UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
_____________________
FORM 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
S Annual Report Pursuant to Section 13 or 15(d) ofFor the Securities Exchange Act of 1934fiscal year ended December 31, 2014 or
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2012
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£ Transition Report Pursuanttransition period from to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period _____ to _____
Commission File Number 000-15071file number 0-15071
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STEEL EXCEL INC.Steel Excel Inc.
(Exact name of registrantRegistrant as specified in its charter)
Delaware | 94-2748530 |
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DELAWARE (State or other jurisdiction of Incorporation)incorporation or organization) | 94-2748530 (I.R.S. Employer Identification Number)No.) |
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1133 WESTCHESTER AVENUE, SUITE N222 WHITE PLAINS, NEW YORK (Address of principal executive offices) | 10604 (Zip Code) |
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Registrant's telephone number, including area code (914) 461-1300 |
2603 Camino Ramon, Suite 200, San Ramon, CA 94583
(Address of principal executive offices, including Zip Code)
(408) 945-8600
(Registrant’s telephone number, including Area Code) _____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: | Common Stock, $.001 par value |
| Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share Preferred Stock Purchase Rights |
Indicate by check mark if the registrantRegistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes¨ £No No Sý
Indicate by check mark if the registrantRegistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes¨ £No No Sý
Indicate by check mark whether the registrantRegistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý SNo No £¨
Indicate by check mark whether the registrantRegistrant has submitted electronically and posted on its corporate Web site, if any, , every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files). Yesý SNo No £¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £¨
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitionsdefinition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).
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Large accelerated filer £o | Accelerated filer Sý | Non-accelerated filer o | Smaller reporting company o |
Non-accelerated filer £ (Do
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company) |
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso £No No Sý
The aggregate market value of the registrant’s Common StockRegistrant's common stock held by non-affiliates of the registrantRegistrant as of June 30, 2012,2014, the last business day of the registrant’sRegistrant's most recently completed second fiscal quarter, was approximately $171.6$116.9 million.
As of March 6, 2013, the registrant had 12,879,757February 28, 2015, there were 11,566,746 shares of itsSteel Excel’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of the registrant’s Form 10-K incorporateswill be incorporated by reference information from the registrant’sto certain portions of a definitive proxy statement, which is expected to be filed withby the Securities and Exchange Commission in connection withRegistrant within 120 days after the solicitationclose of proxies for the registrant’s 2013 Annual Meeting of Stockholders.its fiscal year.
TABLE OF CONTENTS
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PART I | | | | |
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| | | Business | 1 |
| Item 1A. | | Risk Factors | 4 |
| Item 1B. | | Unresolved Staff Comments | 9 |
| Item 2. | | Properties | 9 |
| Item 3. | | Legal Proceedings | 9 |
| Item 4. | | Mine Safety Disclosures | 9 |
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PART II | | |
| Item 5. | | Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 10 |
| Item 6. | | Selected Financial Data | 11 |
| Item 7. | Management’s | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| Item 8. | | Financial Statements and Supplementary Data | 24 |
| Item 9. | | Changes in and Disagreements With Accountants on Accounting and Financial Disclosures | 24 |
| Item 9A. | | Controls and Procedures | 24 |
| Item 9B. | | Other Information | |
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PART IIIPart III. | | | |
| Item 10. | | Directors, ExecutiveExecutives Officers and Corporate Governance | |
| Item 11. | | Executive Compensation | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | | Principal Accounting Fees and Services | |
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PART IV | | |
Item 15.Part IV. | Exhibits, Financial Statement Schedule | 25 |
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| | Item 15. | | Exhibits and Financial Statement Schedules | |
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| | | Signatures | 26 |
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. TheCertain statements contained in this documentannual report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”). Forward-lookingSuch statements are statements regardinginvolve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be materially different from any future eventsresults, performance, or our future performance, and include statements regarding projected operating results. Theseachievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on current expectations, beliefs, intentions, strategies, forecasts andupon reasonable assumptions, and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks include, but are not limited to: our ability to deploy our capital in a manner that maximizes stockholder value; the ability to identify suitable acquisition candidates or business and investment opportunities; the inability to realize the benefits of our net operating losses; the ability to consolidate and manage our newly acquired businesses; fluctuations in demand for our services; the hazardous nature of operations in the oilfield services industry, which could result in personal injury, property damage or damage to the environment; environmental and other health and safety laws and regulations, including those relating to climate change and general economic conditions. We may identify these statements by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date of this Annual Report on Form 10-K, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.
OurCompany’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the forward-looking statements. See “Risk Factors” section in PartItem I ItemPart 1A of this Annual Reportannual report on Form 10-K and elsewhere in this document. In evaluating our business, current and prospective investors should consider carefully thesefor a description of certain factors in addition to the other information set forth in this document.
that might cause such differences. PART I
Item 1. Business
ChangeGeneral
Steel Excel Inc. and it subsidiaries (“Steel Excel”, the “Company”, “we”, “us”, “our”) currently operate in Fiscal Year Endtwo reporting segments - Energy and Sports. Through its wholly-owned subsidiary Steel Energy Services Ltd. ("Steel Energy Services"), the Company’s Energy business provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., the Company’s Sports business provides event-based sports services and other health-related services. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries. Steel Partners Holdings L.P. (“Steel Partners”), an affiliate, beneficially owned approximately 58.0% of the Company’s outstanding common stock as of December 31, 2014.
Through September 2010, the Company provided enterprise-class external storage products and software to original equipment manufacturers, at which time the Company wound down its remaining business operations. At such time the Company focused on capital redeployment and identification of new business opportunities in which it could utilize existing working capital and maximize the use of net operating losses.
The Company began its Energy business in December 2011 with the acquisition of the business and assets of Rogue Pressure Services, LLC (“Rogue”). The Company expanded the business with the acquisition of the business and assets of Eagle Well Services, Inc., in February 2012 and the acquisition of Sun Well Service, Inc. ("Sun Well") in May 2012, both of which operate as Sun Well Service as a combined business. In December 2013, the Company further expanded its Energy business with the acquisition of the business and assets of Black Hawk Energy Services, Inc. (“Black Hawk”).
The Company began its Sports business in June 2011 with the acquisition of the assets of Baseball Heaven LLC (“Baseball Heaven”), a provider of baseball facility services, and the acquisition in August 2011 of a 75% membership in The Show, LLC (“The Show”), a provider of baseball uniforms to Little League and softball players and coaches. The Company expanded the business with the acquisition of a 50% interest in two Crossfit® facilities in California in November 2012, and in 2014 the Company increased its ownership interest in one of the Crossfit® facilities to approximately 86%. In January 2013, the Company acquired a 20% membership interest in Ruckus Sports LLC (“Ruckus”), an obstacle course and mass-participation events company that was controlled by the Company through its majority representation on the Ruckus board. The Company increased its membership interest in Ruckus to 45% during 2013. Also in January 2013, the Company acquired a 40% membership interest in Again Faster LLC, a fitness equipment company that is accounted for as an equity-method investment. In June 2013, the Company further expanded its Sports business with the acquisition of 80% of UK Elite Soccer, Inc. (“UK Elite”), a provider of youth soccer programs and camps.
In July 2012 and November 2013 the Company shut down The Show and Ruckus, respectively, after they did not meet operational and financial expectations. The Show and Ruckus are each reported as discontinued operations in the Company’s consolidated financial statements.
The Company's effected a 1-for-500 reverse stock split (the "Reverse Split") in June 2014, immediately followed by a 500-for-1 forward stock split (the "Forward Split", and together with the Reverse Split, the "Reverse/Forward Split"), of its common stock. As a result of the Reverse Split, stockholders holding fewer than 500 shares received a cash payment for all of their outstanding shares based on a per share price equal to the closing price of the Company’s common stock on June 18, 2014, the effective date of the Reverse/Forward Split. Stockholders holding 500 or more shares as of the effective date of the Reverse/Forward Split did not receive any payments for fractional shares resulting from the Reverse Split, and therefore the total number of shares held by such holders did not change as a result of the Reverse/Forward Split.
OnIn December 7, 2010, our Board of Directors approved a change inwe changed our fiscal year-end date from March 31 to December 31. As a result of this change,Accordingly, we had a nine-month transition period from April 1, 2010, to December 31, 2010 (the “Transition Period”). References in this Annual Report on Form 10-K to “fiscal year 2012” or “fiscal 2012” refers to the calendar year of January 1, 2012 to December 31, 2012. References in this Annual Report on Form 10-K to “fiscal year 2011” or “fiscal 2011” refers to the calendar year of January 1, 2011 to December 31, 2011.
Reverse/Forward Stock Split
At the close of business on October 3, 2011, we effected a reverse split (the “Reverse Split”) immediately followed by a forward split (the “Forward Split” and together with the Reverse Split, the “Reverse/Forward Split”). At our 2011 annual stockholders meeting, our stockholders approved a proposal authorizing our Board of Directors (the “Board”) to effect the reverse/forward stock split at exchange ratios determined by the Board within certain specified ranges.
2010.
The exchange ratio for the Reverse SplitCompany was 1-for-500 and the exchange ratio for the Forward Split was 50-for-1. As a result of the Reverse Split, stockholders holding less than 500 shares (the “Cashed Out Stockholders”) were entitled to a cash payment for all of their shares. All remaining stockholders following the Forward Split (the “Remaining Stockholders”) were also entitled to a cash payment for any fractional shares that they would otherwise have received. The cash payment that each Cashed Out Stockholder or Remaining Stockholder was entitled to receive was based upon such stockholder’s pro rata share of the total net proceeds received in the sale of the aggregated fractional shares by our transfer agent at prevailing prices on the open market.
As a result of the Reverse/Forward Split, our common stock outstanding went from 108,868,286 shares at September 30, 2011 to 10,886,829 shares at October 3, 2011. All shares outstanding and per share information for the previous financial periods being reported in this Annual Report on Form 10-K have been adjusted to reflect the Reverse/Forward Split.
General Information
We were incorporated in 1981California in California1981 under the name Adaptec,“Adaptec, Inc., (“Adaptec”)”, and completed our initial public offering in 1986. In March 1998, we reincorporated in Delaware. On June 22, 2010, weDelaware in March 1998. The Company subsequently changed ourits name to ADPT Corporation (“ADPT”). On“ADPT Corporation” in June 2010 and to “Steel Excel Inc.” in October 3, 2011,2011. Our website is http://www.steelexcel.com. All reports we changedfile electronically with the Securities and Exchange Commission, including annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and proxy statements along with any amendments to those reports are available, free of charge, on or through our namewebsite as soon as reasonably practicable after we file such reports with the Securities and Exchange Commission.
Segment Information
See Note 20 to Steel Excel Inc. (“Steel Excel”).the Company’s consolidated financial statements for information regarding segments.
Services
Business OverviewEnergy business. The Energy business provides various services to exploration and Outlook
Through September 2010, weproduction companies in the oil and gas business. The services provided enterprise-class external storage products, including Application Specific Integrated Circuits, or ASICs,include well completion and softwarerecompletion, well maintenance and workover, snubbing, flow testing, down hole pumping, plug and abatement, and rental of auxiliary equipment. Prior to original equipment manufacturers. Currently, we arethe acquisition of the Black Hawk business in December 2013, the Energy business primarily focused on capital redeploymentprovided its services to customers’ extraction and identification of new businessproduction operations in which weNorth Dakota and Montana in the Bakken basin, and to a lesser extent serviced customers in Colorado and Wyoming in the Niobrara basin. The acquisition of the Black Hawk business increased the Energy business’ heavy concentration in the Bakken basin, and expanded the business into Texas in the Permian basin and New Mexico in the San Juan basin.
Well completion services involve prepping the well for production, including running frac strings, setting production tubing, installing down hole equipment, drilling out vertical and horizontal plugs, cleaning out the wellbore, and starting production flow. Well recompletion services involve assisting in the re-stimulation of an existing well or plug-back to shut off the flow in the well from points before the plug. Well maintenance and workover services include pulling rods or tubing, installing submersible pumping equipment, repairing casing, and swabbing. Snubbing services involve installing or removing tubes to enable the customer to continue to work on a well and perform many tasks without having to stop production. Flow testing services involve separating the elements - oil, water, gas, and solids - so that the customer can utilize our existing working capital and maximize the usequality and quantity of their product. Down hole pumping services involve pumping the necessary fluids into the wellbore. Plug and abatement services involve sealing the well and cleaning the site to reduce the potential for any pollution.
Sports business. The Sports business provides baseball facility services, soccer camps and leagues, and strength and conditioning services. The baseball facility services, which include tournaments, field rentals, camps, and player and umpire instruction, are provided at our net tax operating losses (“NOLs”)facility that is equipped with four full-sized outdoor fields, three smaller youth-sized outdoor fields, and an indoor facility. Soccer camps and leagues are run at facilities owned by municipalities or schools and are run either in conjunction with local youth soccer leagues or as a stand-alone offering. Strength and conditioning services are provided at the two Crossfit® facilities.
Customers
Our Energy business client base consists of exploration and production companies in the future. The identification of new business operations includes, but is not limited to,oil and gas industry. For the oilfield services, sports, training, education, entertainment, and lifestyle businesses. During our fiscal year ended December 31, 2012, we acquired two oilfield services businesses (Eagle Well Services2014, revenues from Oasis Petroleum and Sun Well Service, Inc.)Continental Resources represented 20.7% and two sports-related businesses (CrossFit South Bay and CrossFit Torrance). During our fiscal20.3%, respectively, of the Company’s consolidated revenues; for the year ended December 31, 2011, we acquired two sports-related businesses (Baseball Heaven2013, revenues from Continental Resources and The Show)XTO Energy represented 17.0% and one oilfield services business (Rogue Pressure Services Ltd). We currently operate in these two reportable segments, Steel Sports and Steel Energy, but may add other segments in the future depending upon acquisition opportunities to further redeploy our working capital.
On February 9, 2012, we acquired the business and assets of Eagle Well Services, Inc.10.5%, which after the transaction operated as Well Services Ltd. (“Well Services”). Well Services is a leader in the oilfield service industry serving customers in the Bakken basin of North Dakota and Montana. The purchase price was $48.1 million in cash.
On May 31, 2012, we completed our acquisition of SWH, Inc. (“SWH”), the parent company of Sun Well Service, Inc. (“Sun Well”) and a subsidiary of BNS Holding, Inc. (“BNS”). Sun Well is a provider of premium well services to oil and gas exploration and production companies operating in the Williston Basin of North Dakota and Montana.
Pursuant to the termsrespectively, of the Share Purchase Agreement, we acquired allCompany’s consolidated revenues; and for the year ended December 31, 2012, revenues from Continental Resources and Zenergy, Inc., represented 11.1% and 11.0%, respectively, of the capital stock of SWH for an acquisition price aggregating $68.7 million. The aggregate acquisition price consistedCompany’s consolidated revenues. For the years ended December 31, 2014, 2013, and 2012, revenues from the Energy business’ five largest customers represented 61.2%, 51.3%, and 48.3%, respectively, of the issuance of 2,027,500 shares of our common stock (valued at $30 per share)Company's consolidated revenues. For the years ended December 31, 2014, 2013, and cash of $7.9 million. Affiliates of Steel Partners Holdings L.P. (“Steel Partners”) owned approximately 40% of our outstanding common stock2012, the Energy business’ five largest customers represented 67.1%, 56.1%, and 85% of BNS prior to the execution49.7%, respectively, of the Share Purchase Agreement.
As a resultsegment's revenues and the fifteen largest customers represented 89.0%, 88.2%, and 89.1%, respectively, of the acquisition and additional shares acquired on the open market, Steel Partners beneficially owned approximately 51.1% of our outstanding common stock. Both BNS and we appointed a special committee of independent directors to consider and negotiate the transaction because of the ownership interest held by Steel Partners in each company.
On May 31, 2012, the business of Well Services was combined with Sun Well and both businesses now operate as Sun Well and are included in Steel Energy.
On November 5, 2012, we acquired 50% of CrossFit South Bay for $82,500 and 50% of the newly formed CrossFit Torrance. As part of the transaction, we also agreed to loan CrossFit Torrance up to $1.1 million to fund leasehold improvements and equipment. Both CrossFit companies provide strength and conditioning services and are included in Steel Sports.
On January 30, 2013, we acquired a 40% membership interest in Again Faster LLC (“Again Faster”) for a cash price of $4.0 million. On January 31, 2013, we acquired a 20% membership interest in Ruckus Sports LLC (“Ruckus”) for a cash price of $1.0 million, with the right to acquire up to 60% at the same valuation. Again Faster and Ruckus provide a wide variety of fitness and athletic products and services.
Sales, Marketing and Customers
Our sales and marketing activities are performed through our local operations in each geographic region within the United States. We believe our local personnel can more effectively target marketing activities because they have an excellent understanding of region-specific issues and customer operations.
Our Steel Energy segment customer base is concentrated and thesegment’s revenues. The loss of a significant customer could causehave a material adverse effect on the Energy business and Steel Excel.
Our Sports business client base consists of numerous municipalities, youth sports leagues and organizations, and individuals, none of which provide a significant percentage of the Company’s consolidated revenues. The loss of a customer would not have a material adverse effect on the Sports business or Steel Excel.
Sales and Marketing
We rely primarily on our revenuelocal operations to decline substantially. Wesell and market our services. Because they have two customers that made up 10% or moreconducted business together over several years, the members of our net revenues in fiscal 2012, Continental Resources, Inc. (11%) and Zenergy, Inc.(11%), , and our top 15 Steel Energy customers made up 86% of net revenues in fiscal 2012. No customers comprised 10% or morelocal operations have established strong working relationships with certain of our net revenues in fiscal 2011.
clients. These strong client relationships provide a better understanding of region-specific issues and enable us to better address customer needs.
Competition and Other External Factors
Steel Energy
Our Steel Energy businesses operatebusiness. The Energy business operates in a highly competitive industry that is influenced by price, capacity, reputation, and experience. BecauseWhen oil and natural gas prices and drilling activities are at high levels, and service companies are ordering new equipment to expand their capacity as they are seeing increased demand for their services and attractive returns on investment, oilfieldinvestment. When oil and natural gas prices are declining, service companies may be willing to provide their services companies are ordering newat reduced prices to be able to cover their equipment to expand their capacity.and other fixed costs. To be successful, we must provide quality services that meet the specific needs of oil and gas exploration and production companies at competitive prices. In addition, we need to maintain a safe work environment and a well-trained work force provides a competitive advantage. We strive to provide high-quality services and value to our customers by combining our state of the art equipment with highly-skilled and experienced personnel.
remain competitive.
Our Energy services are affected by seasonal factors, such as inclement weather, fewer daylight hours, and holidays during the winter months. Heavy snow, ice, wind, or rain can make it difficult to operate and to move equipment between work sites, which can reduce our ability to provide services and generate revenues. These seasonal factors affect our competitors as well. Demand for services in ourthe industry as a whole fluctuates with the supply and demand for oil and natural gas. In general, as demand exceeds supply, the need for our services increases.increases when demand exceeds supply. The oil and natural gas producersexploration and production companies attempt to take advantage of a higher-priced environment when demand exceeds supply, which leads to thean increased need for our services. Conversely, as supply equals or exceeds demand, the oil and natural gas producers become more risk-intolerantexploration and production companies will cut back on their production resulting in a decline in their well servicing needs.needs or seek pricing concessions from us and other service providers when the price of oil declines.
Sports business. The market for the Sports business’ baseball facility services and soccer camps and leagues is very fragmented, and its competitors are primarily small local or regional operations. The market for its strength and conditioning services is fragmented, and its competitors vary from large national providers of such services to local providers of comparable or other niche services.
Steel Sports
Similar to our Steel Energy businesses, Baseball Heaven isThe baseball facility services and soccer camps and leagues are affected by seasonal factors, suchwith business volume declining from late autumn through early spring as inclement weathera result of colder temperatures and fewer daylight hours. Our facilities at Baseball Heaven currently doIn addition, inclement weather during peak seasons can have an adverse effect on the business since fields may not include indoor fields so if it rains or snows, scheduled tournaments or clinics must be available to reschedule any canceled which reduces our revenues. As an example, Hurricane Sandy in October 2012 resulted inevents. In 2013, we completed the cancellationconstruction of scheduled tournaments. We are currently constructing an indoor baseball facility to increase utilization rates. CrossFit South Bayenable us to provide year-round baseball services to partially mitigate the revenue declines experienced in non-peak months and Torrance are expected to be less affected by seasonal factors but will have to compete against other established gyms in the area.
during periods of inclement weather.
Government and Environmental Factors
Regulation
Our operationsbusinesses are subject to multiple federal, state, and local laws and regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and the environment. We cannot predict the level of enforcement or the interpretation of existing laws and regulations by enforcement agencies in the future, or the substance of future court rulings or permitting requirements. In addition, we cannot predict what additional laws and regulations may be put in place in the future, or the effect of those laws and regulations on our business and financial condition. We believe we are in substantial compliance with applicable environmental laws and regulations. While we do not believe that the cost of compliance is material to our business or financial condition, it is possible that substantial costs for compliance or penalties for non-compliance may be incurred in the future.
Among otherthe various environmental laws we are subject to, the Clean Water Act that establishesestablished the basic structure for regulating discharges of pollutants into the waters of the United States and quality standards for surface waters. Our operationsbusinesses could requirebe required to obtain permits for dischargesthe discharge of wastewater and/or stormwater. In addition, the Oil Pollution Act of 1990 imposesimposed a multitude of requirements on responsible parties related to the prevention of oil spills and liability for damages resulting from such spills in the waters of the United States. These and similarcomparable state laws provide for administrative, civil, and criminal penalties for unauthorized discharges and impose stringent requirements for spill prevention and response planning, as well as considerable potential liability for the costs of removal and damages in connection with unauthorized discharges.
The Comprehensive Environmental Response, Compensation and Liability Act, as amended, and comparable state laws (“CERCLA” or “Superfund”) impose liability without regard to fault or the legality of the original conduct on certain defined parties, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposition of the hazardous substances found at the site. Under CERCLA, these parties may be subject to joint and several liability for the costs of cleaning up the hazardous substances that were released into the environment and for damages to natural resources. Further, claims may be filed for personal injury and property damages allegedly caused by the release of hazardous substances and other pollutants. We may encounter materials that are considered
hazardous substances in the course of our operations. As a result, we may incur CERCLA liability for cleanup costs and be subject to related third-party claims. We also may be subject to the requirements of the Resource Conservation and Recovery Act, as amended, and comparable state statutes (“RCRA”) related to solid wastes. Under CERCLA or RCRA, we could be required to clean up contaminated property (including contaminated groundwater) or to perform remedial activities to prevent future contamination.
Our operationsbusinesses are also subject to the Clean Air Act, as amended, and similarcomparable state laws and regulations that restrict the emission of air pollutants and impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification, or operation of certain projects or facilities and may require use of emission controls. Various scientific studies suggest that emissions of greenhouse gases, including, among others, carbon dioxide and methane, contribute to global warming (climate change).warming. While it is not possible to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any new restrictions on emissions that are imposed could result in increased compliance costs for, or additional operating restrictions on, our customers and, hence, affectwhich could have an adverse effect on our business.
We are also subject to the federal Occupational Safety and Health Act, as amended, (“OSHA”) and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees and state and local government authorities. We believe we are in substantial compliance with the OSHA and comparable state law requirements, including general industry standards, recordkeepingrecord keeping requirements, and monitoring of occupational exposure to regulated substances.
We cannot predict the level of enforcement or the interpretation of existing laws and regulations by enforcement agencies in the future, or the substance of future court rulings or permitting requirements. In addition, we cannot predict what additional laws and regulations may be put in place in the future, or the effect of those laws and regulations on our business and financial condition. We believe we are in substantial compliance with applicable environmental laws and regulations. While we do not believe that the cost of compliance is material to our business or financial condition, it is possible that substantial costs for compliance or penalties for non-compliance may be incurred in the future.
Employees
As of December 31, 2012,2014, we had 3601,000 employees, thatof which 923 were allfull-time employees and 77 were part-time employees. All of our employees are located in the United States, including nineStates. We also hire additional full-time and part-time employees. Baseball Heaven also employsemployees during peak seasonal workers when needed.periods. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be good and we are not party to any collective bargaining agreements.satisfactory.
Available Information
We make available free of charge through our internet website at www.steelexcel.com, the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”): our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy, information statements and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically and that may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk Factors
Our business faces significant risks. The risks, including those described is this Item 1A. If any of the events or circumstances described below may notas possible risk factors actually occur, our business, financial condition, or results of operations could be adversely affected and could result in a decline in the only risks we face.trading price of our common stock. Additional risks that we doare not yet knowaware of or that we currently think are immaterial may also impairultimately have an adverse effect on our results of operations and financial condition. If
Our Energy business is susceptible to the impact of fluctuations in energy prices. High oil and natural gas prices result in an increase in drilling activity, increasing the demand for oilfield services. Oilfield service companies invest in new equipment in such an environment to expand their capacity to take advantage of this increased activity, which could result in an increasingly competitive environment. Declining oil and natural gas prices can result in our customers reducing their drilling and work over activities, which can result in a reduced demand for our services and requests for price concessions. Oilfield service companies may be willing to provide their services at reduced prices in such an environment to be able to cover their equipment and other fixed costs. The increased competition, reduced demand, or competitive pricing pressure could lead to declines in our prices and utilization, which would have an adverse effect on our results of operations.
We are heavily dependent on the oil and gas industry in North America. Our Energy business is dependent on our customers’ willingness to continue to explore for and produce oil and natural gas in North America, primarily in the Bakken and Permian basins. Factors affecting our customers’ willingness to continue to undertake exploration and production activities include the following:
the prices for oil and natural gas and our customers’ perceptions of such prices in the future;
the supply and demand for oil and natural gas;
the cost for our customers to conduct the necessary exploration and production activities;
the discovery of new oil and gas reserves;
the availability of pipelines and other means of transportation;
increased regulation of the means of transporting oil out of the Bakken basin by rail or road;
the availability and cost of capital;
production levels and geopolitical factors in other oil and gas producing countries;
the price and availability of alternative sources of energy; and
weather conditions.
The adverse effects of any of the events or circumstances describedthese factors could result in the following risks actually occurs,a reduction in our business, financial condition orcustomers’ exploration efforts, which could have a significant adverse effect on our results of operations.
We are exposed to potential unrecoverable losses that could have an adverse effect on our results of operations and financial condition. Our Energy business is subject to many hazards inherent in the industry, including blowouts, cratering, explosions, fires, loss of well control, loss of or damage to the wellbore or underground reservoir, damaged or lost drilling equipment, and damage or loss from inclement weather or natural disasters. Any of these hazards could suffer,result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental and natural resources damage, and damage to the property of others. We may be unable to obtain desired contractual indemnities for such hazards, and our insurance may not provide adequate coverage in certain instances. The occurrence of an event not fully indemnified or insured, or the failure or inability of a customer or insurer to meet its financial obligations, and resulting claims and litigation could result in substantial losses and have a significant adverse effect on our results of operations and financial condition.
Increased regulation of hydraulic fracturing could have an adverse impact on our customers. Many of our customers utilize hydraulic fracturing services, which is the process of creating or expanding cracks, or fractures, in formations underground where water, sand, and other additives are pumped under high pressure into the formation. Although we are not a provider of hydraulic fracturing services, many of our services complement the hydraulic fracturing process. Legislation that has been introduced in Congress to provide for broader federal regulation of hydraulic fracturing operations and the trading pricereporting and public disclosure of chemicals used in the fracturing process could be enacted. Additionally, the United States Environmental Protection Agency has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel fuel under the Safe Drinking Water Act and is completing the process of drafting guidance documents related to this asserted regulatory authority. Our customers’ operations could be adversely affected if additional regulation or permitting requirements were to be required for hydraulic fracturing activities, which could have an adverse effect on our results of operations.
Severe weather conditions could have an adverse effect on our customers and our ability to provide our services. Our Energy business is heavily concentrated in North Dakota and Montana, where severe weather conditions could result in a curtailment of our stockcustomers’ service requirements, damage to our facilities and equipment resulting in increased repair costs and a suspension of our operations, our inability to deliver services, and an overall decline in productivity, all of which could decline.
Risks Associated withresult in an adverse effect on our General Corporate Operationsresults of operations. In addition, inclement weather could result in the cancellation of events and Capital Redeployment
tournaments in our Sports business during peak seasons, which would have an adverse effect on our results of operations.
We may not be able to attract and retain qualified workers, which could have a significant adverse effect on our Energy business. Our Energy business operations require personnel with specialized skills and experience who can perform physically demanding work, and there is intense competition for these workers in the Bakken basin where our Energy business is concentrated. As a result workers may choose to pursue employment in fields that offer a more desirable work environment or better pay. Our inability to controlattract and retain such qualified workers could have an adverse effect on our productivity, the inherent risksquality of acquiringour service offerings, and integratingour ability to expand our operations, all of which could have an adverse effect on our results of operations.
We may sustain losses in our investment portfolio, which could have an adverse effect on our results of operations, financial condition, and liquidity. A substantial portion of our assets consists of investments in marketable securities that we classify as available-for-sale securities, which are adjusted to fair value each period. An adverse change in global economic conditions may result in a decline in the value of our marketable securities. We have not recognized declines in the value of marketable securities held since we have deemed such unrealized losses to be temporary. However, any such declines in value will be recognized as losses upon the sale of such securities or if such declines are deemed to be other than temporary. Any adverse changes in the financial markets and resulting declines in value of our marketable securities could have an adverse effect on our results of operations, financial condition, and liquidity.
Certain of our investments may subject us to greater risk and be less liquid than other investments in our portfolio. Our investments include significant interests in equity-method investees, investments in limited partnerships, and participation in corporate term loans. We have also entered into short sale transactions on certain financial instruments and have sold call and put options. We may continue to engage in similar investing activities in the future. Such investments may be subject to greater price fluctuations, may be more difficult to sell, and may be sold at prices that do not reflect their intrinsic value.
We may be unable to identify and acquire new businesses, which could adversely affecthave an adverse effect on our operations.long term growth. Acquisitions are a key element of our business strategy. We may not be able to identify and acquire acceptable acquisition candidates on favorableacceptable terms. Our inability to identify and acquire new businesses on acceptable terms in the future. could have an adverse effect on our long-term growth.
We may be requiredunable to issue equity securities in connection with future acquisitions,integrate new businesses, which could have an adverse effect on our results of operations, financial condition, and long-term growth. We may not be able to properly integrate acquired businesses, which could result in dilution of stockholders. Acquisitions maysuch businesses not performperforming as expected when the acquisition was madeconsummated and may bepossibly being dilutive to our overall operating results. We face additional acquisition risks, such as:Our inability to properly integrate acquired businesses could result from, among other things, the following:
our failure to retain and attract key employees;
our failure to retain and attract new customers;
our failure to develop effective sales and marketing capabilities; and
our failure to properly operate new lines of business.
| · | retaining and attracting key employees; | | |
| · | retaining and attracting new customers; | | | |
| · | increased administrative burden; | | | | | |
| · | developing our sales and marketing capabilities; | |
| · | managing our growth effectively; | | | | | | |
| · | integrating operations; | | | | | | | |
| · | operating a new line of business; and | | | | |
| · | increased logistical problems common to large, expansive operations. |
If we failOur inability to manage these acquisition risks successfully,integrate new businesses could have an adverse effect on our business could be harmed.
Our stockholders may be subject to the broad discretionresults of managementoperations, financial condition, and our Board of Directors. As we continue to identify new businesses and investment opportunities, our stockholders may not have an opportunity to evaluate the specific merits or risks of any proposed transactions or investments. As a result, our stockholders may depend on the broad discretion and judgment of management and our Board of Directors in connection with the application of our capital and the selection of acquisition or investment targets. There can be no assurance that determinations ultimately made by us will permit us to achieve profitable operations.long-term growth.
We may issue a substantial amountshares of our common stock in the future, which could causeresult in dilution to ourexisting stockholders and otherwise adversely affecthave an adverse effect on the price of our stock price.common stock. Our current primary business strategy is to make acquisitions. While we may make acquisition(s) in whole or in part with cash, as As part of suchour strategy to grow through acquisitions we may issue additional shares of common stock as consideration for such acquisition(s), which could be significant. To the extent that we make acquisitions and also may issue our sharescommon stock to employees and contractors as compensation. Any such issuances of common stock as consideration,will result in our existing stockholders’ equity interest may bebeing diluted. Any such issuanceSuch issuances of common stock will also increase the number of outstanding shares of common stock that will be eligibleavailable for sale in the future. Personsopen market, and those individuals receiving shares of our common stock in connection with these acquisitions may be more likely to sell, off their common stock, which may influencecould have an adverse effect on the price of our common stock.
Restrictions on the transfer of our common stock could inhibit certain transactions that may be beneficial to shareholders. In addition,order to preserve our tax benefit carryforwards, our Certificate of Incorporation generally prohibits the potential issuancetransfer of additional shares in connection with anticipated acquisitions could lessen demand for our common stock and other corporate securities if such a transfer would result in (i) a lower price than mightparty having an ownership interest of 4.9% or greater in the Company or (ii) an increased ownership interest of a party that already has an ownership interest of 4.9% or greater in the Company. This restriction, which is in effect until May 2015, could inhibit or prevent certain transactions that would otherwise be obtained. We may also issue common stock in the future for compensation purposes, in connection with strategic transactions or for other purposes, including in connection with financings.beneficial to stockholders.
Depending on our future activities and operations, weWe may be deemed an investment company, which could impose on us burdensome compliance requirements and restrict our activities, and may make it difficult for us to complete future business combinations or acquisitions.activities. The Investment Company Act of 1940, as amended (the “Investment Company Act”), requires registration,companies to register as an investment company of companies thatif they are engaged primarily in the business of investing, reinvesting, owning, holding, or trading securities. Generally, companies may be deemed investment companies under the Investment Company Act if they are viewed as engaging in the business of investing in securities or they own investment securities having a value exceeding 40% of certain assets. Depending on our future activities and operations, we may become subject to the Investment Company Act. While Rule 3a-2 ofAlthough the Investment Company Act provides an exemption that allows companies that may be deemed investment companies, but have a bona fide intent to engage primarily in a business other than that of investing in securities up to one year to engage in such other business activity,certain exemptions, we may not qualify for this or any other exemption under the Investment Company Act.of these exemptions. If we are deemed to be an investment company we may be subject to certain restrictions that may make it difficult for us to complete business combination,combinations, including restrictions on the nature of and custodial requirements for holding our investments and restrictions on our issuance of securities, which we may use as consideration in a business combination.
In addition, if we are deemed to be an investing company we may have imposed upon us additional burdensome requirements, including:including the following:
having to register as an investment company; | · | registration as an investment company; | | |
| · | adoption of a specific form of corporate structure; and | |
| · | reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. |
adopting a specific form of corporate structure; andhaving to comply with certain reporting, record keeping, voting, proxy, and disclosure requirements.
If we become subjectSuch additional requirements would require us to the Investment Company Act, compliance with these additional regulatory burdens would requireincur additional costs and expenses. There can be no assurance that we will not be deemedhave an investment company, as defined under Sections 3(a)(1)(A) and (C) of the Investment Company Act or that we will qualify for the exemption under Rule 3a-2 of the Investment Company Act.
We may sustain losses in our investment portfolio due to adverse changes in the global credit markets. Global economic conditions have been challenged in the past by slowing growth and the sub-prime debt devaluation crisis, causing worldwide liquidity and credit concerns. More recently, credit and sovereign debt issues have destabilized certain European economies and thereby increased global economic uncertainties. An adverse change in global economic conditions may adversely impact our financial results. A substantial portion of our assets consists of investments in marketable securities that we hold as available-for-sale and we mark them to market. While there has been a decline in the trading values of certain of the securities in which we have invested, we have not recognized a material losseffect on our securities as the unrealized losses incurred were deemed to be temporary. We expect to realize the full valueresults of alloperations and our marketable securities upon maturity or sale, as we have the intent and ability to hold the securities until the full value is realized. However, we cannot provide any assurance thateffectively carry out our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge in the future that could adversely impact our financial results.business plan.
If the financial institutions that maintain our cash, cash equivalents and marketable securities experience financial difficulties, which is more likely during a weakened state of the economy, ourOur cash balances maycould be adversely impacted. affected by the instability of financial institutions.We maintain our cash, cash equivalents, and marketable securities with certain financial institutions inat which our balances exceed the limits that are insured by the Federal Deposit Insurance Corporation. If the underlying financial institutions fail or other adverse conditions occur in the financial markets,There could be an impact on our cash balances may be impacted.if financial institutions at which we maintain our cash and investments experience financial difficulties, which would have an adverse effect on our results of operations and financial condition.
We may not be unableable to realize thefully utilize our tax benefits, of our netwhich could result in increased cash payments for taxes in future periods. Net operating losses (“NOLs”). NOLs may be carried forward to offset federal and state taxable income in future years and eliminatereduce the amount of cash paid for income taxes otherwise payable on such taxable income, subject to certain limits and adjustments. Based on current income tax rates, ifIf fully utilized our NOLs and other carry-forwards could provide a benefit to us ofwith significant tax savings in future tax savings. However, ourperiods. Our ability to useutilize these tax benefits in future years will depend upon our ability to generate sufficient taxable income and to comply with the rules relating to the preservation and use of NOLs. The potential benefit of the NOLs and other carry-forwards may be limited or permanently lost as a result of the amount of following:
our otherwise taxable income. If we do not haveinability to generate sufficient taxable income in future years to use the taxsuch benefits before they expire, we will loseexpire;
a change in control of the benefit of these NOLs permanently. Consequently, our ability to use the tax benefits associated with our NOLs will depend significantly on our success in identifying suitable new business opportunities and acquisition candidatesCompany that maximize our NOLs, and once identified, successfully becoming established in this new business line or consummating such an acquisition.
