Signing Stockholders to accomplish the foregoing;

 

    Arpeggio and Hill to use their reasonable best efforts to obtain the listing for trading on Nasdaq of Arpeggio common stock and warrants. If such listing is not obtainable by the closing of the merger, Arpeggio and Hill will continue to use their best efforts after closing of the merger to obtain such listing; and

 

    Arpeggio to maintain current policies of directors’ and officers’ liability insurance with respect to claims arising from facts and events that occurred prior to the consummation of the merger for a period of six years after the consummation of the merger.

 

Conditions to Closing of the Merger

 

General Conditions

 

Consummation of the merger agreement and the related transactions is conditioned on the Arpeggio stockholders, at a meeting called for these purposes, (i) adopting the merger agreement and approving the merger, (ii) approving the change of Arpeggio’s name, and (iii) approving the increase of the authorized shares of Arpeggio’s common stock from 30,000,000 to 75,000,000. The Arpeggio stockholders will also be asked to adopt the stock option plan and to approve the removal of all of the provisions of Article Sixth of Arpeggio’s certificate of incorporation other than the paragraph relating to Arpeggio’s classified board of directors. The consummation of the merger is not dependent on the approval of either of such actions. In addition, the consummation of the transactions contemplated by the merger agreement is conditioned upon normal closing conditions in a transaction of this nature, including:

 

    no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions;

 

    Arpeggio’s stockholders have approved the merger agreement, the name change amendment and capitalization amendment;

 

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    holders of twenty percent (20%) or more of the shares of Arpeggio common stock issued in Arpeggio’s IPO and outstanding immediately before the consummation of the merger shall not have exercised their rights to convert their shares into a pro rata share of the trust fund in accordance with Arpeggio’s certificate of incorporation;

 

    the delivery by each party to the other party of a certificate to the effect that the representations and warranties of the delivering party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by the delivering party; and

 

    Arpeggio’s common stock being quoted on the OTCBB or approved for listing on Nasdaq and there being no action or proceeding pending or threatened against Arpeggio by the NASD to prohibit or terminate the quotation of Arpeggio’s common stock on the OTCBB or the trading thereof on Nasdaq.

 

Hill’s Conditions to Closing

 

The obligations of Hill to consummate the transactions contemplated by the merger agreement, in addition to the conditions described above, are conditioned upon each of the following, among other things:

 

    there shall have been no material adverse effect with respect to Arpeggio since the date of the merger agreement;

 

    Hill shall have received a legal opinion substantially in the form annexed to the merger agreement, which is customary for transactions of this nature, from Graubard Miller, counsel to Arpeggio; and

 

    Arpeggio shall have made appropriate arrangements to have the trust fund disbursed to Arpeggio immediately upon the Closing.

 

Arpeggio’s Conditions to Closing

 

The obligations of Arpeggio to consummate the transactions contemplated by the merger agreement, in addition to the conditions described above in the second paragraph of this section, are conditioned upon each of the following, among other things:

 

    there shall have been no material adverse effect with respect to Hill since the date of the merger agreement;

 

    employment agreements between Arpeggio and Irvin E. Richter, David L. Richter, and Stuart S. Richter shall be in full force and effect;

 

    Arpeggio shall have received a legal opinion substantially in the form annexed to the merger agreement, which is customary for transactions of this nature, from McCarter & English, LLP, counsel to Hill;

 

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    Arpeggio shall have received “comfort” letters from BDO Seidman, LLP and Amper, Politziner & Mattia, P.C. dated the date of distribution of this proxy statement and the date of consummation of the merger, in forms customary for transactions of this nature, confirming that certain financial data in this proxy statement, other than the numbers in the actual financial statements, are derived from the financial statements and/or from the accounting records of the respective company; and

 

    The voting agreement and the lock-up agreements shall be in full force and effect.

 

Indemnification

 

As the sole remedy for the obligation of the stockholders of Hill to indemnify and hold harmless Arpeggio for any damages, whether as a result of any third party claim or otherwise, and which arise as a result of or in connection with the breach of representations and warranties and agreements and covenants of Hill, at the closing, 12% of the shares of Arpeggio common stock to be issued to the Hill stockholders upon consummation of the merger will be deposited in escrow. Of the shares placed in escrow, five-sixths will be available for the satisfaction of all indemnification claims other than those relating to taxes and one-sixth will be available solely for the satisfaction of tax indemnification claims. Any indemnification payments shall be paid solely from the shares placed in escrow or, at the election of a holder of the escrow shares, in cash paid by such holder in substitution for such shares. Claims for indemnification may be asserted by Arpeggio once the damages exceed $500,000 and are indemnifiable to the extent that damages exceed that amount; however, claims with respect to taxes and certain other matters are not subject to such threshold. The shares available for indemnification claims other than those relating to taxes, less any of the shares applied in satisfaction of a claim for indemnification and the shares related to a claim for indemnification that is then unresolved, will be released on the first business day following the date that is 30 days after the date on which Arpeggio files its Report on Form 10-K pursuant to the Exchange Act of 1934, as amended, for its 2006 fiscal year, to such persons in the same proportions as initially deposited in escrow. Shares still in escrow on December 10, 2010, will be released on the next business day, even if claims to which they relate are not then resolved. For purposes of satisfying an indemnification claim, shares of Arpeggio common stock will be valued at the average reported last sales price for the ten trading days ending on the last day prior to the day that the claim is paid. The escrow agreement is attached as Annex F hereto. We encourage you to read the escrow agreement in its entirety.

 

The board of directors of Arpeggio has appointed Eric Rosenfeld to take all necessary actions and make all decisions pursuant to the escrow agreement regarding Arpeggio’s right to indemnification under the merger agreement. If Mr. Rosenfeld ceases to so act, the board shall appoint as a successor a person who was a director of Arpeggio prior to the closing or some other person who would qualify as an “independent” director of Arpeggio and who had no relationship with Hill prior to the closing. Mr. Rosenfeld, and any successor, is charged with making determinations whether Arpeggio will be entitled to indemnification, and may make a claim for indemnification by giving notice to Irvin Richter, as representative of the Hill stockholders, with a copy to the escrow agent, specifying the details of the claim. Mr. Richter, or his successor, who may be appointed by him, or by the board of Arpeggio, acting through its members who were directors of Hill prior to the closing, from among those of the former stockholders of Hill, or such other person as such members may designate, may accept the claim or dispute it. If the claim is disputed by Mr. Richter and not ultimately resolved by negotiation, it shall be determined by arbitration. Upon a claim and its value becoming established by the parties or through arbitration, it is payable from the shares placed in escrow or cash substituted therefor.

 

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Termination

 

The merger agreement may be terminated at any time, but not later than the closing as follows:

 

    by mutual written consent of Arpeggio and Hill;

 

    by either party if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, ruling or other action is final and nonappealable;

 

    by either party if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within 30 days of the notice of an intent to terminate, provided that the terminating party is itself not in breach;

 

    by either party if, at the Arpeggio stockholder meeting, the merger agreement and the transactions contemplated thereby shall fail to be approved and adopted by the affirmative vote of the holders of Arpeggio’s common stock, or the holders of 20% or more of the shares issued in Arpeggio’s IPO exercise their conversion rights; or

 

    by either party if the merger has not been consummated by June 30, 2006.

 

Effect of Termination

 

In the event of proper termination by either Arpeggio or Hill, the merger agreement will become void and have no effect, without any liability or obligation on the part of Arpeggio or Hill, except that:

 

    the confidentiality obligations set forth in the merger agreement will survive;

 

    the waiver by Hill and the Signing Stockholders of all rights against Arpeggio to collect from the trust account any moneys that may be owed to them by Arpeggio for any reason whatsoever, including but not limited to a breach of the merger agreement, and the acknowledgement that neither Hill nor the Signing Stockholders will seek recourse against the trust account for any reason whatsoever, will survive;

 

    the rights of the parties to bring actions against each other for breach of the merger agreement will survive; and

 

    the fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses.

 

The merger agreement does not specifically address the rights of a party in the event of a refusal or wrongful failure of the other party to consummate the merger. In such event, the non-wrongful party would be entitled to assert its legal rights for breach of contract against the wrongful party.

 

Fees and Expenses

 

All fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the merger is consummated. If the merger is consummated, the fees and expenses of Hill will be paid from the working capital of the combined companies.

 

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Hill entered into an Engagement Letter, dated September 29, 2005, with Morgan Joseph & Co., Inc., whereby Hill engaged Morgan Joseph to serve as its exclusive financial advisor in connection with the merger. Pursuant to the terms of the Engagement Letter, Hill will pay Morgan Joseph upon the closing of the merger a fee equal to 1.25% of the aggregate consideration received by the stockholders of Hill as a result of the merger. Included in such aggregate consideration is the value of Hill’s long-term debt continued in the merger as well as 75% of the present value (calculated at a 10% discount rate) of consideration that will be granted contingent on achievement of the EBIT targets. In addition, Hill will reimburse Morgan Joseph for its reasonable out-of-pocket expenses. Hill has also agreed to indemnify Morgan Joseph and its affiliates from and against all losses, claims, damages, liabilities or expenses related to or arising out of Hill’s engagement of Morgan Joseph. The exact amount of Morgan Joseph’s fee will not be known until closing, but for purposes of the pro forma condensed consolidated balance sheet of Arpeggio and Hill, it was estimated that Morgan Joseph’s fee will be approximately $1,250,000.

 

Confidentiality; Access to Information

 

Arpeggio and Hill will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the merger reasonable access during normal business hours, upon reasonable notice, to all of their respective properties, books, records and personnel to obtain all information concerning the business, including the status of business development efforts, properties, results of operations and personnel, as each party may reasonably request. Arpeggio and Hill will maintain in confidence any non-public information received from the other party, and use such non-public information only for purposes of consummating the transactions contemplated by the merger agreement.

 

Amendment

 

The merger agreement may be amended by the parties thereto at any time by execution of an instrument in writing signed on behalf of each of the parties. The merger agreement was amended on December 30, 2005 to amend the voting agreement to fix the number of director designees at seven and to amend Schedule 5.2 to the Merger Agreement to reflect the directors of Arpeggio upon effectiveness of the merger.

 

Extension; Waiver

 

At any time prior to the closing, any party to the merger agreement may, in writing, to the extent legally allowed:

 

    extend the time for the performance of any of the obligations or other acts of the other parties to the agreement;

 

    waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement or in any document delivered pursuant to the merger agreement; and

 

    waive compliance with any of the agreements or conditions for the benefit of such party contained in the merger agreement.

 

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Public Announcements

 

Arpeggio and Hill have agreed that, until closing or termination of the merger agreement, the parties will:

 

    cooperate in good faith to jointly prepare all press releases and public announcements pertaining to the merger agreement and the transactions governed by it; and

 

    not issue or otherwise make any public announcement or communication pertaining to the merger agreement or the transaction without the prior consent of the other party, which shall not be unreasonably withheld by the other party, except as may be required by applicable laws or court process.

 

Arbitration

 

Any disputes or claims arising under or in connection with merger agreement or the transactions contemplated thereunder will be resolved by binding arbitration. Arbitration will be commenced by the filing by a party of an arbitration demand with the American Arbitration Association (“AAA”). The arbitration will be governed and conducted by applicable AAA rules, and any award and/or decision shall be conclusive and binding on the parties. Each party consents to the exclusive jurisdiction of the federal and state courts located in the State of New York, New York County for such purpose. The arbitration shall be conducted in New York City. Each party shall pay its own fees and expenses for the arbitration, except that any costs and charges imposed by the AAA and any fees of the arbitrator shall be assessed against the losing party.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

 

The following unaudited pro forma condensed consolidated balance sheet combines the historical consolidated balance sheet of Hill as of October 1, 2005 and the historical balance sheet of Arpeggio as of September 30, 2005, giving effect to the merger pursuant to the merger agreement as if the merger had been consummated on October 1, 2005 and treated as a recapitalization of Hill (a reverse merger). Because the merger is treated as a recapitalization, a pro forma statement of operations has not been presented.

 

We are providing the following information to aid you in your analysis of the financial aspects of the merger. We derived this information from the unaudited financial statements of Hill as of October 1, 2005 and Arpeggio as of September 30, 2005. Neither Hill nor Arpeggio assumes any responsibility for the accuracy or completeness of the information provided by the other party. This information should be read together with the Hill audited and unaudited financial statements and related notes included elsewhere in this proxy statement and the Arpeggio audited and unaudited financial statements included elsewhere in this proxy statement.

 

The following information should be read in conjunction with the pro forma condensed consolidated balance sheet:

 

    accompanying notes to the unaudited pro forma condensed balance sheet;

 

    separate historical consolidated financial statements of Hill for the year ended January 1, 2005 and as of and for the nine months ended October 1, 2005 included elsewhere in this document; and

 

    separate historical financial statements of Arpeggio for the year ended December 31, 2004 and as of and for the nine months ended September 30, 2005 included elsewhere in this document.

 

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The unaudited pro forma condensed consolidated balance sheet at October 1, 2005 has been prepared using two different levels of assumptions with respect to the Arpeggio stockholders, as follows:

 

    assuming No Conversions: This presentation assumes that no stockholders of Arpeggio seek to convert their shares into a pro rata share of the trust account; and

 

    assuming Maximum Conversions: This presentation assumes stockholders of Arpeggio owning 19.99% of the stock sold in the IPO seek conversion.

 

The assets and liabilities of Arpeggio have been presented at their historical cost (which is considered to be the equivalent of estimated fair value) with no goodwill or other intangible assets recorded and no increment in stockholders’ equity.

 

Unaudited Pro Forma Condensed Balance Sheet

Assuming No Conversions

At October 1, 2005

(In thousands)

 

     At
October 1, 2005
Hill


   

At
September 30, 2005

Arpeggio


    Adjustments

    Pro
Forma


                 Increase      
                 (Decrease)      

Assets

                              

Cash and cash equivalents

   $ 43     $ 710     $ 35,112 (1)   $ 35,865

US Government securities held in Trust Fund

     —         36,354       (36,354 )(1)     —  

Accrued interest receivable, Trust Fund

     —         4       (4 )(1)     —  

Other current assets

     31,347       25       —         31,372
    


 


 


 

Total current assets

     31,390       37,093       (1,246 )     67,237

Property and equipment, net

     2,732       —         —         2,732

Other assets

     5,435       —         —         5,435
    


 


 


 

Total assets

   $ 39,557     $ 37,093     $ (1,246 )   $ 75,404
    


 


 


 

Liabilities and stockholders’ equity

                              

Total current liabilities, excluding current portion of long-term debt

   $ 21,444     $ 49     $ —       $ 21,493

Long-term debt, including current portion

     9,107       —                 9,107

Common stock subject to possible conversion

             7,268       (7,268 )(2)     —  

Other long-term liabilities

     2,527                       2,527

Common stock

     80       1       (80 )(3)     1

Additional paid-in capital, net of treasury stock

     653       29,528       (2,000 )(1)     28,181
                       7,268 (2)     7,268
                       327 (3)     327

Retained earnings accumulated during development stage

             247       (247 )(3)     —  

Retained earnings

     6,406                       6,406

Accumulated other comprehensive income

     94                       94

Due from stockholder

     (754 )             754 (1)     —  
    


 


 


 

Stockholders’ equity

     6,479       29,776       6,022       42,277
    


 


 


 

Total liabilities and stockholders’ equity

   $ 39,557     $ 37,093     $ (1,246 )   $ 75,404
    


 


 


 

 

See notes to unaudited pro forma condensed balance sheets.

 

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Unaudited Pro Forma Condensed Balance Sheet

Assuming Maximum Conversions

At October 1, 2005

(In thousands)

 

    

At
October 1, 2005

Hill


   

At
September 30, 2005

Arpeggio


    Adjustments

    Pro
Forma


                 Increase
(Decrease)
     

Assets

                              

Cash and cash equivalents

   $ 43     $ 710     $ 27,844 (4)   $ 28,597

US Government securities held in Trust Fund

     —         36,354       (36,354 )(4)     —  

Accrued interest receivable, Trust Fund

     —         4       (4 )(4)     —  

Other current assets

     31,347       25       —         31,372
    


 


 


 

Total current assets

     31,390       37,093       (8,514 )     59,969

Property and equipment, net

     2,732       —         —         2,732

Other assets

     5,435       —         —         5,435
    


 


 


 

Total assets

   $ 39,557     $ 37,093     $ (8,514 )   $ 68,136
    


 


 


 

Liabilities and stockholders’ equity

                              

Total current liabilities, excluding current portion of long-term debt

   $ 21,444     $ 49     $ —       $ 21,493

Long-term debt, including current portion

     9,107       —         —         9,107

Common stock subject to possible conversion

             7,268       (7,268 )(4)     —  

Other long-term liabilities

     2,527                       2,527

Common stock

     80       1       (80 )(5)     1

Additional paid-in capital, net of treasury stock

     653       29,528       (2,000 )(4)     28,181
                       327 (5)     327

Retained earnings accumulated during development stage

             247       (247 )(5)     —  

Retained earnings

     6,406               —         6,406

Accumulated other comprehensive income

     94               —         94

Due from stockholder

     (754 )             754 (4)     —  
    


 


 


 

Stockholders’ equity

     6,479       29,776       (1,246 )     35,009
    


 


 


 

Total liabilities and stockholders’ equity

   $ 39,557     $ 37,093     $ (8,514 )   $ 68,136
    


 


 


 

 

See notes to unaudited pro forma condensed balance sheets.

 

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Notes to Unaudited Pro Forma Consolidated Balance Sheets

 

    Assuming no conversions:

(1)

   $ 36,354     Conversion of US Government securities held in Trust Fund into unrestricted cash
       4     Conversion of accrued interest receivable, Trust Fund into unrestricted cash
       (2,000 )   Payment of fees to investment bankers, attorneys and accountants
       754     Repayment from stockholder of due from stockholder
    


   
     $ 35,112     Total adjustments to cash
    


   
       (36,354 )   Conversion of US Government securities held in Trust Fund into unrestricted cash
       (4 )   Conversion of accrued interest receivable, Trust Fund into unrestricted cash
       (2,000 )   Reduction of additional paid in capital for payment of fees to investment bankers, attorneys and accountants
       754     Reduction of due from stockholder on repayment

(2)

     (7,268 )   Reclassification of common stock subject to possible conversion to paid-in capital
       7,268     Reclassification of common stock subject to possible conversion to paid-in capital

(3)

     (80 )   Common stock
       (247 )   Transfer from earnings accumulated during development stage
       327     Additional paid-in capital
    Assuming maximum conversions:

(4)

   $ 36,354     Conversion of US Government securities held in Trust Fund into unrestricted cash
       4     Conversion of accrued interest receivable, Trust Fund into unrestricted cash
       (7,268 )   Conversion of dissenting shares
       (2,000 )   Payment of fees to investment bankers, attorneys and accountants
       754     Repayment from stockholder of due from stockholder
    


   
     $ 27,844     Total adjustments to cash
    


   
       (36,354 )   Conversion of US Government securities held in Trust Fund into unrestricted cash
       (4 )   Conversion of accrued interest receivable, Trust Fund into unrestricted cash
       (7,268 )   Reduction of dissenting shares
       (2,000 )   Reduction of additional paid-in capital for payment of fees to investment bankers, attorneys and accountants
       754     Reduction of due from stockholder on repayment

(5)

     (80 )   Common stock
       (247 )   Transfer from earnings accumulated during development stage
       327     Additional paid-in capital

 

PRO FORMA EARNINGS (LOSS) PER SHARE

 

The following table sets forth unaudited pro forma combined per share ownership information of Hill and Arpeggio after giving effect to the merger, assuming both no conversions and maximum conversions by Arpeggio stockholders. You should read this information in conjunction with the selected summary historical financial information, included elsewhere in this proxy statement, and the historical financial statements of Hill and Arpeggio and related notes that are included elsewhere in this proxy statement. The unaudited Hill and Arpeggio pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined balance sheets and related notes included elsewhere in this proxy statement.