Additionally, if we underwent an ownership change, the NOLs would be subject to an annual limittrigger limitations on the amount of the taxable income in future years that may be offset by our NOLs generatedand other carry-forwards that existed prior to the ownership change in control; and
examinations and we may be unable to use a significant portion or all of our NOLs to offset taxable income. We have adopted a tax benefits preservation planaudits by the Internal Revenue Service and filed an amendment to our Certificate of Incorporation that restricts certain transfers of our common stock withother taxing authorities could reduce the intention of reducing the likelihood of an ownership change. However, we cannot assure you that these measures will be effective in deterring or preventing all transfers of our common stock that could result in such an ownership change.
The amount of NOLs and other credit carry-forwards that we have claimed has not been audited or otherwise validated by the U.S. Internal Revenue Service, or the IRS. The IRS could challenge our calculation of the amount ofare available for future years.
We maintain a full valuation allowance against our NOLs and our determinations asother carry-forwards due to when a prior change in ownership occurred, and other provisions of the Internal Revenue Code may limituncertainty regarding our ability to carry forward our NOLs to offsetgenerate sufficient taxable income in future years. If the IRS was successful with respectperiods. Our inability to any such challenge, the potential tax benefit thatutilize the NOLs would provide usand other carry-forwards could be substantially reduced.result in increased cash payments for taxes in future periods.
We may be required to payliable for additional income taxes which could negatively affect our results of operations and financial position. Our tax provision continues to reflect judgment and estimation regarding components ofupon examination or audit by the settlement such as interest calculations and the application of the settlements to foreign, state and local taxing jurisdictions. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our Consolidated Financial Statements and may cause a higher effective tax rate that could materially affect our income tax provision, results of operations or cash flows in the period or periods for which such determination is made. While the tax authorities in the foreign jurisdictions in which we formerly operated continue to audit our tax returns for fiscal years subsequent to 1999, the potential outcome of these audits is uncertain and could result in material tax provisions or additional tax payments in future periods.authorities.
We may be subject to a higher effective tax rate that could negatively affect our results of operations and financial position. We are subject to income and other taxes in the United States Singapore and othercertain foreign taxing jurisdictions in which we formerly operated. The determination of our worldwideOur tax provision for income taxesreflects judgments and current and deferred tax assets and liabilities requires judgment and estimation and isestimates, including settlements, that are subject to audit and redetermination by the various taxing authorities. Although we believe our tax estimates are reasonable, the following factors could cause our effectiveultimate outcome of these tax rate to bematters may differ materially different than taxfrom the amounts recorded in our Consolidated Financial Statements:
| · | the jurisdiction inconsolidated financial statements, which profits were determined to be earned and taxed; | | |
| · | adjustments to estimated taxes upon finalization of various tax returns; | | | |
| · | changes in available tax credits; | | | | | |
| · | changes in share-based compensation expense; | | | | |
| · | changes in tax laws, the interpretation of tax laws either in the United States, Singapore or other foreign taxing jurisdictions or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
| · | the resolution of issues arising from tax audits with various tax authorities. | |
The factors noted above may cause a higher effective tax rate that could materially affecthave an adverse effect on our income tax provision, results of operations or cash flows in the period or periods for which such determination is made.
and financial position.
We may be engaged in legal proceedingsThe Energy business carries inherent risks that could cause us to incur unforeseen expenses and could occupy aresult in significant amount of our management’s time and attention.litigation. From time to time we are subject to litigation or claims that arise in the normal course of business. While the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, and results of operations could be materially and adversely affected.
Internal controls weaknesses that are currently immaterial may become material in future periods. We have identified certain deficiencies in internal controls over financial reporting as immaterial and therefore not requiring disclosure in our public filings with the Securities and Exchange Commission. Changes in circumstances could result in such deficiencies becoming material, which could result in material misstatements in our financial statements and required public disclosure if the appropriate remediation action is not undertaken.
A significant disruption in, or breach in security of, our information technology systems could adversely affect our business. We rely on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of critical business processes and activities. We also collect and store sensitive data, including confidential business information and personal data. These systems may be susceptible to damage, disruptions, or shutdowns due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes, or other unforeseen events. In addition, security breaches of our systems could result in the misappropriation or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers, or suppliers. Any such events could disrupt our operations, inhibit our ability to produce financial information, damage customer relationships and our reputation, and result in legal claims related to businesses that we wound down or sold, thatproceedings, liability, or penalties under privacy laws, each of which could negativelyadversely affect our business operations and our financial position. Such disputes could cause us to incur unforeseen expenses, could occupy a significant amount of our management’s time and attention, and could negatively affect our business operations and financial position.statements.
Internal control issues that appear minor nowWe may later become material weaknesses.incur impairments charges related to our long-lived assets. We are required to publicly report on deficiencies or weaknesses in our internal control over financial reporting that meet a materiality standard as required by law and related regulations and interpretations. Management may, at a point in time, accurately categorize a deficiency or weakness as immaterial or minor and therefore not be required to publicly report such deficiency or weakness. Such determination, however, does not preclude a change in circumstances such thatperiodically evaluate the deficiency or weakness could, at a later time, become a material weakness that could have a material impact on our resultscarrying value of operations.
Manmade problems such as computer viruses or terrorism may disrupt our operations and harm our operating results. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have an adverse effect on our business, operating results, and financial condition. In addition, the effects of war or acts of terrorism could have an adverse effect on our business, operating results, and financial condition. Further, as a company with headquarters and operations located in the United States, we may be impacted by actions against the United States. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.
Our future financial results could be adversely impacted by asset impairments or other charges. We evaluate our long-lived assets, including our property and equipment, indefinite-livedidentified intangible assets, and goodwill for impairment. In performing these assessments we project future cash flowsrely on a discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and compare these cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans, estimates, and judgmental assumptions. judgments.
We perform the assessment of potentialcould incur impairment on our goodwill, and indefinite-lived intangible assets at least annually, or more oftencharges if events and circumstances warrant. We perform the assessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due to various external or internal factors. If we determine that our estimates of future cash flows were inaccurate or our actual results are materially different from what we have predicted, we could record impairment charges in future periods,such cash flow projections, which could have a material adverse effect on our financial position and results of operations. In 2014, the Company incurred a goodwill impairment charge of $36.7 million
Risks Related to the Business of our Segments
Our oilfield services business depends on the oil and gas industry and particularly on the activity level of the North American oil and gas industry. Our markets may be adversely affected by industry conditions that are beyond our control.We depend on our customers’ willingness to commit operating and capital expenditures to explore for, develop and produce oil and natural gas in North America. Weakness in oil and natural gas prices, or our customers’ perceptions that oil and natural gas prices will decreasecould incur significant costs in the future could result in a reduction in the utilization of our equipmentto maintain regulatory compliance. Our Energy and result in lower revenues or rates for our services. Our customers’ willingness to undertake these activities depends largely upon prevailing industry conditions thatSports businesses are influenced by many factors over which we have no control, including:
| · | the supply of and demand for oil and natural gas, including current natural gas storage capacity and usage; |
| · | the level of prices and expectations about future prices of oil and natural gas; | | | |
| · | the cost of exploring for, developing, producing and delivering oil and natural gas; | | |
| · | the expected rates of declining current production; | | | | | | | | | | |
| · | the discovery rates of new oil and natural gas reserves; | | | | | | | |
| · | available pipeline and other transportation capacity; | | | | | | | | |
| · | inclement weather conditions can affect oil and natural gas operations over a wide area; | |
| · | domestic and worldwide economic conditions; | | | | | | | | | | | |
| · | political instability in oil and natural gas producing countries; | | | | | | |
| · | technical advances affecting energy consumption; | | | | | | | | | |
| · | the price and availability of alternative fuels; | | | | | | | | | | | | |
| · | the access to and cost of capital for oil and natural gas producers; and | | | | |
| · | merger and divesture activity among oil and natural gas producers. | | | | | |
The level of oil and natural gas exploration and production activity in the United States is volatile. Steel Energy has a significant concentration of operations in North Dakota and Montana resulting from the development of the Bakken Shale Formation. Our operations will be particularly affected by the level of drilling and production in the Bakken Shale Formation. A reduction in the activity levels of our customers could cause a decline in the demand for our services and may adversely affect the prices that we can charge or collect for our services. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, would affect demand for the services we provide. A material decline in oil and natural gas prices or drilling activity levels or sustained lower prices or activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows. Moreover, reduced discovery rates of new oil and natural gas reserves, or a decrease in the development rate of reserves, in our market areas, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could also have a material adverse impact on our business, even in a stronger oil and natural gas price environment.
We operate in a cyclical and volatile industry. Changes in current or anticipated future prices for crude oil and natural gas are a primary factor affecting spending and drilling activity, and decreases in spending and drilling activity can cause rapid and material declines in demand for our services.
The nature of our operations presents inherent risks of loss that could adversely affect our results of operations. Our oilfield services operations are subject to many hazards inherent in the drilling, workover and well-servicing and pressure pumping industries, including blowouts, cratering, explosions, fires, loss of well control, loss of or damage to the wellbore or underground reservoir, damaged or lost drilling equipment and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental and natural resources damage and damage to the property of others.
Our sports-related operations are subject to the potential for injuries by participants in tournaments, classes and clinics.
Accidents may occur, we may be unable to obtain desired contractual indemnities, and our insurance may prove inadequate in certain cases. The occurrence of an event not fully insured or indemnified against, or the failure or inability of a customer or insurer to meet its indemnification or insurance obligations, could result in substantial losses. In addition, insurance may not be available to cover any or all of these risks. Even if available, insurance may be inadequate or insurance premiums or other costs may rise significantly in the future making insurance prohibitively expensive. Moreover, our insurance coverage generally provides that we assume a portion of the risk in the form or a deductible or self-insured retention. We may choose to increase the levels of deductibles (and thus assume a greater degree of risk) from time to time in order to minimize our overall costs.
There is potential for excess capacity in the oilfield services industry. Because oil and natural gas prices and drilling activity are at high levels and service companies are seeing increasing demand for services and attractive returns on investments, oilfield service companies are ordering new equipment to expand their capacity. A growing supply of equipment may result in an increasingly competitive environment for oilfield service companies, which may lead to lower prices and utilization for our services that would adversely affect our business.
We may incur significant costs and liabilities as a result of environmental, health and safety laws and regulations that govern our operations. Our oilfield services operations arecurrently subject to federal, state, and local laws and regulations that impose limitations onpertaining to worker safety, the dischargehandling of pollutants intohazardous materials, transportation standards, and the environment, and establish standards formay be subject to additional regulations in the handling and cleanup of waste materials,future, including toxic and hazardous wastes. Our sports-related businesses must also comply with laws and regulationsany regarding the safetyemission of participants in tournaments and clinics. To comply with these laws and regulations, wegreenhouse gases. We may be required to obtain and maintain permits, approvals, and certificates from various governmental authorities.authorities and incur other capital and operational costs in order to comply with such laws and regulations. Failure to comply with such laws and regulations could result in the assessment of penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, or orders to limit or cease certain operations. In addition, certain such laws impose joint and several liability that could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions. While the cost of such compliance has not been significant in the past, new laws, regulations, and enforcement policies could become more stringent and significantly increase our compliance costs or limit our future business opportunities, which could have a material adverse impacteffect on our results of operations and financial condition.
We may not be able to implement commercially competitive services and products, which could have an adverse effect on our results of operations.
It is not possible to predict how new governmental mandates regarding the emission of greenhouse gases could affect our business; however, any such future laws or regulations could require our customers to devote potentially material amounts of capital or other resources in order to comply and increase their operating costs, which could result in decreased demand The market for our services. Such future laws or regulations could have a material adverse impact on our business.
Failure to comply with environmental, health and safety laws and regulations could result in the assessment of administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and, to a lesser extent, orders to limit or cease certain operations. Certain environmental laws impose strict and/or joint and several liability, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions.
Potential adoption of future state or federal laws or regulations surrounding the hydraulic fracturing process could make it more difficult to complete oil or natural gas wells and could materially and adversely affect our business, financial condition and results of operations. Many of our customers utilize hydraulic fracturing services during the life of a well. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in formations underground where water, sand and other additives are pumped under high pressure into the formation. Although we are not a provider of hydraulic fracturing services, many of our services complement the hydraulic fracturing process.
Legislation that has been introduced in Congress to provide for broader federal regulation of hydraulic fracturing operations and the reporting and public disclosure of chemicals used in the fracturing process could be enacted. Additionally, the U.S. Environmental Protection Agency has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel fuel under the Safe Drinking Water Act and is completing the process of drafting guidance documents related to this asserted regulatory authority. If additional levels of regulation or permitting requirements were imposed through the adoption of new laws and regulations, our customers’ business and operations could be subject to delays and increased operating and compliance costs, which could negatively impact the number of active wells in the marketplaces we serve. Therefore, the adoption of future federal, state or municipal laws regulating the hydraulic fracturing process could negatively impact our business.
Changes in trucking regulations may increase our costs and negatively impact our results of operations. We operate trucks and other heavy equipment associated with many of our oilfield service offerings. We therefore are subject to regulation as a motor carrier by the United States Department of Transportation and by various state agencies, whose regulations include certain permit requirements of state highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations by requiring changes in fuel emission limits, the hours of service regulations that govern the amount of time a driver may drive or work in any specific period, limits on vehicle weight and size and other matters, including safety requirements.
Severe weather could have a material adverse effect on our business. Our Steel Energy business is heavily concentrated in North Dakotacharacterized by continual technological developments to provide better and Montana, where it could be materiallymore reliable performance and adversely affected by severe weather. Repercussions of severe weather may include:
| · | curtailment of services; | | |
| · | weather-related damage to facilities and equipment, resulting in suspension of operations; | |
| · | inability to deliver equipment, personnel and products; and |
| · | increased downtime and loss of productivity. | | | |
These constraints could reduce our revenues, delay our operations and materially increase our operating and capital costs. Unusually warm winters may also adversely affect the demand for our oilfield services by decreasing the demand for natural gas.
We may be unable to attract and retain a sufficient number of skilled and qualified workers.services. Our oilfield services operations require personnel with specialized skills and experience who can perform physically demanding work. Additionally, there is intense competition for these workers in the North Dakota and Montana area where our Steel Energy business is concentrated. As a result of the volatility of the oilfield service industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment or better pay. Similarly, our CrossFit South Bay business requires specially trained and certified instructors. Our ability to be productive and profitable depends on our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force.
If we are unableinability to implement commercially competitive services and access commercially competitive products in a timely manner in response to changes in technology or our existing technologies and work processes becoming obsolete could have an adverse effect on our results of operations.
Our businesses do not have long-term contracts with their customers, which could result in customer turnover and other adverse effects to our business. Neither our Energy business nor our Sports business has long-term contracts with its customers. Both businesses rely on the quality of the service provided and established long-term relationships to retain customers. Absent such long-term contracts, customers can cease using our services for any reason with minimal notice. This can lead to us losing customers or making price concessions in order to retain customers, which could have an adverse effect on our business and revenue could be materially and adversely affected. The market for our oilfield services is characterized by continual technological developments to provide better and more reliable performance and services. If we are not able to implement commercially competitive services and access commercially competitive products in a timely manner in response to changes in technology, our business and revenue could be materially and adversely affected. Likewise, if our proprietary technologies, equipment and facilities, or work processes become obsolete, we may no longer be competitive, and our business and revenue could be materially and adversely affected.results of operations.
Conservation measures and technological advances could reduce demand for oil and gas. Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and gas. Management cannot predict the impactLoss of the changing demand for oil and gas services and products, and any major changes maya significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.financial condition.
The loss of one or morecustomer base of our Energy business is concentrated. For the year ended December 31, 2014, revenues from Oasis Petroleum and Continental Resources represented 20.7% and 20.3%, respectively, of our consolidated revenues, and the fifteen largest customers could materially and adversely affectin the Energy business represented approximately 81.1% of our business, financial condition and results of operations . Our oilfield services (“Steel Energy”) customer base is concentrated andconsolidated revenues. The loss of a significant customer could causehave a material adverse effect on our revenue to decline substantially. For example, we had three customers comprising 10 or more percentresults of operations and financial condition.
The beneficial ownership of our revenues and our top 15 customers comprised approximately 89% of our Steel Energy revenues for the year ended December 31 2012. If a major customer decided not to continue to use our services, revenue could decline and our operating results and financial condition could be harmed.
Risks Relating to our Ownership and Management Structure
Warren G. Lichtenstein, our Chairman, Jack Howard, a member of our Board of Directors, and certain other officers and an additional director, through their affiliations withcommon stock by Steel Partners provides it with control, and the controllercommon management shared with other Steel Partners’ entities may result in the interests of a majoritySteel Partners differing from the interests of our outstanding common stock, have the ability to exert significant influence over our operations.other shareholders. At December 31, 2012,2014, SPH Group Holdings LLC, (“SPHG Holdings”), SPH Group LLC (“SPHG”),an indirect wholly-owned subsidiary of Steel Partners, Holdings L.P. (“Steel Holdings”) and Steel Partners Holdings GP Inc. (“Steel Holdings GP,” and collectively, with SPHG Holdings, SPHG and Steel Holdings, “Steel Partners”) beneficially owned approximately 51.2%58.0% of our outstanding common stock. Steel Holdings GP isWarren G. Lichtenstein, the chairman of our board and chief executive of our Sports business, serves as executive chairman of the general partner of Steel Holdings, the managing member of SPHG and the manager of SPGH Holdings. Warren G. Lichtenstein, our Chairman and President of a subsidiary of ours, serves as Chairman and Chief Executive Officer of Steel Holdings GP, andPartners; Jack Howard, a director and a Vice President of a subsidiary of ours,our principal executive officer, serves as President and a director of the general partner of Steel Holdings GP.Partners. In their capacities as directors and senior executive officers of the general partner of Steel Holdings GP,Partners, Messrs. Lichtenstein and Howard generally have the ability to determine the outcome of any action requiring a stockholder vote, including the election of our Board of Directors, or the approval of amendments to our certificate of incorporation, as amended, and the approval of any proposed merger. The interests of Messrs. Lichtenstein and Howard, as well as those of Steel Partners and its affiliates in such matters may differ from the interests of our other stockholders in some respects. In addition, employees and affiliates of Steel Partners hold positions with us, including John Quicke, a member of our Board of Directors and chief executive of our Interim President and Chief Executive Officer, Mark Zorko,Energy business, James F. McCabe, Jr., our Chief Financial Officer,chief financial officer, and Leonard McGill, General Counsel.our general counsel.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
SteelThe Energy
Rogue leases a shop facility business owns four buildings in Williston, North Dakota from Sun Well, which is 3,200 square feet. Rogue currently leases 10 apartments for employees’ use while on location with leasesND, including one that expire on or through November 30, 2016.
Sun Well ownsserves as its headquarters and operations hub in Williston, North Dakota, which is 21,760 square feet. In addition, Sun Well leases 2,232 square feet ofthe Bakken basin along with separate buildings with office and shop and storagespace. To support its other operations,
the Energy business owns shop space in Sidney, Montana, whichTexas and leases shop space in Colorado under an arrangement that expires March 15, 2014,in 2015. The Energy business also leases shop space and 2,205 square feetoffice space under month-to-month arrangements on an as needed basis, and owns and leases housing for temporary living arrangements for certain of its employees.
The Sports business has a lease for office space in Kenmare, North Dakota,Hermosa Beach, CA, that expires in June 2015, which serves as its headquarters. The Sports business has a lease for approximately 27.9 acres of land in Yaphank, NY, for its baseball services operation that expires March 31, 2013. Sun Well also leases a 2,400 square foot shop facility in Kenmare, North DakotaDecember 2016. Under this lease the Company has two extension options and a 1,000 square footright of shop space in Dickinson, North Dakota on a month-to-month basis.
Steel Sports
Steel Sports, Inc, our sports-related acquisition team, leases its 2,038 square foot headquarters in Hermosa Beach, California, which expires November 30, 2014. Baseball Heaven leases 27.9 acres in Yaphank, New York where it has built four full-size and three youth-size fields along with a restaurant. Baseball Heaven recently began construction on an approximately 12,000 square foot indoor training facility on the property. The indoor training facility is expected to be completed by mid-June 2013. The Baseball Heaven lease expires December 13, 2016, with two options to extend and a first right of refusal to purchase the property. CrossFit South Bay leasesparcel. The Sports business also has a lease for 2,300 square footfeet for its Crossfit® facility in Hermosa Beach, California, whichCA, that expires onin July 31, 2015.2015 and a lease for 9,940 square feet for its Crossfit® facility in Torrance, CA, that expires in March 2023. In addition, the Sports business has leases in various states for small administrative offices to support its youth soccer operation.
The Company believes that its facilities are adequate to meet its needs.
Item 3. Legal Proceedings
From time to time we are subject to litigation or claims including claims related to businesses that we wound down or sold, which are normalarise in the normal course of business, and whilebusiness. While the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position or results of operations or cash flows.operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, and results of operations and cash flows could be materially and adversely affected.
For an additional discussion of certain risks associated with legal proceedings, see “Item 1A. Risk Factors” of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is currently traded in the over the counter market and is quoted on the OTCQB Marketmarketplace under the symbol “SXCL.” In connection with the change of our name to Steel Excel Inc. on October 3, 2011, our symbol was changed from ADPT.PK to the current symbol SXCL. In addition, until August 4, 2010, our common stock was traded on the NASDAQ Global Market. Therefore,The following table sets forth the high and low closing prices shown below include the NASDAQ Global Market prices through August 4, 2010 and then include the OTCQB Market prices thereafter. Further, as indicated earlier in this Annual Report on Form 10-K, we effected the Reverse/Forward Split on October 3, 2011. The prices shown below for the date ranges prior to October 3, 2011 have been retroactively adjusted to give effect to the Reverse/Forward Split.
each period indicated.
| Fiscal Year Ended December 31, 2012 | | High | | | Low | |
| | | | | | | |
| Three-month period ended March 31, 2012 | | $ | 28.50 | | | $ | 23.97 | |
| Three-month period ended June 30, 2012 | | $ | 28.49 | | | $ | 25.25 | |
| Three-month period ended September 29, 2012 | | $ | 27.52 | | | $ | 24.90 | |
| Three-month period ended December 31, 2012 | | $ | 25.51 | | | $ | 23.25 | |
| | | | | | | | | |
| | | | | | | | | |
| Fiscal Year Ended December 31, 2011 | | High | | | Low | |
| | | | | | | | | |
| Three-month period ended April 1, 2011 | | $ | 30.40 | | | $ | 28.00 | |
| Three-month period ended July 1, 2011 | | $ | 30.40 | | | $ | 27.90 | |
| Three-month period ended September 30, 2011 | | $ | 30.10 | | | $ | 26.20 | |
| Three-month period ended December 31, 2011 | | $ | 26.90 | | | $ | 22.70 | |
|
| | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| | High | | Low | | High | | Low |
| | | | | | | | |
| Quarter Ended March 31, | $ | 33.00 |
| | $ | 29.00 |
| | $ | 27.30 |
| | $ | 24.76 |
|
| Quarter Ended June 30, | $ | 50.00 |
| | $ | 30.00 |
| | $ | 29.00 |
| | $ | 26.07 |
|
| Quarter Ended September 30, | $ | 35.35 |
| | $ | 32.00 |
| | $ | 29.65 |
| | $ | 28.75 |
|
| Quarter Ended December 31, | $ | 32.50 |
| | $ | 23.50 |
| | $ | 29.90 |
| | $ | 27.00 |
|
As of March 6, 2013,February 28, 2014, there were approximately 3018 registered stockholdersholders of record of our common stock. This number of registered holdersstock, which does not include holders that have shares of common stock held for them “in street name,” meaning the shares are held for their accounts by a broker or other nominee.
Dividends
No dividends have been paid on the Company’s common stock.
We have not declared or paid cash dividendsapplied for listing on the Nasdaq Stock Market (the “Nasdaq”). There can be no assurance that our application will be accepted. SPH Group Holdings LLC, a wholly owned subsidiary of Steel Partners Holdings L.P. (collectively, “Steel Partners”) beneficially owns more than 50% of our common stock. However,As a result, we remain committedwould be considered a “controlled company” under the corporate governance rules of the Nasdaq. “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group, or another company. Steel Partners and its affiliates have filed a Statement of Beneficial Ownership on Schedule 13D with the Securities and Exchange Commission relating to providing valueits holdings. On this basis, we propose to allavail ourselves of the “controlled company” exception under the Nasdaq rules and not be subject to the Nasdaq listing requirements that would otherwise require us to have: (a) a Board of Directors consisting of a majority of independent directors; (b) compensation of our stockholders,executive officers determined by a majority of our independent directors or a compensation committee consisting solely of independent directors; and (c) director nominees selected, or recommended for the Board of Director’s selection, either by a majority of our independent directors or a nominating committee consisting solely of independent directors. The Board of Directors has established a Compensation Committee and a Nominating and Governance Committee, each of which may include paying cash dividends inhas two independent members, and an Audit Committee, which consists solely of independent directors. Warren G. Lichtenstein, Jack L. Howard, and John J. Quicke, each of whom is associated with Steel Partners, serve as three of the future.six members of our Board of Directors. The other members are John Mutch, Gary W. Ullman, and Robert J. Valentine, who are independent directors.
Issuer PurchasesIf the collective ownership of Equity Securities
In November 2012,Steel Partners were to decrease to 50% or less of our outstanding common stock, our Nominating and Governance Committee and Compensation Committee would be required to have a majority of independent directors within ninety days and be fully independent within one year, and our Board of Directors would need to consist of a majority of independent directors within one year.
The following table sets forth information as of December 31, 2014, with respect to the Company's equity compensation plans under which securities of the Company are authorized afor issuance.
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
| | | | | | | |
| Equity compensation plans approved by security holders | | 70,750 |
| | $ | 23.75 |
| | 1,945,436 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
|
On December 16, 2013, and June 24, 2014, the Company's Board of Directors authorized stock repurchase programprograms to purchaseacquire up to 200,000 shares and 500,000 shares, respectively, of ourthe Company's common stock. DuringAny such repurchases will be made from time to time on the fiscal yearopen market at prevailing market prices or in negotiated transactions off the market in compliance with applicable laws and regulations. The repurchase programs are expected to continue indefinitely, unless terminated by the Board of Directors. No repurchases were made under the repurchase programs during the three months ended December 31, 2012, we2014. The maximum number of shares that may yet be repurchased approximately 0.1 million shares of our common stock pursuant tounder the programprograms was 382,845 at an average price of $24.82 for an aggregate repurchase price of $2.8 million, excluding brokerage commissions. The program has no specific expiration date.
| | | (a) | | | (b) | | | (c) | | | (d) | |
| Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |
| | | | | | | | | | | | | |
| Month of October 2012 | | | - | | | $ | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Month of November 2012 | | | 30,423 | | | $ | 24.76 | | | | - | | | | 169,577 | |
| | | | | | | | | | | | | | | | | |
| Month of December 2012 | | | 81,400 | | | $ | 24.85 | | | | - | | | | 88,177 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 111,823 | | | $ | 24.82 | | | | - | | | | | |
Stock Performance GraphDecember 31, 2014.
The following Performance Graphstock performance graph compares the cumulative total stockholder return on our common stock to the Russell 2000 Index and related informationthe PHLX Oil Service Sector. The graph assumes that $100 was invested in each of the investments on March 31, 2008, with any dividends reinvested. This stock performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC,Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 (the “Exchange Act”) except to the extent that we specifically incorporate it by reference into such filing.
The following performance graph compares the performance of our common stock to the Russell 2000 index and PHLX Oil Service Sector. The graph assumes that $100 was invested on March 31, 2007 and its relative performance was tracked through December 31, 2012 in our common stock and in each index.
Item 6. Selected Financial Data
The following selected financial informationSelected Financial Data has been derived from our consolidated financial statements. Through September 2010, the ConsolidatedCompany provided enterprise-class external storage products and software to original equipment manufacturers (the "Predecessor Business"), at which time the Company wound down its remaining business operations. The Predecessor Business is reported as a discontinued operation in all periods presented in the Selected Financial Statements.Data. The information set forth below is not necessarily indicative of results of future operationsCompany began its Sports and Energy businesses in June 2011 and December 2011, respectively.
In December 2010, we changed our fiscal year-end date from March 31 to December 31. Accordingly, the Selected Financial Data includes a nine-month transition period from April 1, 2010, to December 31, 2010.
The Selected Financial Data should be read in conjunction with “Management’sour financial statements and notes thereto and with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. In July 2012, we reclassified our baseball uniform and tournament business, The Show, to discontinued operations. In July 2011, we reclassified our enterprise-class external storage products business (the “Aristos Business”) to discontinued operations. We sold our data storage and software solutions and products business (the “DPS Business”) to PMC-Sierra, Inc. (“PMC-Sierra”) in June 2010 and sold our Snap Server Network Attached Storage business (the “Snap Server NAS business”) to Overland Storage, Inc. (“Overland”) in June 2008. The information below has been reclassified to reflect the DPS Business, the Snap Server NAS business, the Aristos Business, and The Show as discontinued operations and prior periods have been reclassified to conform to this presentation.
| | | Fiscal Year Ended December 31, | | | | | | Fiscal Year Ended March 31, | |
| | | 2012(8) | | | 2011(2) | | | 2010(3)(4) | | | 2010(3)(5) | | | 2009(3)(6) | |
| | | (in thousands, except per share amounts) | |
Consolidated Statements of Operations Data(1): | | | | | | | | | | | | | | | |
| Net revenues | | $ | 100,104 | | | $ | 2,502 | | | $ | - | | | $ | - | | | $ | - | |
| Cost of revenues | | $ | 66,064 | | | $ | 1,459 | | | $ | - | | | $ | - | | | $ | - | |
| Gross margin | | $ | 34,040 | | | $ | 1,043 | | | $ | - | | | $ | - | | | $ | - | |
| Total operating expenses | | $ | 28,223 | | | $ | 9,554 | | | $ | 14,989 | | | $ | 30,535 | | | $ | 29,653 | |
| Income (loss) from continuing operations, net of taxes | | $ | 22,179 | | | $ | 68 | | | $ | (17,386 | ) | | $ | (17,232 | ) | | $ | (6,499 | ) |
Income (loss) from discontinued operations, net of taxes attributable to Steel Excel | | $ | (1,508 | ) | | $ | 1,696 | | | $ | (11,289 | ) | | $ | (1,438 | ) | | $ | (8,418 | ) |
Gain on disposal of discontinued operations, net of taxes attributable to Steel Excel | | $ | - | | | $ | 5,005 | | | $ | 10,916 | | | $ | 1,236 | | | $ | 4,727 | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 20,693 | | | $ | 6,769 | | | $ | (17,759 | ) | | $ | (17,434 | ) | | $ | (10,190 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) Per Share Data: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) | | $ | (1.45 | ) | | $ | (0.54 | ) |
Income (loss) from discontinued operations, net of taxes | | $ | (0.16 | ) | | $ | 0.62 | | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.31 | ) |
| Net income (loss) | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) | | $ | (1.46 | ) | | $ | (0.85 | ) |
| Diluted | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) | | $ | (1.45 | ) | | $ | (0.54 | ) |
Income (loss) from discontinued operations, net of taxes | | $ | (0.16 | ) | | $ | 0.61 | | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.31 | ) |
| Net income (loss) | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) | | $ | (1.46 | ) | | $ | (0.85 | ) |
| Shares used in computing income (loss) per share | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 12,110 | | | | 10,882 | | | | 11,609 | | | | 11,920 | | | | 11,977 | |
| Diluted | | | 12,133 | | | | 10,897 | | | | 11,609 | | | | 11,920 | | | | 11,977 | |
| | | December 31, | | | March 31, | |
| | | | 2012 | | | | 2011 | | | | 2010(3) | | | | 2010(4) | | | | 2009(5) | |
| | | (in thousands, except per share amounts) | |
| Consolidated Balance Sheets Data: | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and marketable securities(7) | | $ | 270,684 | | | $ | 323,428 | | | $ | 352,411 | | | $ | 375,347 | | | $ | 376,592 | |
| Restricted cash and/or marketable securities | | $ | - | | | $ | - | | | $ | 1,676 | | | $ | - | | | $ | - | |
| Total assets | | $ | 466,495 | | | $ | 368,677 | | | $ | 367,552 | | | $ | 429,076 | | | $ | 450,107 | |
Long-term liabilities(7) | | $ | 19,155 | | | $ | 10,767 | | | $ | 13,189 | | | $ | 9,568 | | | $ | 14,974 | |
| Stockholders' equity | | $ | 431,901 | | | $ | 351,469 | | | $ | 346,266 | | | $ | 397,703 | | | $ | 410,880 | |
Working capital(7) | | $ | 276,233 | | | $ | 324,130 | | | $ | 356,797 | | | $ | 377,035 | | | $ | 385,219 | |
| (1) | Prior period information has been reclassified to conform to the current period presentation. The reclassification for discontinued operations had no impact on net income (loss), total assets or stockholders’ equity. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Nine-Month Period Ended December 31, 2010(D) |
| | 2014 (A) | | 2013 (B) | | 2012 (C) | | 2011 | |
| | (in thousands, except per share data) |
| Statements of Operations Data: | | | | | | | | | |
| Net revenues | $ | 210,148 |
| | $ | 120,028 |
| | $ | 100,104 |
| | $ | 2,502 |
| | $ | — |
|
| Income (loss) from continuing operations before income taxes | $ | (19,522 | ) | | $ | 7,911 |
| | $ | 6,467 |
| | $ | (158 | ) | | $ | (9,784 | ) |
| Net income (loss) from continuing operations | $ | (24,269 | ) | | $ | 16,391 |
| | $ | 22,179 |
| | $ | 68 |
| | $ | (17,386 | ) |
| Net income (loss) from continuing operations attributable to Steel Excel Inc. per share of common stock - basic and diluted | $ | (2.06 | ) | | $ | 1.31 |
| | 1.83 |
| | $ | 0.01 |
| | $ | (1.50 | ) |
| | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 479,354 |
| | $ | 538,694 |
| | $ | 466,495 |
| | $ | 368,677 |
| | $ | 367,552 |
|
| Long-term obligations | $ | 79,874 |
| | $ | 93,484 |
| | $ | 14,397 |
| | $ | — |
| | $ | — |
|
The following actions affect the comparability of the data of the periods presented in the above table:
| (2) | The income from discontinued operations, net of taxes, for fiscal 2011 includes the release of a $5.0 million purchase price holdback related to the sales of our DPS Business to PMC-Sierra and the sale of $1.9 million of patents related to our DPS Business. |
| (A) | (3) | We recorded restructuring charges in the Transition Period and fiscal years 2010 and 2009 of $3.9 million, $1.1 million, and $3.5 million, respectively. |
| (4) | In the Transition Period, we (i) recorded stock-based compensation expense of $0.5 million and cash compensation expense of $1.2 million, which primarily reflected the acceleration of unvested stock-based awards andIncludes a settlement of unvested stock-based awards in the form of a fixed cash payment, respectively, based on the modifications to such awards approved by our Compensation Committee of the Board of Directors, (ii) changed the remaining useful life of our intangible assets to reflect the pattern in which the economic benefits of the assets were expected to be realized, which materially impacted the amounts amortized, (iii) recorded angoodwill impairment charge of $10.2 million related to our long-lived assets that is included in “Loss from discontinued operations, net of taxes” (see Note 8 to the Consolidated Financial Statements) and (iv) recorded a gain of $10.7 million on the sale of the DPS Business (see Note 5 to the Consolidated Financial Statements).$36.7 million. |
| (5) | In fiscal 2010, we (i) recorded stock-based compensation expense of $3.6 million, which included modifications of certain stock-based awards primarily related to our former Chief Executive Officer, resulting in a charge of $0.9 million, (ii) received $0.9 million as part of a class action suit, (iii) received $0.4 million from the sale of an investment in a non-controlling interest of a non-public company and (iv) recorded an additional gain of $1.2 million on the sale of the Snap Server NAS business. |
| (B) | (6)Includes a benefit from income taxes of $9.3 million. |
| In fiscal 2009, we (i) recorded an impairment charge of $16.9 million to write off goodwill, (ii) recorded stock-based compensation of $1.8 million, (iii) recorded a gain of $2.3 million on the sale of marketable equity securities, (iv) recorded a gain of $1.7 million on the repurchase of our 3/4% Convertible Senior Notes due 2023, or 3/4% Notes, on the open market, (v) recorded a gain of $4.6 million on the sale of the Snap Server NAS business and (vi) recorded a tax benefit arising from the resolution of tax disputes and the adjustment of taxes due in a prior period. |
| (C) | (7) | In the Transition Period, we sold the DPS Business to PMC-Sierra and received $29.3 million upon the closing of the transaction. In fiscal 2009, we utilized cash to pay off substantially all of the debt associated with the 3/4% Notes, in the amount of $222.9 million. In addition, we paid approximately $38.0 million to acquire Aristos in fiscal 2009. |
| (8) | We recordedIncludes a benefit from income taxes of $15.7 millionmillion. |
| |
| (D) | No revenues are reported for the yearnine-month period ended December, 31, 2012, primarily due to2010, since the release of a portion of our valuation allowanceEnergy and a refund receivedSports businesses had not yet commenced and the Predecessor Business is reported as a resultdiscontinued operation in all periods. Period includes a restructuring charge of a tax settlement in Singapore.$3.9 million. |
No cash dividends have been paid or declared on the Company’s common stock.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Basis of PresentationSteel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments - Energy and Sports. The Energy segment focuses on providing drilling and production services to the oil and gas industry. The Sports segment provides event-based sports services and other health-related services. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify business acquisition opportunities in both the Energy and Sports industries as well as in other unrelated industries.