 

     In thousands, except per share data

     Hill

   Arpeggio

   Combined Company

Number of shares of common stock outstanding upon consummation of the merger:

              

Assuming no conversions

   14,500    8,300    22,800

Assuming maximum conversions

   14,500    6,941    21,441

 

The unaudited pro forma consolidated statement of operations of Hill for the year ended January 1, 2005 shows a net loss of $424. The unaudited condensed consolidated statement of operations of Hill for the nine months ended October 1, 2005 shows net income of $3,966.

 

Based on the pro forma number of shares shown in the table above, in the column labeled “Combined Company,” Hill’s pro forma earnings (loss) per share would be:

 

    

Earnings (loss) per

share


 

Pro forma for the year ended January 1, 2005

        

Assuming no conversions

   $ (.02 )

Assuming maximum conversions

     (.02 )

 

    

Earnings (loss) per

share


Pro forma for the nine months ended October 1, 2005

      

Assuming no conversions

   $ .17

Assuming maximum conversions

     .18

 

 

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NAME CHANGE AMENDMENT PROPOSAL

 

Pursuant to the merger agreement, we are proposing to change our corporate name from “Arpeggio Acquisition Corporation” to “Hill International, Inc.” upon consummation of the merger. The merger will not be consummated unless the proposal to change our name is approved at the meeting. If the merger is not approved, the name change amendment will not be presented at the meeting.

 

In the judgment of our board of directors, the change of our corporate name is necessary to reflect our merger with Hill. The Hill name has been a recognized name in the construction management business for over two decades and the construction claims business for over three decades.

 

The approval of the name change amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

Stockholders will not be required to exchange outstanding stock certificates for new stock certificates if the amendment is adopted.

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE NAME CHANGE AMENDMENT.

 

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CAPITALIZATION AMENDMENT PROPOSAL

 

Pursuant to the merger agreement, we are proposing to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000 upon consummation of the merger. The merger will not be consummated unless the proposal to increase our capitalization is approved at the meeting. If the merger is not approved, the capitalization amendment will not be presented at the meeting.

 

In the judgment of our board of directors, the increase in our capitalization is necessary and in our stockholders’ best interests. Currently, we have 8,300,000 shares of our common stock outstanding and we will be issuing an additional 14,500,000 shares of common stock upon consummation of the merger. Additionally, we have reserved 13,600,000 shares of common stock issuable upon exercise of warrants plus 900,000 shares of common stock issuable upon exercise of a unit purchase option issued in our IPO. We will also need to reserve 6,600,000 contingent shares that might be issued pursuant to the merger agreement based on meeting certain EBIT targets and 1,140,000 shares of common stock in connection with our stock option plan proposal discussed below. The authorization of additional shares of common stock is necessary to fully reserve for all of these shares, as indicated above, and will enable us to have the flexibility to authorize the issuance of shares of common stock in the future for financing our business, for acquiring other businesses, for forming strategic partnerships and alliances and for stock dividends and stock splits.

 

The approval of the capitalization amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE CAPITALIZATION AMENDMENT.

 

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ARTICLE SIXTH AMENDMENT PROPOSAL

 

Pursuant to the merger agreement, we are proposing to remove the preamble and sections A through D, inclusive, of Article Sixth of Arpeggio’s certificate of incorporation and to redesignate section E of Article Sixth as Article Sixth upon consummation of the merger. If the merger is not approved, the Article Sixth amendment will not be presented at the meeting.

 

In the judgment of our board of directors, the Article Sixth amendment is desirable, as sections A through D relate to the operation of Arpeggio as a blank check company prior to the consummation of a business combination. Such sections will not be applicable upon consummation of the merger.

 

The approval of the Article Sixth amendment will require the affirmative vote of the holders of a majority of the outstanding shares of Arpeggio common stock on the record date.

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ARTICLE SIXTH AMENDMENT.

 

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2006 EMPLOYEE STOCK OPTION PLAN PROPOSAL

 

Arpeggio’s 2006 Employee Stock Option Plan has been approved by Arpeggio’s board of directors and will take effect upon consummation of the merger, subject to stockholder approval.

 

The purpose of the stock option plan is to enable us to attract, retain, motivate and provide additional incentive to certain directors, officers, employees, consultants and advisors, whose contributions are essential to our growth and success by enabling them to participate in our long-term growth through the exercise of stock options and the ownership of our stock.

 

The following is a summary of the material provisions of our stock option plan and is qualified in its entirety by reference to the complete text of the plan, a copy of which is attached to this proxy statement as Appendix C.

 

Summary of the Stock Option Plan

 

Administration. The stock option plan will be administered by our board of directors. Our board of directors may delegate the administration of the stock option plan to our Compensation Committee or to another committee of the board of directors. For purposes of the following discussion, the term “Administrator” means the board of directors or the committee to which it delegates its authority as provided above. The Administrator has the authority, subject to the terms of the stock option plan, to determine the individuals to whom options will be granted, the times at which options will be granted and the terms and conditions of the options.

 

Eligibility. Options may be granted to our directors, officers, employees, consultants and advisors. Options intended to qualify, under the standards set forth in certain federal tax rules, as incentive stock options (“ISOs”) may be granted only to employees while actually employed by us. Non-employee directors, consultants and advisors are not entitled to receive ISOs.

 

Option Price. The option price for ISOs generally will be 100% of the fair market value of our common stock on the date the option is granted; however, if the participant in the stock option plan owns more than 10% of the combined voting power of Arpeggio and any subsidiary or parent corporation, the option price will be not less than 110% of the fair market value of our common stock on the date of grant. The value of our common stock (based upon exercise price times number of shares) for which ISOs first become subject to exercise during any given calendar year may not exceed $100,000. The option price for non-qualified stock options will be determined by the Administrator and may be less than, equal to or greater than the fair market value of our common stock on the date of grant. Fair market value for purposes of the stock option plan is the closing market price of our common stock as reported on the market determined by our board of directors to be the primary market for the common stock on the date of grant. In the event our common stock is not traded on a recognized market at the time of grant, the Administrator will determine fair market value.

 

Duration of Options. Each stock option will terminate on the date fixed by the Administrator, which will not be more than ten years after the date of grant. If the participant in the stock option plan owns more than 10% of the combined voting power of Arpeggio and any subsidiary or parent corporation, any ISO granted to such participant will terminate not more than five years after the date of grant.

 

Vesting. Options become exercisable when they have vested, subject to any further restrictions on exercise imposed by our board of directors in individual option agreements. The Administrator will specify the relevant vesting provisions at the time of the grant.

 

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Exercise Period. The exercise period for options granted under the stock option plan may not exceed ten years from the date of grant.

 

Payment. The Administrator will determine whether exercise of options will be settled in whole or in part in cash, common stock or other securities of the Company, or other property.

 

Shares That May Be Issued Under the Stock Option Plan. A maximum of 1,140,000 shares of our common stock, which number may be adjusted as described below, are available for issuance pursuant to the exercise of stock options granted under the stock option plan. If any stock option terminates or is canceled for any reason without having been exercised in full, the shares of stock not issued will then become available for additional grants of options. The number of shares available under the stock option plan is subject to adjustment in the event of any stock split, stock dividend, recapitalization, spin-off or other similar action.

 

Estimate of Benefits. Until and unless approved by our stockholders, no grants will be made under the stock option plan. We cannot determine the benefits to be received by our directors or officers under the stock option plan or the benefits that would have been received by our directors and officers in 2005 had the plan been in effect in 2005.

 

Termination of and Amendments to the Stock Option Plan. The board of directors may amend the stock option plan from time to time, except that no amendment will be made without shareholder approval if such approval is necessary to comply with applicable law. No options may be granted under the stock option plan after June 30, 2016.

 

Income Tax Consequences. Under present law, the federal income tax treatment of stock options under the stock option plan is generally as follows:

 

Incentive Stock Options. For regular income tax purposes, an optionee will not realize taxable income upon either the grant of an ISO or its exercise if the optionee has been an employee of Arpeggio or a subsidiary at all times from the date of grant to a date not more than three months before the date of exercise. The difference between the fair market value of the stock at the date of exercise and the exercise price of an ISO, however, will be treated as an item of tax preference in the year of exercise for purposes of the alternative minimum tax. If the shares acquired upon an exercise of an ISO are not disposed of by the optionee within two years from the date of grant or within one year from the date of exercise, any gain realized upon a subsequent sale of the shares will be taxable as a capital gain. In that case, Arpeggio will not be entitled to a deduction in connection with the grant or the exercise of the ISO or the subsequent disposition of the shares by the optionee. The amount of gain or loss realized upon such a sale or other disposition will be measured by the difference between the amount realized and the earlier exercise price of the ISO (the optionee’s basis in the stock). If the optionee disposes of the shares within two years from the date of grant of the ISO or within one year from the date of exercise of the ISO, the optionee will realize ordinary income in an amount equal to the excess of the fair market value of the shares at the date of exercise (or the amount realized on disposition, if less) over the option price, and Arpeggio will be allowed a corresponding deduction. If the amount realized on the disposition exceeds the fair market value of the shares at the date of exercise the gain on disposition in excess of the amount treated as ordinary income will be treated as capital gain. If the optionee holds the shares for more than 12 months from the date of exercise, any such gain will be a long-term capital gain.

 

Non-Qualified Stock Options. An optionee will not realize income upon the grant of a non-qualified stock option (“NSO”). Upon the exercise of a NSO granted at or above fair market value, an optionee will be required to recognize ordinary income in an amount equal to the excess of the fair market

 

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value at the date of exercise of the NSO over the option price. In the case of an option granted at below fair market value, proposed federal regulations provide that the optionee will be taxed on the spread when the option vests, unless the option is automatically exercised upon the occurrence of specific events. If the option is taxed when it vests, the optionee will also be subject to an additional 20% tax. Any compensation includable in the gross income of an employee with respect to a NSO will be subject to appropriate federal income and employment taxes. Arpeggio will be entitled to a business expense deduction in the same amount and at the same time as when the optionee recognizes compensation income. Upon a subsequent sale of the stock, any amount realized in excess of such fair market value will constitute a capital gain. If the optionee holds the shares for more than 12 months from the date of exercise, any such gain will be a long-term capital gain. In the limited circumstances in which an officer who is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act”) exercises a NSO, which exercise is not exempt under Section 16(b), no income is recognized for federal income tax purposes at the time of exercise unless the optionee makes an election under Section 83(b) of the Code within 30 days after the date of exercise, in which case the optionee will be subject to the tax based on the value of the shares on the date of exercise. Where such an election is not made, the optionee will recognize ordinary income on the first date that sale of such shares would not create liability under Section 16(b) of the 1934 Act (this is generally, but not necessarily, six months after the date of exercise). The ordinary income recognized by such an optionee will be the excess, if any, of the fair market value of shares on such later date over the option exercise price.

 

The foregoing discussion does not purport to be a complete analysis of all the potential tax consequences relevant to recipients of options or to Arpeggio or its subsidiaries. The above discussion does not take into account the effect of state and local tax laws. Moreover, no assurance can be given that legislative, administrative, regulatory or judicial changes or interpretations will not occur which could modify such analysis. In addition, an individual’s particular tax status may result in different tax consequences from those described above. Therefore, any participant in the stock option plan should consult with his own tax adviser concerning the tax consequences of the grant, exercise and surrender of such options and the disposition of any stock acquired pursuant to the exercise of such options.

 

Recommendation and Vote Required

 

Approval of our incentive compensation plan will require the affirmative vote of the holders of a majority of the outstanding shares of our common stock represented in person or by proxy and entitled to vote at the meeting.

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE STOCK OPTION PLAN.

 

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OTHER INFORMATION RELATED TO ARPEGGIO

 

Business of Arpeggio

 

Arpeggio was formed on April 2, 2004, to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Prior to executing the merger agreement with Hill, Arpeggio’s efforts were limited to organizational activities, completion of its IPO and the evaluation of possible business combinations.

 

Offering Proceeds Held in Trust

 

Arpeggio consummated its IPO on June 30, 2004. The net proceeds of the offering, after payment of underwriting discounts and expenses, were approximately $36,772,000. Of that amount, $35,352,000 was placed in the trust account and invested in government securities. The remaining proceeds have been used by Arpeggio in its pursuit of a business combination. The trust account will not be released until the earlier of the consummation of a business combination or the liquidation of Arpeggio. The trust account contained $36,357,327 as of September 30, 2005 and $             as of                     , 2006, the record date. If the merger with Hill is consummated, the trust account will be released to Arpeggio, less the amounts paid to stockholders of Arpeggio who do not approve the merger and elect to convert their shares of common stock into their pro-rata share of the trust account. The released funds will be used for working capital and acquisitions by the combined entity.

 

Fair Market Value of Target Business

 

Pursuant to Arpeggio’s certificate of incorporation, the initial target business that Arpeggio acquires must have a fair market value equal to at least 80% of Arpeggio’s net assets at the time of such acquisition. Arpeggio’s board of directors determined that this test was met in connection with its acquisition of Hill. Further, Arpeggio has received an opinion from Capitalink that this test has been met.

 

Stockholder Approval of Business Combination

 

Arpeggio will proceed with the acquisition of Hill only if a majority of all of the outstanding shares of Arpeggio is voted in favor of each of the merger, the name change amendment and the capitalization amendment. The Arpeggio Inside Stockholders have agreed to vote their common stock acquired prior to our IPO on the merger proposal in accordance with the vote of holders of a majority of the outstanding shares of Arpeggio’s common stock. If the holders of 20% or more of Arpeggio’s common stock vote against the merger proposal and demand that Arpeggio convert their shares into their pro rata share of the trust account, then Arpeggio will not consummate the merger. If this happens, and if Arpeggio does not consummate another business combination before June 30, 2006, it will be forced to liquidate.

 

Liquidation If No Business Combination

 

Arpeggio’s certificate of incorporation provides for mandatory liquidation of Arpeggio in the event that Arpeggio does not consummate a business combination within 18 months from the date of consummation of its IPO, or 24 months from the consummation of the IPO if certain extension criteria have been satisfied. Such dates are December 30, 2005 and June 30, 2006, respectively. Arpeggio signed a letter of intent with Hill on November 16, 2005 and signed a definitive merger agreement with Hill on December 5, 2005. As a result of having signed the letter of intent, Arpeggio satisfied the extension criteria and now has until June 30, 2006 to complete the merger.

 

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If Arpeggio does not complete the merger or another business combination by June 30, 2006, Arpeggio will be dissolved and will distribute to all of its public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest, plus any remaining net assets. Arpeggio’s stockholders who obtained their Arpeggio stock prior to Arpeggio’s IPO have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them immediately prior to the IPO. There will be no distribution from the trust account with respect to Arpeggio’s warrants.

 

If Arpeggio were to expend all of the net proceeds of the IPO, other than the proceeds deposited in the trust account, the per-share liquidation price as of                     , 2006 would be approximately $            , or $             less than the per-unit offering price of $6.00 in Arpeggio’s IPO. The proceeds deposited in the trust account could, however, become subject to the claims of Arpeggio’s creditors and there is no assurance that the actual per-share liquidation price will not be less than $            , due to those claims. If Arpeggio liquidates prior to the consummation of a business combination, Eric S. Rosenfeld, chairman of the board, chief executive officer and president, will be personally liable to pay debts and obligations to vendors and other entities that are owed money by Arpeggio for services rendered or products sold to Arpeggio, or to any target business, to the extent such debts and obligations are not covered by Arpeggio’s assets, excluding amounts in the trust agreement. There is no assurance, however, that he would be able to satisfy those obligations.

 

If Arpeggio fails to complete the business combination with Hill by June 30, 2006, upon notice from Arpeggio, the trustee of the trust account will commence liquidating the investments constituting the trust account and will turn over the proceeds to the transfer agent for distribution to the stockholders holding shares acquired through the IPO.

 

The stockholders holding shares of Arpeggio common stock issued in the IPO will be entitled to receive funds from the trust account only in the event of Arpeggio’s liquidation or if the stockholders seek to convert their respective shares into cash and the merger is actually completed. In no other circumstances shall a stockholder have any right or interest of any kind to or in the trust account.

 

Facilities

 

Arpeggio maintains executive offices at 10 East 53rd Street, 35th Floor, New York, New York 10022. The cost for this space is included in a $7,500 per-month fee that Crescendo Advisors II LLC, an affiliate of Eric S. Rosenfeld, one of our current officers and directors, charges Arpeggio for general and administrative services. Arpeggio believes, based on rents and fees for similar services in the New York metropolitan area, that the fees charged by Crescendo Advisors II LLC are at least as favorable as Arpeggio could have obtained from an unaffiliated person. Arpeggio considers its current office space adequate for current operations.

 

Employees

 

Arpeggio currently has two executive officers and six directors. These individuals are not obligated to contribute any specific number of hours per week and devote only as much time as they deem necessary to our affairs. Arpeggio does not intend to have any full time employees prior to the consummation of a business combination.

 

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Periodic Reporting and Audited Financial Statements

 

Arpeggio has registered its securities under the Securities Exchange Act of 1934 and has reporting obligations, including the requirement to file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, Arpeggio’s annual reports contain financial statements audited and reported on by Arpeggio’s independent accountants. Arpeggio has filed with the Securities and Exchange Commission a Form 10-KSB covering the fiscal year ended December 31, 2004 and its most recent Forms 10-QSB covering the fiscal quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

 

Legal Proceedings

 

There are no legal proceedings pending against Arpeggio.

 

Plan of Operations

 

The following discussion should be read in conjunction with Arpeggio’s financial statements and related notes thereto included elsewhere in this proxy statement.

 

Net Income for the nine months ended September 30, 2005 of $176,607 consisted of interest income on the trust fund investment of $716,218, interest on cash and cash equivalents of $13,596 offset by general and administrative expenses of $67,500 for a monthly administrative services agreement, $155,717 for professional fees (including $112,400 for the due diligence of a potential target company), $67,500 for officer liability insurance, $15,388 for travel, $184,790 for income taxes and $62,312 for other expenses (including $15,729 in franchise tax).

 

Net Income for the period from April 2, 2004 (inception) to September 30, 2004 of $39,404 consisted of interest income on the trust fund investment of $131,392, interest on cash and cash equivalents of $3,490 offset by general and administrative expenses of $24,250 expense for a monthly administrative services agreement, $4,252 for professional fees, $21,250 expense for officer liability insurance, $9,279 for travel expenses, $21,126 for income taxes and $15,321 for other expenses.