OnThe Company began its Energy business in December 7, 2010, our Board2011 with the acquisition of Directors approvedthe business and assets of Rogue Pressure Services Ltd. (“Rogue”). The Company expanded the business with the acquisition of the business and assets of Eagle Well Services, Inc. ("Eagle Well"), in February 2012 and the acquisition of Sun Well Service, Inc. ("Sun Well") in May 2012, both of which operate under Sun Well as a changecombined business. In December 2013, the Company further expanded its Energy business with the acquisition by its wholly-owned subsidiary Black Hawk Energy Services, Ltd. ("Black Hawk Ltd.") of the business and assets of Black Hawk Energy Services, Inc. (“Black Hawk Inc.”), for $59.6 million.
The Company began its Sports business in our fiscal year-end from March 31June 2011 with the acquisition of the assets of Baseball Heaven LLC (“Baseball Heaven”), a provider of baseball facility services, and the acquisition in August 2011 of a 75% membership in The Show, LLC (“The Show”), a provider of baseball uniforms to December 31. AsLittle League and softball players and coaches. The Company expanded the business with the acquisition of a result50% interest in two Crossfit® facilities in California in November 2012, and in 2014 the Company increased its ownership interest in one of this change, we hadthe Crossfit® facilities to approximately 86%. In January 2013, the Company acquired a nine-month transition period from April 1, 201020% membership interest in Ruckus Sports LLC ("Ruckus"), an obstacle course and mass-participation events company that was controlled by the Company through its representation on the Ruckus board. The Company increased its membership interest in Ruckus to December 31, 2010 (the “Transition Period”). References45% during 2013. Also in this Annual Report on Form 10-K to “fiscal year 2012” or “fiscal 2012” refers toJanuary 2013, the calendar yearCompany acquired a 40% membership interest in Again Faster LLC, a fitness equipment company that is accounted for as an equity-method investment. In June 2013, the Company further expanded its Sports business with the acquisition of January 1, 2012 to December 31, 2012. References in this Annual Report on Form 10-K to “fiscal year 2011” or “fiscal 2011” refers to80% of UK Elite Soccer, Inc. (“UK Elite”), a provider of youth soccer programs and camps. In 2014, UK Elite acquired the calendar yearbusiness and assets of January 1, 2011 to December 31, 2011.three independent providers of soccer clinics and camps.
In July 2012 we reclassifiedand November 2013 the Company shut down The Show toand Ruckus, respectively, after they did not meet operational and financial expectations. The Show and Ruckus are reported as discontinued operations. In July 2011, we reclassifiedoperations in the Aristos Business to discontinued operations. We sold our data storage and software solutions and products business (the “DPS Business”) to PMC-Sierra, Inc. (“PMC-Sierra”) in June 2010 and sold our Snap Server Network Attached Storage business (the “Snap Server NAS business”) to Overland Storage, Inc. (“Overland”), in June 2008. Accordingly, we reclassified theCompany’s consolidated financial statements and related disclosures for all periods, except for the historical Consolidated Balance Sheets and Statement of Stockholders’ Equity, to reflect these businesses as discontinued operations. These reclassifications had no impact on net loss, total assets or total stockholders’ equity. Unless otherwise indicated, the following discussions pertain only to our continuing operations.statements.
AtIn July 2013, Steel Energy Services Ltd. ("Steel Energy Services"), a wholly-owned subsidiary of the closeCompany, entered into a credit agreement, as amended (the “Amended Credit Agreement”), that provides for a borrowing capacity of business on October 3, 2011, we$105.0 million consisting of a $95.0 million secured term loan and up to $10.0 million in revolving loans. A pre-existing credit agreement at Sun Well (the “Sun Well Credit Agreement”) that had been fully repaid was terminated upon the initial closing of the Amended Credit Agreement.
In June 2014, following stockholder approval and authorization from its board of directors, the Company effected a 1-for-500 reverse stock split (the “Reverse Split”"Reverse Split"), immediately followed by a 500-for-1 forward stock split (the “Forward Split”"Forward Split", and together with the Reverse Split, the “Reverse/"Reverse/Forward Split”Split"). At our 2011 annual stockholders meeting, our stockholders approved a proposal authorizing our Board, of Directors (the “Board”)its common stock effective as of the close of business on June 18, 2014. In connection with the Reverse Split, the Company paid $10.1 million in July 2014 for 295,659 shares of common stock and the return of 1,388 non-vested restricted stock awards previously awarded to effect the reverse/forward stock split at exchange ratios determined by the Board within certain specified ranges.employees.
The exchange ratio forfollowing discussion and analysis should be read in conjunction with the Reverse Split was 1-for-500Company’s consolidated financial statements and the exchange ratio for the Forward Split was 50-for-1. As a result of the Reverse Split, stockholders holding less than 500 shares (the “Cashed Out Stockholders”) were entitled to a cash payment for all of their shares. All remaining stockholders following the Forward Split (the “Remaining Stockholders”) were also entitled to a cash payment for any fractional shares that they would otherwise have received. The cash payment that each Cashed Out Stockholder or Remaining Stockholder was entitled to receive was based upon such stockholder’s pro rata share of the total net proceeds received in the sale of the aggregated fractional shares by our transfer agent at prevailing prices on the open market.notes thereto.
As a result of the Reverse/Forward Split, our common stock outstanding went from 108,868,286 shares at September 30, 2011 to 10,886,829 shares at October 3, 2011. All shares outstanding and per share information for the previous financial periods being reported in this Annual Report on Form 10-K have been adjusted to reflect the Reverse/Forward Split.
Overview
We continue to focus on capital redeployment and identification of new business operations in which we can utilize our existing working capital and maximize the use of our net tax operating losses (“NOLs”) in the future. The identification of new business operations includes, but is not limited to, the oilfield servicing, sports, training, education, entertainment, and lifestyle businesses. For details regarding our historical business, which has been accounted for as discontinued operations, refer to Note 5 of the Notes to Consolidated Financial Statements.
We currently operate in two segments (Steel Sports and Steel Energy), but may add others in the future depending upon acquisition opportunities to further redeploy our working capital. While we have separate legal subsidiaries with discrete financial information, we have one chief operating decision maker. We currently report our business in two reportable segments, consisting of:
Steel Sports: Focuses on sports and health-related businesses. Services include marketing and providing baseball facility services, including training camps, summer camps, leagues and tournaments, concession and catering events and other events and related websites. In addition, we provide strength and conditioning services.
Steel Energy: Focuses on providing services to oil and gas companies, utilizing technological advances in supporting horizontal drilling and hydraulic fracturing. Services include snubbing services (controlled installation and removal of all tubulars - drill strings and production strings) in and out of the wellbore with the well under full pressure, flowtesting, and hydraulic work over/simultaneous operations (allows customers to perform multiple tasks on multiple wells on one pad at the same time).
During our fiscal year ended December 31, 2011, we acquired two Steel Sports businesses (Baseball Heaven and The Show) and one Steel Energy business (Rogue Pressure Services). During the fiscal year ended December 31, 2012, we acquired two additional Steel Sports businesses (CrossFit South Bay and CrossFit Torrance) and two Steel Energy businesses (Eagle and Sun Well). See “Acquisitions” section later in this Item 7 for additional details.
Results of Operations
WithRevenues increased significantly in 2014 primarily as a result of a full year of operations from the Aristos reclassificationbusinesses acquired during 2013, particularly the business acquired by Black Hawk Ltd. and UK Elite. The Company incurred an operating loss in 2014 as a result of a goodwill impairment charge. Operating income before goodwill impairments increased significantly in 2014 primarily from a full year of operations of the business acquired by Black Hawk Ltd. in 2013. This increase in operating income before goodwill impairments was partially offset by additional costs incurred for Corporate activities and the full year of operations of UK Elite that included expected seasonal losses not incurred in the prior year.
Recent developments in the oil services industry will have a significant adverse effect on the results of operations of the Company's Energy segment in 2015. The decline in energy prices, particularly the significant decline in oil prices, has
resulted in our customers, the oil and gas exploration and production companies (the "E&P Companies"), cutting back on their planned capital expenditure budgets for 2015, which will result in significantly reduced drilling activity. In addition, the E&P Companies are seeking price concessions from their service providers to discontinuedoffset their drop in revenue. Such actions on the part of the E&P Customers had little impact on the Energy segment's operations in July 2011,2014, but have had an adverse effect on its operations beginning in the early part of 2015. The Energy segment has experienced a decline in rig utilization in all net revenuesof its operations and costprices for its services have declined. The Company has taken certain actions and instituted cost-reduction measures in an effort to mitigate these adverse effects. The Energy segment's results of revenues have been reclassifiedoperations going forward will be dependent on the price of oil in the future, the resulting drilling rig count in the basins in which it operates, and the Company's ability to return to the pricing and service levels of the past as discontinuedoil prices increase. Although the impact on the Energy segment's results of operations in fiscal periods prior2015 is very uncertain, the drilling rig count in North America has declined 35% in the early part of 2015 from its high mark in 2014, which has directly impacted the segment's rig utilization, and the pricing for the segment's services has declined in the low-to-mid double-digit teens levels in the early part of 2015. As a result, the Company expects the Energy segment to experience a significant decline in operating income in 2015 as compared to the fiscal2014 results. As a result of the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Company's Energy segment, the Company recognized a goodwill impairment charge of $36.7 million in the fourth quarter of 2014. At December 31, 2014, the remaining goodwill associated with the energy business was $28.7 million, which is at risk of impairment if the fair values of the Company's reporting units in the Energy segment decline further in value.
Year ended December 31, 2014, compared with 2013
Net revenues for the year ended December 31, 2011. As such, there is no comparative presentation2014, increased by $90.1 million as compared to 2013. Net revenues from the Company's Energy segment increased by $82.0 million primarily as a result of resultsan increase of $75.5 million from Black Hawk Ltd., which business was acquired in December 2013, and an increase in revenues of $6.5 million in the Energy segment's other operations due primarily to an increase in rig utilization for its snubbing services and an increase in revenues from its flow back services related to new equipment purchased in 2014. Net revenues in the Company's Sports segmentincreased by $8.1 million primarily as a result of an increase in revenues of $6.8 million from UK Elite, which was acquired in June 2013, and an increase in revenues of $1.1 million from Baseball Heaven.
Gross profit for the year ended December 31, 2014, increased by $24.5 million as compared to 2013, and as a percentage of net revenuesrevenue declined slightly to 28.2% from 28.9%. Gross profit in the Energy segment increased by $21.1 million, and as a percentage of revenue declined slightly to 26.5% in 2014 from 27.0% in 2013. Gross profit in the Energy segment increased as a result of an increase of $22.4 million from Black Hawk Ltd., partially offset bya decrease in gross profit of $1.2 million in the Energy segment's other operations. Gross profit in the Sports segment in 2014 increased by $3.4 million primarily as a result of an increase in gross profit of $2.7 million from UK Elite and an increase in gross profit of $0.6 million from Baseball Heaven.
SG&A expenses in 2014 increased by $13.0 million as compared to 2013. SG&A expenses in the Energy segment increased by $3.1 million as a result of an increase of $3.0 million in costs incurred at Black Hawk Ltd. in 2014. SG&A expenses in the Sports segment increased by $3.8 million primarily as a result of costs incurred at UK Elite, including costs associated with operating the businesses acquired in the current period. SG&A expenses in corporate and other business activities increased by $6.1 million primarily as a result of increased costs incurred for any periodsservices provided by affiliates of 2010. In addition, all researchthe Company and development expenses and sales and marketing expenses have been reclassifiedan increase in stock-based compensation expense in the 2014 period.
The Company incurred an operating loss of $23.4 million in 2014 as discontinued operationscompared to operating income of $2.6 million in fiscal periods prior2013 primarily as a result of the goodwill impairment of $36.7 million relating to the fiscalEnergy segment. Operating income before goodwill impairments was $13.3 million in 2014 as compared to $2.6 million in 2013 . Operating income before goodwill impairments in the Energy segment increased by $17.5 million primarily as a result of an increase of $16.8 million from Black Hawk Ltd. The operating loss in the Sports segment increased by $0.8 million primarily due to the expected seasonal losses incurred in the first half of the current year at UK Elite with no corresponding losses in the prior year. The operating loss from Corporate and other business activities increased by $6.1 million from increased costs incurred for services provided by affiliates of the Company and an increase in stock-based compensation expense in 2014 .
Amortization of intangibles in 2014 increased by $0.9 million as compared to 2013 as a result of amortization expense on the intangible assets recognized in connection with the businesses acquired by Black Hawk Ltd. and UK Elite, partially offset by a declining rate of amortization for the intangible assets recognized in connection with prior period acquisitions.
The Company recognized an impairment charge of $36.7 million in the fourth quarter of 2014 related to the goodwill associated with its Energy segment. The impairment resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Energy segment.
Interest expense of $3.2 million in 2014 increased by $1.5 million as compared to 2013 primarily as a result of the borrowings under the Amended Credit Agreement being outstanding for the full year in 2014.
Other income of $7.1 million in 2014 primarily represented investment income of $6.6 million and realized gains on the sale of marketable securities of $3.8 million, partially offset by a loss of $1.8 million recognized on financial instrument obligations, a loss of $0.6 million recognized upon initially accounting for an investment under the equity method of accounting at fair value, and a foreign exchange loss of $1.1 million.
The Company recognized a benefit for income taxes of $1.3 million for the year ended December 31, 2011, so there is no comparative discussion2014. The provision recognized for Federal and state income taxes of these areas as well.$0.1 million and $0.3 million, respectively, was offset by a benefit recognized for foreign taxes of $1.7 million primarily resulting from a refund received upon the completion of tax authority audits pertaining prior periods.
The following table sets forthresults of operations for the itemsyear ended December 31, 2014, included income from discontinued operations of $0.5 million primarily related to an adjustment to the outstanding obligations of Ruckus.
Year ended December 31, 2013, compared with 2012
Net revenues for the year ended December 31, 2013, increased by $19.9 million as compared to 2012. Net revenues from the Company's Energy segment increased by $12.4 million as a result of the acquisition of Sun Well in May 2012 being included for the entire 2013 period and the acquisition of Black Hawk Ltd. in December 2013 being included in the Consolidated Statements2013 period. Such increases were partially offset by a decrease in revenues at operations in the Energy segment operated in both periods as a result of Operationsincreased competition in the marketplace and a slight decline in rig utilization resulting from unfavorable weather conditions. Net revenues from the Company's Sports segment increased by $7.5 million primarily as a result of the acquisition of UK Elite in June 2013 and the acquisition of the Crossfit® entities in November 2012 being included for the entire 2013 period.
Gross profit for the year ended December 31, 2013, increased by $0.6 million as compared to 2012, and as a percentage of revenue declined to 28.9% from 34.0%. Gross profit in the Energy segment decreased by $2.4 million and as a percentage of revenue declined to 27.0% in 2013 from 32.9% in 2012. The decline in 2013 was due primarily to increased competition in the marketplace, a slight decline in rig utilization as a result of unfavorable weather conditions, increased rig staffing costs, fewer rigs operating around the clock that resulted in higher costs for generating comparable revenues, a decline in higher-margin services in 2013 resulting from a change in the overall mix of services provided, increased workers compensation insurance costs, and settlement of a customer claim. Such decline in the Energy segment was partially offset by the gross profit generated by Black Hawk Ltd. in 2013 subsequent to the acquisition. Gross profit in the Sports segment increased by $3.0 million primarily as a result of the acquisition of UK Elite in June 2013 and the acquisition of the Crossfit® entities in November 2012 being included for the fiscal years ended December 31, 2012 and 2011:
| | | Fiscal Year Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Net revenues | | | 100 | % | | | 100 | % |
| Cost of revenues | | | 66 | % | | | 58 | % |
| Gross margin | | | 34 | % | | | 42 | % |
| Operating expenses: | | | | | | | | |
| Selling, marketing and administrative | | | 28 | % | | | 383 | % |
| Goodwill impairment | | | 0 | % | | | 0 | % |
| Restructuring charges | | | 0 | % | | | -1 | % |
| Total operating expenses | | | 28 | % | | | 382 | % |
| Income (loss) from continuing operations | | | 6 | % | | | -340 | % |
| Interest and other income, net | | | 1 | % | | | 334 | % |
| Interest expense | | | 0 | % | | | 0 | % |
| Income (loss) from continuing operations before income taxes | | | 7 | % | | | -6 | % |
| Benefit from (provision for) income taxes | | | 16 | % | | | 9 | % |
| Income (loss) from continuing operations, net of taxes | | | 23 | % | | | 3 | % |
| Discontinued operations, net of taxes: | | | | | | | | |
| Income (loss) from discontinued operations, net of taxes | | | -2 | % | | | 65 | % |
| Gain on disposal of discontinued oeprations, net of taxes | | | 0 | % | | | 200 | % |
| Income (loss) from discontinuend operations | | | -2 | % | | | 265 | % |
| Net income (loss) | | | 21 | % | | | 268 | % |
| Non-controlling interest of continuing operations | | | 0 | % | | | 0 | % |
| Non-controlling interest of discontinued operations | | | 0 | % | | | -3 | % |
| Net income (loss) attributable to Steel Excel Inc. | | | 21 | % | | | 271 | % |
Net Revenues and Gross Marginentire 2013 period.
The table below outlines net revenuesSelling, general and gross marginadministrative ("SG&A") expenses in 2013 increased by reportable segment for the fiscal years ended December 31,$3.0 million as compared to 2012 and 2011. As disclosed above, we had no continuing operations prior to fiscal 2011.
| | | Fiscal Year Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | (in millions) | |
| | | | | | | |
| Steel Energy net revenues | | $ | 97.2 | | | $ | 1.4 | |
| Steel Sports net revenues | | $ | 2.9 | | | $ | 1.1 | |
| Consolidated net revenues | | $ | 100.1 | | | $ | 2.5 | |
| | | | | | | | | |
| Steel Energy gross margin | | $ | 31.9 | | | $ | 0.2 | |
| Steel Sports gross margin | | $ | 2.1 | | | $ | 0.8 | |
| Consolidated gross margin | | $ | 34.0 | | | $ | 1.0 | |
| As a % of revenues | | | 34 | % | | | 42 | % |
Consolidated net revenues increased $97.6 million from $2.5 million in fiscal 2011 to $100.1 million in fiscal 2012 and gross margins increased $33.0 million from $1.0 million in fiscal 2011 to $34.0 million in fiscal 2012primarily as a result of the acquisitions in the Sports segment and Sun Well being included for the entire 2013 period, partially offset by the reversal of all our Steel Energy companies. Fiscalthe contingent consideration liability of $0.5 million associated with the acquisition of Rogue.
Amortization of intangibles in 2013 increased by $1.1 million as compared to 2012 Steel Energy net revenues included revenues from seven monthsas a result of intangible assets recognized in connection with the acquisitions of Sun Well in May 2012 and eleven monthsUK Elite in June 2013.
Interest expense of Well Services (which subsequently merged with Sun Well) aggregating $70.4$1.7 million in 2013 increased by $1.3 million as compared to 2012 primarily associated with the remainder attributable to Rogueborrowings under the Amended Credit Agreement.
Other income of $7.1 million in 2013 primarily represented investment income of $4.8 million and realized gains on the sale of marketable securities of $2.6 million, partially offset by a loss on extinguishment of debt of $0.5 million from the write off of unamortized deferred financing costs upon terminating the Sun Well Credit Agreement.
The Company recognized a benefit from income taxes of $9.3 million for the entire year. Consolidated unaudited pro forma net revenues were $123.9 million in fiscal 2012. Fiscal 2011 included revenues from six months of Baseball Heaven and one month for Rogue only. As indicated above, all net revenues and gross margins for fiscal periods prior to our fiscal year ended December 31, 2011 were reclassified2013, primarily as discontinued operations.
Sales, General and Administrative Expense
Selling, general and administrative expenses increased $18.5 million from $9.6 million in fiscal 2011 to $28.0 million in fiscal 2012. Fiscal 2012 and 2011 include sales expenditures from the recently acquired businesses, while all other periods presented include administrative expenses only. In addition, fiscal 2011 included six months of Baseball Heaven and one month or Rogue only, while fiscal 2012 includes all our newly acquired Steel Energy companies.
Our administrative expense for the fiscal year ended December 31, 2011 consists primarily of salaries, consulting fees and outside service provider fees. As of December 31, 2010, we had 15 employees engaged in administrative activities but reduced staffing to one employee by May 2011. Other general and administrative positions were converted to consultants during fiscal 2011. As we continue to make acquisitions, our general and administrative expense may increase.
The decrease in administrative expense in the Transition Period compared to the nine-month period ended January 1, 2010 was primarily a result of reductions in our workforce and infrastructure spending due to a restructuring plan we implemented in fiscal 2010, which resulted in a 57% decrease in our average headcountreversal of $7.2 million of reserves for employees engaged in Selling, general and administrative functions. We also recorded lower stock-based compensation expense by $2.0 million inforeign taxes upon the Transition Period compared to the nine-month period ended January 1, 2010, as the nine-month period ended January 1, 2010 included stock-based compensation expense related to the modification of certain stock-based awards, and to a lesser extent, no stock-based awards were granted to employees in the Transition Period. The decrease in administrative expense in the Transition Period compared to the nine-month period ended January 1, 2010 was partially offset by cash compensation expense of $0.5 million related to the modification and settlement of certain unvested stock-based awards in the form of a fixed cash payment and expense of $0.5 million related to a discretionary bonus offered to Mr. Quicke, our Interim President and Chief Executive Officer.
Restructuring Charges
There are no restructuring charges in fiscal 2012 and 2011 as all restructuring plans were put into place by the end of our Transition Period. We implemented several restructuring plans during the Transition Period and fiscal years 2010 and 2009. The goal of these plans was to bring our operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense-control programs.
The restructuring charges of $3.9 million recorded in the Transition Period primarily related to the restructuring plan implemented during the Transition Period with minimal adjustments related to prior fiscal years’ restructuring plans. The restructuring charges of $1.1 million recorded in fiscal 2010 primarily related to the restructuring plan implemented during that fiscal year with minimal adjustments related to prior fiscal years’ restructuring plans. All expenses, including adjustments, associated with our restructuring plans are included in “Restructuring charges” and “Income (loss) from discontinued operations, net of taxes” in the Consolidated Statements of Operations. For further discussion of our restructuring plans, please refer to Note 11 to the Consolidated Financial Statements.
Transition Period Restructuring Plan: In June 2010, we completed our actions and notified affected employeesexpiration of the terminationstatute of their employment, primarilylimitations. In addition, in engineering and general administrative functions,2013 the Company reversed a portion of its valuation allowance for deferred tax assets as a result of deferred tax liabilities recognized in connection with a restructuring plan adopted on May 6, 2010, with expected restructuring charges of $3.9 million. The execution of this restructuring plan was substantially contingent upon the sale of the our DPS Business to PMC-Sierra, which transaction was consummated on June 8, 2010, and was intended to allow us to reduce our operating expenses following such sale. Certain of the employees notified continued to provide services through December 2010 in connection with the transition services we provided to PMC-Sierra, and to a lesser extent, to assist in corporate matters, including the completion of the wind down of the Aristos Business by the end of September 2010. We incurred severance and related benefits charges of $3.7 million associated with this restructuring plan, all of which $3.7 million was recorded in the Transition Period. We also consolidated our facilities and incurred a termination fee of $0.2 million in the Transition Period upon vacating a facility in California.
Impairment of Long-Lived Assets and Goodwill
As a result of our annual review of goodwill, we recorded a $0.2 million goodwill impairment charged related to Baseball Heaven in fiscal 2012.
During our review of long-lived assets in the Transition Period, we determined that an indicator was present in which the carrying value was not recoverable . We recorded an impairment charge of $4.8 million in the Transition Period to write off our intangible assets related to customer relationships and to reduce the carrying value of our property and equipment, net, to the estimated fair value based upon the market approach and in consideration of the perspective of market participants using or exchanging our long-lived assets. The write off of our intangible assets related to core and existing technologies was originally reflected in “Cost of revenues” in the Consolidated Statements of Operations, but was reclassified to “Loss from discontinued operations, net of taxes” when the Aristos Business was moved to discontinued operations in July 2011. See Notes 5 and 8 to the Consolidated Financial Statements for further discussions regarding the reclassification to discontinued operations and the impairment of our long-lived assets.
Interest and Other Income, Net
Interest income reflects interest earned on our cash, cash equivalents and marketable securities’ balances and realized gains and losses on marketable securities. Other income, net, is primarily attributable to realizedunrealized gains on marketable equity securities and investments, gains from the repurchaseincluded as a component of certain portions of our 3/4% Notes, and fluctuations in foreign currency gains or losses, and to a lesser extent, includes recorded changes in values not deemed to be other-than-temporary on non-controlling interest on certain investments as well as gains and losses on the dispositions of property and equipment. From fiscal 2011 to fiscal 2012, interest and other income, net decreased $7.3 million from $8.4 million to $$1.1 million, respectively. We expect that our interest and other income, net, will remain consistent or decline slightly in future periods primarily due to the maturity of higher yielding investments, our move to mainly government-issued securities and the use of our cash and cash equivalents to make future acquisitions.
comprehensive income. The increase in interest and other income, net, in our fiscal 2011 compared to the Transition Period was primarily due to higher interest earned on our cash, cash equivalents and marketable securities’ balances. The decrease in interest and other income, net, in the Transition Period compared to the nine-month period ended January 1, 2010 was primarily due to lower interest earned on our cash, cash equivalents and marketable securities' balances and gains of $1.3 millionCompany recognized in the nine-month period ended January 1, 2010 related to the settlement of a class action suit and the sale of an investment.
Benefit From (Provision For) Income Taxes
We recorded a benefit from income taxes of $15.7 million for the year ended December
31, 2012, primarily due to the releasefrom a reversal of a portion of ourits valuation allowance and a refund receivedfor deferred tax assets as a result of a tax settlement in Singapore. The valuation allowance release was related to deferred tax liabilities recognized foron the difference between the fair value and carrying basis of certain tangible andidentifiable intangible assets obtained as partacquired in connection with the acquisition of the business combination, which can be used as a source of income to support realization of certain domestic deferred tax assets. Under generally accepted accounting principles, changes in an acquirer's valuation allowance that stem from a business combination should be recognized as an element of the acquirer's deferred income tax expense (benefit) in the reporting period that includes the business combination. For income tax purposes, amounts assigned to particular assets acquired and liabilities assumed may be different than amounts used for financial reporting. The differences in assigned values for financial reporting and tax purposes result in temporary differences. In applying ASC 740, companies are required to recognize the tax effects of temporary differences related to all assets and liabilities. We paid $3.5 million in taxes in Singapore during fiscal 2012 for prior year assessments on a liability that was part of our FIN 48 reserve. The Singapore IRAS subsequently refunded $1.4 million of that assessment based on information we provided.
In fiscal 2011, our tax benefit consisted primarily of the reversal of reserves for foreign taxes as a result of a favorable settlement in Singapore. In addition, during fiscal 2011, we made significant changes to our historic investment portfolio to move to primarily low-risk interest-bearing government securities. In our judgment, these changes were significant enough to consider the legacy portfolio to have been disposed of for the purpose of tracking a disproportionate tax effect that arose in fiscal 2008. Further, we realized certain currency translation gains due to substantial liquidation of certain of our foreign subsidiaries that were partially offset by tax benefits from losses incurred in certain foreign jurisdictions and reversal of certain foreign reserves.
Sun Well.
InThe results of operations for the Transition Period and the twelve-month periodyear ended December 31, 2010, our tax provision2013, included tax expenses of $7.9 million primarily due to changes in judgment related to the on-going audits in our foreign jurisdictions.
Our effective tax rates include foreign losses in jurisdictions where no tax benefit is derived, foreign taxes in jurisdictions where tax rates differ from U.S. tax rates, changes in the valuation allowance on deferred tax assets, certain state minimum taxes, dividends from foreign subsidiaries, tax benefits associated with settling certain tax disputes primarily with the United States, Singapore and German taxing authorities, releases of our Irish withholding taxes, changes in judgment related to uncertain tax positions in both the United States and foreign jurisdictions based on new information received and new uncertain tax positions that were identified. Our effective tax rates also include the Company realizing certain currency translation gains due to substantial liquidation of certain of its foreign subsidiaries and the receipt of dividends from foreign subsidiaries.
The Company continues to monitor the status of its NOLs, which may be used to offset future taxable income. If the Company underwent an ownership change, the NOLs would be subject to an annual limit on the amount of the taxable income that may be offset by its NOLs generated prior to the ownership change and additionally, the Company may be unable to use a significant portion of its NOLs to offset taxable income. For details regarding the Company’s NOL carryforwards, please refer to Note 15 of the Notes to Consolidated Financial Statements.
As of December 31, 2012, the Company’s total gross unrecognized tax benefits were $26.4 million, of which $7.4 million, if recognized, would affect the effective tax rate. There was an overall decrease of $3.5 million in the Company’s gross unrealized tax benefits from fiscal 2011 to fiscal 2012, primarily due to the reversal of reserves for foreign taxes as a result of a favorable settlement with the Singapore taxing authorities for various tax assessment years beginning in 2003.
The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates or formerly operated. As of December 31, 2012, fiscal years 2005 onward remained open to examination by the U.S. taxing authorities and fiscal years 2000 onward remained open to examination in various foreign jurisdictions. U.S. tax attributes generated in fiscal years 2000 onward also remain subject to adjustment in subsequent audits when they are utilized.
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company conducts or formerly conducted business. Management believes that it is not reasonably possible that the gross unrecognized tax benefits will change significantly within the next 12 months; however, tax audits remain open and the outcome of any tax audits are inherently uncertain, which could change this judgment in any given quarter.
Income (Loss) From Discontinued Operations, Net of Taxes
The loss from discontinued operations net of taxes,$5.5 million related to Ruckus, of which approximately $3.6 million related to the impairment of goodwill. The results of operations for fiscalthe year ended December 31, 2012, includes The Show only, which was originally acquired in August 2011. The incomeincluded a loss from discontinued operations net of taxes, for fiscal 2011 includes the release of the $5.0 million purchase price holdback related to the sales of our DPS Business to PMC-Sierra, the sale of $1.9 million of patents related to our DPS Business, and $0.2 million of loss from The Show.
The change in discontinued operations in the Transition Period compared to nine-month period ended January 1, 2010 was primarily attributable to the gain of $10.7 million, net of taxes of $6.6 million, on the sale of the DPS Business to PMC-Sierra, which was consummated in June 2010, and was recorded in the Transition Period in “Gain on disposal of discontinued operations, net of taxes,” in the Consolidated Statements of Operations. We also recorded a gain of $0.1 million and $1.0 million in the Transition Period and nine-month period ended January 1, 2010, respectively in “Gain on disposal of discontinued operations, net of taxes,” in the Consolidated Statements of Operations related to the sale of the Snap Server NAS business with Overland. The gain recorded in the Transition Period for the sale of the Snap Server NAS business was based on the cash received in connection with the amended promissory note agreement with Overland, in which Overland was allowed to pay us the remaining $1.2 million receivable plus accrued interest by March 31, 2010. We also incurred “Income (loss) from discontinued operations, net of taxes” of $(18.1) million and $(3.3) million in the Transition Period and nine-month period ended January 1, 2010, respectively, related to the Aristos Business, DPS Business and Snap Server NAS business.
Liquidity and Capital Resources
Key ComponentsThe Amended Credit Agreement entered into in July 2013 and amended in December 2013 provides for a borrowing capacity of Cash Flow$105.0 million consisting of a $95.0 million secured term loan (the “Term Loan”) and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. Steel Energy Services borrowed $70.0 million under the Term Loan in July 2013, the proceeds of which were combined with $10.0 million in intercompany loans from Sun Well and Rogue and used to pay the Company a dividend of $80.0 million. Steel Energy Services borrowed an additional $25.0 million under the Term Loan in December 2013, the proceeds of which were combined with cash provided by the Company and Steel Energy Services and used to fund the acquisition of the business and assets of Black Hawk Inc. At December 31, 2014, the Company had $10.0 million of borrowing capacity under the Revolving Loans, all of which was available as no Revolving Loans were outstanding. As of December 31, 2014, the Company had $79.3 million outstanding under the Term Loan.
Working Capital: Our principal sourceBorrowings under the Amended Credit Agreement are collateralized by substantially all the assets of liquidity is cash on handSteel Energy Services and marketable securities. We focus on managingits wholly-owned subsidiaries Sun Well, Rogue, and Black Hawk Ltd., and a pledge of all of the critical componentsissued and outstanding shares of working capital which include payablesstock of Sun Well, Rogue, and short-term debt. Our working capital at December 31, 2012Black Hawk Ltd. Borrowings under the Amended Credit Agreement are fully guaranteed by Sun Well, Rogue, and 2011 was $276.2 million and $324.1 million, respectively.Black Hawk Ltd.
The decreaseAmended Credit Agreement runs through July 2018, with the Term Loan amortizing in workingquarterly installments of $3.3 million and a balloon payment due on the maturity date. Borrowings under the Amended Credit Agreement bear interest at annual rates of either (i) the Base Rate plus an applicable margin of 1.50% to 2.25% or (ii) LIBOR plus an applicable margin of 2.50% to 3.25%. The “Base Rate” is the greatest of (i) the prime lending rate, (ii) the Federal Funds Rate plus 0.5%, and (iii) the one-month LIBOR plus 1.0%. The applicable margin for both Base Rate and LIBOR is determined based on the leverage ratio calculated in accordance with the Amended Credit Agreement. LIBOR-based borrowings are available for interest periods of one, three, or six months. In addition, the Company is required to pay commitment fees of between 0.375% and 0.50% per annum on the daily unused amount of the Revolving Loans.
The Amended Credit Agreement contains certain financial covenants, including (i) a leverage ratio not to exceed 3.00:1 for quarterly periods through June 15, 2015, 2.75:1 for quarterly periods through June 30, 2017, and 2.5:1 thereafter and (ii) a fixed charge coverage ratio of 1.15:1 for quarterly periods through December 31, 2016, and 1.25:1 thereafter. The Company was in compliance with all financial covenants as of December 31, 2014.
The Amended Credit Agreement also contains standard representations, warranties, and non-financial covenants. The repayment of the Term Loan can be accelerated upon (i) a change in control, which would include Steel Energy Services owning less than 100% of the equity of Sun Well or Rogue or Steel Partners Holdings L.P. (“SPLP”) owning, directly or indirectly, less than 35% of Steel Energy Services or (ii) other events of default, including payment failure, false representations, covenant breaches, and bankruptcy.
The Company finances its operations and capital expenditure requirements from its existing cash and marketable securities balances, which at December 31, 20122014, totaled $51.9 million and $138.5 million, respectively. Working capital in 2014 decreased by $55.0 million due primarily to a decrease of $27.6 million from a reclassification of current available-for-sale securities to non-current equity method investments during the year, the repayment of $13.2 million in long-term debt, repurchases of the Company's common stock of $10.4 million, and payments of $10.1 million to shareholders in connection with the Reverse Split.
Cash flows from operating activities of continuing operations increased by $16.1 million in 2014 as compared to December 31, 2011 of $47.9 million is2013 due primarily attributable to our acquisitions of Sun Well, Eagle and CrossFit South Bay that were made entirely, oran increase in part, with cash as well as $0.3 million towards the loan to CrossFit Torrance. The decrease in working capital at December 31, 2011 compared to December 31, 2010 of $32.7 million is primarily attributable to our acquisitions of Baseball Heaven, The Show, and Rogue that were made with cash.generated from net income.
Operating activities: OperatingDuring 2014, the Company used $31.3 million of cash activities consistfor investing activities. The Company made purchases of loss from continuing operations,marketable securities, net of taxes, adjusted for certain non-cash itemsproceeds from sales and changesrestricted cash, of $12.3 million, invested $15.9 million in assets and liabilities. Non-cash items generally consisted of the non-cash effect of impairment charges, loss on sale of the long-lived assets, the release of a portion of our deferred tax valuation allowance, depreciation and amortization of intangible assets, property and equipment, and marketable securities and stock-based compensation expense.
Net cash provided by operating activities was $18.7 million for fiscal 2012 compared to $10.8 million for fiscal 2011. The increase in cash provided by operations is primarily the resultmade other investments of our acquisitions of operating businesses in 2011 and 2012.$3.0 million.
Investing activities: Investing cash activities generally consist of purchases, sales and maturities of marketable securities, net cash18
During 2014, the Company used for acquisitions, proceeds from the sale$34.3 million of our DPS Business and Snap Server NAS business (prior to fiscal 2011), proceeds from the sale of investments, and purchases of property and equipment. Net cash provided by (used in) investing activities was $50.3 million, $(40.9) million, $2.6 million, $21.1 million, and $(31.9) million in fiscal 2012, fiscal 2011, the twelve-month period ended December 31, 2010, the Transition Period, and the nine-month period ended January 1, 2010, respectively.
The investing activities of fiscal 2012 and 2011 included the acquisitions aggregating $52.6 million and $36.5 million, respectively. In the Transition Period, we received proceeds from the sale of our DPS Business to PMC-Sierra of $29.3 million. We utilized cash for the net purchasesfinancing activities. The Company paid an aggregate of marketable securities of $7.2$20.4 million in the Transition Period. We continue to manage our cash through interest-bearing accounts.
Financing activities: Financing cash activities consist primarily of repayments of long-term debt, repurchases of our common stock under theacquire treasury shares and repurchase program, and employee stock option exercises. Net cash provided by (used in) financing activities in fiscal 2012, fiscal 2011, and the Transition Period was $6.0 million, $29,000, and $(32.5) million, respectively. In fiscal 2012, we used $3.2 million for the repayment of capital lease obligations and long-term debt we acquired through Sun Well. In fiscal 2012 and the Transition Period, we also repurchased $2.8 million and $34.7 million, respectively, of our common stock in connection with authorized stock repurchase programs.
Common Stock Repurchase Program
In November 2012, our Boardthe Reverse Split and made debt repayments on the Amended Credit Agreement of Directors authorized a stock repurchase program to purchase up to 200,000 shares of our common stock. During the fiscal year ended December 31, 2012, we repurchased approximately 0.1 million shares of our common stock pursuant to the program at an average price of $24.82 for an aggregate repurchase price of $2.8 million, excluding brokerage commissions.
In July 2008, our Board of Directors authorized a stock repurchase program to purchase up to $40 million of our common stock. We announced the adoption of this program on July 31, 2008. During the Transition Period ended December 31, 2010, we repurchased approximately 1.2 million shares of our common stock at an average price of $29.30 for an aggregate repurchase price of $34.3 million, excluding brokerage commissions. This program was terminated in December 2010. Under the authorized stock repurchase program, we cumulatively repurchased approximately 1.4 million shares of our common stock for an aggregate repurchase price of $38.4 million, excluding brokerage commissions, in the open market through December 31, 2010. All numbers of shares and the average stock price were adjusted retroactively to give effect to the Reverse/Forward Split.
Liquidity and Capital Resource Requirements$13.2 million.
At December 31, 2012, we2014, the Company had $270.7$190.4 million in cash cash equivalents and marketable securities, exclusive of $21.3 million of restricted cash related to short sale transactions on certain financial instruments for which approximately $1.7 million was held by our foreign subsidiaries whose functional currency is the local currency. Our available-for-saleCompany has an obligation to deliver or purchase securities at a later date.
Available-for-sale securities at December 31, 2014, included short-term deposits, corporate obligations, corporate securities, commercial paper, United States government securitiesdebt and equity instruments, and mutual funds, and were recorded on our Consolidated Balance Sheetsthe consolidated balance sheet at fair market value, with theirany related unrealized gain or loss reflectedreported as a component of “Accumulated other comprehensive income, net of taxes”income” in the Consolidated Statements of Stockholders’ Equity.
During February 2012, our Board of Directors executed a written consent permitting us to invest up to $10 million in publicly traded companies engaged in certain oilfield servicing, energy services, and related businesses, which was an exception to our investment policy at that time. In June 2012, our Board established an Investment Committee, which was formed to develop investment strategies for the Company and to set and implement investment policies with respect to our cash. The Investment Committee was directed by the Board to establish and implement an investment policy for our portfolio that meets the following general objectives: preserve principal; maximize total return given overall market conditions; meet internal liquidity requirements; and comply with applicable accounting, internal control and reporting requirements and standards. Our Investment Committee is authorized, among other things, to invest our excess cash directly or allocate investments to outside managers for investment in equity or debt securities, provided that our Investment Committee may not invest more than $25 million in any single investment or with any single asset manager without our Board’s approval. Given the overall market conditions, we regularly review our investment portfolio to ensure adherence our investment policy and to monitor individual investments for risk analysis and proper valuation.
In fiscal 2012, fiscal 2011, and the Transition Period, we did not recognize a material loss on our securities as the unrealized losses incurred were deemed to be temporary. We hold our marketable securities as available-for-sale and mark them to market.stockholders’ equity. We expect to realize the full value of all our marketable securities upon maturity or sale, as we have the intent and ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge that could adversely impact our financial results.
In addition, we maintain our cash cash equivalents and marketable securities with certain financial institutions, in which our balances exceed the limits that are insured by the Federal Deposit Insurance Corporation. If the underlying financial institutions fail or other adverse conditionsevents occur in the financial markets, our cash balances may be impacted.
We anticipate making additional acquisitions of businesses, and we may be required to use a significant portion of our available cash balances for such acquisitions or for working capital needs thereafter.
We have invested in technology companies through two venture capital funds, Pacven Walden Venture V Funds and APV Technology Partners II, L.P. At December 31, 2012 and 2011, the carrying value of such investments aggregated $1.0 million and $1.1 million, respectively, which were based on quarterly statements we receive from each of the funds. The statements are generally received one quarter in arrears, as more timely valuations are not practical. The statements reflect the net asset value, which we use to determine the fair value for these investments, which (a) do not have a readily determinable fair value and (b) either have the attributes of an investment company or prepare their financial statements consistent with the measurement principles of an investment company. The assumptions we use, due to lack of observable inputs, may impact the fair value of these equity investments in future periods. While we have seen some improvement in global economic conditions, any adverse changes in equity investments and current market conditions may require us to record an impairment charge against all or a portion of these investments in the future.
As of December 31, 2012, we have $13.0 million of long-term debt and $1.4 million of capital lease obligations that will be due and payable within the next three years. These obligations are the result of our acquisition of Sun Well. Sun Well has a credit agreement with Wells Fargo Bank, National Association that includes a term loan of $20,000,000 and a revolving line of credit for up to $5,000,000. The loans are secured by the assets of Sun Well and bear interest, at the option of Sun Well, at LIBOR plus 3.5% or the greater of (a) the bank’s prime rate, (b) the Federal Funds Rate plus 1.5%, or (c) the Daily One-Month LIBOR rate plus 1.5% for base rate loans. Both options are subject to leverage ratio adjustments. The interest payments are made monthly. The term loan is repayable in $1,000,000 quarterly principal installments from September 30, 2011 through June 30, 2015. Sun Well borrowed $20,000,000 on the term loan in July 2011 and has made $7,000,000 in scheduled principal payments through December 31, 2012. Borrowings under the revolving loan, which are determined based on eligible accounts receivable, mature on June 30, 2015. There is no balance due on the revolving loan as of December, 2012. Under the agreement, Sun Well is subject to certain financial covenants, with which it was in compliance as of December 31, 2012. In February 2013, we paid an additional $10.0 million towards the principal balance of the term loan.
We believe that our cash balances will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12twelve months. We anticipate making additional acquisitions and investments, and we may be required to use a significant portion of our available cash balances for such acquisitions and investments or for working capital needs thereafter. The consummation of multiple acquisitions in fiscal 2012 and 2011 and the anticipation of additional acquisitions, in the future, prevailing economic conditions, and/orand financial, business and other factors beyond our control could adversely affect our estimates of our future cash requirements. As such, we could be required to fund our cash requirements by alternative financing. In these instances, we may seek to raise such additional funds through public or private equity or debt financings or from other sources. As a result, we may not be able to obtain adequate or favorable equity financing, if needed, due in part to our shares of common stock currently trading on the OTCQB Market. Any equity financing we obtain may dilute existing ownership interests, and any debt financing could contain covenants that impose limitations on the conduct of our business. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all.
Commitments and ContingenciesOff-balance Sheet Arrangements
Legal Proceedings
From time to time, we are subject to litigation or claims, including claims related to businesses that we wound down or sold, which are normal in the course of business, and while the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters willThe Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material adverse impactcurrent or future effect on ourits financial position,condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.capital resources that are material to investors.
For an additional discussion of certain risks associated with legal proceedings, see “Item 1A. Risk Factors” of this Annual Report on Form 10-K.
Convertible Subordinated Notes
In fiscal 2010, we repurchased a total of $0.1 million at a price equal to 100% of the principal amount of the 3/4% Notes. At December 31, 2012, we had a remaining liability of $0.3 million of aggregate principal amount related to our 3/4% Notes that are due in December 2023. Each remaining holder of the 3/4% Notes may require us to purchase all or a portion of our 3/4% Notes on December 22, 2013, December 22, 2018 or upon the occurrence of a change of control (as defined in the indenture governing the 3/4% Notes) at a price equal to the principal amount of 3/4% Notes being purchased plus any accrued and unpaid interest. We may redeem some or all of the 3/4% Notes for cash at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued interest to, but excluding, the redemption date. We may seek to make open market repurchases of the remaining balance of our 3/4% Notes within the next twelve months (See Note 9 to the Consolidated Financial Statements for a detailed discussion).
Contractual Obligations
Our contractual obligations at December 31, 2012 are2014, were as follows:
| | | Payments Due By Period | |
| | | Total | | | | | | 1-3 Years | | | 3-5 Years | | | | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | | |
Short-term debt(1) | | $ | 346 | | | $ | 346 | | | $ | - | | | $ | - | | | $ | - | |
Operating lease obligations(2) | | | 1,990 | | | | 509 | | | | 1,444 | | | | 37 | | | | - | |
Capital lease obligations(3) | | | 1,550 | | | | 490 | | | | 1,060 | | | | - | | | | - | |
Tax obligations(4) | | | 7,340 | | | | - | | | | 7,340 | | | | - | | | | - | |
Long-term debt(5) | | | 13,000 | | | | 4,000 | | | | 9,000 | | | | - | | | | - | |
| Total | | $ | 24,226 | | | $ | 5,345 | | | $ | 18,844 | | | $ | 37 | | | $ | - | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | (in thousands) |
| Long-term debt | $ | 79,285 |
| | $ | 13,214 |
| | $ | 26,428 |
| | $ | 39,643 |
| | $ | — |
|
Interest on long-term debt (1) | 6,576 |
| | 2,416 |
| | 3,543 |
| | 617 |
| | — |
|
| Operating lease obligations | 4,182 |
| | 1,092 |
| | 1,707 |
| | 601 |
| | 782 |
|
| Capital lease obligations | 615 |
| | 437 |
| | 178 |
| | — |
| | — |
|
| Deferred compensation | 3,709 |
| | 220 |
| | 3,489 |
| | — |
| | — |
|
| Total | $ | 94,367 |
| | $ | 17,379 |
| | $ | 35,345 |
| | $ | 40,861 |
| | $ | 782 |
|
(1) | Short-term debt includes anticipated interest payments on our ¾% Notes that are not recorded on our Consolidated Balance Sheet. As we will seek to make open market repurchases of the remaining balance of our ¾% Notes within the next 12 months, we have continued to classify the ¾% Notes as short-term obligations, due in less than one year. Any future repurchases of our ¾% Notes would reduce anticipated interest and/or principal payments |
(2) | Operating lease obligations relate to facility leases. | |
(3) | Capital lease obligations related to two rigs and a Caterpillar payloader acquired through Sun Well. |
(4) | Tax obligations relate to liabilities for uncertain tax positions, which were reflected in “Other long-term liabilities.” The timing of any payments that could result from the unrecognized tax benefits will depend on a number of factors. Management believes that it is not reasonably possible that the net unrecognized benefits will change significantly within the next 12 months. For the purposes of this table, we have disclosed the gross unrecognized tax benefits in the “one to three years” column based on our estimate of the timing of payment for the remaining tax obligations. |
(5) | Long-term debt relates to a term loan acquired through Sun Well. |
(1) Interest on variable-rate long-term debt is an estimate based on current interest rates. Interest excludes commitment fees and non-cash amortization of deferred financing costs, which are included as components of interest expense in the consolidated statements of operations.
Critical Accounting Policies
The Company’s management must make certain estimates and Estimatesassumptions in preparing the financial statements. Certain of these estimates and assumptions relate to matters that are inherently uncertain as they pertain to future events. The Company’s management believes that the estimates and assumptions used in preparing the financial statements were the most appropriate at that time, although actual results could differ significantly from those estimates under different conditions.
OurNote 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements included in this Annual Report on Form 10-K provides a detailed discussion and analysis of ourthe various accounting policies of the Company. We believe that the following accounting policies are critical since they require subjective or complex judgments that could potentially affect the financial condition andor results of operations areof the Company.
Allowance for Doubtful Accounts: We assess the carrying value of our accounts receivable based on our Consolidated Financial Statements,management's assessment of the collectibility of specific client accounts, which have been prepared in accordanceincludes consideration of the creditworthiness and financial condition of those specific clients. We also assess the carrying value of accounts receivable balances based on other factors, including historical experience with accounting principles generally accepted inbad debts, client concentrations, the United States. Note 1general economic environment, and the aging of such receivables. We record an allowance for doubtful accounts to reduce the accounts receivable balance to the Consolidated Financial Statements describes the significant accounting policies essential to our Consolidated Financial Statements. The preparation of these financial statements requires estimates and assumptionsamount that affect the reported amounts and disclosures. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ materially from our estimates.
We believe the followingis reasonably believed to be collectible. Based on our critical accounting policies because they are both important toestimates there was no allowance for doubtful accounts at December 31, 2014 and 2013. A change in our assumptions, including the portrayalcreditworthiness of clients and the default rate on receivables, would result in us recovering an amount of our financial condition and results of operations and they require critical management judgments and estimates about mattersaccounts receivable that are uncertain. If actual resultsdiffers from the current carrying value. Such difference, either positive or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operation for future periods could be materially affected. See “Risk Factors” for certain risks relating to our future operating results.
Fair Value Measurements: We measure fair value as the price thatnegative, would be received to sell an asset or paid to transferreflected as a liabilitycomponent of SG&A expense in an orderly transaction between market participants at the measurement date. The accounting principles generally accepted in the United States of America fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels, as described below:future periods.
Level 1 applies to quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 applies to observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 applies to unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Cash, Cash Equivalents and Marketable Securities Valuation: Our marketable securities are classified as available-for-sale andsecurities. Accordingly marketable securities are reported at fair market value inclusive ofwith unrealized gains and losses recognized in stockholders' equity as of the respective balance sheet date. Marketable securities consist of corporate obligations, United States government securities, and government agencies. Our Consolidated Balance Sheet is updated at each reporting period to reflect the change"other comprehensive income (loss)". Declines in the fair value of securities below their amortized cost basis are evaluated to determine if the decline in value is other than temporary, with other-than-temporary declines recognized as an impairment charge. This determination requires a high degree of judgment and is based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, our intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market value, and other factors specific to the individual security. A change in any one of the aforementioned factors could result in other-than-temporary impairment charges in future periods, which could have an adverse effect on our results of operations.
Fair Value Measurements: Certain of our assets and liabilities, primarily cash, marketable securities, certain equity-method investments, and financial instrument obligations are reported at their estimated fair value. We estimate the fair value of such assets and liabilities based on quoted market prices (Level 1), quoted prices of similar instruments with an active market (Level 2), or prices obtained from funds statements or from third-party pricing services (Level 3). Securities valued as Level 2 and Level 3 securities consist primarily of marketable securities that have declined below or risen above their original cost. Our Consolidated Statements of Operations reflect a charge in the period in which a determination is made that the declineare classified as “available for sale” securities, with changes in fair value is considered to be other-than-temporary. We do not holdrecognized in stockholders' equity as "other comprehensive income (loss)". A change in our assumptions, including obtaining quoted market prices for specific securities valued as a Level 2 or Level 3 securities or obtaining quoted prices of similar securities with an active market for trading or speculative purposes.
Property and Equipment: Property and equipment are recorded at cost and depreciated usingsecurities valued as a Level 3 security, would result in a fair value of such securities that differs from the straight-line method with the following useful lives:
| | | Steel Sports | | | Steel Energy | |
| | | (in years) | |
| | | | | | | |
| Buildings, improvements and sports fields | | | 10-25 | | | | 7-39 | |
| Rigs and workover equipment | | | N/A | | | | 7-15 | |
| Other equipment | | | 5-10 | | | | 4-7 | |
| Vehicles | | | N/A | | | | 4-7 | |
| Furniture and fixtures | | | 5 | | | | 5 | |
Repairs and maintenance of property and equipment are expensed as incurred.
Impairment of Long-Lived Assets and Goodwill: Long-lived assets primarily relate to our intangible assets and property and equipment. Intangible assets are amortized on a straight-line and accelerated basis over their estimated useful lives, which range from five to ten years. Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from five to 25 years.
We regularly perform reviews of long-lived assets to determine if facts or circumstances are present, either internal or external, which would indicate that the carrying values of our long-lived assets may not be recoverable. Indicators include, but are not limited to, a significant decline in the market price of a long-lived asset, an expectation that more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life and a current period operatingfair value. Such difference, either positive or cash flow loss combined with a historicalnegative, would be reflected as an increase or projected operating or cash flow loss.
The recoverability ofdecrease in the carrying value of the long-lived assets, not including goodwill, is based on the estimated future undiscounted cash flows derived from the usesuch securities.
Valuation of the asset. If a long-lived asset is determined to be impaired, the loss is measured based on the difference between the long-lived asset’s fair value and its carrying value. The estimate of fair value of long-lived assets is based on a discounted estimated future cash flows method and application of a discount rate commensurate with the risks inherent in our current business model. Our current business model contains management’s subjective estimates and judgments; however, actual results may be materially different than the assumptions made by management.
Based on our decision to pursue the sale or disposition of assets and/or business operations in December 2009, we evaluated and recorded impairment charges in the Transition Period ended December 31, 2010 aggregating $10.2 million. Of this $10.2 million, $6.1 million related to the write-off of intangible assets and $4.1 million related to the reduction ofLong-Lived Assets: We review the carrying value of our property and equipment net, to our estimated fair value. There were no impairment charges onand other long-lived assets recorded in fiscal 2012 and 2011.
Goodwill represents the excess of cost over the value of net assets of businesses acquired and is carried at cost unless write-downs for impairment are required. Our goodwill as of December 31, 2012 is a result of our acquisitions in fiscal 2012 and 2011. We operate under three reporting units, Sun Well, Rogue and Sports, and accordingly, our goodwill has been recorded in these respective reporting units. We evaluate the carrying value of goodwill at each reporting unit on an annual basis during the fourth quarter and wheneverwhen events andor changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such indicators would include a significant reductionRecoverability is assessed by comparing the carrying value of the assets to the future undiscounted cash flows the assets are expected to generate. If it is determined that the carrying amount is not recoverable, an impairment charge is recognized equal to the amount by which the carrying value of the asset exceeds its fair market value. In 2014, the adverse effect on the Energy business of declining oil prices resulted in its market capitalization, a decrease in operating results or deteriorationthe need for the Company to assess the recoverability of certain of its financial position. Infinite-lived intangible assets and property and equipment. The undiscounted cash flows expected to be generated by such assets exceeded their carrying value, and therefore the Company has not recognized any impairment charges on its long-lived assets. A change in the Company’s business climate in future periods, including an inability to effectively integrate new businesses in which significant investments have been made or a general downturn in one of the Company’s businesses could lead to a required assessment of the recoverability of the Company’s long-lived assets, which may subsequently result in an impairment charge.
Valuation of Goodwill: We assess the carrying value of goodwill by comparing the carrying value of underlying businesses to their fair values. We are required to test its goodwill for impairment at least annually, and more frequently if an event occurs or circumstances change to indicate that an impairment may have occurred. The Company performs its annual
impairment test during the fourth quarter of fiscal 2012 and 2011, we tested the goodwill acquired. In fiscal 2012, we determined the goodwill from Baseball Heaven (the Steel Sports reporting unit) was fully impaired and wrote off the $0.2 million. There was no impairment of the Sun Well and Rogue reporting units. The impairment analysis required a two-step approach and entailed certain assumptions and estimates of discounted cash flows and a residual terminal value categorized as Level 3 inputs undereach year. We estimated the fair value hierarchy. We used a discount rate of approximately 16% and assumed a multiple of EBITDA ranging from 4.6 to 6.0. There was no impairment indicated in fiscal 2011.
Revenue Recognition: In general, we recognize revenue upon providing the product or service. We provide services and products through two segments: Steel Sports and Steel Energy. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. Revenue is recognized net of estimated allowances. Revenue is generated by short-term projects, most of which are governed by master service agreements (“MSAs”) that are short-term in nature. The MSAs establish per day or per usage rates for equipment services.our Energy revenue is recognized daily on a proportionate performance method,business based on valuations, which relied on certain assumptions we made including projections of future revenues based on assumed long-term growth rates, estimated costs, and the appropriate discount rates. The estimates we used for long-term revenue growth and future costs are based on historical data, various internal estimates, and a variety of external sources, and were developed as part our long-range assessment of our Energy business given the recent developments in the oil services rendered. Revenue is reported netindustry. Based on the use of sales tax collected. For sports services revenues,these assumptions in estimating the fair value of the Energy business, we do not recognize revenue untilincurred a goodwill impairment charge of $36.7 million in the tournament or league occurs. For sports products, we recognize revenue upon shipment.
Income Taxes: We account for income taxes for uncertain tax positions using a two-step process to determinefourth quarter of 2014. After the amountimpairment charge, the carrying value of tax benefit to be recognized. First, the tax position must be evaluated to determinegoodwill in the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognizeEnergy business was $28.7 million at December 31, 2014. A change in our financial statements.assumptions, including lower long-term growth rates, higher operating costs, or higher discount rates could cause a change in the estimated fair value of the Energy business, and therefore could result in an additional impairment of goodwill, which would have an adverse effect on our results of operations.
Stock-Based Compensation: The amount of the benefit that maystock-based compensation expense to be recognized on stock options and restricted stock granted to employees and non-employee directors is based on their fair value on the largest amount that has a greater than 50 percent likelihoodgrant date. We determine the fair value of being realized upon ultimate settlement. In addition,restricted stock awards based on the market price of the Company's common stock on the date of grant; we continued to recognize interest and/or penalties related to uncertain tax positions as income tax expense in our Consolidated Statementsdetermine the fair value of Operations.
stock option awards using the Black-Scholes pricing model. We must make certain estimatesassumptions in determining the fair value of the stock option awards, including the volatility of our common stock, the future dividend yield on our common stock, and the term over which equity awards will remain outstanding. In addition, we must make certain assumptions regarding the rate at which options will be forfeited to estimate the service period that will be completed by the holders of stock options. Any deviation in the actual volatility of our common stock, the actual dividend yield, and the actual early exercise behavior of holders of stock options from that assumed in estimating the fair value of the awards will not result in a change in the amount of compensation expense recognized, but will result in the actual value realized by the holder of the award to be different from the amount of compensation expense recognized. Any deviation in the actual forfeitures of non-vested stock options during the service period from that assumed will result in a change to the amount of compensation expense recognized, either as additional compensation expense or a reversal of previously recognized compensation expense in the period of change.
Income Taxes:We make certain assumptions and judgments in determining income tax expense for financial statementreporting purposes. These include estimates of taxable income for the current and judgments occur in the calculation of certain tax assets, tax credits, benefits, deductions and liabilities, which arise from differences infuture periods, the timing of recognitionutilization of revenuetax benefits, the amount of business we will conduct in the jurisdictions in which we operate, and expense forthe applicable tax and financial statement purposes, as well asrates. We also must make certain judgments in assessing the interest and penalties related tolikelihood that certain tax positions will be sustained upon examination, including those uncertain tax positions. Significant changes toin foreign jurisdictions. A change in these estimates mayassumptions would result in an increase or decrease toa change in our tax provision for financial reporting purposes in subsequent periods.future periods and could result in our cash payments for taxes to be more or less than originally estimated.
We must assess the likelihoodrecoverability of our deferred tax assets based on our historical taxable income and estimates of future taxable income. In estimating its future taxable income, we have to make various assumptions about our future operating performance, including assumptions regarding the energy industry. We believe that weit was more likely than not that the benefit associated with the deferred tax assets will not be ablefully realized in future periods. Accordingly, a valuation allowance in the amount of $78.0 million and $69.8 million at December 31, 2014 and 2013, respectively, was established to recoverreserve against the carrying value of certain of our deferred tax assets. We consider positive and negative evidence such as historical levelsA change in the assumptions, including better or worse operating performance than projected, could result in a change in the amount of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If we ultimately determine that paymentrecovered, and therefore could result in a reduction or increase to the valuation allowance established at December 31, 2014. Such an adjustment would be reflected as a component of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for income taxes in the period in which we determine thatof the recorded tax liability is less than we expect the ultimate assessment to be.
adjustment
Contingent Liabilities:Environmental Liabilities: We are responsible in many cases for any environmental liabilities resulting from our oilfield services work. We do not anticipate significant environmental liabilities for work completed through December 31, 2012, so no reserve for environmental liabilities has been recorded.
Acquisitions
During the fiscal years ended December 31, 2012 and 2011, we began implementing our strategy of redeploying our working capital by making acquisitions.
On June 27, 2011, we acquired all of the net assets of Baseball Heaven for an aggregate purchase price of $6.0 million in cash. Baseball Heaven issubject to subject to litigation or claims that arise in the businessnormal course of marketingbusiness. We are also subject to multiple federal, state, and providing baseball facility services, including training camps, summer camps, leagueslocal laws and tournaments,regulations pertaining to worker safety, the handling of hazardous materials, transportation standards, and concessionthe environment. We assessed our potential exposure to legal and catering events. Baseball Heaven is located in Long Island, New York and serves the northeast and mid-Atlantic areas of the United States. Baseball Heaven is included in Steel Sports.
On August 15, 2011, we acquired all of the net assets used by The Show, which we contributed to The Show in exchange for a 75% membership interest. We paid an aggregate purchase price of $1.5 million in cash for these assets. The Show is engaged in the business of outfitting little league baseball and softball players and coaches in fully licensed Major League Baseball, minor league, and college replica uniforms and sponsoring, hosting, operating, and managing baseball and softball leagues, tournaments, and other events and related websites. The Show primarily operated in New York, Texas, Oklahoma, Colorado and California, but was ultimately discontinued in fiscal 2012.
On December 7, 2011, we acquired the business and assets of Rogue, a leader in the oilfield service industry located primarily in Williston, North Dakota, while also operating in Colorado. The aggregate purchase price was $31.2 million, which includes cash of $29.0 million and a contingent consideration liability of $1.2 million pursuant to an earn-out clauseenvironmental claims based on the achievementfacts and circumstances and our knowledge of any potential exposure. Based on such assessments we have not recognized a contingent liability for environmental or legal claims. A change in assumptions could result in us being deemed liable for certain performance levels. This acquisition marked the launch of our new strategy to focus a portion of our acquisition efforts on new opportunitiessuch matters, which would be result in the United States oilfield service industry presented by technological advances in supporting horizontal drillingadditional expense and hydraulic fracturing. Rogue provides snubbing services (controlled installation and removal of all tubulars - drill strings and production strings) in and out of the wellbore with the well under full pressure, flowtesting, and hydraulic work over/simultaneous operations (allows customers to perform multiple tasks on multiple wells on one pad at the same time). Rogue is included in Steel Energy.an increased liability.
On February 9, 2012, we acquired the business and assets of Eagle Well Services, Inc., which after the transaction operated as Well Services. Well Services is a leader in the oilfield service industry serving customers in the Bakken basin of North Dakota and Montana. The purchase price was $48.1 million in cash.
On May 31, 2012, we completed our acquisition of SWH, the parent company of Sun Well and a subsidiary of BNS. Sun Well is a provider of premium well services to oil and gas exploration and production companies operating in the Williston Basin of North Dakota and Montana.
Pursuant to the terms of the Share Purchase Agreement, we acquired all of the capital stock of SWH for an acquisition price aggregating $68.7 million. The aggregate acquisition price consisted of the issuance of 2,027,500 shares of our common stock (valued at $30 per share) and cash of $7.9 million. Affiliates of Steel Partners owned approximately 40% of our outstanding common stock and 85% of BNS prior to the execution of the Share Purchase Agreement.
As a result of the acquisition and additional shares acquired on the open market, Steel Partners beneficially owned approximately 51.1% of our outstanding common stock. Both BNS and we appointed a special committee of independent directors to consider and negotiate the transaction because of the ownership interest held by Steel Partners in each company.
On May 31, 2012, the business of Well Services was combined with Sun Well and both businesses now operate as Sun Well and are included in Steel Energy.
On November 5, 2012, we acquired 50% of CrossFit South Bay for $82,500 and 50% of the newly formed CrossFit Torrance. As part of the transaction, we also agreed to loan CrossFit Torrance up to $1.1 million to fund leasehold improvements and equipment. Both CrossFit companies provide strength and conditioning services and are included in Steel Sports.
Business Disposition and Wind Down
In July 2012, we reclassified The Show to discontinued operations as it was not meeting projections, with no expectation to perform as represented when acquired.
In July 2011, we ceased our efforts to sell or license our intellectual property from the Aristos Business and finalized the wind down of such business.
We sold the DPS Business to PMC-Sierra on June 8, 2010. The purchase price for the DPS Business was $34.3 million, of which $29.3 million was received by us upon the closing of the transaction and the remaining $5.0 million was withheld in an escrow account (“DPS Holdback”). The DPS Holdback was released to us on June 8, 2011, one year after the consummation of the sale, except for $0.1 million to provide for one disputed claim, and was recognized as contingent consideration in discontinued operations when received. The $0.1 million was received in September 30, 2011.
As such, The Show, the disposed DPS Business and wound down Aristos Business are reflected as discontinued operations in the accompanying financial statements and prior periods have been reclassified to conform to this presentation.
Recent Accounting Pronouncements
For a discussionIn April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of the impact of recently issued accounting pronouncement, see “Recent Accounting Pronouncements” in Note 2 to the Consolidated Financial Statements included(Topic 205) and Property, Plant, and Equipment (Topic 360), which changes the requirements for reporting discontinued operations. Pursuant to this pronouncement, the disposal of a component of an entity is required to be reported in this Annual Reportdiscontinued operations if the disposal represents a strategic shift that will have a major effect on Form 10-K.an entity’s operations and financial results. This pronouncement also requires additional disclosures for discontinued operations and requires disclosures about disposals of individually significant components of an entity that do not qualify for
Subsequent Eventsdiscontinued operations presentation in the financial statements. ASU No. 2014-08 is effective for annual reporting periods beginning after December 15, 2014, and for interim reporting period within those years. The Company does not expect the adoption of ASU No. 2014-08 to have a material effect on its consolidated financial statements.
On January 30, 2013, we acquiredIn May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a 40% membership interestcore principle, achieved through a five-step process, that an entity should recognize revenue to depict the transfer of promised goods or services to customers in Again Fasteran amount that reflects the consideration to which the entity expects to be entitled in exchange for a cash pricethose goods or services. ASU No. 2014-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and for interim reporting periods within those years. Upon adoption, ASU No. 2014-09 can be applied either retrospectively to each reporting period presented or retrospectively with the cumulative effect of $4.0 million. On January 31, 2013, we acquired a 20% membership interest in Ruckus for a cash priceinitially applying the standard recognized at the date of $1.0 million. Again Fasterinitial application. Early application is not permitted. The Company is evaluating the potential impact on its consolidated financial statements of adopting ASU No. 2014-09 and Ruckus provide a wide variety of fitness and athletic products and services.has not yet determined the implementation method to be used.In February 2013, we made an extra principalJune 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718), to address diversity in accounting for share-based payment of $10.0 million on our term loan with Wells Fargo. See Note 11awards that require a specific performance target to the Consolidated Financial Statementsbe achieved in order for additional details.
In November 2012, the Company purchased $11.9 million face amount of 3.75% Unsecured Convertible Subordinated Debentures Due 2026 in School Specialty Inc., a market leader in school supplies and educational materials (“School Specialties”), at a total cost of $6.0 million. On January 28, 2013, School Specialties filed a Chapter 11 bankruptcy petition. Subsequently, on February 26, 2013, the Company committedemployees to participate, with a sharebecome eligible to vest in the amount of approximately $22.0 million, inawards. ASU No. 2014-12 requires that a $155.0 million debtor-in-possession loan to School Specialties.performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting period within those years, with earlier adoption permitted. The Company believesdoes not expect the loan, in conjunction with other sourcesadoption of financing, will enable School SpecialtiesASU No. 2014-12 to successfully executehave a plan of reorganization or other alternative transaction.material effect on its consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), as part of its initiative to reduce complexity in accounting standards. ASU No. 2015-01 eliminates from generally accepted accounting principles the concept of extraordinary items. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with earlier adoption permitted. A reporting entity may apply the provisions of ASU No. 2015-01 prospectively or retrospectively to all prior periods presented in the financial statements. The Company does not expect the adoption of ASU No. 2015-01 to have a material effect on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to interest rate risk in connection with our borrowings under a credit facility that aggregated $79.3 million at December 31, 2014. Interest rates on funds borrowed under the credit facility vary based on changes to the prime rate, LIBOR, or the Federal funds rate. A change in interest rates of 1.0% would result in an annual change in income before taxes of $0.8 million based on the outstanding balance under the credit facility at December 31, 2014.
We are also exposed to interest rate risk related to certain of our investment portfolio and debt issuances. As of investments in marketable securities. At December 31, 2012,2014, our available-for-salemarketable securities excluding those classified as cash equivalents, aggregated $251.0$138.5 million, (see Note 6 to the Consolidated Financial Statements) and includedof which $29.6 million represented corporate obligations government agenciesthat pay a fixed rate of interest and United States government securities, all of which are high investment grade as specified by our investment policy. Our investment policy also limits investment concentrations, the final maturity of any investment and the overall duration of the portfolio to preserve capital, meet liquidity requirements and maximize total return. Given the overall market conditions, we regularly review our investment portfolio to ensure adherence to our investment policy and to monitor individual investments for risk analysis and proper valuation. If the yield-to-maturity on our current available-for-sale investments declines by 10%, our “Interest and other income, net”reported at fair value. A change in interest rates would result in a change in the Consolidated Statementsvalue of Operationssuch securities in future periods. Although a change in interest rates in future periods will not affect the amount of interest income earned on the specific securities held at December 31, 2014, a change in interest rates of 1.0% would be negatively impacted by approximately $0.1 million.
result in an annual change in income before taxes of $0.3 million in future periods if comparable amounts were invested in similar securities.
Equity Price Risk
We consider our direct exposureare exposed to equity price risk related to be minimal. We have investedcertain of our investments in technology companies through two venture capital funds. As of marketable securities. At December 31, 2012,2014, our marketable securities aggregated $138.5 million, of which $108.8 million represented mutual funds and corporate equities that are reported at fair value, and our investments in equity-method investees accounted for using the carryingfair value option aggregated $24.4 million. In addition, our financial instrument obligations aggregated $21.3 million at December 31, 2014. A change in the equity price of the marketable securities or equity method investments or in the equity price of the securities underlying the financial instrument obligations would result in a change in value of such investments aggregated $1.0 million (see Note 7 to the Consolidated Financial Statements). We monitor our equity investments on a periodic basis, by recording these investments based on quarterly statements we receive from the funds. The statements are generally received one quartersecurities and obligations in arrears, as more timely valuations are not practical. In the event that the carrying value of our equity investments exceeds their fair value, or the decline in value is determined to be other-than-temporary, the carrying value is reduced to its current fair value. While we have seen some improvement in global economic conditions, any adverse changes in equity investments and current market conditions may require us to record an impairment charge against all or a portion of the investments in the future. Such an action would adversely affect our financial results.
future periods.
Foreign Currency Exchange Risk
We translatehold certain investments denominated in a currency other than the United States dollar. We also hold assets and have legacy obligations in foreign currencies into U.S Dollars for reporting purposes andcountries even though we no longer have any operations outside of the United States. Changes in foreign currency fluctuationsexchange rates can have an impact on our results. For our fiscal 2012, fiscal 2011, and the Transition Period, there was no material currency exchange impact from our intercompany transactions. The amount of local currency obligations settled in any period is not significant to our cash flows or results of operations althoughsince we continuously monitortranslate foreign currencies into United States dollars for financial reporting purposes. Changes in foreign currency exchange rates would also result in changes in the amountvalue received or paid in United States dollars for the assets and timing of those obligations.obligations denominated in a foreign currency.
Item 8. Financial Statements and Supplementary Data
Please see Item 15(a)(1)See financial statements beginning on page F-1 of this Annual Report on Form 10-K for our Consolidated Financial Statements and supplementary data.
.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
UnderAs required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"), we conducted an evaluation under the supervision and with the participation of our management, including our Interim Chief Executive Officer, or Interim CEO,principal executive officer and our Chief Financial Officer, or CFO, we conducted an evaluationprincipal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Reportreport. Based on Form 10-K. Based upon that evaluation, our Interim CEOPrincipal Executive Officer and our CFO haveChief Financial Officer concluded that the design and operationas of December 31, 2014, our disclosure controls and procedures wereare effective to provide reasonable assurancein ensuring that theall information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC,the Securities and Exchange Commission rules and forms and (ii)that such information is accumulated and communicated to our management, including our Interim CEOprincipal executive officer and CFO, as appropriate to allowprincipal financial officer, in a manner that allows timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three-month period ended December 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our managementManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, (asas such term is defined in RulesRule 13a-15(f) and 15d-15(f) under the Exchange Act).Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external reporting purposes in accordance with United States generally accepted accounting principles.
Under the supervision and with the participation of ourthe Company's management, including our Interim ChiefPrincipal Executive Officer (principal executive officer) and Chief Financial Officer, (principal financial officer), wethe Company conducted an evaluation of the effectiveness of ourthe internal control over financial reporting based onof the frameworkCompany as referred to above as of December 31, 2014, as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, the Company used the criteria set forth in the framework in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourits evaluation under the framework set forth in Internal Control –- Integrated Framework our(2013), management concluded that ourthe Company's internal control over financial reporting was effective as of December 31, 2012.2014.