 

Net Income for the period from April 2, 2004 (inception) to September 30, 2005 of $247,033 consisted of interest income on the trust fund investment of $1,005,327, interest on cash and cash equivalents of $21,269 offset by general and administrative expenses of $114,250 for a monthly administrative services agreement, $165,731 for professional fees (including $112,400 for the due diligence of a potential target company), $110,000 for officer liability insurance, $29,138 for travel, $252,507 for income taxes and $107,937 for other expenses (including $41,582 in franchise tax).

 

We consummated our initial public offering on June 30, 2004. Gross proceeds from our initial public offering, including proceeds from the exercise of the underwriters’ over-allotment option, were $40,800,000. After deducting offering expenses of $1,580,000 including $1,080,000 evidencing the underwriters’ non-accountable expense allowance of 3% of the gross proceeds, and underwriting discounts of $2,448,000, net proceeds were $36,772,000. Of this amount, $35,352,000 was placed in trust and the remaining proceeds are available to be used to provide for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

 

We are obligated to pay to Crescendo Advisors II LLC, an affiliate of Eric S. Rosenfeld, our chairman of the board of directors, chief executive officer and president, a monthly fee of $7,500 for general and administrative services. Through September 30, 2005, an aggregate of $114,250 has been incurred for such services. In addition, in April and May 2004, Eric S. Rosenfeld advanced an aggregate

 

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of $77,500 to us, on a non-interest bearing basis, for payment of offering expenses on our behalf. This amount was repaid in July 2004 out of proceeds of our initial public offering.

 

Arpeggio reimburses its officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on Arpeggio’s behalf such as identifying and investigating possible target businesses and business combinations. From Arpeggio’s inception on April 2, 2004, through December 31, 2005, Arpeggio reimbursed its officers and directors in the aggregate amount of $62,360 for expenses incurred by them on its behalf, including travel, meals and entertainment and telephone.

 

Arpeggio intends to utilize its cash, including the funds held in the trust account, and its capital stock to effect a business combination. Upon consummation of the merger with Hill, the proceeds in the trust account, including interest thereon, as well as any other available cash will be used for working capital and acquisitions by Hill. Upon consummation of the merger, the proceeds in the trust account also may be used for payments due under the conversion rights of Arpeggio stockholders and expenses of the merger that are not covered by the working capital of Arpeggio held outside of the trust. At September 30, 2005, we had cash outside of the trust account of $710,407, and total liabilities of $48,600, leaving Arpeggio with working capital of $661,807, excluding investments held in trust.

 

Off-Balance Sheet Arrangements

 

There were no off-balance sheet arrangements during the period from April 2, 2004 (inception) through December 31, 2005, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to Arpeggio.

 

BUSINESS OF HILL

 

General

 

Hill provides fee-based project management and construction claims services to clients worldwide, but primarily in the United States, Europe and the Middle East. Hill’s clients include the United States and other national governments and their agencies, state and local governments and agencies and the private sector. Hill was founded in 1976 and is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

 

Hill provides construction management and claims consulting services to a broad range of owners and builders. The projects on which Hill has worked include transportation, power, oil and gas, commercial office, education, government, airport and medical facility projects, among others.

 

Hill’s business has grown principally through organic growth, although Hill has also acquired a number of project management and claims consulting businesses. Since 1998, Hill has completed seven acquisitions. See “Acquisitions,” below.

 

Construction Industry Background

 

In its October 5, 2005 Engineering and Construction Sector Update, Morgan Joseph & Co., Inc. stated that the outlook for the engineering and construction sector is better now that at any time over the last several years. (Morgan Joseph is acting as financial advisor to Hill. For a discussion of its involvement in the merger, see “The Merger Proposal – Background of the Merger” above) This analysis expects that the industry should benefit from positive longer-term capital spending trends, as well as some

 

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positive cyclical spending trends in several key end-market sectors, including energy, power, chemicals, civil infrastructure, and government service. According to the Morgan Joseph analysis, the damage from hurricanes in the U.S. Gulf region as well as recent legislation are expected to spur activity in the sector.

 

Hill is already seeking to develop business based upon these industry trends. For instance, Hill has been indirectly retained by the Federal Emergency Management Agency (“FEMA”) to provide consulting services related to estimating the damage caused by Hurricane Katrina. In addition, the Pennsylvania Department of Transportation, the Illinois State Toll Highway Authority and other agencies have retained Hill on a variety of highway reconstruction projects. Hill also has been involved in the Iraq and Afghanistan reconstruction efforts.

 

In addition, the construction management market in particular is growing rapidly. In its June 13, 2005 issue, the McGraw-Hill industry publication Engineering News-Record reported that, among the 100 largest U.S.-based firms, program/construction management generated $6.76 billion in fees in 2004, up 14.3% from 2003. This included domestic project fees of $5.41 billion (up 6.7% from 2003) and international project fees of $1.35 billion (up 59.7% from 2003).

 

Project Management Group

 

Hill’s Project Management Group offers fee-based or “agency” construction management services to its clients, leveraging its construction claims expertise to identify potential trouble, difficulties and sources of delay on a construction project before they develop into costly problems. Hill is a fee-based consultant and does not assume project completion risk. Clients are typically billed a negotiated multiplier of the actual direct cost of each consultant assigned to a project and Hill is reimbursed for all out-of-pocket expenses.

 

As construction manager, Hill has managed all phases of the construction process from pre-design through completion. Services include program management, project management, project management oversight, troubled project turnaround, staff augmentation, estimating and cost management, project labor agreements and management consulting. Since its inception, Hill has managed more than 1,000 projects having an aggregate construction cost of more than $100 billion. The Project Management Group accounted for approximately 82% of Hill’s revenue less reimbursable expenses, and for approximately 79% of Hill’s gross profit, during the three quarters ended October 1, 2005.

 

Hill has received nine Project Achievement Awards from the Construction Management Association of America honoring its performance as construction manager on various projects. In its June 13, 2005, issue, Engineering News-Record ranked Hill as the 18th largest construction management firm in the United States.

 

Recent project management clients include:

 

    City of Philadelphia Division of Aviation

 

    Dubai International Properties

 

    Illinois State Toll Highway Authority

 

    Liberty Property Trust

 

    Merck & Co.

 

    Nakheel Corporation

 

    National Institutes of Health

 

    New Jersey Schools Construction Corp.

 

    New York City Department of Design and Construction

 

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    Port Authority of New York and New Jersey

 

    Romanian Ministry of Finance

 

    Smithsonian Institution

 

    Sunoco

 

    U.S. Army Corps of Engineers

 

    U.S. Department of Energy

 

Construction Claims Group

 

Hill’s Construction Claims Group advises clients in order to assist them in preventing or resolving claims and disputes based upon schedule delays, cost overruns and other problems on major construction projects worldwide. Hill’s claims consulting services include claims preparation, analysis and review, litigation support, expert witness testimony, cost and damages assessment and delay/disruption analysis. Hill is retained as a claims consultant at the onset of a project, during the course of a project or upon the completion of a project, and Hill assists owners or contractors in adversarial situations as well as in situations where an amicable resolution is sought. Clients are typically billed based on an hourly rate for each consultant assigned to the project, and Hill is reimbursed for its out-of-pocket expenses. The Construction Claims Group accounted for approximately 18% of Hill’s revenue less reimbursable expenses, and for approximately 21% of Hill’s gross profit, during the three quarters ended October 1, 2005.

 

Hill has helped resolve over 5,000 disputes involving claims in excess of $50 billion. Hill’s claims consulting clients include participants on all sides of a construction project, including owners, contractors, subcontractors, architects, engineers, attorneys, lenders and insurance companies.

 

Hill has been involved in resolving construction claims for many major construction projects worldwide, including for the Channel Tunnel connecting the United Kingdom and France and the Petronas Twin Towers in Kuala Lumpur, Malaysia.

 

Recent construction claims clients include:

 

    Abu Dhabi Public Works Dept.

 

    Bear Stearns

 

    Bechtel Group

 

    Bombardier Transportation

 

    Dubai Dept. of Civil Aviation

 

    General Electric Co.

 

    Honeywell

 

    Lexington Insurance Co.

 

    U.S. Federal Bureau of Prisons

 

    U.S. General Services Administration

 

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Clients

 

Hill’s clients consist primarily of the United States and other national governments, state and local governments, agencies and authorities, and the private sector. The following table sets forth Hill’s percentage of revenues attributable to these categories of clients for each of the periods indicated:

 

Revenue by Client Type

 

     Year Ended

   Nine Months Ended

    

12/28

2002


  

12/27

2003


  

1/1

2005


  

10/2

2004


  

10/1

2005


U.S. Government

   12.0    20.8    24.9    25.0    17.1

State and local governments, agencies and authorities

   45.6    34.8    32.5    31.6    36.3

Foreign governments

   6.4    11.8    17.0    15.3    16.8

Private sector

   36.0    32.6    25.5    28.0    29.8

 

One of the Company’s clients, the City of New York Department of Design and Construction, accounted for 21% and 15% of revenue during the year ended December 28, 2002, and the nine month period ended October 1, 2005, respectively. Another of the Company’s clients, the New Jersey School Construction Authority, accounted for 11% of revenue during the year ended January 1, 2005.