Management’s assessment of and conclusionBDO USA LLP, the independent registered public accounting firm, who audited the Company's 2014 consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of internal control over financial reporting did not include the internal controls of Eagle Well Services, Inc. and Sun Well Service, Inc., which were acquired on February 9, 2012 and May 31, 2012, respectively, and which are included in our consolidated balance sheet of December 31, 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended. On May 31, 2012, the business of Eagle Well Services, Inc. was merged with Sun Well Services, Inc. and both businesses operated as Sun Well Service, Inc. (Sun Well). Sun Well constituted 34% and 31% of total assets and net assets, respectively, as of December 31, 2012, and 70% of net revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Sun Well because of the timing of the acquisitions, merger of the two acquired entities and subsequent integration efforts.
The effectiveness of ourCompany's internal control over financial reporting as of December 31, 20122014, which is included herein.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting occurred during the quarter ended December 31, 2014, that has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well conceived and operated, can only provide reasonable assurance that the objectives of the control system are met. Because of theseits inherent limitations, no evaluation of our disclosure controls and procedures or our internal control over financial reporting will provide absolute assurancemay not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that misstatements due to errorcontrols may become inadequate because of changes in conditions, or fraud will not occur.that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
Not applicable.None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
InformationThe information with respect to directors, executive officers, and corporate governance required by this Item is incorporated in this Annual Report on Form 10-Kherein by reference to our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year coveredSecurities and Exchange Commission by this Annual Report, for our Annual Meeting of Stockholders to be held in 2013.April 30, 2015.
Item 11. Executive Compensation
InformationThe information with respect to executive compensation required by this Item is incorporated in this Annual Report on Form 10-Kherein by reference to our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year coveredSecurities and Exchange Commission by this Annual Report, for our Annual Meeting of Stockholders to be held in 2013.April 30, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
InformationThe information with respect to security ownership of certain beneficial owners and management and related stockholder matters required by this Item is incorporated in this Annual Report on Form 10-Kherein by reference to our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year coveredSecurities and Exchange Commission by this Annual Report, for our Annual Meeting of Stockholders to be held in 2013.April 30, 2015.
Item 13. Certain Relationships and Related Transactions and Director Independence
InformationThe information with respect to certain relationships and related transactions and director independence required by this Item is incorporated in this Annual Report on Form 10-Kherein by reference to our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year coveredSecurities and Exchange Commission by this Annual Report, for our Annual Meeting of Stockholders to be held in 2013.April 30, 2015.
Item 14. Principal Accounting Fees and Services
InformationThe information with respect to principal accounting fees and services required by this Item is incorporated in this Annual Report on Form 10-Kherein by reference to our Definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year coveredSecurities and Exchange Commission by this Annual Report, for our Annual Meeting of Stockholders to be held in 2013.April 30, 2015.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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| (a) | The followingListed below are the documents are filed as part of this Annual Report on Form 10-K:report. |
| 1. | Index to Financial Statements |
1.Financial Statements and Reports of Independent Registered Public Accounting Firm:
| Page |
| |
Report of Independent Registered Public Accounting Firm | F-1 |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | F-2 |
Report of Predecessor Independent Registered Public Accounting Firm | F-3 |
Consolidated Statements of Operations for the fiscal years ended December 31, 2012 and 2011, and the nine-month transition period ended December 31, 2010 | F-4 |
Consolidated Statement of Comprehensive Income (Loss) for the fiscal years ended December 31, 2012 and 2011, and the nine-month transition period ended December 31, 2010 | F-5 |
Consolidated Balance Sheets as of December 31, 2012 and 2011 | F-6 |
Consolidated Statement of Stockholders’ Equity for the fiscal years December 31, 2012 and 2011, and the nine-month transition period ended December 31, 2010 | F-7 |
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2012 and 2011, and the nine-month transition period ended December 31, 2010 | F-8 |
Notes to Consolidated Financial Statements | F-9 |
| 2. | Financial Statement Schedule |
Schedule II - Valuation and Qualifying Accounts | II-1 |
The exhibits listed in the accompanying Index to Exhibits, which follows the signature page, are filed or incorporated by reference as part of this Annual Report on Form 10-K.
(b) | Exhibits – see item 15(a)(3) above.
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(c) | Financial Statement Schedules – see Item 15(a)(2) above.
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Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Statements of Operations for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013, and 2012
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
2.Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2014, 2013, and 2012
See Exhibit Index beginning on page G-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Steel Excel Inc. | |
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| By: | /s/ Jack L. Howard | |
| Jack L. Howard | |
| Vice Chairman | |
| Date: | March 16, 2015 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | | |
| Signature | | Title |
| | | |
| By: | /s/ Jack L. Howard | | Vice Chairman |
| Jack L. Howard | | (Principal executive officer) |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ James F. McCabe, Jr. | | Chief Financial Officer |
| James F. McCabe, Jr. | | (Principal financial officer) |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ Warren G. Lichtenstein | | Chairman of the Board |
| Warren G. Lichtenstein | | |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ John J. Quicke | | Director |
| John J. Quicke | | |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ John Mutch | | Director |
| John Mutch | | |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ Gary Ullman | | Director |
| Gary Ullman | | |
| Date: | March 16, 2015 | | |
| | | |
| By: | /s/ Robert Valentine | | Director |
| Robert Valentine | | |
| Date: | March 16, 2015 | | |
| | | |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Steel Excel Inc.
San Ramon, CaliforniaWhite Plains, New York
We have audited the accompanying consolidated balance sheets of Steel Excel Inc. (formerly ADPT Corporation) as of December 31, 20122014 and 20112013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years then ended.in the period ended December 31, 2014. In connection with our audits of the 2012 and 2011 financial statements, we have also audited Schedule II – Valuation and Qualifying Accounts as of and for the years ended December 31, 2012 and 2011.financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statementstatements and schedule presentation.schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steel Excel Inc. at December 31, 20122014 and 2011,2013, and the results of its operations and its cash flows for each of the three years thenin the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, Schedule II – Valuation and Qualifying Accounts as of and for the year ended December 31, 2012 and 2011,financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Steel Excel Inc.’s internal control over financial reporting as of December 31, 2012,2014, based on criteria established inInternal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 8, 201316, 2015 expressed an unqualified opinion thereon.
We also have audited the reclassifications to the consolidated financial statements for the nine months ended December 31, 2010 resulting from presenting the Company’s Aristos Business as a discontinued operation and retroactively adjusting outstanding share and per share information for a reverse/forward split, as described in Notes 1 and 5. In our opinion, such reclassifications are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the December 31, 2010 financial statements of the Company referred to above other than with respect to the reclassifications and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2010 financial statements taken as a whole. The reclassifications had no effect on net loss.
/s/ BDO USA, LLP
San Jose, CaliforniaNew York, New York
March 8, 201316, 2015
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders
Steel Excel Inc.
San Ramon, CaliforniaWhite Plains, New York
We have audited Steel Excel Inc.’s (formerly ADPT Corporation) internal control over financial reporting as of December 31, 2012,2014, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Steel Excel Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s“Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Eagle Well Services, Inc. and Sun Well Service, Inc., which were acquired on February 9, 2012 and May 31, 2012, respectively, and which are included in the consolidated balance sheet of Steel Excel Inc. as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended. On May 31, 2012, the business of Eagle Well Services, Inc. was merged with Sun Well Services, Inc. and both businesses operated as Sun Well Service, Inc. (Sun Well). Sun Well constituted 34% and 31% of total assets and net assets, respectively, as of December 31, 2012, and 70% of net revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Sun Well because of the timing of the acquisitions, merger of the two acquired entities and subsequent integration efforts. Our audit of internal control over financial reporting of Steel Excel Inc. also did not include an evaluation of the internal control over financial reporting of Sun Well.
In our opinion, Steel Excel Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Steel Excel Inc. as of December 31, 20122014 and 2011,2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years thenin the period ended December 31, 2014, and our report dated March 8, 201316, 2015 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, CaliforniaNew York, New York
March 8, 201316, 2015
Report of Predecessor Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Steel Excel Inc.
In our opinion, the consolidated statements of operations, of comprehensive loss, of stockholders’ equity and of cash flows listed in the index appearing under Item 15(a)1, present fairly, in all material respects, the results of operations and cash flows of Steel Excel Inc. (formerly ADPT Corporation) and its subsidiaries for the nine month period ended December 31, 2010, before the effects of the adjustments to retrospectively reflect the discounted operations and the reverse/forward stock split described in Note 1, in conformity with accounting principles generally accepted in the United States of America (the 2010 financial statements before the effects of the adjustments described in Note 1 are not presented herein). In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)2 presents fairly, in all material respects, the information set forth therein for the nine month period ended December 31, 2010 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards required that we plan to perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts of disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations and the reverse/forward stock split described in Note 1 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 3, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands) |
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2014 | | 2013 | | 2012 |
| | | | (in thousands, except per-share data) |
| | | | | | | | |
| Net revenues | | | $ | 210,148 |
| | $ | 120,028 |
| | $ | 100,104 |
|
| | | | | | | | |
| Cost of revenues | | | 150,979 |
| | 85,385 |
| | 66,064 |
|
| | | | | | | | |
| Gross profit | | | 59,169 |
| | 34,643 |
| | 34,040 |
|
| | | | | | | | |
| Operating expenses: | | | | | |
| | |
|
| Selling, general and administrative expenses | | | 36,324 |
| | 23,372 |
| | 20,397 |
|
| Amortization of intangibles | | | 9,582 |
| | 8,709 |
| | 7,634 |
|
| Impairment of goodwill | | | 36,666 |
| | — |
| | 192 |
|
| Total operating expenses | | | 82,572 |
| | 32,081 |
| | 28,223 |
|
| | | | | | | | |
| Operating income (loss) | | | (23,403 | ) | | 2,562 |
| | 5,817 |
|
| | | | | | | | |
| Interest expense | | | (3,177 | ) | | (1,725 | ) | | (417 | ) |
| Other income, net | | | 7,058 |
| | 7,074 |
| | 1,067 |
|
| | | | | | | | |
| Income (loss) from continuing operations before income taxes and equity method loss | | | (19,522 | ) | | 7,911 |
| | 6,467 |
|
| | | | | | | | |
| Benefit from income taxes | | | 1,323 |
| | 9,342 |
| | 15,712 |
|
| Loss from equity method investees, net of tax | | | (6,070 | ) | | (862 | ) | | — |
|
| | | | | | | | |
| Net income (loss) from continuing operations | | | (24,269 | ) | | 16,391 |
| | 22,179 |
|
| | | | | | | | |
| Income (loss) from discontinued operations, net of taxes | | | 506 |
| | (5,540 | ) | | (1,935 | ) |
| | | | | | | | |
| Net income (loss) | | | (23,763 | ) | | 10,851 |
| | 20,244 |
|
| | | | | | | | |
| Net loss (income) attributable to non-controlling interests in consolidated entities | | | | | |
| | |
|
| Continuing operations | | | 235 |
| | 156 |
| | 22 |
|
| Discontinued operations | | | (279 | ) | | 3,188 |
| | 427 |
|
| | | | | | | | |
| Net income (loss) attributable to Steel Excel Inc. | | | $ | (23,807 | ) | | $ | 14,195 |
| | $ | 20,693 |
|
| | | | | | | | |
| Basic income (loss) per share attributable to Steel Excel Inc.: | | | | | |
| | |
|
| Net income (loss) from continuing operations | | | $ | (2.06 | ) | | $ | 1.31 |
| | $ | 1.83 |
|
| Income (loss) from discontinued operations, net of taxes | | | $ | 0.02 |
| | $ | (0.19 | ) | | $ | (0.12 | ) |
| Net income (loss) | | | $ | (2.04 | ) | | $ | 1.13 |
| | $ | 1.71 |
|
| | | | | | | | |
| Diluted income (loss) per share attributable to Steel Excel Inc.: | | | | | |
| | |
|
| Net income (loss) from continuing operations | | | $ | (2.06 | ) | | $ | 1.31 |
| | $ | 1.83 |
|
| Income (loss) from discontinued operations, net of taxes | | | $ | 0.02 |
| | $ | (0.19 | ) | | $ | (0.12 | ) |
| Net income (loss) | | | $ | (2.04 | ) | | $ | 1.13 |
| | $ | 1.71 |
|
| | | | | | | | |
| Shares used in computing income (loss) per share: | | | | | |
| | |
|
| Basic | | | 11,678 |
| | 12,584 |
| | 12,110 |
|
| Diluted | | | 11,678 |
| | 12,602 |
| | 12,133 |
|
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| Net revenues | | $ | 100,104 | | | $ | 2,502 | | | $ | - | |
| | | | | | | | | | | | | |
| Cost of revenues | | | 66,064 | | | | 1,459 | | | | - | |
| Gross margin | | | 34,040 | | | | 1,043 | | | | - | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general and administrative | | | 28,031 | | | | 9,585 | | | | 11,045 | |
| Impairment of goodwill | | | 192 | | | | - | | | | - | |
| Restructuring charges | | | - | | | | (31 | ) | | | 3,944 | |
| Total operating expenses | | | 28,223 | | | | 9,554 | | | | 14,989 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | 5,817 | | | | (8,511 | ) | | | (14,989 | ) |
| | | | | | | | | | | | | |
| Interest and other income, net | | | 1,067 | | | | 8,358 | | | | 5,208 | |
| Interest expense | | | (417 | ) | | | (5 | ) | | | (3 | ) |
| Income (loss) from continuing operations before income taxes | | | 6,467 | | | | (158 | ) | | | (9,784 | ) |
| | | | | | | | | | | | | |
| Benefit from (provision for) income taxes | | | 15,712 | | | | 226 | | | | (7,602 | ) |
| Income (loss) from continuing operations, net of taxes | | | 22,179 | | | | 68 | | | | (17,386 | ) |
| | | | | | | | | | | | | |
| Income (loss) from discontinued operations, net of taxes | | | (1,935 | ) | | | 1,624 | | | | (11,289 | ) |
| Gain on disposal of discontinued operations, net of taxes | | | - | | | | 5,005 | | | | 10,916 | |
| Income (loss) from discontinued operations | | | (1,935 | ) | | | 6,629 | | | | (373 | ) |
| Net income (loss) | | | 20,244 | | | | 6,697 | | | | (17,759 | ) |
| | | | | | | | | | | | | |
| Net loss attributable to non-controlling interests in consolidated entities | | | | | | | | | | | | |
| Continuing operations | | | (22 | ) | | | - | | | | - | |
| Discontinued operations | | | (427 | ) | | | (72 | ) | | | - | |
| | | | (449 | ) | | | (72 | ) | | | - | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 20,693 | | | $ | 6,769 | | | $ | (17,759 | ) |
| | | | | | | | | | | | | |
| Basic income (loss) per share: | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) |
| Income (loss) from discontinued operations, net of taxes | | $ | (0.16 | ) | | $ | 0.61 | | | $ | (0.03 | ) |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) |
| | | | | | | | | | | | | |
| Diluted income (loss) per share: | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) |
| Income (loss) from discontinued operations, net of taxes | | $ | (0.16 | ) | | $ | 0.61 | | | $ | (0.03 | ) |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) |
| | | | | | | | | | | | | |
| Shares used in computing income (loss) per share: | | | | | | | | | | | | |
| Basic | | | 12,110 | | | | 10,882 | | | | 11,609 | |
| Diluted | | | 12,133 | | | | 10,897 | | | | 11,609 | |
See accompanying Notes to Consolidated Financial Statements.
STEEL EXCEL INC.Steel Excel Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 20,693 | | | $ | 6,769 | | | $ | (17,759 | ) |
| Other comprehensive income (loss), net of taxes | | | | | | | | | | | | |
| Net foreign currency translation adjustment, net of taxes: | | | | | | | | | | | | |
| Foreign currency translation adjustment, net of taxes | | | (100 | ) | | | 164 | | | | 141 | |
| Release of foreign currency translation gains, net of taxes | | | - | | | | (2,542 | ) | | | - | |
| Subtotal | | | (100 | ) | | | (2,378 | ) | | | 141 | |
| Net unrealized gain (loss) on marketable securities, net of taxes | | | 303 | | | | 260 | | | | (1,566 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | | 20,896 | | | | 4,651 | | | | (19,184 | ) |
| Comprehensive loss attributable to non-controlling interest | | | (449 | ) | | | (72 | ) | | | - | |
| | | | | | | | | | | | | |
| Comprehensive income (loss) attributable to Steel Excel Inc. | | $ | 20,447 | | | $ | 4,579 | | | $ | (19,184 | ) |
|
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2014 | | 2013 | | 2012 |
| | | | (in thousands) |
| Net income (loss) | | | $ | (23,763 | ) | | $ | 10,851 |
| | $ | 20,244 |
|
| Other comprehensive income (loss): | | | |
| | |
| | |
| Foreign currency translation adjustment | | | 20 |
| | (63 | ) | | (100 | ) |
| Reclassification to realized gains | | | — |
| | (361 | ) | | — |
|
Net foreign currency translation adjustment (A) | | | 20 |
| | (424 | ) | | (100 | ) |
| | | | | | | | |
| Marketable securities: | | | | | | | |
Gross unrealized gains (losses) on marketable securities, net of tax (B) | | | (20,043 | ) | | 7,636 |
| | 506 |
|
Reclassification to realized gains, net of tax (C) | | | (5,223 | ) | | (1,642 | ) | | (203 | ) |
| Net unrealized gain (loss) on marketable securities, net of taxes | | | (25,266 | ) | | 5,994 |
| | 303 |
|
| | | | | | | | |
| Comprehensive income (loss) | | | (49,009 | ) | | 16,421 |
| | 20,447 |
|
| Comprehensive loss (income) attributable to non-controlling interest | | | (44 | ) | | 3,344 |
| | 449 |
|
| | | | | | | | |
| Comprehensive income (loss) attributable to Steel Excel Inc. | | | $ | (49,053 | ) | | $ | 19,765 |
| | $ | 20,896 |
|
| | | | | | | | |
| (A) No tax effect on cumulative translation adjustments | | | | | | | |
| (B) Tax provision on gross unrealized gains (losses) | | | $ | — |
| | $ | (4,490 | ) | | $ | (196 | ) |
| (C) Tax benefit on reclassifications to realized gains (losses) | | | $ | — |
| | $ | 966 |
| | $ | 79 |
|
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
(in thousands)
| | | | December 31, | | | | | | |
| | | 2012 | | | 2011 | | December 31,
2014 | | December 31, 2013 |
| | | | | | | | (in thousands. except per-share data) |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | | $ | 71,556 | | | $ | 8,487 | | $ | 51,910 |
| | $ | 73,602 |
|
| Restricted cash | | 21,311 |
| | — |
|
| Marketable securities | | | 199,128 | | | | 314,941 | | 138,457 |
| | 178,485 |
|
| Accounts receivable, net of allowance for doubtful accounts of $0 | | | 17,257 | | | | 4,660 | | 28,016 |
| | 25,355 |
|
| Prepaid expenses and other current assets | | | 3,670 | | | | 2,055 | | 4,228 |
| | 5,870 |
|
| Deferred income taxes | | 1,696 |
| | — |
|
| Current assets of discontinued operations | | — |
| | 31 |
|
| Total current assets | | | 291,611 | | | | 330,143 | | 245,618 |
| | 283,343 |
|
| Property and equipment, net | | | 77,768 | | | | 21,060 | | 107,187 |
| | 105,890 |
|
| Goodwill | | | 53,093 | | | | 8,244 | | 30,864 |
| | 67,530 |
|
| Intangible assets, net | | | 39,887 | | | | 5,786 | | 35,782 |
| | 44,438 |
|
| Other investments | | 28,525 |
| | 25,844 |
|
| Investments in equity method investees ($24,355 at fair value in 2014) | | 30,060 |
| | 8,339 |
|
| Deferred income taxes | | 80 |
| | 1,556 |
|
| Other long-term assets | | | 4,136 | | | | 3,444 | | 1,238 |
| | 1,754 |
|
| | | | | | | | | | |
| Total assets | | $ | 466,495 | | | $ | 368,677 | | $ | 479,354 |
| | $ | 538,694 |
|
| | | | | | | | | | | | |
| Liabilities and Stockholders' Equity: | | | | | | | | | |
| | |
|
| Current liabilities: | | | | | | | | | |
| | |
|
| Accounts payable | | $ | 4,282 | | | $ | 1,841 | | $ | 3,936 |
| | $ | 4,754 |
|
| Accrued expenses and other liabilities | | | 6,337 | | | | 3,826 | | 8,916 |
| | 7,763 |
|
| Financial instrument obligations | | 21,311 |
| | — |
|
| Current portion of long-term debt | | | 4,000 | | | | - | | 13,214 |
| | 13,214 |
|
| Current portion of capital lease obligations | | | 413 | | | | - | | 412 |
| | 412 |
|
| 3/4% convertible senior subordinated notes due 2023 | | | 346 | | | | 346 | | |
| Convertible senior subordinated notes | | — |
| | 346 |
|
| Deferred income taxes | | 85 |
| | 3,612 |
|
| Current liabilities of discontinued operations | | 450 |
| | 987 |
|
| Total current liabilities | | | 15,378 | | | | 6,013 | | 48,324 |
| | 31,088 |
|
| Capital lease obligations, net of current portion | | | 984 | | | | - | | 177 |
| | 572 |
|
| Long-term debt, net of current portion | | | 9,000 | | | | - | | 66,071 |
| | 79,286 |
|
| Deferred income taxes | | 3,549 |
| | — |
|
| Other long-term liabilities | | | 9,171 | | | | 10,767 | | 3,715 |
| | 3,813 |
|
| Total liabilities | | | 34,533 | | | | 16,780 | | 121,836 |
| | 114,759 |
|
| | | | | | | | | | | | |
| Commitments and contingencies (Note 13) | | | | | | | | | |
| Commitments and contingencies | |
|
| |
|
|
| | | | | | | | | | | | |
| Stockholders' equity: | | | | | | | | | |
| | |
|
Preferred stock; $0.001 par value; Authorized shares, 1,000; Series A Shares, 250 designated; outstanding shares, none | | | - | | | | - | | |
Common stock; $0.001 par value; Authorized shares, 40,000; outstanding shares, 12,907 and 10,892 at December 31, 2012 and 2011, respectively | | | 13 | | | | 11 | | |
| Common stock ($0.001 par value, 40,000 shares authorized; 14,220 and 14,508 shares issued in 2014 and 2013, respectively; 11,406 and 12,005 shares outstanding in 2014 and 2013, respectively) | | 14 |
| | 14 |
|
| Additional paid-in capital | | | 231,170 | | | | 171,636 | | 267,444 |
| | 274,826 |
|
| Accumulated other comprehensive income | | | 946 | | | | 743 | | |
| Accumulated other comprehensive income (loss) | | (18,730 | ) | | 6,516 |
|
| Retained earnings | | | 199,772 | | | | 179,079 | | 190,160 |
| | 213,967 |
|
| Treasury stock, at cost (2014 - 2,814 shares; 2013 - 2,503 shares) | | (81,355 | ) | | (71,001 | ) |
| Total Steel Excel Inc. stockholders' equity | | | 431,901 | | | | 351,469 | | 357,533 |
| | 424,322 |
|
| Non-controlling interest | | | 61 | | | | 428 | | (15 | ) | | (387 | ) |
| Total stockholders' equity | | | 431,962 | | | | 351,897 | | 357,518 |
| | 423,935 |
|
| | | | | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 466,495 | | | $ | 368,677 | | $ | 479,354 |
| | $ | 538,694 |
|
See accompanying Notes to Consolidated Financial Statements.
STEEL EXCEL INC.Steel Excel Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(in thousands)
| | | Common Stock | | | | | | | | | Retained | | | | | | | | |
| | | Shares | | | Amount | | | Capital | | | Income | | | Earnings | | | Interest | | | Total | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Steel Excel Inc. Stockholders' Equity | | | | |
| Balance, March 31, 2010 | | | 12,040 | | | $ | 12 | | | $ | 203,336 | | | $ | 4,286 | | | $ | 190,069 | | | $ | - | | | $ | 397,703 | | |
| Net loss attributable to Steel Excel Inc. | | | - | | | | - | | | | - | | | | - | | | | (17,759 | ) | | | - | | | | (17,759 | ) | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | (1,425 | ) | | | - | | | | - | | | | (1,425 | ) | |
Sale of common stock under employee option plans | | | 76 | | | | - | | | | 2,169 | | | | - | | | | - | | | | - | | | | 2,169 | | |
| Net issuance of restricted shares | | | (62 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| Net settlement of restricted shares | | | 1 | | | | - | | | | (861 | ) | | | - | | | | - | | | | - | | | | (861 | ) | |
| Stock-based compensation | | | - | | | | - | | | | 1,123 | | | | - | | | | - | | | | - | | | | 1,123 | | |
| Repurchase of common stock | | | (1,173 | ) | | | (1 | ) | | | (34,683 | ) | | | - | | | | - | | | | - | | | | (34,684 | ) | |
| Balance, December 31, 2010 | | | 10,882 | | | | 11 | | | | 171,084 | | | | 2,861 | | | | 172,310 | | | | - | | | | 346,266 | | |
| | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Non-Controlling Interest | | |
| | | Shares | | Amount | | Shares | | Amount | | Total |
| | | | | | | | | | | | | | | | | | | |
| Balance, January 1, 2012 | | 12,239 |
| | $ | 12 |
|
| (1,347 | ) |
| $ | (38,841 | ) | | $ | 210,476 |
|
| $ | 743 |
|
| $ | 179,079 |
|
| $ | 428 |
|
| $ | 351,897 |
|
| Net income attributable to Steel Excel Inc. | | | - | | | | - | | | | - | | | | - | | | | 6,769 | | | | - | | | | 6,769 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20,693 |
| | — |
| | 20,693 |
|
| Net loss attributable to non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | (72 | ) | | | (72 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (449 | ) | | (449 | ) |
| Other comprehensive loss | | | | | | | | | | | | | | | (2,118 | ) | | | - | | | | - | | | | (2,118 | ) | |
Sale of common stock under employee option plans | | | 1 | | | | - | | | | 29 | | | | | | | | - | | | | - | | | | 29 | | |
| Non-controlling interest of acquired entities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 157 |
| | 157 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 203 |
| | — |
| | — |
| | 203 |
|
| Net issuance of restricted shares | | | 5 | | | | - | | | | | | | | | | | | - | | | | - | | | | - | | 99 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net settlement of restricted shares | | | 4 | | | | - | | | | | | | | | | | | - | | | | - | | | | - | | |
| Stock-based compensation | | | - | | | | - | | | | 523 | | | | | | | | - | | | | - | | | | 523 | | — |
| | — |
| | — |
| | — |
| | 1,487 |
| | — |
| | — |
| | — |
| | 1,487 |
|
| Non-controlling interest investment | | | | | | | | | | | | | | | | | | | - | | | | 500 | | | | 500 | | |
| Balance, December 31, 2011 | | | 10,892 | | | | 11 | | | | 171,636 | | | | 743 | | | | 179,079 | | | | 428 | | | | 351,897 | | |
| Issuance of common stock for acquisition | | 2,027 |
| | 2 |
| | — |
| | — |
| | 60,823 |
| | — |
| | — |
| | — |
| | 60,825 |
|
| Repurchases of common stock | | — |
| | — |
| | (111 | ) | | (2,776 | ) | | — |
| | — |
| | — |
| | — |
| | (2,776 | ) |
| Reversal of non-controlling interest upon disposition | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (75 | ) | | (75 | ) |
| Balance, December 31, 2012 | | 14,365 |
| | 14 |
| | (1,458 | ) | | (41,617 | ) | | 272,786 |
| | 946 |
| | 199,772 |
| | 61 |
| | 431,962 |
|
| Net income attributable to Steel Excel Inc. | | | - | | | | - | | | | - | | | | - | �� | | | 20,693 | | | | - | | | | 20,693 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,195 |
| | — |
| | 14,195 |
|
| Net loss attributable to non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | (449 | ) | | | (449 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,344 | ) | | (3,344 | ) |
| Non-controlling interest investment in The Show | | | | | | | | | | | | | | | | | | | | | | | 75 | | | | 75 | | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 203 | | | | - | | | | - | | | | 203 | | — |
| | — |
| | — |
| | — |
| | — |
| | 5,570 |
| | — |
| | — |
| | 5,570 |
|
| Net issuance of restricted shares | | | 85 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | 143 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net settlement of restricted shares | | | 14 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| Stock-based compensation | | | - | | | | - | | | | 1,487 | | | | - | | | | - | | | | - | | | | 1,487 | | — |
| | — |
| | — |
| | — |
| | 2,040 |
| | — |
| | — |
| | — |
| | 2,040 |
|
| Issuance of common stock for acquisition | | | 2,027 | | | | 2 | | | | 60,823 | | | | - | | | | - | | | | - | | | | 60,825 | | |
| Repurchase of common stock | | | (111 | ) | | | - | | | | (2,776 | ) | | | - | | | | - | | | | - | | | | (2,776 | ) | |
| Non-controlling interest investment in CrossFit | | | - | | | | - | | | | - | | | | - | | | | - | | | | 82 | | | | 82 | | |
| Write-off of non-controlling interest of The Show | | | - | | | | - | | | | - | | | | - | | | | - | | | | (75 | ) | | | (75 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2012 | | | 12,907 | | | $ | 13 | | | $ | 231,170 | | | $ | 946 | | | $ | 199,772 | | | $ | 61 | | | $ | 431,962 | | |
| Repurchases of common stock | | — |
| | — |
| | (1,045 | ) | | (29,384 | ) | | — |
| | — |
| | — |
| | — |
| | (29,384 | ) |
| Non-controlling interest of acquired entities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,896 |
| | 2,896 |
|
| Balance, December 31, 2013 | | 14,508 |
| | $ | 14 |
| | (2,503 | ) | | $ | (71,001 | ) | | $ | 274,826 |
| | $ | 6,516 |
| | $ | 213,967 |
| | $ | (387 | ) | | $ | 423,935 |
|
| Net loss attributable to Steel Excel Inc. | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (23,807 | ) | | — |
| | (23,807 | ) |
| Net loss attributable to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
| | 44 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (25,246 | ) | | — |
| | — |
| | (25,246 | ) |
| Net issuance of restricted shares | | 9 |
| | 1 |
| | — |
| | — |
| | (120 | ) | | | | | | | | (119 | ) |
| Stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 2,807 |
| | — |
| | — |
| | — |
| | 2,807 |
|
| Reverse/forward stock split | | (297 | ) | | (1 | ) | | — |
| | — |
| | (10,069 | ) | | — |
| | — |
| | — |
| | (10,070 | ) |
| Repurchases of common stock | | | | | | (311 | ) | | (10,354 | ) | | — |
| | — |
| | — |
| | — |
| | (10,354 | ) |
| Contribution from non-controlling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 328 |
| | 328 |
|
| Balance, December 31, 2014 | | 14,220 |
| | $ | 14 |
| | (2,814 | ) | | $ | (81,355 | ) | | $ | 267,444 |
| | $ | (18,730 | ) | | $ | 190,160 |
| | $ | (15 | ) | | $ | 357,518 |
|
See accompanying Notes to Consolidated Financial Statements.
Steel Excel Inc.
STEEL EXCEL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | |
| Cash Flows From Operating Activities: | | | | | | | | | |
| Net income (loss) | | $ | 20,693 | | | $ | 6,769 | | | $ | (17,759 | ) |
| Less: Income (loss) from discontinued operations, net of taxes | | | (1,935 | ) | | | 6,915 | | | | (373 | ) |
| Income (loss) from continuing operations, net of taxes | | | 22,628 | | | | (146 | ) | | | (17,386 | ) |
Adjustments to reconcile income (loss) from continuing operations, net of taxes, to net cash provided by (used in) operating activities of continuing operations: | | | | | | | | | | | | |
| Stock-based compensation expense | | | 1,487 | | | | 523 | | | | 470 | |
| Depreciation and amortization | | | 16,728 | | | | 2,809 | | | | 3,214 | |
| Adjustment of deferred taxes | | | (15,105 | ) | | | 1,395 | | | | - | |
| Loss on disposal of long-lived assets | | | 819 | | | | - | | | | - | |
| Impairment of goodwill | | | 192 | | | | - | | | | - | |
| Gain on release of foreign currency translation, net of taxes | | | - | | | | (2,542 | ) | | | - | |
| Changes in current assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (5,469 | ) | | | (569 | ) | | | - | |
| Prepaid expenses and other current assets | | | (970 | ) | | | 2,835 | | | | 6,554 | |
| Assets held for sale | | | - | | | | 6,216 | | | | - | |
| Other assets | | | (132 | ) | | | (802 | ) | | | 153 | |
| Accounts payable | | | 1,903 | | | | 177 | | | | (7,120 | ) |
| Accrued expenses and other liabilities | | | (2,098 | ) | | | (5,934 | ) | | | (6,717 | ) |
| Net loss attributable to non-controlling interest | | | (449 | ) | | | (72 | ) | | | - | |
Net cash provided by (used in) operating activities of continuing operations | | | 19,534 | | | | 3,890 | | | | (20,832 | ) |
Net cash provided by (used in) operating activities of discontinued operations | | | (847 | ) | | | 6,933 | | | | 6,519 | |
| Net cash provided by (used in) operating activities | | | 18,687 | | | | 10,823 | | | | (14,313 | ) |
| | | | | | | | | | | | | |
| Cash Flows From Investing Activities: | | | | | | | | | | | | |
| Purchases of net assets in acquisitions | | | (52,567 | ) | | | (36,530 | ) | | | - | |
| Purchases of property and equipment | | | (11,818 | ) | | | (65 | ) | | | - | |
| Investment by non-controlling interest | | | 75 | | | | - | | | | - | |
| Purchases of marketable securities | | | (523,443 | ) | | | (537,898 | ) | | | (198,403 | ) |
| Sales of marketable securities | | | 573,792 | | | | 441,226 | | | | 141,681 | |
| Maturities of marketable securities | | | 64,253 | | | | 92,321 | | | | 49,536 | |
| Net cash provided by (used in) investing activities of continuing operations | | | 50,292 | | | | (40,946 | ) | | | (7,186 | ) |
| Net cash provided by investing activities of discontinued operations | | | - | | | | - | | | | 28,285 | |
| Net cash provided by (used in) investing activities | | | 50,292 | | | | (40,946 | ) | | | 21,099 | |
| | | | | | | | | | | | | |
| Cash Flows From Financing Activities: | | | | | | | | | | | | |
| Proceeds from issuance of common stock | | | - | | | | 29 | | | | 2,169 | |
| Repurchases of common stock | | | (2,776 | ) | | | - | | | | (34,684 | ) |
| Repayments of capital lease obligations | | | (230 | ) | | | - | | | | - | |
| Repayments of long-term debt | | | (3,000 | ) | | | - | | | | - | |
| Net cash provided by (used in) financing activities | | | (6,006 | ) | | | 29 | | | | (32,515 | ) |
| Effect of foreign currency translation on cash and cash equivalents | | | 96 | | | | 305 | | | | 57 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 63,069 | | | | (29,789 | ) | | | (25,672 | ) |
| Cash and cash equivalents, beginning balance | | | 8,487 | | | | 38,276 | | | | 63,948 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, ending balance | | $ | 71,556 | | | $ | 8,487 | | | $ | 38,276 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Cash Flows From Operating Activities: | | | | | |
| Net income (loss) | $ | (23,763 | ) | | $ | 10,851 |
| | $ | 20,244 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| Loss (income) from discontinued operations | (506 | ) | | 5,540 |
| | 1,935 |
|
| Stock-based compensation expense | 2,807 |
| | 2,040 |
| | 1,487 |
|
| Depreciation and amortization | 24,156 |
| | 19,185 |
| | 15,303 |
|
| Impairment of goodwill | 36,666 |
| | — |
| | 192 |
|
| Adjustment of deferred income taxes | (198 | ) | | (1,536 | ) | | (15,105 | ) |
| Gain on sales of marketable securities | (3,765 | ) | | (2,608 | ) | | (282 | ) |
| Reversal of tax reserves | (45 | ) | | (7,236 | ) | | — |
|
| Loss on equity-method investees | 6,070 |
| | 862 |
| | — |
|
| Loss on financial instrument obligations | 1,820 |
| | — |
| | — |
|
| Other | 1,684 |
| | 935 |
| | 2,244 |
|
| Changes in operating assets and liabilities, net of effects of acquisitions: | |
| | |
| | |
| Accounts receivable | (2,488 | ) | | 2,653 |
| | (5,469 | ) |
| Assets held for sale | — |
| | — |
| | — |
|
| Prepaid expenses and other assets | 1,782 |
| | (833 | ) | | (1,102 | ) |
| Accounts payable and other liabilities | (305 | ) | | (2,044 | ) | | (195 | ) |
| Net cash used in operating activities of discontinued operations | — |
| | (2,116 | ) | | (847 | ) |
| Net cash provided by operating activities | 43,915 |
| | 25,693 |
| | 18,405 |
|
| | | | | | |
| Cash Flows From Investing Activities: | |
| | |
| | |
| Purchases of businesses, net of cash acquired | (517 | ) | | (61,888 | ) | | (52,567 | ) |
| Purchases of property and equipment | (15,939 | ) | | (8,932 | ) | | (11,818 | ) |
| Proceeds from sale of property and equipment | 632 |
| | 552 |
| | — |
|
| Other investments | (3,000 | ) | | (25,000 | ) | | — |
|
| Investments in equity method investees | (144 | ) | | (9,202 | ) | | — |
|
| Purchases of marketable securities | (111,648 | ) | | (189,268 | ) | | (523,443 | ) |
| Sales of marketable securities | 116,314 |
| | 75,825 |
| | 574,074 |
|
| Maturities of marketable securities | 4,302 |
| | 145,994 |
| | 64,253 |
|
| Proceeds from issuance of financial instrument obligations | 385 |
| | — |
| | — |
|
| Repayments of financial instrument obligations | (381 | ) | | — |
| | — |
|
| Reclassification of restricted cash | (21,311 | ) | | — |
| | — |
|
| Net cash provided by investing activities of discontinued operations | — |
| | — |
| | 75 |
|
| Net cash provided by (used in) investing activities | (31,307 | ) | | (71,919 | ) | | 50,574 |
|
| | | | | | |
| Cash Flows From Financing Activities: | |
| | |
| | |
| Repurchases of common stock - treasury shares | (10,354 | ) | | (29,384 | ) | | (2,776 | ) |
| Repurchases of common stock - reverse/forward stock split | (10,070 | ) | | — |
| | — |
|
| Proceeds from issuance of long-term debt | — |
| | 95,000 |
| | — |
|
| Payments for debt issuance costs | — |
| | (1,368 | ) | | |
| Repayments of long-term debt | (13,215 | ) | | (15,500 | ) | | (3,000 | ) |
| Other financing activities | (681 | ) | | (413 | ) | | (230 | ) |
| Net cash provided by (used in) financing activities | (34,320 | ) | | 48,335 |
| | (6,006 | ) |
| | | | | | |
| Net increase (decrease) in cash and cash equivalents | (21,712 | ) | | 2,109 |
| | 62,973 |
|
| Effect of foreign currency translation on cash and cash equivalents | 20 |
| | (63 | ) | | 96 |
|
| Cash and cash equivalents at beginning of period | 73,602 |
| | 71,556 |
| | 8,487 |
|
| | | | | | |
| Cash and cash equivalents at end of period | $ | 51,910 |
| | $ | 73,602 |
| | $ | 71,556 |
|
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
| |
| 1. | Organization and Basis of Presentation |
Description
Steel Excel Inc. (“Steel Excel” or the “Company”) currently operates in two reporting segments:segments - Energy and Sports. Through its wholly-owned subsidiary Steel Energy Services Ltd. ("Steel Energy Services"), the Company’s Energy business provides drilling and production services to the oil and gas industry. Through its wholly-owned subsidiary Steel Sports Inc., the Company’s Sports business provides event-based sports services and Steel Energy, while continuingother health-related services. The Company also makes significant non-controlling investments in entities in industries related to its reporting segments as well as entities in other unrelated industries. The Company continues to identify additional new business acquisition opportunities. For details regardingopportunities in both the Energy and Sports industries as well as in other unrelated industries. The Company began its Sports and Energy businesses in June 2011 and December 2011, respectively. Prior to that the Company provided enterprise-class external storage products and software to original equipment manufacturers (the "Predecessor Business"). Steel Partners Holdings L.P. (“Steel Partners”), an affiliate, beneficially owned approximately 58.0% of the Company’s historical business, which has been accounted foroutstanding common stock as discontinued operations, refer to Note 5 of the Notes to Financial Statements. The Company was previously known as ADPT Corporation.December 31, 2014.
Basis of Presentation
The consolidated financial statements which include the Company and its wholly-owned subsidiaries, arehave been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s Consolidated Financial Statementsin the United States, and include the accounts of Steel Excelthe Company and all of its subsidiaries. The Company consolidates entities in which it owns greater than 50% of the voting equity attributableof an entity or otherwise is able to non-controlling interests in subsidiaries is shown separately in the accompanying consolidated balance sheets.exert control. All significant intercompany accounts and transactions have been eliminated in consolidation.the consolidated financial statements.
ChangeThe Company shut down the operations of Fiscal Year
On December 7, 2010, the Company’s Board of Directors approved the change in its fiscal year-end from March 31 to December 31. As a result of this change, the transition fiscal year was a nine-month transition period from April 1, 2010 to December 31, 2010 (the “Transition Period”). References in these Notes to Consolidated Financial Statements (the “Notes”) to “fiscal year 2012” or “fiscal 2012” refer to the calendar year of January 1, 2012 to December 31, 2012. References in these Notes to “fiscal year 2011” or “fiscal 2011” refer to the calendar year of January 1, 2011 to December 31, 2011.
During fiscal year 2012, the Company acquired one sports-related business, South Bay Strength and Conditioning LLC, and two oilfield servicing businesses, Sun Well Service Inc. and Eagle Well Services. During fiscal year 2011, the Company acquired two sports-related businesses, Baseball Heaven and The Show, LLC (“The Show”), a provider of baseball uniforms to Little League and one oilfield servicing business, Rogue Pressure Services LLC. See Note 3 for additional details. The Company operatessoftball players and coaches, and Ruckus Sports LLC (“Ruckus”), a provider of obstacle course and mass-participation events, in two reportable segments: Steel Sports and Steel Energy. See Note 16 for additional details.
Use of Estimates and Reclassifications
In accordance with GAAP, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Certain reclassifications have been made to prior years’ amounts to conform to the current year’s presentation. In July 2012 the Company reclassified The Show (acquired in August 2011) to discontinued operations as it was not meeting projections, with no expectation to perform as represented when acquired. In July 2011, the Company ceased its efforts to sell or license its intellectual property from its former enterprise-class external storage products business (the “Aristos Business”) and finalized the wind down of such business. As such,November 2013, respectively. Both The Show and Ruckus were part of the AristosCompany’s Sports business. The consolidated financial statements reflect The Show, Ruckus, and any residual activity of the Predecessor Business are reflected as a discontinued operations in the accompanying financial statements and priorall periods have been reclassified to conform to this presentation.(see Note 4).
Reverse/Forward Stock Split
At the close of business on October 3, 2011, the CompanyThe Company's effected a 1-for-500 reverse stock split (the “Reverse Split”"Reverse Split") in June 2014, immediately followed by a 500-for-1 forward stock split (the “Forward Split”"Forward Split", and together with the Reverse Split, the “Reverse/"Reverse/Forward Split”Split"). At, of its common stock. The consolidated financial statements reflect the Company’s 2011 annual stockholders meeting, its stockholders approved a proposal authorizing the Board of Directors (the “Board”) to effect the reverse/forward stock split at exchange ratios determined by the Board within certain specified ranges.
The exchange ratio for the Reverse Split was 1-for-500 and the exchange ratio for the Forward Split was 50-for-1. As a result of the Reverse Split, stockholders holding less than 500 shares (the “Cashed Out Stockholders”) were entitled to a cash payment for all of their shares. All remaining stockholders following the Forward Split (the “Remaining Stockholders”) were also entitled to a cash payment for any fractional shares that they would otherwise have received. The cash payment that each Cashed Out Stockholder or Remaining Stockholder was entitled to receive was based upon such stockholder’s pro rata share of the total net proceeds received in the sale of the aggregated fractional shares by the Company’s transfer agent at prevailing prices on the open market.
As a resulteffects of the Reverse/Forward Split the Company’s common stock outstanding went from 108,868,286 shares at September 30, 2011 to 10,886,829 shares at October 3, 2011. All shares outstanding and per share information for the current and previous financial periods being reported(see Note 21).
Certain other prior period amounts have been adjustedreclassified to reflectconform to the Reverse/Forward Split.2014 presentation.
| |
| 2. | Summary of Significant Accounting Policies |
Cash and Cash Equivalents: Cash and cash equivalents include all cash balances and highly liquid investments having original maturities of three months or less.
SummaryMarketable Securities: Marketable securities are classified as available-for-sale and consist of Significant Accounting Policiesshort-term deposits, corporate debt and equity instruments, and mutual funds. Marketable securities are reported at fair value, with unrealized gains and losses recognized in stockholders’ equity as “other comprehensive income (loss)”. Declines in fair value that are determined to be other than temporary are recognized as an impairment charge. Realized gains or losses on marketable securities are determined based on specific identification of the securities sold and are recognized as “other income (loss)” at the time of sale. The Company classifies its marketable securities as current assets based on the nature of the securities and their availability for use in current operations.
Fair Value MeasurementsAllowance for Doubtful Accounts: The Company recognizes bad debt expense on trade receivables through an allowance account using estimates based on past experience, and writes off trade receivables against the allowance account when the Company believes it has exhausted all available means of collection. There was no allowance for doubtful accounts recognized as of December 31, 2014 and 2013.
Fair Value Measurements:The Company measuresreports certain assets and liabilities at their fair value, aswhich is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The GAAP fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels, as described below:
Level 1 applies to quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 applies to observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 applies to unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
See Notes 6 and 8.
Cash, Cash Equivalents and Marketable Securities Valuation
The Company’s marketable securities are classified as available-for-sale and are reported at fair market value, inclusiveFair values of unrealized gains and losses, as of the respective balance sheet date. Marketable securities consist of corporate obligations, United States government securities, and government agencies. The Consolidated Balance Sheet is updated at each reporting period to reflect the change in the fair value of its marketable securities that have declined below or risen above their original cost. The Consolidated Statements of Operations reflect a charge in the period in which a determination is made that the decline in fair value is considered to be other-than-temporary. The Company does not hold its securities for trading or speculative purposes.
The Company recognizes an impairment charge for available-for-sale investments when a decline in the fair value of its investments below the cost basis is determined to be other than temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the length of time the investment has been in a loss position, the extent to which the fair value has been less than the Company's cost basis, the investment's financial condition, and near-term prospects of the investee. If the Company determines that the decline in an investment's fair value is other than temporary, the difference is recognized as an impairment loss in its Consolidated Statements of Operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, marketable securities and trade accounts receivable. Deposits held with banks, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand and, therefore, bear minimal risk. The Company, by policy, limits the amount of credit exposure through diversification, and management regularly monitors the composition of its investment portfolio for compliance with the Company’s investment policies.
Foreign Currency Translation
For foreign subsidiaries whose functional currency is the local currency, the Company translates assets and liabilities to United States Dollars using period-end exchange rates, and translates revenues and expenses using average monthly exchange rates. The resulting cumulative translation adjustments are included in “Accumulated other comprehensive income, net of taxes,” as a separate component of stockholders’ equity in the Consolidated Balance Sheets.
For foreign subsidiaries whose functional currency is the United States Dollar, certain assets and liabilities are remeasured at the period-end or historical rates are used as appropriate. Revenues and expenses are remeasured at the average monthly exchange rates. Currency transaction gains and losses are recognized in current operations and have not been material to the Company’s operating results for the periods presented.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company's assessment of the collectability of customer accounts. The Company regularly reviews its receivables that remain outstanding past their applicable payment terms and establishes an allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer's ability to pay. There were no allowances for doubtful accounts as of December 31, 2012 and 2011.
Property and Equipment, Net
Property and equipment are recorded at cost and depreciated using the straight-line method with the following useful lives:
| | | Steel Sports | | | Steel Energy | |
| | | (in years) | |
| | | | | | | | | | | |
| Buildings, improvements and sports fields | | 10 | - | 25 | | | 7 | - | 39 | |
| Rigs and workover equipment | | | N/A | | | | 7 | - | 15 | |
| Other equipment | | 5 | - | 10 | | | 4 | - | 7 | |
| Vehicles | | | N/A | | | | 4 | - | 7 | |
| Furniture and fixtures | | | 5 | | | | | 5 | | |
Assets in progress are related to the construction of rigs and a building that have not yet been placed in service for their intended use. Depreciation for rigs commences once it is placed in service and depreciation for buildings commences once they are ready for their intended use.
Repairs and maintenance of property and equipment are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets primarily relate to the Company’s intangible assets and property and equipment. Intangible assets are amortized on a straight-line and an accelerated basis over their estimated useful lives, which range from five to ten years. Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from five to 25 years.
The Company regularly performs reviews to determine if facts or circumstances are present, either internal or external, which would indicate that the carrying values of its long-lived assets may not be recoverable. Indicators include, but are not limited to, a significant decline in the market price of a long-lived asset, an expectation that more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life or a current period operating or cash flow loss combined with a historical or projected operating or cash flow loss.
The recoverability of the carrying value of the long-lived assets, other than goodwill, is based on the estimated future undiscounted cash flows derived from the use of the asset. If a long-lived asset is determined to be impaired, the loss is measured based on the difference between the long-lived asset’s fair value and its carrying value. The estimate of fair value of long-lived assets is based on a discounted estimated future cash flows method and application of a discount rate commensurate with the risks inherent in the current business model. The Company’s current business model contains management’s subjective estimates and judgments; however, actual results may be materially different than the assumptions made by management.
Based on the Company’s decision to pursue the sale or disposition of assets and/or business operations, it evaluated its long-lived assets and recorded impairment charges in the Transition Period aggregating $10.2 million. Of this $10.2 million, $6.1 million related to the write-off of intangible assets and $4.1 million related to the reduction of the carrying value of property and equipment, net, to our estimated fair value. There were no impairment charges on long-lived assets recorded in fiscal 2012 and 2011.
Goodwill and Intangibles, Net
Goodwill represents the excess of cost over the value of net assets of businesses acquired and is carried at cost unless write-downs for impairment are required. The Company’s goodwill as of December 31, 2012 is a result of its acquisitions in fiscal 2012 and 2011. The Company operates under three reporting units, Sun Well, Rogue and Sports, and accordingly, its goodwill has been recorded in these respective reporting units. The Company evaluates the carrying value of goodwill at its reporting unit on an annual basis during the fourth quarter and whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. Such indicators would include a significant reduction in its market capitalization, a decrease in operating results or deterioration of its financial position. In the fourth quarter of fiscal 2012 and 2011, the Company tested the goodwill acquired. In fiscal 2012, it determined the goodwill from Baseball Heaven (the Sports reporting unit) was fully impaired and wrote off the $0.2 million. There was no impairment of the Sun Well and Rogue reporting units. The impairment analysis required a two-step approach and entailed certain assumptions and estimates of discounted cash flows and a residual terminal value categorized as Level 3 inputs under the fair valuethree-level measurement input hierarchy. The Company used a discount rate of approximately 16% and assumed a multiple of EBITDA ranging from 4.6 to 6.0. There was no impairment indicated in fiscal 2011.
Intangible assets, net, for the Steel Sports segment, consist of acquisition-related customer relationships that are amortized over their estimated life of five years on a straight-line basis. Intangible assets, net, for the Steel Energy segment, consist of acquisition-related customer relationships and trade names. The customer relationships and trade names are amortized over the useful life of ten and five years, respectively, utilizing the accelerated amortization method that approximates the estimated future cash flows from the intangibles. Also, see Note 3 to the Consolidated Financial Statements. The Company evaluates other intangible assets for impairment whenever events and circumstances indicate that such assets might be impaired.
Environmental Liabilities
The Company is responsible in many cases for any environmental liabilities resulting from its oilfield services work. It does not anticipate significant environmental liabilities for work completed through December 31, 2012, so no reserve for environmental liabilities has been recorded.
Revenue Recognition
The Company recognizes revenue upon providing the product or service. It provides services and products through two segments: Steel Sports and Steel Energy. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. Revenue is recognized net of estimated allowances. Revenue is generated by short-term projects, most of which are governed by master service agreements (“MSAs”) that are short-term in nature. The MSAs establish per day or per usage rates for equipment services. Steel Energy revenue is recognized daily on a proportionate performance method, based on services rendered. Revenue is reported net of sales tax collected. For Steel Sports revenues, the Company does not recognize revenue until the tournament or league occurs. For sports products, revenue is recognized upon shipment.
Revenue recognition for the Company’s discontinued operations was as follows:
The application of the appropriate accounting principle to the Company’s revenue was dependent upon specific transactions or combination of transactions. As described below, significant management judgments and estimates were made and used in connection with the revenue recognized in any accounting period. Material differences may have resulted in the amount and timing of revenue for any period if management had made different judgments or utilized different estimates.
The Company recognized revenue from its product sales, including sales to original equipment manufacturers, when persuasive evidence of an arrangement existed, delivery had occurred or services had been rendered, the price was fixed or determinable and collectibility was reasonably assured. These criteria were usually met upon shipment from the Company, provided that the risk of loss had transferred to the customer, customer acceptance was obtained or acceptance provisions had lapsed, or the Company had established a historical pattern that acceptance by the customer was fulfilled. The Company’s sales were based on customer purchase orders, and to a lesser extent, contractual agreements, which provided evidence that an arrangement existed.
The Company’s distributor arrangements provided distributors with certain product rotation rights. Additionally, the Company permitted distributors to return products subject to certain conditions. The Company established allowances for expected product returns. The Company also established allowances for rebate payments under certain marketing programs entered into with distributors. These allowances comprised the Company’s revenue reserves and were recorded as direct reductions of revenue and accounts receivable. The Company made estimates of future returns and rebates based primarily on its past experience as well as the volume of products in the distributor channel, trends in distributor inventory, economic trends that might impact customer demand for its products (including the competitive environment), the economic value of the rebates being offered and other factors. In the past, actual returns and rebates were not significantly different from the Company’s estimates.
For products that contained software, where software was essential to the functionality of the product, or software product sales, the Company recognized revenue when passage of title and risk of ownership was transferred to customers, persuasive evidence of an arrangement existed, which was typically upon sale of product by the customer, the price was fixed or determinable and collectibility was probable. For software sales that were considered multiple element transactions, the entire fee from the arrangement was allocated to each respective element based on its vendor specific fair value or upon the residual method and recognized when revenue recognition criteria for each element was met. Vendor specific fair value for each element was established based on the sales price charged when the same element was sold separately or based upon a renewal rate.
Income Taxes
The Company accounts for income taxes for uncertain tax positions using a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in our financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. In addition, the Company continued to recognize interest and/or penalties related to uncertain tax positions as income tax expense in its Consolidated Statements of Operations.
The Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets, tax credits, benefits, deductions and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to those uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to its tax provision in subsequent periods. Due to the complexity and uncertainty associated with the Company’s tax contingencies, the Company cannot make a reasonably reliable estimate of the period in which the cash settlement will be made for the Company’s liabilities associated with uncertain tax positions.
The Company must assess the likelihood that it will be able to recover its deferred tax assets. It considers positive and negative evidence such as historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, it must increase its provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable.
In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The Company recognizes liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes and related interest will be due. If it ultimately determines that payment of these amounts is unnecessary, the Company reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary. The Company records an additional charge in its provision for taxes in the period in which it determines that the recorded tax liability is less than it expects the ultimate assessment to be.
Note 2. Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-02, Topic 350 - Comprehensive Income ("ASU 2013-02"), which amends Topic 220 to improve the reporting of reclassifications out of accumulated other comprehensive income to the respective line items in net income. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company is evaluating the impact of this ASU and does not expect the adoption will have a material impact on its consolidated results of operations or financial condition.
In July 2012, the FASB issued ASU No. 2012-02, Topic 350 - Intangibles - Goodwill and Other ("ASU 2012-02"), which amends Topic 350 to allow an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. An entity would not be required to determine the fair value of the indefinite-lived intangible unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company is evaluating the impact of this ASU and does not expect the adoption will have an impact on its consolidated results of operations or financial condition.
During both fiscal 2012 and 2011, the Company completed six acquisitions as it began its redeployment of capital into operating businesses.
Baseball Heaven
On June 27, 2011, the Company acquired all the net assets of Baseball Heaven LLC and Baseball Café, Inc. (collectively, “Baseball Heaven”), respectively, for an aggregate purchase price of $6.0 million in cash. Baseball Heaven is in the business of marketing and providing baseball facility services, including training camps, summer camps, leagues and tournaments, and concession and catering events. Baseball Heaven is included in the Steel Sports reporting segment.
The Company accounted for the Baseball Heaven acquisition as a business combination and the total consideration of $6.0 million has been allocated to the net assets and liabilities acquired based on their respective estimated fair values at June 27, 2011 as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Accounts receivable | | $ | 149 | |
| Loan receivable | | | 15 | |
| Property and equipment | | | 5,855 | |
| Intangible assets | | | 235 | |
| Deferred revenue | | | (416 | ) |
| Total identifiable net assets acquired | | | 5,838 | |
| | | | | |
| Goodwill | | | 192 | |
| | | | | |
| Net assets acquired | | $ | 6,030 | |
The intangible assets acquired, consisting of customer relationships, are being amortized on a straight-line basis with a life of five years. The amortization expense of $20,000 is included in “Selling, marketing, and administrative expenses” in the Consolidated Statements of Operations for fiscal year 2011. The goodwill of $0.2 million arose from the growth potential the Company saw for Baseball Heaven and was expected to be deductible for tax purposes. As of December 31, 2012, the Company found this goodwill to be impaired. The $0.2 million goodwill impairment charge is included in the Consolidated Statements of Operations for fiscal 2012. The acquisition-related costs for the purchase of Baseball Heaven, included in “Selling, marketing, and administrative” expenses in the Consolidated Statements of Operations, were $0.2 million for fiscal year 2011.
The Show
On August 15, 2011, the Company acquired all of the net assets used by The Show, LLC (“The Show”), which it contributed to The Show in exchange for a 75% membership interest. The Company paid an aggregate purchase price of $1.5 million in cash for these assets. The Show was engaged in the business of outfitting little league baseball and softball players and coaches in fully licensed Major League Baseball, minor league, and college replica uniforms, and sponsoring, hosting, operating, and managing baseball and softball leagues, tournaments, and other events and related websites. The Show was included in the Steel Sports reporting segment.
The Company accounted for The Show acquisition as a business combination and the total consideration of $1.5 million was allocated to the net assets acquired (no liabilities were assumed in connection with this transaction) based on their respective estimated fair values at August 15, 2011 as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Inventory | | $ | 53 | |
| Property and equipment | | | 151 | |
| Total identifiable net assets acquired | | | 204 | |
| | | | | |
| Non-controlling interest in The Show | | | (500 | ) |
| Goodwill | | | 1,796 | |
| | | | | |
| Net assets acquired | | $ | 1,500 | |
The goodwill of $1.8 million arose from the Company’s expectations for the potential of The Show to expand and was expected to be deductible for tax purposes. In July 2012, the Company reclassified The Show to discontinued operations as it was not meeting projections, with no expectation to perform as represented when acquired. As such, this goodwill was written off. See Note 5 for additional details. The acquisition-related costs for the purchase of The Show, included in “Selling, marketing, and administrative” expenses in the Consolidated Statements of Operations, were $0.1 million for fiscal year 2011.
Rogue
On December 7, 2011, the Company acquired all of the net assets of Rogue Pressure Services, LLC (“Rogue”) for an aggregate purchase price of $30.2 million, which includes cash of $29.0 million and a contingent consideration liability of $1.2 million pursuant to an earn-out clause based on the achievement of certain performance levels. Rogue provides snubbing services (controlled installation and removal of all tubulars - drill strings and production strings) in and out of the wellbore with the well under full pressure, flowtesting, and hydraulic work over/simultaneous operations (allows customers to perform multiple tasks on multiple wells on one pad at the same time). Rogue is included in the Steel Energy reporting segment.
The Company accounted for the Rogue acquisition as a business combination and the total cash consideration of $29.0 million was allocated to the net assets acquired and liabilities assumed based on their respective estimated fair values at December 7, 2011 as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Accounts receivable | | $ | 4,031 | |
| Inventory | | | 138 | |
| Prepaid expenses | | | 78 | |
| Property and equipment | | | 15,309 | |
| Intangible assets | | | 5,600 | |
| Accrued expenses | | | (1,194 | ) |
| Total identifiable net assets acquired | | | 23,962 | |
| | | | | |
| Goodwill | | | 6,256 | |
| Contingent consideration | | | (1,218 | ) |
| | | | | |
| Net assets acquired | | $ | 29,000 | |
The intangible assets acquired consist of customer relationships and a trade name, which are being amortized on an accelerated basis over their useful lives, which range from five to ten years. The amortization expense of $29, 000 is included in “Cost of revenues” in the Consolidated Statements of Operations for fiscal year 2011. The goodwill of $6.3 million arises from the growth potential the Company sees for Rogue and is expected to be deductible for tax purposes. The acquisition-related costs for the purchase of Rogue included in “Selling, marketing, and administrative” expenses in the Consolidated Statements of Operations, were $0.2 million for fiscal 2011. The contingent consideration liability is included in “Accrued expenses and other liabilities” in the Consolidated Balance Sheet. As Rogue did not meet the requirements for payment of the contingent consideration liability for fiscal 2012, the Company recorded an adjustment to the liability of $0.7 million, which is included as a reduction of “Selling, general and administrative” expenses in the Consolidated Statements of Operations for fiscal 2012.
Eagle
On February 9, 2012, the Company acquired the business and assets of Eagle Well Services, Inc., which after the transaction operated as Well Services Ltd. (“Well Services”) for an aggregate purchase price of $48.1 million in cash. Well Services engaged in the business of workover rig well servicing, including down hole well maintenance and workover, down hole well repairs, well completions, well recompletions, well drill outs and clean outs, and well reentry.
The Company accounted for this acquisition as a business combination and the total cash consideration of $48.1 million has been allocated to the net assets acquired based on their respective estimated fair values at February 9, 2012 as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Property and equipment | | $ | 23,842 | |
| Intangible assets | | | 14,300 | |
| Accrued expenses | | | (137 | ) |
| Total net identifiable assets | | | 38,005 | |
| | | | | |
| Goodwill | | | 10,126 | |
| | | | | |
| Net assets acquired | | $ | 48,131 | |
The intangible assets acquired consist of customer relationships, which are being amortized on an accelerated basis over the estimated useful life of ten years. The $10.1 million goodwill arises from the growth potential the Company sees for the Well Services business, along with expected synergies with the Company’s current Steel Energy businesses, and is expected to be deductible for tax purposes. The acquisition-related costs for the purchase of Well Services included in “Selling, general and administrative” expenses in the Consolidated Statement of Operations were $0.2 million for fiscal 2012.
Sun Well
On May 31, 2012, the Company completed its acquisition of SWH, Inc. (“SWH”), a subsidiary of BNS Holding, Inc. (“BNS”). SWH’s sole business is Sun Well Service, Inc. (“Sun Well”), which is a provider of premium well services to oil and gas exploration and production companies operating in the Williston Basin in North Dakota and Montana.
Pursuant to the terms of the Share Purchase Agreement, the Company acquired all of the capital stock of SWH for an acquisition price aggregating $68.7 million. The aggregate acquisition price consisted of the issuance of 2,027,500 shares of the Company’s common stock (valued at $30 per share) and cash of $7.9 million. Affiliates of Steel Partners Holdings L.P. (“Steel Partners”) owned approximately 40% of the Company’s outstanding common stock and 85% of BNS prior to the execution of the Share Purchase Agreement.
As a result of the acquisition and additional shares acquired on the open market, Steel Partners beneficially owned approximately 51.1% of the Company’s outstanding common stock. Both BNS and the Company appointed a special committee of independent directors to consider and negotiate the transaction because of the ownership interest held by Steel Partners in each company. Please see Note 18 for further details of this related party transaction.
The Company accounted for this acquisition as a business combination and the total acquisition price has been allocated to the net assets acquired based on their respective estimated fair values at May 31, 2012 as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Cash | | $ | 3,561 | |
| Accounts receivable | | | 7,233 | |
| Prepaid expense and other current assets | | | 782 | |
| Property and equipment | | | 29,787 | |
| Identifiable intangible assets | | | 27,300 | |
| Other long-term assets | | | 714 | |
| Accounts payable | | | (1,036 | ) |
| Accrued expenses and other current liabilities | | | (3,464 | ) |
| Long-term debt | | | (16,000 | ) |
| Capital lease obligations | | | (1,622 | ) |
| Deferred tax liabilities | | | (15,066 | ) |
| Total net identifiable assets | | | 32,189 | |
| | | | | |
| Goodwill | | | 36,557 | |
| | | | | |
| Net assets acquired | | $ | 68,746 | |
The $27.3 million intangible assets acquired consist of customer relationships and a trade name, which will be amortized on an accelerated basis over their respective estimated useful lives of ten and five years, respectively. The $36.6 million goodwill arises from the growth potential the Company sees for Sun Well, along with expected synergies with the Company’s current Steel Energy businesses, and is expected to be non-deductible for tax purposes. The acquisition-related costs for the purchase of SWH included in “Selling, general and administrative” expenses in the Consolidated Statements of Operations were $1.2 million for fiscal 2012.
Additionally, on May 31, 2012, the business of Well Services was combined with Sun Well and both businesses now operate as Sun Well, which is included in the Steel Energy reporting segment.
CrossFit
On November 5, 2012, we acquired 50% of CrossFit South Bay for $82,500 and 50% of the newly formed CrossFit Torrance. As part of the transaction, we also agreed to loan CrossFit Torrance up to $1.1 million to fund leasehold improvements and equipment. Both CrossFit companies provide strength and conditioning services and are included in Steel Sports. Due to having control over the operations, the Company accounted for the CrossFit South Bay acquisition as a business combination and the total consideration of $82,500 has been allocated to the net assets and liabilities acquired based on their respective estimated fair values at November 5, 2012, as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Cash | | $ | 6 | |
| Property and equipment | | | 18 | |
| Accounts payable | | | (14 | ) |
| Total identifiable net assets acquired | | | 10 | |
| | | | | |
| Non-controlling interest in CrossFit South Bay | | | (82 | ) |
| Goodwill | | | 154 | |
| | | | | |
| Net assets acquired | | $ | 82 | |
The $0.1 million of goodwill arises from the growth potential the Company sees for CrossFit South Bay, and is expected to be deductible for tax purposes. The acquisition-related costs for the acquisition of CrossFit South Bay included in “Selling, general and administrative” expenses in the Consolidated Statement of Operations aggregated $4,252 for fiscal 2012.
The results of operations of the acquisitions have been included in the accompanying financial statements since their respective acquisition dates. Since all previous operations of the Company prior to June 2011 have been discontinued, the revenues and cost of revenues of the acquired businesses represent the entire revenues and cost of revenues of the Company for the periods presented.
Pro Forma Financial Information
The Company is not including pro forma information for the operations of Baseball Heaven, The Show and CrossFit South Bay for the periods prior to their acquisition because they were not material to the Company’s results of operations and earnings per share. The following pro forma financial information presents the combined results of the Company, Sun Well (including Eagle merged as Well Services) and Rogue, as if the acquisitions had occurred at the beginning of the fiscal year ended December 31, 2011. Such pro forma results are not necessarily indicative of what would have actually occurred had the acquisitions been in effect for the entire periods. The pro forma financial results are as follows:
| | | | | | | |
| | | (unaudited) | |
| | | (in thousands) | |
| | | | | | | |
| Net revenues | | $ | 123,876 | | | $ | 82,755 | |
| Income from continuing operations, net of taxes | | $ | 24,997 | | | $ | 8,347 | |
| Income (loss) from discontinued operations, net of taxes | | $ | (1,935 | ) | | $ | 6,275 | |
| Net income attributable to Steel Excel Inc. | | $ | 23,511 | | | $ | 14,712 | |
Note 4. Stock Benefit Plans
The Company grants stock options and other stock-based awards to employees, directors and consultants under two equity incentive plans, the 2004 Equity Incentive Plan, as amended and restated on August 20, 2008 and as further amended thereafter (the “2004 Equity Incentive Plan”) and the 2006 Director Plan, as amended. As disclosed in Note 1, all share information has been adjusted to reflect the Reverse/Forward Split.
As of December 31, 2012, the Company had an aggregate of 1.8 million shares of its common stock reserved for issuance under its 2004 Equity Incentive Plan, of which 0.1 shares were subject to outstanding options and other stock-based awards and 1.7 million shares were available for future grants of options and other stock-based awards. As of December 31, 2012, the Company had an aggregate of 0.5 million shares of its common stock reserved for issuance under its 2006 Director Plan, of which 0.1 million shares were subject to outstanding options and other stock-based awards and 0.4 million shares were available for future grants of options and other stock-based awards.
Stock Benefit Plan Activities
Stock Options: A summary of stock option activity under all of the Company’s equity incentive plans as of December 31, 2012 and for fiscal years ended December 31, 2012 and 2011, and for the Transition Period is as follows:
| | | Shares | | | | | | Weighted Average Remaining | | | | |
| | | (in thousands, except exercise price and contractual terms) | |
| | | | | | | | | | | | | |
| Outstanding at March 31, 2010 | | | 488 | | | $ | 40.50 | | | | | | | |
| Granted | | | 9 | | | $ | 29.30 | | | | | | | |
| Exercised | | | (76 | ) | | $ | 28.50 | | | | | | | |
| Forfeited | | | - | | | $ | 38.70 | | | | | | | |
| Expired | | | (341 | ) | | $ | 44.00 | | | | | | | |
| Outstanding at December 31, 2010 | | | 80 | | | $ | 35.61 | | | | | | | |
| Granted | | | 28 | | | $ | 28.73 | | | | | | | |
| Exercised | | | (1 | ) | | $ | 28.60 | | | | | | | |
| Forfeited | | | (1 | ) | | $ | 28.40 | | | | | | | |
| Expired | | | (12 | ) | | $ | 48.32 | | | | | | | |
| Outstanding at December 31, 2011 | | | 94 | | | $ | 31.89 | | | | | | | |
| Granted | | | 3 | | | $ | 13.32 | | | | | | | |
| Exercised | | | - | | | $ | - | | | | | | | |
| Forfeited | | | (5 | ) | | $ | 37.60 | | | | | | | |
| Expired | | | (27 | ) | | $ | 46.16 | | | | | | | |
| Outstanding at December 31, 2012 | | | 65 | | | $ | 30.93 | | | | 7.76 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Options vested and expected to vest at | | | | | | | | | | | | | | | | |
| December 31, 2012 | | | 65 | | | $ | 30.93 | | | | 7.76 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Options exercisable at: | | | | | | | | | | | | | | | | |
| December 31, 2010 | | | 69 | | | $ | 36.60 | | | | | | | | | |
| December 31, 2011 | | | 68 | | | $ | 33.12 | | | | | | | | | |
| December 31, 2012 | | | 46 | | | $ | 31.98 | | | | 7.21 | | | $ | - | |
There is no aggregate intrinsic value of options at December 31, 2012 and 2011 as there were no options “in-the-money.” During fiscal year 2011 and the Transition Period, the aggregate intrinsic value of options exercised under the Company’s equity incentive plans was minimal. The following table summarizes the Company’s options outstanding and exercisable at December 31, 2012:
| | | | | Options Outstanding | | | Options Exercisable | |
| Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | |
| | | | | (in thousands, except exercise price and contractual life) | |
| | | | | | | | | | | | | | | | | | |
| $25.00 | - | $30.00 | | | 45 | | | | 8.56 | | | $ | 28.67 | | | | 26 | | | $ | 28.88 | |
| $30.01 | - | $35.00 | | | 15 | | | | 6.42 | | | $ | 32.84 | | | | 12 | | | $ | 32.84 | |
| $35.01 | - | $40.00 | | | - | | | | - | | | $ | - | | | | - | | | $ | - | |
| $40.01 | - | $45.00 | | | 5 | | | | 5.19 | | | $ | 40.72 | | | | 8 | | | $ | 40.72 | |
| | | | | | 65 | | | | | | | | | | | | 46 | | | | | |
As of December 31, 2012, the total unamortized stock-based compensation expense related to non-vested stock options, net of estimated forfeitures, was approximately $0.1 million and this expense is expected to be recognized over a remaining weighted-average period of 1.7 years.
Restricted Stock: Restricted stock awards and restricted stock units (collectively, “restricted stock”) were granted under the Company’s 2004 Equity Incentive Plan and 2006 Director Plan. As of December 31, 2012, there were 86,041 shares of service-based restricted stock awards and 16,875 shares of restricted stock units outstanding. The cost of restricted stock, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse. Certain non-employee directors received restricted stock shares that will vest immediately if the relationship between the Company and the non-employee director ceases for any reason. These non-vested shares are recognized and fully expensed as stock-based compensation expense at the date of grant.
A summary of activity for restricted stock as of December 31, 2012 and changes during fiscal years 2012 and 2011, and the Transition Period is as follows:
| | | Shares | | | Weighted Average Grant Date Fair Value | |
| | | (in thousands) | | | | |
| | | | | | | |
| Non-vested stock at March 31, 2010 | | | 172 | | | $ | 30.10 | |
| Awarded | | | 8 | | | $ | 29.30 | |
| Vested | | | (45 | ) | | $ | 32.80 | |
| Forfeited | | | (127 | ) | | $ | 29.10 | |
| Non-vested stock at December 31, 2010 | | | 8 | | | $ | 29.40 | |
| Awarded | | | 17 | | | $ | 37.61 | |
| Vested | | | (10 | ) | | $ | 28.97 | |
| Forfeited | | | - | | | $ | 28.39 | |
| Non-vested stock at December 31, 2011 | | | 15 | | | $ | 29.40 | |
| Awarded | | | 100 | | | $ | 27.34 | |
| Vested | | | (12 | ) | | $ | 29.09 | |
| Forfeited | | | - | | | $ | - | |
| Non-vested stock at December 31, 2012 | | | 103 | | | $ | 23.34 | |
All restricted stock units issued prior to December 31, 2011 were awarded at the par value of $0.001 per share (adjusted to $0.01 per share to reflect the Reverse/Forward Split). As of December 31, 2012, the total unamortized stock-based compensation expense related to non-vested restricted stock units that is expected to vest, net of estimated forfeitures, was immaterial.
Stock-Based Compensation
The Company measures and recognizes stock-based compensation for all stock-based awards made to its employees and directors based on estimated fair values using a straight-line amortization method over the respective requisite service period of the awards and adjusts it for estimated forfeitures. In addition, the Company applies the simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, which is available to absorb tax shortfalls.