 

Geographic Regions

 

Hill operates worldwide and has offices in ten foreign countries. The majority of Hill’s revenues has been derived from operations in the United States. However, in the past three completed fiscal years, the percentage of Hill’s revenues derived from overseas operations has risen consistently. The following table sets forth the amount and percentage of Hill’s revenues from its operations in each of the United States, Europe and the Middle East for each of the past three completed fiscal years:

 

Revenue by Geographic Region

 

For the fiscal year ended

$ (000’s)


   December 28,
2002


    December 27,
2003


    January 1,
2005


 
   $

   %

    $

   %

    $

   %

 

United States

   $ 62,391    85.4 %   $ 61,512    78.1 %   $ 60,505    71.9 %

Middle East

     5,435    7.4 %     8,283    10.6 %     14,887    17.7 %

Europe

     5,264    7.2 %     8,936    11.3 %     8,715    10.4 %
    

  

 

  

 

  

Total

   $ 73,090    100.0 %   $ 78,731    100.0 %   $ 84,107    100.0 %
    

  

 

  

 

  

 

Contracts

 

The price provisions of the contracts Hill undertakes can be grouped into three broad categories: cost-plus, time and materials and fixed-price. The majority of Hill’s contracts are of the cost-plus type.

 

Cost-plus contracts provide for reimbursement of costs and overhead incurred by Hill plus a predetermined fee. Under some cost-plus contracts, Hill’s fee may be based on quality, schedule and other performance factors.

 

Doing business with governments, including the United States government, is complex and requires the ability to comply with intricate regulations and satisfy periodic audits. Hill believes that the ability to understand these requirements and to successfully conduct business with government agencies is a barrier to entry for smaller, less experienced competitors.

 

For the nine months ended October 1, 2005, revenues from federal government contracts represented approximately 17.1% of Hill’s revenues. Most government contracts, including Hill’s contracts with the federal government, are subject to termination by the government, to government audits and to continued appropriations.

 

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Backlog

 

A strong indicator of Hill’s future performance is its backlog of uncompleted projects under contract or awarded. Hill’s total backlog was approximately $281 million as of December 31, 2005. Hill estimates that approximately 33.8% of the backlog at December 31, 2005 will be recognized during its 2006 fiscal year. Hill’s total backlog as of January 1, 2005 and December 27, 2003 was $256 million and $201 million, respectively.

 

Acquisitions

 

Since 1998, Hill has completed seven acquisitions, three of which involved project management firms and four of which were focused on construction claims. Four of these targets were U.S. based, two were headquartered in the U.K., and one had offices in both countries. Hill’s management expects to continue considering targets for acquisition that could expand geographic coverage in the U.S. and elsewhere, add additional end-market expertise or bolster existing operations. Hill is also currently considering several possible acquisitions in the project management sector.

 

Competition

 

The construction management and claims consulting industries are highly competitive. Hill competes for contracts, primarily on the basis of technical capability, with numerous entities, including design or engineering firms, general contractors, other “pure” construction management companies, other claims consulting firms, the “Big Four” and other accounting firms, management consulting firms and other entities. Many of these competitors are large, well-established companies that have broader geographic scope and greater financial and other resources than Hill.

 

Management

 

Hill is led by an experienced management team with significant experience in the construction industry. Information about its primary executive officers is set forth in the section entitled “Directors and Executive Officers of Arpeggio Following the Merger.” In addition to such persons, Hill’s operational team includes 13 Senior Vice Presidents and 37 Vice Presidents.

 

Employees

 

At October 31, 2005, Hill had 771 personnel. Of these individuals, 622 worked in Hill’s Project Management Group, 111 worked in Hill’s Construction Claims Group and 38 worked in Hill’s Corporate Group. Hill’s personnel at October 31, 2005 included 675 full-time employees, 80 part-time employees and 16 independent contractors. Hill’s future success will depend significantly on its ability to attract, retain and motivate qualified personnel. Hill is not a party to any collective bargaining agreement and it has not experienced any strikes or work stoppages. Hill considers its relationship with its employees to be satisfactory.

 

Facilities

 

Hill’s executive and operating offices are located at 303 Lippincott Centre, Marlton, New Jersey 08053. The telephone number at Hill’s executive office is (856) 810-6200. Hill maintains 21 other offices in New York, NY; Danbury, CT; Trenton, NJ; Philadelphia, PA; Bensalem, PA; Washington, DC; Chicago, IL; San Francisco, CA; London, UK; Manchester, UK; Athens, Greece; Bucharest, Romania; Skopje, Macedonia; Dubai, UAE; Abu Dhabi, UAE; Doha, Qatar; Manama, Bahrain; Sharq, Kuwait;

 

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Baghdad, Iraq; Seoul, Korea; and Hong Kong. Hill does not own any real property and all of its offices are in leased premises.

 

Insurance

 

Hill maintains insurance covering professional liability, as well as for claims involving bodily injury and property damage. Hill has historically enjoyed a favorable loss ratio in all lines of insurance and Hill’s management considers Hill’s present limits of liability, deductibles and reserves to be adequate. Hill endeavors to reduce or eliminate risk through the use of quality assurance/control, risk management, workplace safety and similar methods to eliminate or reduce the risk of losses on a project.

 

The terrorist attacks that occurred on September 11, 2001 have had a material adverse effect on the insurance industry as a whole. Consequently, along with its competition, Hill has experienced, and expects to continue to experience, a significant increase in its insurance premiums.

 

Legal Proceedings

 

From time to time, Hill is a party to litigation or other legal proceedings. As of November 29, 2005, Hill was a co-defendant or a defendant in various proceedings, some of which do not allege a specific amount of damages, but which damages might be, either individually or in the aggregate, material. In these proceedings, claims of negligence, breach of contract and/or other claims had been asserted, and Hill considers these types of claims to be part of the ordinary course of its business. With respect to many of these proceedings, Hill believes that the claims are covered by its existing insurance policies.

 

On September 23, 1996, William Hughes General Contractors, Inc. filed a complaint against the Monroe Township Board of Education, Hill and other parties, alleging breach of contract and other causes of action in connection with its performance of a construction project for Monroe Township. Monroe Township, which had terminated the plaintiff from the construction project prior to the commencement of the litigation on the basis of the plaintiff’s performance, made a cross claim against Hill and other parties for contribution and indemnification. Plaintiff is seeking in excess of $3.5 million in damages. Monroe Township is seeking approximately $89,000 in damages from Hill, in addition to an indemnification for the plaintiff’s claims. Hill believes that the claims are without merit and has vigorously defended its interests in this matter since its outset.

 

On September 22, 1999, Wartsila NSD North America, Inc. filed a complaint against Hill in the United States District Court for the District of New Jersey. Wartsila is seeking damages in excess of $7.3 million. The complaint alleges negligence, fraud and breach of contract against Hill in connection with plaintiff’s hiring of a former Hill employee. It is expected that this case will go to trial in February 2006. Hill believes that the plaintiff’s claims are without merit and has vigorously defended its interests in this matter since its outset.

 

On August 8, 2003, South Jersey Port Corp. filed a complaint against S.T. Hudson Engineers, Hill and other parties alleging negligence and other causes of action in connection with a matter in which Hill was the project manager during construction of a pier for the Battleship U.S.S. New Jersey memorial and museum project. South Jersey Port Corp. is seeking damages of $7.7 million, including interest, from all defendants. Hill believes that the claims are without merit and has vigorously defended its interests in this matter since its outset.

 

As a government contractor, Hill is subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. Government scrutiny of contractors’ compliance with those laws and regulations through audits and investigations is inherent in government contracting, and, from time to time, Hill receives inquiries, subpoenas and similar demands relating to its ongoing business with government entities. Violations can result in civil or criminal liability as well as suspension or debarment from eligibility for awards of new government contracts or option renewals. Management believes that government contract-related audits, investigations and claims should not have any material adverse effect on Hill’s financial condition or results of operations.

 

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HILL’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Certain statements in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this discussion, including, without limitation, statements regarding Hill’s future financial position, business strategy, budgets, projected costs and plans and objectives of Hill’s management for future operations are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof or variations thereon or similar terminology. Although Hill believes that the expectations reflected in such forward-looking statements are reasonable, Hill cannot assure you that such expectations will prove to be correct. These forward looking statements involve certain known and unknown risks, uncertainties and other factors which may cause Hill’s actual results, performance or achievements to be materially different from any results, performances or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from Hill’s expectations, include, without limitation, a general economic downturn; future government appropriations relating to certain of Hill’s long-term contracts; Hill’s ability to win profitable government contracts; potential termination of government contracts; audits of government contracts; approval of client change orders; potential losses under fixed-price contracts; adjustments and\or cancellations of future contracts; competition; dependence upon key management; the identification, hiring and retention of qualified personnel; dependence on subcontractors, partners and specialists; adequate insurance coverage; legal, political and economic risks in different countries; currency exchange rate fluctuations; changes to the laws of the foreign countries; working conditions in high security risk countries; the ability to identify, negotiate and integrate future acquisitions; the ability to manage Hill’s growth. Undue reference should not be placed on these forward-looking statements, which speak only as of the date hereof. Hill undertakes no obligation to update any forward-looking statements.

 

The following discussion should be read in conjunction with Hill’s consolidated financial statements and the related notes contained in this Proxy Statement.

 

Hill provides fee-based project management and construction claims services to clients worldwide, but primarily in the United States, Europe and the Middle East. Hill’s clients include the United States and other national governments and their agencies, state and local governments and agencies, and the private sector. Hill was founded in 1976 and is organized into two key operating divisions: the Project Management Group and the Construction Claims Group.

 

Hill’s business has grown principally through organic growth, although Hill has also acquired a number of project management and claims consulting businesses. Since 1998, Hill has completed seven acquisitions.

 

Hill derives its revenues from fees for professional services. As a service company Hill is labor intensive rather than capital intensive. Hill’s revenue is driven by its ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to its clients and execute projects successfully. Hill’s income from operations is derived from its ability to generate revenue and collect cash under its contracts in excess of subcontractors and other reimbursable costs, direct labor and other direct costs of executing the projects and selling, general and administrative costs.

 

Critical Accounting Policies

 

Hill’s discussion and analysis of its financial condition and results of operations are based on Hill’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Hill to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using the estimates. Hill utilizes estimates in assessing its exposure to insurance claims that fall below policy deductibles, to assess its litigation and other legal claims and contingencies, in recording its allowance for doubtful accounts and in determining the utilization of deferred tax assets

 

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and the adequacy of the valuation reserve against the deferred tax asset and in determining cost to complete under the percentage-of-completion method of accounting for contracts.

 

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

 

Hill’s significant accounting policies are described in Note 1 to the Notes to Hill’s Consolidated Financial Statements for the year ended January 1, 2005. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However the following policies are considered to be critical within the SEC definition:

 

Revenue Recognition

 

Hill generates revenue primarily from project management consulting services. Revenue is generally recognized upon the performance of services. In providing these services, the Company may incur reimbursable expenses, which consist principally of amounts paid to subcontractors and other third parties as well as travel and other job related expenses that are contractually reimbursable for clients. In accordance with Emerging Issues Task Force Issue No. (“EITF”) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” Hill has assessed the indicators provided in EITF 99-19 and determined that Hill will include reimbursable expenses in computing and reporting Hill’s total contract revenues as long as Hill remains responsible to the client for the fulfillment of the contract and for the overall acceptability of all services provided.

 

Hill earns its revenues from cost-plus, fixed-price and time-and-materials contracts. If estimated total costs on any contract indicate a loss, Hill charges the entire estimated loss to operations in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, anticipated losses, and others are recorded in the accounting period in which the events indicating a loss are known and the loss can be reasonably estimated. Such revisions could occur at any time and the effects may be material.

 

The majority of Hill’s contracts are for project management work where Hill bills the client monthly at hourly billing rates. The hourly billing rates are determined by contract terms. For Governmental clients, the hourly rates are generally calculated as salary costs plus overhead costs plus a negotiated profit percentage. For commercial clients, the hourly rate can be taken from a standard fee schedule by staff classification or it can be a discount from this schedule. In some cases, primarily for foreign work, a fixed monthly staff rate is negotiated rather than an hourly rate. This monthly rate is a build up of staffing costs plus a profit. Hill accounts for these contracts on a time-and-expenses method, recognizing revenue as costs are incurred.

 

A small percentage of Hill’s contracts are fixed price. Hill accounts for these contracts on the “percentage-of-completion” method, wherein revenue is recognized as costs are incurred. Under the percentage-of-completion method for revenue recognition, Hill estimates the progress towards completion to determine the amount of revenue and profit to be recognized. Hill generally utilizes a cost-to-cost approach in applying the percentage-of-completion method, where revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred.

 

Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of estimates. Hill has a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on its long-term construction management contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.

 

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Long-Lived Assets

 

Hill evaluates the recoverability of its long-lived assets when events or changes in circumstances suggest that the carrying value of assets may not be recoverable.

 

Allowance for Doubtful Accounts

 

Hill records an estimate of its anticipated bad debt expense based on Hill’s historical experience. If the financial condition of Hill’s clients were to deteriorate, or if the payment behavior were to change, resulting in either their inability or refusal to make payment to Hill, additional allowances would be required.

 

Income Taxes

 

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary timing differences become deductible. Hill determines the utilization of deferred tax assets in the future based on current year projections by management and criteria described in Statement on Financial Accounting Standards (“SFAS”) No. 109.

 

Nine Months Ended October 1, 2005 Compared to

Nine Months Ended October 2, 2004

 

Results of Operations

 

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to December 31. The nine months ended October 1, 2005 began on January 2, 2005 and the nine months ended October 2, 2004 began on December 28, 2003. The nine months ended October 1, 2005 includes 39 weeks and the nine months ended October 2, 2004 includes 40 weeks.

 

Revenues by Geographic Region:

 

     Nine Months Ended
October 2, 2004


    Nine Months Ended
October 1, 2005


 

$ (000’s)


   $’s

   %

    $’s

   %

 

United States

   $ 45,146    73.7 %   $ 51,241    63.7 %

Europe

     5,493    9.0 %     10,227    12.7 %

Middle East

     10,645    17.3 %     18,904    23.6 %
    

  

 

  

Total

   $ 61,284    100 %   $ 80,372    100 %
    

  

 

  

 

Hill measures performance of many of its key operating metrics as a percentage of revenue less reimbursable expenses (“RLRE”) as Hill believes that it is a better measure of operating performance than is total revenue. Throughout this discussion Hill has used RLRE as the denominator in many of Hill’s ratios.

 

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The following table sets forth, for the periods indicated, historical operating data as a percentage of RLRE.

 

     Nine months ended

 
     October 2,
2004


    October 1,
2005


 

Revenue, less reimbursable expenses

   100 %   100 %

Direct expenses

   54.1 %   52.6 %
    

 

Gross profit

   45.9 %   47.4 %

Selling, general and administrative expenses

   48.0 %   38.3 %

Equity in earnings of affiliate

   0.1 %   1.0 %
    

 

Operating (loss) income

   (2.0 )%   10.1 %

Interest expense

   (1.0 )%   (0.7 )%
    

 

(Loss) income before provision for income taxes

   (3.0 )%   9.4 %

(Benefit from) provision for income taxes

   (1.0 )%   2.7 %
    

 

Net (loss) income

   (2.0 )%   6.7 %
    

 

 

Revenue

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   %

    $’s

   %

    $’s

    %

 

Project Management

   $ 50,115    81.8 %   $ 69,306    86.2 %   $ 19,191     38.3 %

Construction Claims

     11,169    18.2 %     11,066    13.8 %     (103 )   (0.9 )%
    

  

 

  

 


 

Total

   $ 61,284    100 %   $ 80,372    100 %   $ 19,088     31.1 %
    

  

 

  

 


 

 

The $19,088,000 increase in total revenue is primarily attributable to a $10,755,000 increase in overseas project management revenue and an $8,436,000 increase in domestic project management revenue over the first three quarters of 2005 relative to the comparable period in 2004. The increase in overseas project management revenue is principally due to an increase of $7,306,000 in the Middle East and an increase of $3,449,000 in Europe, reflecting continued successful business development efforts. The increase in domestic project management revenue is principally due to $9,211,000 of new contracts with the New York City Department of Design and Construction, less a decline in work performed for the New Jersey Schools Construction Corporation. The decrease in construction claims revenue is due to Hill’s shift in focus towards more predictable project management revenue which is typically generated from multi-year contracts. Hill anticipates continued faster growth in project management revenue relative to construction claims revenue.

 

Reimbursable expenses

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   %

    % of
Revenue


    $’s

   %

    % of
Revenue


    $’s

    %

 

Project Management

   $ 12,908    89.8 %   25.8 %   $ 20,724    96.7 %   29.9 %   $ 7,816     60.5 %

Construction Claims

     1,461    10.2 %   13.1 %     703    3.3 %   6.4 %     (758 )   (51.9 )%
    

  

 

 

  

 

 


 

Total

   $ 14,369    100 %   23.4 %   $ 21,427    100 %   26.6 %   $ 7,058     49.1 %
    

  

 

 

  

 

 


 

 

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Reimbursable expenses consist principally of amounts paid to subcontractors and other third parties as well as travel and other job related expenses that are reimbursed by Hill’s clients. Reimbursable expenses increased in 2005 as Hill used more subcontractors due to certain new contracts with the New York City Department of Design and Construction.

 

Revenue, less reimbursable expenses (“RLRE”)

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   %

    $’s

   %

    $’s

   %

 

Project Management

   $ 37,207    79.3 %   $ 48,582    82.4 %   $ 11,375    30.6 %

Construction Claims

     9,708    20.7 %     10,363    17.6 %     655    6.8 %
    

  

 

  

 

  

Total

   $ 46,915    100 %   $ 58,945    100 %   $ 12,030    25.7 %
    

  

 

  

 

  

 

Due to the increase in total revenue, which was largely driven by 38.3% growth in the project management revenue, less the increase in reimbursable expenses described above, revenue less reimbursable expenses increased by 25.7% in the first three quarters of 2005 relative to the comparable 2004 period.

 

Direct expenses

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   %

    % of
RLRE


    $’s

   %

    % of
RLRE


    $’s

   %

 

Project Management

   $ 21,378    84.2 %   57.5 %   $ 26,528    85.6 %   54.6 %   $ 5,150    24.1 %

Construction Claims

     4,013    15.8 %   41.3 %     4,453    14.4 %   43.0 %     440    11.0 %
    

  

 

 

  

 

 

  

Total

   $ 25,391    100 %   54.1 %   $ 30,981    100 %   52.6 %   $ 5,590    22.0 %
    

  

 

 

  

 

 

  

 

The increase in direct expenses is principally due to the increase in RLRE, as foreign projects direct labor increased $3,937,000 and domestic projects labor increased $1,507,000. The decrease in direct expenses as percentage of RLRE is due to more efficient overseas operations as those operations continue to grow.

 

Foreign currency contracts are mostly denominated in British pounds, European euros or United Arab Emirates dirhams.

 

Gross Profit

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   %

    % of
RLRE


    $’s

   %

    % of
RLRE


    $’s

   %

 

Project Management

   $ 15,829    73.5 %   42.5 %   $ 22,054    78.8 %   45.4 %   $ 6,225    39.3 %

Construction Claims

     5,695    26.5 %   58.7 %     5,910    21.2 %   57.0 %     215    3.8 %
    

  

 

 

  

 

 

  

Total

   $ 21,524    100 %   45.9 %   $ 27,964    100 %   47.4 %   $ 6,440    29.9 %
    

  

 

 

  

 

 

  

 

The increase in Hill’s gross profit over the first three quarters of 2005 relative to the comparable 2004 period is attributable to both an increase in RLRE as well as an increase in Hill’s gross profit margin. The increase in gross profit as percentage of RLRE is due to more efficient overseas operations.