In May 2010, the Compensation Committee of the Board of Directors modified all employees’ unvested stock-based awards, including stock options, restricted stock awards and restricted stock units, including those with performance-based vesting (none of which affect the Company’s Interim President and Chief Executive Officer). The modification of the unvested stock-based awards was effective the earlier of (1) June 8, 2010, the date the Company consummated the Purchase Agreement with PMC-Sierra for the sale of the DPS Business and PMC-Sierra assumed certain liabilities related to the DPS Business or (2) the date in which an employee was involuntarily terminated (other than for cause) as part of the actions the Company took related to its sale of the DPS Business. The modifications included the acceleration of unvested stock-based awards and a settlement of unvested stock-based awards in the form of a fixed cash payment, resulting in total stock-based compensation expense of $0.2 million and cash compensation expense of $1.2 million, respectively, for the Transition Period.
Stock-based compensation expense included in the Consolidated Statements of Operations for the Transition Period and fiscal 2012 and 2011 is as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010(2) | |
| | | (in thousands) | |
| Stock-based compensation expense by caption | | | | | | | | | |
| Selling, marketing and administrative | | $ | 1,487 | | | $ | 524 | | | $ | 470 | |
Effect on income (loss) from continuing operations, net of taxes(1) | | $ | 1,487 | | | $ | 524 | | | $ | 470 | |
| | | | | | | | | | | | | |
| Stock-based compensation expense by type of award: | | | | | | | | | | | | |
| Stock options | | $ | 92 | | | $ | 69 | | | $ | 215 | |
| Restricted stock awards and restricted stock units | | | 1,395 | | | | 455 | | | | 255 | |
Effect on income (loss) from continuing operations, net of taxes(1) | | $ | 1,487 | | | $ | 524 | | | $ | 470 | |
(1) | The total stock-based compensation, net of taxes, recorded on the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for Transition Period and fiscal 2010, differs from the Consolidated Statements of Stockholders’ Equity as the Consolidated Statements of Stockholders’ Equity includes both continuing and discontinued operations. |
(2) | The stock-based compensation recorded in the Transition Period excluded the cash compensation expense of $1.2 million paid to employees related to the settlement of unvested stock-based awards in the form of a fixed cash payment. |
Stock-based compensation expense in the above table does not reflect any significant income tax expense, which is consistent with the Company’s treatment of income or loss from its United States operations for tax purposes. For the fiscal 2012 and 2011, and the Transition Period, there are no income tax benefits realized for the tax deductions from option exercises of the stock-based payment arrangements. In addition, there was no stock-based compensation costs capitalized as part of an asset in the Transition Period and fiscal 2012 and 2011 as the amounts were immaterial.
Valuation Assumptions
The Company used the Black-Scholes option pricing model for determining the estimated fair value for all stock-based awards. The fair value of the stock-based awards granted in the Transition Period and fiscal 2012 and 2011 were estimated using the following weighted-average assumptions:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| Expected life (in years) | | | 1.1 | | | | 4.3 | | | | 5.5 | |
| Risk-free interest rate | | | 0.2 | % | | | 1.5 | % | | | 1.7 | % |
| Expected volatility | | | 58 | % | | | 44 | % | | | 44 | % |
| Dividend yield | | | - | | | | - | | | | - | |
| Forfeiture rate | | | 40 | % | | | 40 | % | | | 40 | % |
| Weighted average fair value | | | | | | | | | | | | |
| Stock options | | $ | 13.32 | | | $ | - | | | $ | 12.30 | |
| Restricted stock | | $ | 27.34 | | | $ | 28.40 | | | $ | 28.30 | |
Note 5. Business Disposition and Wind Down
The Company sold its business of providing data storage and software solutions and products (the “DPS Business”) to PMC-Sierra, Inc. (“PMC-Sierra”) on June 8, 2010. The purchase price for the DPS Business was $34.3 million, of which $29.3 million was received by the Company upon the closing of the transaction and the remaining $5.0 million was withheld in an escrow account (“DPS Holdback”). The DPS Holdback was released to the Company on June 8, 2011, one year after the consummation of the sale, except for $0.1 million to provide for one disputed claim, and was recognized as contingent consideration in discontinued operations when received. The $0.1 million was received in September 30, 2011. The Company recorded a gain of $10.7 million, net of taxes of $6.6 million, on the disposal of the DPS Business in the Transition Period, which is included in the “Loss from discontinued operations, net of taxes” in the Consolidated Statements of Operations.
Further, on June 8, 2010, the Company entered into a transition service agreement with PMC-Sierra, in which the Company provided certain services required for the operation of the DPS Business through December 2010 and the direct costs associated with providing these services were reimbursed by PMC-Sierra. As a result of the transition service agreement, cash of $1.7 million was received on behalf of PMC-Sierra upon collection of accounts receivable and was classified as “Restricted cash” and included in “Accounts payable” on the Company’s Consolidated Balance Sheets at December 31, 2010. In the Transition Period, the Company incurred approximately $1.3 million in direct costs under the transition service agreement with PMC-Sierra, which were reimbursed by PMC-Sierra.
In July 2011, the Company ceased its efforts to sell or license its intellectual property from the Aristos Business and finalized the wind down of such business. As such, the disposed DPS Business and wound down Aristos Business are reflected as discontinued operations in the accompanying financial statements and prior periods have been reclassified to conform to this presentation.
As disclosed above, in July 2012, the Company reclassified The Show to discontinued operations as it was not meeting projections, with no expectation to perform as represented when acquired.
Revenues and the components of income related to The Show, the DPS Business and the Aristos Business included in discontinued operations in the fiscal years ended December 31, 2012 and 2011, and nine-month transition period ended December 31, 2010 are as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Revenues | | $ | 451 | | | $ | 91 | | | $ | 20,620 | |
| | | | | | | | | | | | | |
| Income (loss) from discontinued operations before income taxes | | $ | (1,935 | ) | | $ | 1,624 | | | $ | (17,647 | ) |
| Benefit from income taxes | | | - | | | | - | | | | 6,358 | |
| Income (loss) from discontinued operations, net of taxes | | $ | (1,935 | ) | | $ | 1,624 | | | $ | (11,289 | ) |
Income from discontinued operations for fiscal year ended December 31, 2011, includes the sale of patents from the DPS Business for $1.9 million and activity from The Show. There was no financial activity from the Aristos Business during fiscal year 2011. The loss from discontinued operations for the fiscal year ended December 31, 2012 includes activity of The Show only.
Note 6. Marketable Securities
During February 2012, the Company’s Board of Directors executed a written consent permitting it to invest up to $10 million in publicly traded companies engaged in certain oilfield servicing, energy services, and related businesses, which was an exception to its investment policy at that time. In June 2012, the Board established an Investment Committee, which was formed to develop investment strategies for the Company and to set and implement investment policies with respect to its cash. The Investment Committee was directed by the Board to establish and implement an investment policy for the Company’s portfolio that meets the following general objectives: preserve principal; maximize total return given overall market conditions; meet internal liquidity requirements; and comply with applicable accounting, internal control and reporting requirements and standards. The Investment Committee is authorized, among other things, to invest its excess cash directly or allocate investments to outside managers for investment in equity or debt securities, provided that the Investment Committee may not invest more than $25 million in any single investment or with any single asset manager without the Board’s approval. Given the overall market conditions, the Company regularly reviews its investment portfolio to ensure adherence to the investment policy and to monitor individual investments for risk analysis and proper valuation.
The Company’s portfolio of marketable securities at December 31, 2012 was as follows:
| | | Cost | | | | | | | | | | |
| | | (in thousands) | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Short-term deposits | | $ | 48,596 | | | $ | - | | | $ | - | | | $ | 48,596 | |
| Mutual funds | | | 10,368 | | | | 1,452 | | | | - | | | | 11,820 | |
| United States government securities | | | 99,299 | | | | 178 | | | | - | | | | 99,477 | |
| Corporate securities | | | 20,842 | | | | 1,255 | | | | (1,980 | ) | | | 20,117 | |
| Corporate obligations | | | 48,708 | | | | 283 | | | | (277 | ) | | | 48,714 | |
| Commerical paper | | | 22,275 | | | | 16 | | | | - | | | | 22,291 | |
| Total available-for-sale securities | | | 250,088 | | | | 3,184 | | | | (2,257 | ) | | | 251,015 | |
| Amounts classified as cash equivalents | | | (51,887 | ) | | | - | | | | - | | | | (51,887 | ) |
| Amounts classified as marketable securities | | $ | 198,201 | | | $ | 3,184 | | | $ | (2,257 | ) | | $ | 199,128 | |
The Company’s portfolio of marketable securities at December 31, 2011 was as follows:
| | | Cost | | | | | | | | | | |
| | | (in thousands) | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Short-term deposits | | $ | 3,029 | | | $ | - | | | $ | - | | | $ | 3,029 | |
| United States government securities | | | 309,189 | | | | 593 | | | | (3 | ) | | | 309,779 | |
| Government agencies | | | 3,505 | | | | 21 | | | | - | | | | 3,526 | |
| Corporate obligations | | | 1,513 | | | | 8 | | | | - | | | | 1,521 | |
| Total available-for-sale securities | | | 317,236 | | | | 622 | | | | (3 | ) | | | 317,855 | |
| Amounts classified as cash equivalents | | | (2,914 | ) | | | - | | | | - | | | | (2,914 | ) |
| Amounts classified as marketable securities | | $ | 314,322 | | | $ | 622 | | | $ | (3 | ) | | $ | 314,941 | |
Sales of marketable securities resulted in gross realized gains of $0.6 million, $2.0 million, and $1.1 million for fiscal 2012 and 2011, and the Transition Period, respectively. Sales of marketable securities resulted in gross realized losses of $0.3 million, $0.3 million, $0.5 million for fiscal 2012 and 2011, and the Transition Period, respectively.
The following table summarizes the fair value and gross unrealized losses of the Company’s available-for-sale marketable securities, aggregated by type of investment instrument and length of maturity for individual securities that were in an unrealized loss position at December 31, 2012:
| | | Less than 12 Months | | | 12 Months or Greater | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | | | |
| U.S. government securities | | $ | 88,420 | | | $ | - | | | $ | 11,056 | | | $ | - | | | $ | 99,476 | | | $ | - | |
| Corporate oligations | | | 24,346 | | | | (2 | ) | | | 24,370 | | | | (272 | ) | | | 48,716 | | | | (274 | ) |
| Total | | $ | 112,766 | | | $ | (2 | ) | | $ | 35,426 | | | $ | (272 | ) | | $ | 148,192 | | | $ | (274 | ) |
The following table summarizes the fair value and gross unrealized losses of the Company’s available-for-sale marketable securities, aggregated by type of investment instrument and length of maturity for individual securities that were in an unrealized loss position at December 31, 2011:
| | | Less than 12 Months | | | 12 Months or Greater | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | | | |
| U.S. government securities | | $ | 15,186 | | | $ | (3 | ) | | $ | - | | | $ | - | | | $ | 15,186 | | | $ | (3 | ) |
The Company’s investment portfolio consists of both corporate and government securities that generally mature within three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities purchased with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in interest rates and bond yields. The Company has considered all available evidence and determined that the marketable securities in which unrealized losses were recorded in the Transition Period and fiscal years 2012 and 2011 were deemed to be temporary. The Company holds its marketable securities as available-for-sale and marks them to market through a corresponding adjustment to other comprehensive income (loss) in stockholders’ equity. Classification of marketable securities as a current asset is based on the intended holding period and realizability of the asset.
The amortized cost and estimated fair value of investments in available-for-sale debt securities at December 31, 2012, by contractual maturity, were as follows:
| | | Cost | | | | |
| | | (in thousands) | |
| | | | | | | |
| Mature in one year or less | | $ | 214,784 | | | $ | 215,589 | |
| Mature after one year through three years | | | 19,550 | | | | 19,854 | |
| Mature in more than three years | | | 15,753 | | | | 15,572 | |
| Total | | $ | 250,087 | | | $ | 251,015 | |
Note 7. Accumulated Other Comprehensive Income
Changes, net of tax, in Accumulated other comprehensive income are as follows:
| | | Unrealized Gain on Securities | | | Cumulative Translation Adjustment | | | Total | |
| | | | | | | | | | |
| Balance at December 31, 2011 | | $ | 624 | | | $ | 119 | | | $ | 743 | |
| Other comprehensive income (loss) | | | 303 | | | | (100 | ) | | | 203 | |
| | | | | | | | | | | | | |
| Balance at December 31, 2012 | | $ | 927 | | | $ | 19 | | | $ | 946 | |
Note 8. Fair Value Measurements
Fair value is defined as the price that would be received for selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard surrounding fair value measurements establishes a fair value hierarchy, consisting of three levels, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial Assets Measured at Fair Value on a Recurring Basis
The Company utilized levels 1, 2 and 3 to value its financial assets on a recurring basis. Level 1 instruments useinputs are quoted prices in active markets for identical assets or liabilities whichas of the measurement date. Level 2 inputs are other than quoted market prices that are observable, either directly or indirectly, for an asset or liability. Level 2 inputs can include the Company’s cash accounts, short-term deposits and money market funds as these specific assets are liquid. Level 1 instruments also include United States government securities, government agencies, and state and municipalities, as these securities are backed by the federal or state governments and tradedquoted prices in active markets frequently with sufficient volume. Level 2 instruments are valued using the market approach, which usesfor similar assets or liabilities, quoted prices in marketsa market that areis not active for identical assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. Level 3 inputs are unobservable for the asset or liability when there is little, if any, market activity for the asset or liability. Level 3 inputs are based on the best
information available, and may include data for substantiallydeveloped by the full termCompany.
Property and Equipment, Net: Property and equipment is stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which generally range from four years for certain vehicles and equipment to thirty-nine years for buildings. Leasehold improvements and assets recorded under capital leases are amortized on a straight-line basis over the shorter of their estimated useful lives or liabilitiesthe terms of the leases.
Long-Lived Assets: The Company evaluates the recoverability of its finite-lived intangible assets and include mortgage-backed securities, corporate obligationsits property and asset-backed securities as similarequipment by comparing their carrying values to the expected future undiscounted cash flows to be generated from such assets when events or identical instruments can be foundcircumstances indicate that an impairment may have occurred. If the carrying values of the long-lived assets exceed the sum of the undiscounted cash flows, an impairment charge is recognized in active markets. Level 3the amount by which the carrying values exceeds their fair values.
Goodwill:Goodwill is supported by littletested for impairment on an annual basis, or no market activity and requiresmore frequently if an event occurs or circumstances change to indicate that an impairment may have occurred. The Company performs its annual impairment test in the fourth quarter of each year. The goodwill impairment test involves a high level of judgment to determinetwo-step process. The first step compares the fair value which includesof a reporting unit with its carrying amount, including goodwill. No potential impairment exists if the Company’s two venture fund investments andcarrying value of the Rogue contingent consideration.reporting unit is less than its fair value. If the carrying value of the reporting unit exceeds its fair value, then the second step is necessary to measure the impairment. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the contingent consideration is measured atreporting unit goodwill carrying value in excess of the implied fair value on a recurring basis using unobservable inputs in which little or no market activity exists. The Company periodically monitors its two venture capital funds and records these investments within “Other long-term assets” on the Condensed Balance Sheets based on quarterly statementsis recognized as an impairment. In 2014, the Company receives from eachincurred a goodwill impairment charge of the funds. The statements are generally received one quarter in arrears, as more timely valuations are not practical. The statements reflect the net asset value, which the Company uses to determine the fair value for these investments, which (a)$36.7 million (see Note 8).
Other Investments:Investments that do not have a readily determinable market value and in which the Company does not have a controlling financial interest are accounted for as cost-method investments or, if they Company has the ability to exert significant influence, as equity-method investments. The carrying values of equity-method investments are adjusted for either the Company’s proportionate share of the investee’s earnings, which may be reported on a lag of up to three months, or the change in fair value of the investee. Both cost-method investments and (b) either have the attributesequity-method investments are monitored for indications of an investment company or prepare theirimpairment.
Financial Instrument Obligations: The Company recognizes a liability for short sale transactions on certain financial statements consistent with the measurement principles of an investment company. The assumptions used byinstruments in which the Company duereceives proceeds from the sale of such financial instruments and incurs obligations to lack of observable inputs, may impactdeliver or purchase securities at a later date. Subsequent changes in the fair value of such obligations, determined based on the closing market price of the financial instruments, are recognized currently as gains or losses, with a comparable reclassification made between the amounts of the Company's unrestricted and restricted cash.
Contingent Liabilities: The Company recognizes a liability for certain contingencies, including those related to litigation or claims or to certain governmental laws and regulations, when it is probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated.
Business Combinations:The Company allocates the fair value of the total consideration of its acquisitions to the tangible assets, liabilities, and identifiable intangible assets acquired based on their estimated fair values. The excess of the fair value of the total consideration over the fair values of these equity investmentsidentifiable assets and liabilities is recognized as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred as a component of “selling, general, and administrative expenses.”
Revenue Recognition: The Company recognizes revenue at the time the service is provided to the customer. Revenue is recognized in future periods. Inthe Energy business when the services are rendered. Revenue is recognized in the Sports business when the service is rendered or the event thatoccurs. Amounts received from customers in advance of the carrying value of its equity investments exceeds their fair value,service or event are deferred until such time the service is rendered or the decline in value is determined to be other-than-temporary, the carrying value is reduced to its current fair value, which is recorded in “Interest and other income, net,” in the Condensed Statements of Operations. At December 31, 2012, there were no significant transfers that occurred between any of the levels of the Company’s financial assets.event occurs.
A summary of financial assets measured atStock-based Compensation: The Company recognizes compensation expense for stock options and restricted stock granted to employees and non-employee directors over the requisite service period based on the estimated fair value on a recurring basis at December 31, 2012the grant date. The fair value of restricted stock awards is as follows:
| | | | | | Fair Value Measurements at Reporting Date Used | |
| | | Total | | | | | | | | | | |
| | | (in thousands) | |
| Assets | | | | | | | | | | | | |
Cash, including short-term deposits(1) | | $ | 80,085 | | | $ | 80,085 | | | $ | - | | | $ | - | |
United States government securities(2) | | | 99,477 | | | | 99,477 | | | | - | | | | - | |
Corporate securities(2) | | | 20,117 | | | | 20,117 | | | | - | | | | - | |
Commercial paper(2) | | | 22,291 | | | | - | | | | 22,291 | | | | - | |
Corporate obligations(2) | | | 48,714 | | | | - | | | | 46,931 | | | | 1,783 | |
Non-controlling interests in certain funds(3) | | | 1,021 | | | | - | | | | - | | | | 1,021 | |
| | | $ | 271,705 | | | $ | 199,679 | | | $ | 69,222 | | | $ | 2,804 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
Rogue contingent consideration(4) | | $ | (475 | ) | | $ | - | | | $ | - | | | $ | (475 | ) |
(1) | At December 31 2012, the Company recorded $68.2 million and $11.9 million within “Cash and cash equivalents” and “Marketable securities,” respectively. |
(2) | Recorded within “Marketable securities.” | |
(3) | Recorded within “Other long-term assets.” | | |
(4) | Recorded within “Accrued expenses and other liabilities.” | | |
the market price of the Company's common stock on the date of grant. The fair value of option awards is estimated using the Black-Scholes pricing model.
A summary of financial assets measured at fair value on a recurring basis at December 31, 2011Advertising expenses: Advertising costs are expensed in the period in which the advertising appears in print or is as follows:
| | | | | | Fair Value Measurements at Reporting Date Used | |
| | | Total | | | | | | | | | | |
| | | (in thousands) | |
| Assets | | | | | | | | | | | | |
Cash, including short-term deposits(1) | | $ | 8,601 | | | $ | 8,601 | | | $ | - | | | $ | - | |
U.S. government securities(2) | | | 309,780 | | | | 309,780 | | | | - | | | | - | |
Government agencies(2) | | | 3,526 | | | | 3,526 | | | | - | | | | - | |
Corporate obligations(2) | | | 1,521 | | | | - | | | | 1,521 | | | | - | |
Non-controlling interests in certain funds(3) | | | 1,117 | | | | - | | | | - | | | | 1,117 | |
| | | $ | 324,545 | | | $ | 321,907 | | | $ | 1,521 | | | $ | 1,117 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
Rogue contingent consideration(4) | | $ | (1,218 | ) | | $ | - | | | $ | - | | | $ | (1,218 | ) |
(1) | At December 31 2011, the Company recorded $8.5 million and $0.1 million within “Cash and cash equivalents” and “Marketable securities,” respectively. |
(2) | Recorded within “Marketable securities.” | |
(3) | Recorded within “Other long-term assets.” | | |
(4) | Recorded within “Accrued expenses and other liabilities.” | | |
A reconciliation of the beginning and ending balances of the Rogue contingent considerationbroadcast. The Company's advertising expense for the years ended December 31, 20122014, 2013, and 2011 is as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Balance, December 31, 2010 | | $ | - | |
| Acquisition of Rogue | | | (1,218 | ) |
| Change in fair value | | | - | |
| Balance, December 31, 2011 | | | (1,218 | ) |
| Change in fair value | | | 743 | |
| Balance, December 31, 2012 | | $ | (475 | ) |
The Company’s other financial instruments include accounts payable and accrued and other liabilities. Carrying values of these financial liabilities approximate their fair values due to the relatively short maturity of these items. The related cost basis for the Company’s 3/4% Convertible Senior Notes due December 22, 2023 (the “3/4% Notes”) at December 31, 2012 and 2011 was approximately $0.3 million on both dates. Although the remaining balance of its 3/4% Notes is relatively small and the market trading is very limited, the Company expects the cost basis for the 3/4% Notes of approximately $0.3 million at December 31, 2012 to approximate fair value. The Company’s convertible debt is recorded at its carrying value, not the estimated fair value.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company utilized Level 3 to value its non-financial assets on a non-recurring basis. Level 3 is categorized as significant unobservable inputs. The Company has no non-financial assets measured at fair value on a non-recurring basis as of December 31, 2012 and 2011. At December 31, 2010, the Company had $6.0 million of long-lived assets held-for-sale classified as Level 3 non-financial assets measured at fair value on a non-recurring basis. These assets were originally classified as held and used for $10.1 million, but were written down to the impaired fair value of $6.0 million on July 2, 2010, resulting in an impairment charge of $4.1 million included in the Consolidated Statement of Operations for the Transition Period. Other long-lived assets held and used were written down to zero value during the Transition Period, resulting in an impairment charge of $6.1 million.
Note 9. Long-Lived Assets and Goodwill
Property and Equipment, Net
The components of property and equipment, net, at December 31, 2012 and 2011 are as follows:
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (in thousands) | |
| | | | | | | |
| Rigs and workover equipment | | $ | 42,945 | | | $ | 11,750 | |
| Buildings and improvements | | | 6,110 | | | | - | |
| Land | | | 1,068 | | | | - | |
| Leasehold improvements | | | 5,909 | | | | 5,677 | |
| Other equipment | | | 25,440 | | | | 3,205 | |
| Vehicles | | | 1,639 | | | | 648 | |
| Furniture and fixtures | | | 308 | | | | 100 | |
| Assets in progress | | | 2,342 | | | | - | |
| | | | 85,761 | | | | 21,380 | |
| Accumulated depreciation | | | (7,993 | ) | | | (320 | ) |
| Property and equipment, net | | $ | 77,768 | | | $ | 21,060 | |
Assets in progress as of December 31, 2012 include a new indoor facility and restaurant building renovations at Baseball Heaven and a rig, service trucks and a building at Sun Well. The estimated cost to complete these assets is $1.3 million.
Depreciation expense for fiscal 2012, was $7.8$0.2 million, with $6.4 million and $1.4 million being included in “Cost of revenues” and “Selling, general and administrative” expenses, respectively, in the Consolidated Statements of Operations. Depreciation expense for fiscal 2011 was $0.3 million, with $0.1 million, and $0.2$0.1 million, being included in “Cost of revenues” and “Selling, general and administrative” expenses, respectively, in the Consolidated Statements of Operations. Depreciation expense in the Transition Period was $0.3 million and was included in “Loss from discontinued operations, net of taxes.” The Company impaired certain of its assets in the Transition Period, resulting in a write-down of $4.1 million, which was also included in “Loss from discontinued operations.”respectively.
Goodwill
A reconciliation of the changes to the Company’s carrying amount of goodwill for fiscal 2012 and 2011 are as follows:
| | | Amount | |
| | | (in thousands) | |
| | | | |
| Balance, December 31, 2010 | | $ | - | |
| Goodwill acquired in the acquisition of Baseball Heaven | | | 192 | |
| Goodwill acquired in the acquisition of The Show | | | 1,796 | |
| Goodwill acquired in the acquisition of Rogue | | | 6,256 | |
| Balance, December 31, 2011 | | | 8,244 | |
| Goodwill acquired in the acquisition of Eagle | | | 10,126 | |
| Goodwill acquired in the acquisition of Sun Well | | | 36,557 | |
| Goodwill acquired in the acquisition of CrossFit South Bay | | | 154 | |
| Impairment of goodwill of The Show | | | (1,796 | ) |
| Impairment of goodwill of Baseball Heaven | | | (192 | ) |
| | | | | |
| Balance, December 31, 2012 | | $ | 53,093 | |
The components of goodwill at December 31, 2012 and 2011 are as follows:
| | | December 31, | |
| | | 2012 | | | | 2,011 | |
| | | (in thousands) | |
| | | | | | | | |
| Goodwill | | $ | 55,081 | | | $ | 8,244 | |
| Accumulated impairment | | | (1,988 | ) | | | - | |
| Net goodwill | | $ | 53,093 | | | $ | 8,244 | |
Intangible Assets, Net
The acquisitions made in fiscal 2012 and 2011 resulted in customer relationships and trade names aggregating $47.4 million as of December 31, 2012.
The components of intangible assets, net, at December 31, 2012and their amortization details are as follows:
| | | December 31, 2012 | | | | |
| | | Cost | | | | | | Net | | | | Estimated Useful Life (years) |
| | | (in thousands) | | | | |
| Steel Sports: | | | | | | | | | | | | |
| Customer relationships | | $ | 235 | | | $ | (67 | ) | | | 168 | | Straight-line | | 5 |
| | | | | | | | | | | | | | | | |
| Steel Energy: | | | | | | | | | | | | | | | |
| Customer relationships | | | 43,100 | | | | (6,356 | ) | | | 36,744 | | Accelerated | | 10 |
| Trade names | | | 4,100 | | | | (1,125 | ) | | | 2,975 | | Accelerated | | 5 |
| | | | 47,200 | | | | (7,481 | ) | | | 39,719 | | | | |
| | | $ | 47,435 | | | $ | (7,548 | ) | | $ | 39,887 | | | | |
The components of intangible assets, net, at December 31, 2011and their amortization details are as follows:
| | | December 31, 2011 | | | | |
| | | Cost | | | | | | Net | | | | Estimated Useful Life (years) |
| | | (in thousands) | | | | |
| Steel Sports: | | | | | | | | | | | | |
| Customer relationships | | $ | 235 | | | $ | (20 | ) | | | 215 | | Straight-line | | 5 |
| | | | | | | | | | | | | | | | |
| Steel Energy: | | | | | | | | | | | | | | | |
| Customer relationships | | | 4,700 | | | | (29 | ) | | | 4,671 | | Accelerated | | 10 |
| Trade names | | | 900 | | | | - | | | | 900 | | Accelerated | | 5 |
| | | | 5,600 | | | | (29 | ) | | | 5,571 | | | | |
| | | $ | 5,835 | | | $ | (49 | ) | | $ | 5,786 | | | | |
Estimated aggregate future amortization expenses for the next five years for the intangible assets are as follows:
| | | Steel Sports | | | Steel Energy | | | Total | |
| | | (in thousands) | |
| For the year ended December 31: | | | | | | | | | |
| 2013 | | $ | 47 | | | $ | 8,534 | | | $ | 8,581 | |
| 2014 | | | 47 | | | | 6,565 | | | | 6,612 | |
| 2015 | | | 47 | | | | 5,267 | | | | 5,314 | |
| 2016 | | | 27 | | | | 4,216 | | | | 4,243 | |
| 2017 | | | - | | | | 3,158 | | | | 3,158 | |
| Thereafter | | | - | | | | 11,979 | | | | 11,979 | |
| | | $ | 168 | | | $ | 39,719 | | | $ | 39,887 | |
Amortization expense for fiscal 2012 was $7.5 million, which is included in “Selling, general and administrative” expenses in the Consolidated Statement of Operations. Amortization expense for fiscal 2011 was $49,000, which is included in “Selling, general and administrative” expenses in the Consolidated Statements of Operations. Amortization expense for the Transition Period was $9.9 million and is included in “Loss from discontinued operations, net of taxes” in the Consolidated Statements of Operations.
Impairment Review
In June 2010,Foreign Currency Translation: Although the Company made a decision to wind down its Aristos Business and notified its customers that final shipments would occur by the end of September 2010. The Company also planned to put its building up for sale towards the end of the Transition Period. As a result of these actions, the Company evaluated the carrying value of its long-lived assets at July 2, 2010 and determined that the carrying value of such assets may not be fully recoverable. The Company then measured the impairment loss and recognized the amountno longer has current operations in which the carrying value exceeded the estimated fair value by recording an impairment charge of $10.2 million in the Transition Period, which is included in “Loss from discontinued operations, net of taxes,” in the Consolidated Statements of Operations. Of the $10.2 million impairment charge, $6.1 million related to the write off of intangible assets and the remaining $4.1 million related to the reduction of the carrying value of its property and equipment, net, to its estimated fair value. The estimated fair value was based on the market approach and considered the perspective of market participants using or exchanging the Company’s long-lived assets. The estimation of the impairment involved assumptions that required judgment by the Company.
In December 2003, the Company issued $225.0 million in aggregate principal amount of 3/4% Notes. The issuance costsforeign jurisdictions, it consolidates certain foreign-based entities associated with the 3/4% Notes totaled $6.8 million, which was amortized to interest expense over five years,Predecessor Business. Assets and the net proceeds to the Companyliabilities of foreign entities are translated from the offeringfunctional currency into United States dollars using the exchange rate in effect at the balance sheet date. Revenues and expenses of foreign operations are translated from the 3/4% Notes were $218.2 million.functional currency into United States dollars using the average exchange rate for the period. Adjustments resulting from the translation into United States dollars are recognized in stockholders’ equity as “other comprehensive income (loss)”.
Income Taxes: The Company pays cash interest at an annual rateuses the asset and liability method of 3/4% of the principal amount at issuance, payable semi-annually on June 22 and December 22 of each year. The 3/4% Notes are subordinated to all existing and future senior indebtedness of the Company. The Company does not apply the accounting standard issued in May 2008 by the FASB with regard to applying a nonconvertible debt borrowing rate on its 3/4% Notes, as the 3/4% Notes may not be settled in cash or other assets upon conversion.
The 3/4% Notes are convertible at the option of the holders into shares of the Company’s common stock, par value $0.001 per share, only under the following circumstances: (1) prior to December 22, 2021, on any date during a fiscal quarter if the closing sale price of the Company’s common stock was more than 120% of the then current conversion price of the 3/4% Notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, (2) on or after December 22, 2021, if the closing sale price of the Company’s common stock was more than 120% of the then current conversion price of the 3/4% Notes, (3) if the Company elects to redeem the 3/4% Notes, (4) upon the occurrence of specified corporate transactions or significant distributions to holders of the Company’s common stock occur or (5) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in which the average trading price of the 3/4% Notes was less than 98% of the average of the sale price of the Company’s common stock during such five-day trading period multiplied by the 3/4% Notes then current conversion rate. Subject to the above conditions, each $1,000 principal amount of 3/4% Notes is convertible into approximately 8.5441 shares of the Company’s common stock (equivalent to an initial conversion price of approximately $117.04 per share of common stock).
In fiscal 2010, the Company repurchased a total of $0.1 million at a price equal to 100% of the principal amount of the 3/4% Notes. At December 31, 2012 and 2011, the Company had a remaining liability of $0.3 million of aggregate principal amount related to its 3/4% Notes. Each remaining holder of the 3/4% Notes may require the Company to purchase all or a portion of its 3/4% Notes on December 22, 2013, on December 22, 2018 or upon the occurrence of a change of control (as defined in the indenture governing the 3/4% Notes) at a price equal to the principal amount of 3/4% Notes being purchased plus any accrued and unpaid interest and the Company may redeem some or all of the 3/4% Notes for cash at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued interest to, but excluding, the redemption date. The Company may seek to make open market repurchases of the remaining balance of its 3/4% Notes within the next twelve months.
The components of accrued and other liabilities at December 31, 2012 and 2011 are as follows:
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (in thousands) | |
| | | | | | | |
| Tax-related | | $ | 1,197 | | | $ | 56 | |
| Accrued compensation and related taxes | | | 3,658 | | | | 1,593 | |
| Deferred revenue | | | 299 | | | | 278 | |
| Professional services | | | 282 | | | | 485 | |
| Accrued fuel and rig-related charges | | | 162 | | | | - | |
| Accrued workers compensation | | | - | | | | 1,233 | |
| Other | | | 739 | | | | 181 | |
| | | $ | 6,337 | | | $ | 3,826 | |
The components of other long-term liabilities at December 31, 2012 and 2011 are as follows:
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (in thousands) | |
| | | | | | | |
| Tax-related | | $ | 7,373 | | | $ | 10,737 | |
| Phantom stock liability | | | 1,798 | | | | - | |
| | | $ | 9,171 | | | $ | 10,737 | |
The tax-related long-term liabilities relate primarily to FIN 48 uncertainties primarily associated with our foreign subsidiaries. Through its acquisition of SWH, the Company has a phantom stock plan agreement (the “Phantom Plan”), in which the board of directors is authorized to grant phantom shares to employees and consultants. The value of the phantom shares outstanding was fixed as a result of the acquisition. If employees or consultants terminate from the Company other than by death or disability, their unvested shares are returned to the Phantom Plan. Phantom stockholders are entitled to receive a cash payment for their vested shares on February 1, 2016, unless there is a change of control or employee death. The Company is accounting for the unvested portion of the Phantom Plan as post-combination compensation expense by accreting a liability over the vesting period.
Sun Well has a credit agreement with Wells Fargo Bank, National Association that includes a term loan of $20.0 million and a revolving line of credit for up to $5.0 million. The loans are secured by the assets of Sun Well and bear interest, at the option of Sun Well, at LIBOR plus 3.5% or the greater of (a) the bank’s prime rate, (b) the Federal Funds Rate plus 1.5%, or (c) the Daily One-Month LIBOR rate plus 1.5% for base rate loans. Both options are subject to leverage ratio adjustments. The interest payments are made monthly. The term loan is repayable in $1.0 million quarterly principal installments from September 30, 2011 through June 30, 2015. Sun Well borrowed $20.0 million on the term loan in July 2011 and has made $6.0 million and $1.0 million in scheduled and extra principal payments through December 31, 2012, respectively. Borrowings under the revolving loan, which are determined based on eligible accounts receivable, mature on June 30, 2015 with a balloon payment. There is no balance due on the revolving loan as of December, 2012. Under the agreement, Sun Well is subject to certain financial covenants, with which it was in compliance as of December 31, 2012.
The future principal payments due on the notes payable are as follows:
| | | Amount | |
| | | (in thousands) | |
| For the year ended December 31: | | | |
| 2013 | | $ | 4,000 | |
| 2014 | | | 4,000 | |
| 2015 | | | 5,000 | |
| | | $ | 13,000 | |
The Company made a principal payment of $10.0 million in February 2013 but intends to continue with the scheduled quarterly payments.
Through its acquisitions, the Company acquired certain equipment under capital lease obligations. The following is a schedule of the future annual minimum payments for these leases as of December 31, 2012:
| | | Amount | |
| | | (in thousands) | |
| For the year ended December 31: | | | |
| 2013 | | $ | 490 | |
| 2014 | | | 463 | |
| 2015 | | | 463 | |
| 2016 | | | 134 | |
| Total minimum lease payments | | | 1,550 | |
| Less amount representing interest | | | (153 | ) |
| | | | | |
| Present value of net minimum lease payments | | | 1,397 | |
| Less current portion | | | (413 | ) |
| | | | | |
| Capital lease obligations, net of current portion | | $ | 984 | |
Note 12. Restructuring Charges
During fiscal 2011, the Company completed all of its outstanding restructuring plans. The Company had implemented restructuring plans in the Transition Period, and in fiscal 2010 and 2009. In addition, the Company had an acquisition-related restructuring plan in place from its fiscal year ended March 31, 2006. The goals of these plans were to bring the Company’s operational expenses to appropriate levels relative to its historical net revenues, while simultaneously implementing extensive company-wide expense-control programs. All expenses, including adjustments, associated with the Company’s restructuring plans are included in “Restructuring charges” and/or “Loss from discontinued operations, net of taxes” in the Consolidated Statements of Operations.
The activity in the restructuring accrual for all outstanding plans from December 31, 2010 through December 31, 2011 was as follows:
| | | | | | Other Charges | | | Total | |
| | | (in thousands) | |
| | | | | | | | | | |
| Accrual balance at December 31, 2010 | | $ | 881 | | | $ | 350 | | | $ | 1,231 | |
| Accrual adjustments | | | (36 | ) | | | - | | | | (36 | ) |
| Cash paid | | | (845 | ) | | | (350 | ) | | | (1,195 | ) |
| Accrual balance at December 31, 2011 | | $ | - | | | $ | - | | | $ | - | |
All restructuring plans were completed as of December 31, 2011 and the Company does not anticipate further plans being implemented.