 

Selling, general and administrative (“SG&A”) expenses

 

$(000’s)


   2004

    2005

    Change

 
   $’s

   % of
RLRE


    $’s

   % of
RLRE


    $’s

   %

 

Selling, general and administrative expenses

   $ 22,512    48.0 %   $ 22,577    38.3 %   $ 65    0.3 %
    

  

 

  

 

  

 

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The $65,000 increase in selling, general and administrative expenses is primarily attributable to the following:

 

    Expenses related to Hill’s legal costs related to an investment transaction (the Tickets.com litigation) decreased $1,772,000 to $0 in 2005, as the litigation was concluded in April 2004.

 

    An increase in unapplied and indirect labor expense of $1,198,000, due to the increases in staff required to produce and support the increase in revenue.

 

    Administrative travel increased $519,000, with increased travel by corporate, finance and business development staff to the monitor and enhance continued overseas growth.

 

    Legal fees, other than for the Tickets.com litigation, increased $487,000 principally because Hill incurred legal fees in connection with two lawsuits in the ordinary course of business for which insurance did not provide defense costs. Hill believes one suit is without merit and it believes it has provided a sufficient accrual for any losses in the second suit.

 

    A decrease in bad debt expense of $472,000 related to improved receivables collections.

 

    An increase of $105,000 in other selling, general and administrative expenses due to a variety of factors.

 

Equity in earnings of affiliate

 

Hill’s share of the earnings of an affiliate, Stanley Baker Hill, LLC (“SBH”), which was formed in April 2004 for the purpose of providing various architect-engineering and construction management services in connection with the Iraq Reconstruction Program, increased $522,000, from $37,000 in the first three quarters of 2004 to $559,000 in the first three quarters of 2005. SBH was formed in April 2004 and operations did not fully commence until the fourth quarter of 2004.

 

Operating income

 

Operating income increased $6,897,000, from a loss of $951,000 in 2004 to income of $5,946,000 in 2005, principally due to higher revenue, higher margins in Hill’s project management operation, an increase in Hill’s share of the earnings of SBH, and the conclusion of the Tickets.com litigation.

 

Interest expense (net)

 

Net interest expenses decreased $16,000 to $420,000 for 2005 as compared to 2004 principally due to decreased borrowings under Hill’s revolving credit facility during 2005.

 

Tax expense (benefit)

 

For 2005, Hill recognized a tax expense of $1,560,000 relative to a tax benefit of $483,000 for 2004, principally relating to higher operating profit in 2005 and the recording of the Tickets.com loss and litigation expenses in 2004.

 

The effective tax rates for the fiscal years of 2004, 2003 and 2002 were 39%, 40% and 41%, respectively. The effective tax rate for the nine months ended October 1, 2005 is 28%. The effective rate is lower than in previous periods because a greater portion of Hill’s profit in the nine-months ended October 1, 2005 came from foreign operations which are taxed at lower rates.

 

Hill has non-current deferred tax assets related to “alternative minimum tax carryforwards” with no expiration dates. Because operating results for fiscal years 2003 and 2004 were negatively impacted by unusual litigation expenses unrelated to Hill’s ongoing business, and in light of improved results for the nine-months ended October 1, 2005, Hill’s backlog as of December 31, 2005 and management’s

 

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expectations of continued increasing revenue, Hill believes it is more likely than not (per Statement of Financial Accounting Standards No. 109) that such deferred tax assets will be utilized in future periods.

 

Net income (loss)

 

Hill reported net income of $3,966,000 for 2005 as compared to a loss of $904,000 in 2004. Overall profitability improved due to an increase in RLRE of 25.7% with a slight improvement in gross profit as a percentage of RLRE, relatively constant overall selling, general and administrative expenses and a decline in Hill’s effective tax rate, as described above.

 

Year Ended January 1, 2005 Compared to

Year Ended December 27, 2003

 

Results of Operations

 

Hill utilizes a 52-53 week fiscal year ending on the Saturday closest to December 31. The fiscal years 2002, 2003 and 2004 ended December 28, 2002, December 27, 2003 and January 1, 2005, respectively and were 52, 52 and 53 week years, respectively. Throughout the following discussion Hill refers to the fiscal year ended December 28, 2002 as 2002; fiscal year ended December 27, 2003 as 2003 and fiscal year ended January 1, 2005 as 2004.

 

Revenues by Geographic Region

 

For the fiscal year

$ (000’s)


   2002

    2003

    2004

 
   $

   %

    $

   %

    $

   %

 

United States

   $ 62,391    85.4 %   $ 61,512    78.1 %   $ 60,505    71.9 %

Middle East

     5,435    7.4 %     8,283    10.6 %     14,887    17.7 %

Europe

     5,264    7.2 %     8,936    11.3 %     8,715    10.4 %
    

  

 

  

 

  

Total

   $ 73,090    100.0 %   $ 78,731    100.0 %   $ 84,107    100.0 %
    

  

 

  

 

  

 

Hill measures performance of many of its key operating metrics as a percentage of revenue less reimbursable expenses (“RLRE”) as Hill believes that it is a better measure of operating performance than is total revenue. Throughout this discussion Hill has used RLRE as the denominator in many of Hill’s ratios.

 

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The following table sets forth, for the periods indicated, historical operating data as a percentage of RLRE.

 

     Fiscal year

 
     2002

    2003

    2004

 

Revenue, less reimbursable expenses

   100.0 %   100.0 %   100.0 %

Direct expenses

   49.7 %   51.7 %   54.5 %
    

 

 

Gross profit

   50.3 %   48.3 %   45.5 %

Selling, general and administrative expenses

   49.2 %   48.9 %   46.4 %

Equity in earnings of affiliate

   0.0 %   0.0 %   0.7 %
    

 

 

Operating income (loss)

   1.1 %   (0.6 )%   (0.2 )%

Interest expense, net

   (1.0 )%   (1.0 )%   (0.9 )%
    

 

 

Income (loss) before provision (benefit) for income tax

   0.1 %   (1.6 )%   (1.1 )%

Provision (benefit) for income tax

   0.1 %   (0.6 )%   (0.4 )%
    

 

 

Net income (loss)

   0.0 %   (1.0 )%   (0.7 )%
    

 

 

 

Revenue

 

$(000’s)


   2003

    2004

    Change

 
   $’s

   %

    $’s

   %

    $’s

    %

 

Project Management

   $ 60,943    77.4 %   $ 70,260    83.5 %   $ 9,317     15.3 %

Construction Claims

     17,788    22.6 %     13,847    16.5 %     (3,941 )   (22.1 )%
    

  

 

  

 


 

Total

   $ 78,731    100.0 %   $ 84,107    100.0 %   $ 5,376     6.8 %
    

  

 

  

 


 

 

The increase in total revenue is primarily attributable to an $8,229,000 increase in overseas project management revenue and $1,088,000 in domestic project management revenue, partially offset by the decline of $3,941,000 in construction claims revenue. The increase in overseas project management revenue is principally due to an increase of $6,978,000 in the Middle East including new contracts in Dubai and expansions of existing contracts in Qatar and Kuwait and an increase of $1,251,000 in Europe, all attributable to expanded business development efforts. The increase in domestic project management revenue of $1,785,000 is primarily due to a new contract for the Reconstruction of Iraq with the United States government. The decrease in construction claims revenue is due to Hill’s shift in focus towards more predictable project management revenue which is typically derived from multi-year contracts. Hill anticipates continued faster growth in project management revenue as compared to construction claims revenue.

 

Reimbursable expenses

 

$(000’s)


   2003

    2004

    Change

 
   $’s

   %

    % of
Revenue


    $’s

   %

    % of
Revenue


    $’s

    %

 

Project Management

   $ 19,826    87.7 %   32.5 %   $ 19,203    91.1 %   27.3 %   $ (623 )   (3.1 )%

Construction Claims

     2,793    12.3 %   15.7 %     1,865    8.9 %   13.5 %     (928 )   (33.2 )%
    

  

 

 

  

 

 


 

Total

   $ 22,619    100.0 %   28.7 %   $ 21,068    100.0 %   25.1 %   $ (1,551 )   (6.8 )%
    

  

 

 

  

 

 


 

 

Reimbursable expenses consist principally of amounts paid to subcontractors and other third parties and travel and other job related expenses that are contractually reimbursable from clients. Reimbursable expenses decreased in 2004 as Hill used fewer subcontractors in 2004 due to the ending of certain of its contracts with the New York City Department of Design and Construction. Several new contracts with this client started in 2005.

 

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Table of Contents

Revenue, less reimbursable expenses (“RLRE”)

 

$(000’s)


   2003

    2004

    Change

 
   $’s

   %

    $’s

   %

    $’s

    %

 

Project Management

   $ 41,117    73.3 %   $ 51,057    81.0 %   $ 9,940     24.2 %

Construction Claims

     14,995    26.7 %     11,982    19.0 %     (3,013 )   (20.1 )%
    

  

 

  

 


 

Total

   $ 56,112    100.0 %   $ 63,039    100.0 %   $ 6,927     12.3 %
    

  

 

  

 


 

 

Due to the $5,376,000 increase in total revenue, and the $1,551,000 decrease in reimbursable expenses, revenue less reimbursable expenses increased $6,927,000 or 12.3%, to $63,039,000 for the year ended January 1, 2005 as compared to $56,112,000 for the year ended December 27, 2003.

 

Direct expenses

 

$(000’s)


   2003

    2004

    Change

 
   $’s

   %

    % of
RLRE


    $’s

   %

    % of
RLRE


    $’s

    %