Note 13. Commitments and Contingencies
Contractual Obligations
Through its acquisitions, the Company assumed additional leases of property with the following non-cancelable obligations:
| | | Amount | |
| | | (in thousands) | |
| For the year ending December 31: | | | |
| 2013 | | $ | 490 | |
| 2014 | | | 463 | |
| 2015 | | | 463 | |
| 2016 | | | 134 | |
| 2017 | | | - | |
| | | $ | 1,550 | |
Rent expense for property and equipment for the fiscal year ended December 31, 2012 was $2.7 million as a result of the various acquisitions. Rent expense for fiscal 2011 and the Transition Period were immaterial.
Legal Proceedings
From time to time, we are subject to litigation or claims, including claims related to businesses that we wound down or sold, which are normal in the course of business, and while the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
For an additional discussion of certain risks associated with legal proceedings, see “Item 1A. Risk Factors” of this Annual Report on Form 10-K.
Intellectual Property and Other Indemnification Obligations
The Company has agreements whereby it indemnified its directors and certain of its officers for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. These indemnification agreements are not subject to a maximum loss clause; however, the Company maintains a director and officer insurance policy which may cover all or a portion of the liabilities arising from its obligation to indemnify its directors and officers. It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, the Company has not incurred significant costs to defend lawsuits or settle claims related to such agreements and no amount has been accrued in the accompanying Consolidated Financial Statements with respect to these indemnification guarantees.
In addition, the Company entered into agreements with PMC-Sierra that included certain indemnification obligations related to the sale of the DPS Business. These indemnification obligations generally required the Company to compensate the other party for certain damages and costs incurred as a result of third party claims. In these circumstances, payment by the Company was conditional on the other party making a claim pursuant to the procedures specified in the particular agreements, which procedures typically allowed the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements was limited in terms of time and/or amount, and in some instances, the Company may have had recourse against third parties for certain payments made by it under these agreements. No liability resulted from the agreements with PMC-Sierra.
Product Warranty from Discontinued Operations
The Company provided an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales. The estimated future warranty obligations related to product sales were recorded in the period in which the related revenue was recognized. The estimated future warranty obligations were affected by sales volumes, product failure rates, material usage and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage or replacement costs differed from the Company’s estimates, revisions to the estimated warranty obligations would be required. Substantially all of the Company’s product warranty liability transferred to PMC-Sierra upon the sale of the DPS Business, except those amounts associated with the Company’s Aristos Business. As of December 31, 2010, all product warranties were fulfilled.
Note 14. Interest and Other Income, Net
The components of interest and other income net, for fiscal 2012, fiscal 2011, and the Transition Period are as follows:
| | | | | | | | | | |
| | | (in thousands) | |
| | | | | | | | | | |
| Interest income | | $ | 2,184 | | | $ | 4,088 | | | $ | 5,101 | |
| Realized currency translation gains | | | 79 | | | | 3,934 | | | | 18 | |
| Loss on disposal of long-lived assets | | | (679 | ) | | | - | | | | - | |
| Other | | | (517 | ) | | | 336 | | | | 89 | |
| | | $ | 1,067 | | | $ | 8,358 | | | $ | 5,208 | |
The components of income (loss) from continuing operations before benefit from (provision for) income taxes for all periods presented are as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| Income (loss) from continuing operations before income taxes: | | | | | | | | | |
| Domestic | | $ | 6,326 | | | $ | (2,717 | ) | | $ | (12,220 | ) |
| Foreign | | | 141 | | | | 2,559 | | | | 2,436 | |
| | | $ | 6,467 | | | $ | (158 | ) | | $ | (9,784 | ) |
The components of the benefit from (provision) for income taxes from continuing operations for all periods presented are as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| Federal: | | | | | | | | | |
| Current | | $ | 34 | | | $ | (2,666 | ) | | $ | 76 | |
| Deferred | | | 15,066 | | | | - | | | | - | |
| | | | 15,100 | | | | (2,666 | ) | | | 76 | |
| Foreign: | | | | | | | | | | | | |
| Current | | | 1,373 | | | | 1,979 | | | | (7,961 | ) |
| Deferred | | | - | | | | 921 | | | | 276 | |
| | | | 1,373 | | | | 2,900 | | | | (7,685 | ) |
| State | | | | | | | | | | | | |
| Current | | | (979 | ) | | | (8 | ) | | | 7 | |
| Deferred | | | 218 | | | | - | | | | - | |
| | | | (761 | ) | | | (8 | ) | | | 7 | |
| | | | | | | | | | | | | |
| Benefit from (provision for) income taxes | | $ | 15,712 | | | $ | 226 | | | $ | (7,602 | ) |
The Company’s effective tax rate differed from the federal statutory rate for all periods presented as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State taxes, net of federal benefit | | | 15.1 | % | | | -1.9 | % | | | 0.0 | % |
| Foreign losses not benefited | | | -0.6 | % | | | -19.6 | % | | | 1.2 | % |
| Changes in tax reserves | | | 0.0 | % | | | 640.3 | % | | | -78.2 | % |
| Change in valuation allowance | | | -297.8 | % | | | 5852.1 | % | | | -33.6 | % |
| Distributions from foreign subsidiaries | | | -4.9 | % | | | -6599.8 | % | | | -3.8 | % |
| Other permanent differences | | | 24.6 | % | | | 143.2 | % | | | 1.7 | % |
| | | | -228.6 | % | | | 49.3 | % | | | -77.7 | % |
The Company recorded a benefit from income taxes of $15.7 million for the year ended December 31, 2012, primarily due to the release of a portion of the valuation allowance and a refund received as a result of a tax settlement in Singapore. The valuation allowance release was related to deferred tax liabilities recognized for the difference between the fair value and carrying basis of certain tangible and intangible assets obtained as part of the business combination, which can be used as a source of income to support realization of certain domestic deferred tax assets. Under generally accepted accounting principles, changes in an acquirer's valuation allowance that stem from a business combination should be recognized as an element of the acquirer's deferred income tax expense (benefit) in the reporting period that includes the business combination. For income tax purposes, amounts assigned to particular assets acquired and liabilities assumed may be different than amounts used for financial reporting. The differences in assigned values for financial reporting and tax purposes result in temporary differences. In applying ASC 740, companies are required to recognize the tax effects of temporary differences related to all assets and liabilities. The Company paid $3.5 million in taxes in Singapore during fiscal 2012 for prior year assessments on a liability that was part of its FIN 48 reserve. The Singapore IRAS subsequently refunded $1.4 million of that assessment based on information the Company provided.
The Company recorded a benefit from income taxes of $0.2 million for the fiscal year ended December 31, 2011, primarily due to the reversal of reserves for foreign taxes as a result of a favorable settlement in Singapore. During fiscal 2011, the Company made significant changes to its historic investment portfolio to move to primarily low-risk interest-bearing government securities. These changes were significant enough, in the Company’s judgment, to consider the legacy portfolio to have been disposed of for the purpose of tracking a disproportionate tax effect that arose in fiscal 2008. Fiscal 2011 also included the Company realizing certain currency translation gains due to substantial liquidation of certain of its foreign subsidiaries and the receipt of dividends from foreign subsidiaries. These taxes were partially offset by income tax benefits from losses incurred in the Company’s foreign jurisdictions and the reversal of reserves for certain foreign taxes.
In the Transition Period, the Company’s tax provision was associated with losses incurred from continuing operations being offset by state minimum taxes and taxes related to foreign subsidiaries. The tax provision included tax expenses of $7.9 million primarily due to changes in judgment related to the ongoing audits in its foreign jurisdictions.
The significant components of the Company’s deferred Deferred tax assets and liabilities at December 31, 2012are recognized for the expected tax consequences of temporary differences between the tax bases of assets and 2011liabilities and their reported amounts. Valuation allowances are as follows:
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (in thousands) | |
| Deferred tax assets: | | | | | | |
| NOL carryover | | $ | 40,771 | | | $ | 58,870 | |
| Research and development credits | | | 29,659 | | | | 29,659 | |
| Compensatory and other accruals | | | 1,200 | | | | 688 | |
| Foreign tax credits | | | 7,528 | | | | 10,035 | |
| Fixed assets | | | - | | | | 155 | |
| Other, net | | | 2,901 | | | | 2,693 | |
| Gross deferred tax assets | | | 82,059 | | | | 102,100 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Unremitted earnings | | | (29,425 | ) | | | (30,667 | ) |
| Unrealized loss on investments | | | (321 | ) | | | (229 | ) |
| Intangible assets | | | (8,886 | ) | | | - | |
| Fixed assets | | | (4,403 | ) | | | - | |
| Other, net | | | - | | | | (30 | ) |
| Gross deferred tax liabilities | | | (43,035 | ) | | | (30,926 | ) |
| | | | | | | | | |
| Valuation allowance | | | (37,173 | ) | | | (69,508 | ) |
| | | | | | | | | |
| Deferred tax assets, net | | $ | 1,851 | | | $ | 1,666 | |
The significant components of the Company’srecorded to reduce deferred tax assets and liabilities at December 31, 2012 and 2011 were classifiedto the amount that will more likely than not be realized, with changes in valuation allowances recognized in the Consolidated Balance Sheets as follows:
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (in thousands) | |
| Deferred tax assets: | | | | | | |
| Other current assets | | $ | 188 | | | $ | - | |
| Other long-term assets | | | 1,696 | | | | 1,711 | |
| Total deferred tax assets | | | 1,884 | | | | 1,711 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Other current liabilities | | | - | | | | (15 | ) |
| Other long-term liabilities | | | (33 | ) | | | (30 | ) |
| Total deferred tax liabilities | | | (33 | ) | | | (45 | ) |
| | | | | | | | | |
| | | $ | 1,851 | | | $ | 1,666 | |
provision for income taxes. The Company continues to provide United States deferredaccounts for uncertainty in income taxes using a two-step approach to recognizing and foreign withholding taxes on its undistributed earnings. At December 31, 2012 and 2011,measuring uncertain tax positions. The first step is to evaluate the Company recorded a deferred tax liabilityposition for recognition by determining if the weight of $29.6 million and $30.7 million, respectively related to the foreign undistributed earnings, which was offset by a reduction in the Company’s valuation allowance against its deferred tax assets.
The Company continuously monitors the circumstances impacting the expected realization of its deferred tax assets on a jurisdiction by jurisdiction basis. At December 31, 2012 and 2011, the Company’s analysis of its deferred tax assets demonstratedavailable evidence indicates that it wasis more likely than not that all of its net U.S. deferred tax assetsthe position will not be realized, resulting in a valuation allowance for deferred tax assets of $37.2 million and $69.5 million, which included immaterial out-of-period adjustments that had no impactsustained on audit. The second step is to net loss, respectively. This resulted in a decrease to the valuation allowance by $32.3 million in the fiscal year ended December 31, 2012 and by $0.9 million in the fiscal year ended December 31, 2011. Factors that led to this conclusion included, but were not limited to, the Company’s past operating results, cumulative tax losses in the United States, worthless securities, multiple acquisitions and uncertain future income on a jurisdiction by jurisdiction basis.
The Company continues to monitor the status of its NOLs, which may be used to offset future taxable income. If the Company underwent an ownership change, the NOLs would be subject to an annual limit on the amount of the taxable income that may be offset by its NOLs generated prior to the ownership change and additionally, the Company may be unable to use a significant portion of its NOLs to offset taxable income. At December 31, 2012, the Company had net operating loss carryforwards of $126.0 million for federal and $150.4 million for state purposes that expire in various years beginning in 2019 for federal and are currently expiring for state purposes. At December 31, 2012, the Company had research and development credits of $30.3 million for federal purposes that expire in various years beginning in 2019 and credits of $17.7 million for state purposes that carry forward indefinitely until fully exhausted. At December 31, 2012, the Company had foreign tax credits of $1.6 million that expire in various years beginning in 2013. Of the federal net operating loss carryforwards, $10.2 million were related to stock option deductions,measure the tax benefit as the largest amount that is more than 50% likely of which will be credited to additional paid-in capital when realized.
Uncertainty in Income Taxes
being realized upon settlement. The Company recognizes interest and/orclassifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment within one year. Interest and penalties related to uncertain tax positions within “Benefit from (provision for) income taxes” in its Consolidated Statements of Operations. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provisionare recognized in the period that such determination is made. The amount of interest and penalties accrued during fiscal year 2012 and 2011, and the Transition Period was immaterial.provision for income taxes.
A reconciliation of the changes to the Company’s gross unrecognized tax benefits for all periods presented is as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Balance at beginning of period | | $ | 29,903 | | | $ | 31,818 | | | $ | 23,925 | |
| Tax positions related to current year: | | | | | | | | | | | | |
| Additions | | | - | | | | - | | | | 84 | |
| Tax positions related to prior years: | | | | | | | | | | | | |
| Additions | | | - | | | | 951 | | | | 7,809 | |
| Settlements | | | (3,484 | ) | | | (2,866 | ) | | | - | |
| Balance at end of period | | $ | 26,419 | | | $ | 29,903 | | | $ | 31,818 | |
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company conducts or formerly conducted business. Management believes that it is not reasonably possible that the gross unrecognized tax benefits will change significantly within the next 12 months; however, tax audits remain open and the outcome of any tax audits are inherently uncertain, which could change this judgment in any given quarter.
As of December 31, 2012, the Company’s total gross unrecognized tax benefits were $26.4 million, of which $7.4 million, if recognized, would affect the effective tax rate. There was an overall decrease of $3.5 million in the Company’s gross unrealized tax benefits from fiscal 2011 to fiscal 2012, primarily due to the reversal of reserves for foreign taxes as a result of an assessment with the Singapore taxing authorities. The Company recorded a benefit from income taxes of $1.4 million for the year ended December 31, 2012, due to a refund received as a result of a settlement in Singapore.
The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates or formerly operated. As of December 31, 2012, fiscal years 2005 onward remained open to examination by the U.S. taxing authorities and fiscal years 2000 onward remained open to examination in various foreign jurisdictions. U.S. tax attributes generated in fiscal years 2000 onward also remain subject to adjustment in subsequent audits when they are utilized.
Note 16. Net Income (Loss) Per Share
per Share:Basic net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share gives effect to all potentially dilutive common shares outstanding during the period, which include certain stock–based awards, calculated using the treasury stock method, and convertible notes which are potentially dilutive at certain earnings levels, and are computed using the if-converted method. As disclosed in Note 1, all share information has been adjusted to reflect the Reverse/Forward Split.
A reconciliation of the numerator and denominator of the basic and diluted income (loss) per share computations for continuing operations, discontinued operations and net income (loss) for all periods presented is as follows:
| | | Fiscal Year Ended December 31, | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands, except per share amounts) | |
| | | | | | | | | | |
| Numerators (basic and diluted): | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 22,179 | | | $ | 68 | | | $ | (17,386 | ) |
| Income (loss) from discontinued opertions, net of taxes | | $ | (1,935 | ) | | $ | 6,629 | | | $ | (373 | ) |
| Net income (loss) attributable to Steel Excel Inc. | | $ | 20,693 | | | $ | 6,769 | | | $ | (17,759 | ) |
| | | | | | | | | | | | | |
| Denominators: | | | | | | | | | | | | |
| Weighted average shares outstanding - basic | | | 12,110 | | | | 10,882 | | | | 11,609 | |
| Effect of common stock equivalents (if any): | | | | | | | | | | | | |
| Stock-based awards | | | 23 | | | | 15 | | | | - | |
| 3/4% notes | | | - | | | | - | | | | - | |
| Weighted average shares outstanding - diluted | | | 12,133 | | | | 10,897 | | | | 11,609 | |
| | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) |
| Income (loss) from discontinued opertions, net of taxes | | $ | (0.16 | ) | | $ | 0.61 | | | $ | (0.03 | ) |
| Net income (loss) | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) |
| Diluted | | | | | | | | | | | | |
| Income (loss) from continuing operations, net of taxes | | $ | 1.83 | | | $ | 0.01 | | | $ | (1.50 | ) |
| Income (loss) from discontinued opertions, net of taxes | | $ | (0.16 | ) | | $ | 0.61 | | | $ | (0.03 | ) |
| Net income (loss) | | $ | 1.71 | | | $ | 0.62 | | | $ | (1.53 | ) |
Diluted loss per share for the Transition Period was based on the basic weighted average shares outstanding only, as the inclusion of any common stock equivalents would have been anti-dilutive. For the “Loss from continuing operations, net of taxes,” for fiscal 2011, the basic weighted average shares outstanding was also used, as the inclusion of any common stock equivalents would have been anti-dilutive. The potential common shares excluded for each of the periods presented are as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Outstanding stock options | | | - | | | | - | | | | 297 | |
| Outstanding restricted stock | | | - | | | | 20 | | | | 43 | |
| 3/4% convertible senior subordinated notes due 2023 | | | 3 | | | | 3 | | | | 3 | |
Note 17. Segment Information
period.
As disclosed earlier, during fiscal years 2012Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and 2011, we made multiple acquisitions withincash equivalents, marketable securities, and trade receivables. The Company maintains its cash balances and marketable securities with high credit quality financial institutions. Deposits held with banks, including those held in foreign branches of global banks, may exceed the sportsamount of insurance provided on such deposits. These deposits may be withdrawn upon demand and oilfield servicing industries. We currently operate in these two reportable segments: Steel Sportstherefore bear minimal risk. The Company limits the amount of credit exposure through diversification and Steel Energy. These reportable segments are based onmanagement regularly monitors the product and/or service provided by the subsidiaries and the financial information used by the chief operating decision maker to allocate resources, make operating decisions and assess financial performance. In certain cases, two or more operating segments are aggregated into a reportable segment if they have similar economic characteristics and long-term average gross margins. The Steel Energy reportable segment results from the aggregationcomposition of the Sun Well and Rogue operating segments. The accounting policies of the segments are the same as described in the significant accounting policies noted herein.
Steel Sports: provides services related to marketing and providing baseball facility services, including training camps, summer camps, leagues and tournaments, concession and catering events and other events and related websites. In addition, the November 2012 CrossFit South Bay acquisition provides strength and conditioning services.its investment portfolio.
SteelThe Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. The Company’s clients in its Energy: provides technological advances business are concentrated in horizontal drillingthe oil and hydraulic fracturing. Services include snubbing services (controlled installationgas industry, and removalare concentrated in North Dakota and Montana in the Bakken basin. The Company’s five largest customers in the Energy business provided approximately 61.2% and 51.3% of all tubulars - drill stringsconsolidated revenues for the years ended December 31, 2014 and production strings)2013, respectively. In addition, amounts due from these clients represented 65.5% and 42.3% of trade accounts receivable at December 31, 2014 and 2013, respectively. A significant reduction in business from a significant customer or their failure to pay outstanding trade accounts receivable could have a material adverse effect on the Company’s results of operations and out of the wellbore with the well under full pressure, flowtesting, and hydraulic work over/simultaneous operations (allows customers to perform multiple tasks on multiple wells on one pad at the same time).financial condition.
Segment information for continuing operations asUse of December 31, 2012 and for the fiscal year then ended is as follows:
| | | | | | | | | | | | Consolidated | |
| | | (in thousands) | |
| | | | | | | | | | | | | |
| Net revenues | | $ | 2,913 | | | $ | 97,191 | | | $ | - | | | $ | 100,104 | |
| | | | | | | | | | | | | | | | | |
| Operating income (loss) | | $ | (2,062 | ) | | $ | 16,836 | | | $ | (8,957 | ) | | $ | 5,817 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 518 | | | $ | 14,940 | | | $ | - | | | $ | 15,458 | |
| | | | | | | | | | | | | | | | | |
| Interest and other income (expense), net | | $ | - | | | $ | (413 | ) | | $ | 1,063 | | | $ | 650 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 7,613 | | | $ | 199,889 | | | $ | 258,993 | | | $ | 466,495 | |
| | | | | | | | | | | | | | | | | |
| Accounts receivable | | $ | 158 | | | $ | 17,099 | | | $ | - | | | $ | 17,257 | |
| | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 154 | | | $ | 52,939 | | | $ | - | | | $ | 53,093 | |
| | | | | | | | | | | | | | | | | |
| Property and equipment, net | | $ | 6,005 | | | $ | 71,763 | | | $ | - | | | $ | 77,768 | |
Two customers within the Steel Energy reporting segment comprise 10% or moreEstimates: The preparation of the Company’s consolidated netfinancial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.
Recently Issued Accounting Standards: In April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), which changes the requirements for reporting discontinued operations. Pursuant to this pronouncement, the disposal of a component of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on an entity’s operations and financial results. This pronouncement also requires additional disclosures for discontinued operations and requires disclosures about disposals of individually significant components of an entity that do not qualify for discontinued operations presentation in the financial statements. ASU No. 2014-08 is effective for annual reporting periods beginning after December 15, 2014, and for interim reporting period within those years. The Company does not expect the adoption of ASU No. 2014-08 to have a material effect on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a core principle, achieved through a five-step process, that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for public companies for annual reporting
periods beginning after December 15, 2016, and for interim reporting periods within those years. Upon adoption, ASU No. 2014-09 can be applied either retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. Early application is not permitted. The Company is evaluating the potential impact on its consolidated financial statements of adopting ASU No. 2014-09 and has not yet determined the implementation method to be used.
In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718), to address diversity in accounting for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting period within those years, with earlier adoption permitted. The Company does not expect the adoption of ASU No. 2014-12 to have a material effect on its consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), as part of its initiative to reduce complexity in accounting standards. ASU No. 2015-01 eliminates from generally accepted accounting principles the concept of extraordinary items. ASU No. 2015-01 is effective for fiscal 2012 (Customeryears, and interim periods within those fiscal years, beginning after December 15, 2015, with earlier adoption permitted. A had $11.1 million and Customer B had $11.0 millionreporting entity may apply the provisions of net revenues, with $3.6 million and $2.9 million includedASU No. 2015-01 prospectively or retrospectively to all prior periods presented in accounts receivable asthe financial statements. The Company does not expect the adoption of December 31, 2012, respectively). In addition, the top 15 Steel ASU No. 2015-01 to have a material effect on its consolidated financial statements.
Energy customers made up 86% of consolidated net revenues in fiscal 2012Business
Segment informationOn December 16, 2013, Black Hawk Energy Services Ltd. ("Black Hawk Ltd."), an indirect wholly-owned subsidiary of the Company, acquired the business and substantially all of the assets of Black Hawk Energy Services, Inc. (“Black Hawk Inc.”), a provider of drilling and production services to the oil and gas industry, for continuing operations asapproximately $59.6 million in cash. The acquisition was funded with approximately $34.6 million from the Company's cash reserves and $25.0 million in proceeds from additional borrowings under an existing credit facility (see Note 9). The Company acquired the business of December 31, 2011Black Hawk Inc. to further solidify its presence in North Dakota in the Bakken basin and forto expand its business into other regions, including Texas and New Mexico.
The estimated fair value of the fiscal year then ended isassets and liabilities acquired in connection with the Black Hawk transaction was as follows:
| | | | | | | | Consolidated |
| | (in thousands) |
| | | | | | | | |
| Net revenues | $ 1,176 | | $ 1,417 | | $ - | | $ 2,593 |
| | | | | | | | |
| Operating income (loss) | $ (354) | | $ 165 | | $ (8,322) | | $ (8,511) |
| | | | | | | | |
| Depreciation and amortization expense | $ 206 | | $ 144 | | $ - | | $ 350 |
| | | | | | | | |
| Interest and other income (expense), net | $ - | | $ - | | $ 8,353 | | $ 8,353 |
| | | | | | | | |
| Total assets | $ 8,697 | | $ 32,228 | | $ 327,766 | | $ 368,691 |
| | | | | | | | |
| Accounts receivable | $ 156 | | $ 4,504 | | $ - | | $ 4,660 |
| | | | | | | | |
| Goodwill | $ 192 | | $ 8,052 | | $ - | | $ 8,244 |
| | | | | | | | |
| Property and equipment, net | $ 5,866 | | $ 15,194 | | $ - | | $ 21,060 |
|
| | | | | | |
| | Amount |
| | (in thousands) |
| Accounts receivable | $ | 10,114 |
|
| Prepaid expenses and other current assets | 319 |
|
| Property and equipment | 30,088 |
|
| Intangible assets | 12,210 |
|
| Accounts payable | (1,584 | ) |
| Accrued expenses | (2,160 | ) |
| Total net identifiable assets | 48,987 |
|
| Goodwill | 10,576 |
|
| Net assets acquired | $ | 59,563 |
|
No customers comprised 10% or moreThe goodwill recognized, which is fully deductible for tax purposes, arose from the growth potential the Company anticipates along with expected synergies within the Company’s Energy business. The intangible assets acquired represented customer relationships, a trade name, and a non-compete arrangement, all of which are being amortized over a five-year period. The fair value of trade accounts receivable was based on their carrying value at the date of acquisition and was expected to be fully collected. The results of operations of Black Hawk Ltd. have been included in the Company's results of operations since the acquisition date. Revenues and operating income from Black Hawk Ltd. included in the Company’s consolidated financial
statements for the year ended December 31, 2013, totaled $2.5 million and $0.8 million respectively.
On February 9, 2012, the Company acquired the business and assets of Eagle Well Services, Inc. (“Eagle Well”), a provider of drilling and production services to the oil and gas industry, for approximately $48.1 million in cash. The Company acquired Eagle Well to expand its then nascent Energy business.
The estimated fair value of the Company’s net revenues for fiscal 2011.assets and liabilities acquired in connection with the Eagle Well transaction was as follows:
Note 18. Related Party Transactions
|
| | | | | | |
| | Amount |
| | (in thousands) |
| Property and equipment | $ | 23,842 |
|
| Identifiable intangible assets | 14,300 |
|
| Accrued expenses | (137 | ) |
| Total net identifiable assets | 38,005 |
|
| Goodwill | 10,126 |
|
| Net assets acquired | $ | 48,131 |
|
As disclosedThe goodwill recognized, which is fully deductible for tax purposes, arose from the growth potential the Company anticipated along with expected synergies within the Company’s Energy business. The intangible assets acquired represented customer relationships, which are being amortized over a ten-year period. The results of operations of Eagle Well have been included in Note 3, pursuant to the termsCompany's results of operations since the Share Purchase Agreement,acquisition date.
On May 31, 2012, the Company acquired all of the capital stockoutstanding equity of SWH for an acquisition price aggregatingSun Well Service, Inc. (“Sun Well”), a provider of drilling and production services to the oil and gas industry. The total consideration aggregated $68.7 million. The aggregate acquisition pricemillion, and consisted of the issuance of 2,027,500 shares of the Company’s common stock (valuedvalued at $30 per share)$60.8 million and cash$7.9 million of $7.9 million.cash. The Company acquired Sun Well to further expand its Energy business. Steel Partners beneficially owned approximately 85% of Sun Well and approximately 40% of the Company’s outstanding common stock and 85% of BNS prior toCompany at the executiontime of the Share Purchase Agreement. Theacquisition. Both the Company and Steel Partners appointed a special committee (the “Special Committee”) comprised solely of independent directors to consider and negotiate the transaction as did BNS, because of the ownership interest ofheld by Steel Partners in each company. entity (see Note 19 for related party information).
The Special Committee,estimated fair value of the assets and liabilities acquired in connection with the assistanceacquisition of Sun Well was as follows:
|
| | | | | | |
| | Amount |
| | (in thousands) |
| Cash | $ | 3,561 |
|
| Accounts receivable | 7,233 |
|
| Prepaid expenses and other current assets | 782 |
|
| Property and equipment | 29,787 |
|
| Identifiable intangible assets | 27,300 |
|
| Other long-term assets | 714 |
|
| Accounts payable | (1,036 | ) |
| Accrued expenses and other current liabilities | (2,030 | ) |
| Other long-term liabilities | (1,805 | ) |
| Long-term debt | (16,000 | ) |
| Capital lease obligations | (1,622 | ) |
| Deferred tax liabilities | (16,539 | ) |
| Total net identifiable assets | 30,345 |
|
| Goodwill | 38,401 |
|
| Net assets acquired | $ | 68,746 |
|
The goodwill recognized was adjusted in 2013 to reflect additional acquisition-date deferred income tax liabilities and non-current deferred compensation obligations aggregating $1.8 million. The goodwill recognized, which is not deductible for tax purposes, arose from the growth potential the Company anticipates along with expected synergies within the Company’s Energy business. The intangible assets acquired represented customer relationships and a trade name, which are being amortized over ten-year and five-year periods, respectively. The fair value of trade accounts receivable was based on their carrying value at the date of acquisition and was expected to be fully collected.
Upon the acquisition of Sun Well, the business of Eagle Well was merged with the business of Sun Well and operated as a single business. The results of operations of Eagle Well and Sun Well have been included in the Company's results of operations since their respective acquisition dates. Revenues and operating income from the combined business of Eagle Well and Sun Well included in the Company’s consolidated financial statements for the year ended December 31, 2012, totaled $70.4 million and $14.6 million, respectively. In the fourth quarter of 2014, the Company recognized a goodwill impairment charge of $30.4 million related to the goodwill from the Sun Well and Eagle Well transactions (see Note 8).
On December 7, 2011, the Company acquired the business and assets of Rogue Pressure Services, LLC (“Rogue”), a provider of drilling and production services to the oil and gas industry. Contingent consideration was recognized at the acquisition date of Rogue and was payable upon attaining certain operational performance levels in the ensuing three years. In 2012, the Company reversed $0.7 million of the contingent consideration liability based on the failure to achieve the operational performance levels in 2012 and projections of future years' performance. In 2013, the Company reversed the remaining $0.5 million of the contingent consideration liability based on the projections for 2013 and 2014. Such amounts were recognized as a reduction of "Selling, general, and administrative expenses" in the respective periods.
Sports Business
On June 19, 2013, the Company acquired 80% of the outstanding common stock of UK Elite Soccer, Inc. ("UK Elite"), a provider of youth soccer programs and camps, for approximately $2.3 million in cash. The fair value of the non-controlling interest at the acquisition date was based on the amount paid by the Company for 80% of the common stock. The Company acquired UK Elite to expand its Sports business to include soccer events.
The estimated fair value of the assets and liabilities acquired in connection with the acquisition of UK Elite was as follows:
|
| | | | | | |
| | Amount |
| | (in thousands) |
| Cash | $ | 1,126 |
|
| Marketable securities | 194 |
|
| Accounts receivable | 637 |
|
| Prepaid expenses and other current assets | 759 |
|
| Identifiable intangible assets | 1,050 |
|
| Other assets | 53 |
|
| Accrued liabilities and other current liabilities | (2,577 | ) |
| Deferred income taxes | (447 | ) |
| Total identifiable net assets | 795 |
|
| Non-controlling interest | (563 | ) |
| Goodwill | 2,018 |
|
| Net assets acquired | $ | 2,250 |
|
The goodwill recognized, which is not deductible for tax purposes, arose from the growth potential the Company anticipated. The intangible assets acquired represented customer relationships and a trade name, which are being amortized over four-year and five-year periods, respectively. The results of operations of UK Elite have been included in the Company's results of operations since the acquisition date. Revenues and operating income from UK Elite included in the Company’s consolidated financial statements for the year ended December 31, 2013, totaled $6.2 million and $0.6 million, respectively.
In 2014, UK Elite acquired the business and assets of three independent providers of soccer clinics and camps for a total purchase price of $1.0 million, or approximately $0.5 million net of cash acquired. In connection with these acquisitions, the Company recognized approximately $0.2 million in current assets, primarily trade receivables, approximately $0.6 million in current liabilities, primarily deferred revenue, and approximately $0.9 million in intangible assets representing customer relationships that are being amortized over a five-year period.
On November 5, 2012, the Company acquired a 50% interest in two Crossfit® facilities in California that provide strength and conditioning services. Through the provisions of the operating agreements the Company has the ability to control the operations of the Crossfit® entities. Accordingly, the Company accounted for its investments as business combinations and consolidates both entities. The Company acquired its interests in the Crossfit® entities for approximately $0.1 million in cash and a commitment to loan one of the Crossfit® entities up to $1.1 million to fund the construction of the facility and the purchase of equipment. In 2014, the Company increased its ownership interest in one of the Crossfit® entities to approximately 86% through the contribution of loans and other advances.
In connection with the acquisition of its independent financial advisor, consideredinterests in the Crossfit® entities, the Company recognized approximately $0.2 million of goodwill and a numbernon-controlling interest of factorsapproximately $0.1 million. The Crossfit® entities had tangible net assets at the date of acquisition that were not material. The results of operations of the Crossfit® entities have been included in negotiatingthe Company's results of operations since the acquisition price, including, without limitation,date. Revenues and operating income from the fairness opinion from itsCrossfit® entities included in the Company’s consolidated financial advisor.statements for the year ended December 31, 2012, were not material.
On January 31, 2013, the Company acquired a 20% membership interest in Ruckus with an option to acquire an additional 40% membership interest in the next two years. Pursuant to an operating agreement, the Company appointed two directors on a three-member board of directors and therefore had the ability to control the operations of Ruckus. Accordingly, the Company accounted for its acquisition of its 20% membership interest as a business combination and consolidated Ruckus. The total consideration aggregated $1.0 million, and consisted of $0.9 million of cash and the contribution of a loan of $0.1 million. The fair value of the non-controlling interest at the acquisition date was based on the amount paid by the Company for its 20% membership interest and a control premium equal to 50% of the total consideration based on a study of business combinations. The Company acquired its membership interests in Ruckus to expand the health-related and entertainment services of its Sports business. In May 2013 and July 2013 the Company acquired additional membership interests in Ruckus of 10% and 15%, respectively, for cash payments aggregating $1.3 million, thereby increasing the Company's ownership interest to 45%. Such additional investments were recorded as equity transactions since Ruckus was a consolidated at the time of the investments.
In connection with the acquisition of its membership interests in Ruckus, the Company recognized approximately $3.6 million of goodwill and a non-controlling interest of approximately $2.3 million. Ruckus had tangible net liabilities at the date of acquisition that were not material.
In November 2013, the Company shut down the operations of Ruckus after it did not meet operational and financial expectations. The Company recognized a goodwill impairment charge of $3.6 million in connection with the shutdown of the business. Ruckus is reported as a discontinued operation in the Company’s consolidated financial statements and no amounts are included in revenues or income from continuing operations.
On August 15, 2011, the Company acquired a 75% membership interest in The Show, a provider of baseball uniforms to Little League and softball players and coaches, for approximately $1.5 million in cash. In July 2012, the Company shut down the operations of The Show after it did not meet operational and financial expectations. The Company recognized a goodwill impairment charge of $1.8 million in connection with the shutdown of The Show. The Show is reported as a discontinued operation in the Company’s consolidated financial statements and no amounts are included in revenues or income from continuing operations.
The following unaudited pro forma financial information combines the results of operations of the Company with the results of operations of the acquisitions consummated during the year ended December 31, 2013, as if those acquisitions had occurred at the beginning of the year prior to the date of acquisition. No pro forma financial information is provided for the year ended December 31, 2014, for the businesses acquired by UK Elite in 2014 since their results of operations are not material. The pro forma financial information for the year ended December 31, 2013, does not include the results of Ruckus, which is reported as a discontinued operation in the Company's consolidated financial statements. The pro forma financial information is not necessarily indicative of what would have actually occurred had the acquisitions been consummated at the beginning of the year prior to the date of acquisition or results that may occur in the future.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2013 | | 2012 |
| | (in thousands) |
| Net revenues | $ | 182,591 |
| | $ | 164,652 |
|
| Net income from continuing operations | $ | 27,963 |
| | $ | 32,386 |
|
| Net income | $ | 22,423 |
| | $ | 31,399 |
|
| Net income attributable to Steel Excel Inc. | $ | 25,767 |
| | $ | 30,900 |
|
| |
| 4. | Discontinued Operations |
The Company shut down the operations of Ruckus and The Show in November 2013 and July 2012, respectively, after they did not meet operational and financial expectations. Both The Show and Ruckus were part of the Company’s Sports business. The operations of Ruckus and The Show are reported as discontinued operations for all periods presented in the consolidated financial statements. The results of operations of Ruckus and The Show and the gain (loss) on the sale or disposal are presented as discontinued operations in the accompanying consolidated financial statements follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Revenues | $ | — |
| | $ | 1,260 |
| | $ | 451 |
|
| | | | | | |
| Income (loss) from operations of discontinued operations | $ | 506 |
| | $ | (5,540 | ) | | $ | (1,935 | ) |
| Gain on disposal of discontinued operations | — |
| | — |
| | — |
|
| Income (loss) from discontinued operations | $ | 506 |
| | $ | (5,540 | ) | | $ | (1,935 | ) |
Income from operations for the year ended December 31, 2014, consists entirely of income from operations of Ruckus and represents an adjustment to its outstanding obligations. The loss from operations for the year ended December 31, 2013, consists entirely of the loss from operations of Ruckus, and includes a goodwill impairment charge of $3.6 million. The loss from operations for the year ended December 31, 2012, consists entirely of the loss from operations of The Show, and includes a goodwill impairment charge of $1.8 million. There was no tax effect on any of the activity of discontinued operations for the years ended December 31, 2014, 2013, and 2012.
Marketable Securities
All of the Company's marketable securities at December 31, 2014 and 2013, were classified as "available-for-sale" securities, with changes in fair value recognized in stockholders' equity as "other comprehensive income (loss)". Marketable securities at December 31, 2014, consisted of the following:
|
| | | | | | | | | | | | | | | |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (in thousands) |
| Short-term deposits | $ | 42,681 |
| | $ | — |
| | $ | — |
| | $ | 42,681 |
|
| Mutual funds | 17,030 |
| | 4,262 |
| | (322 | ) | | 20,970 |
|
| Corporate securities | 103,761 |
| | 7,821 |
| | (23,732 | ) | | 87,850 |
|
| Corporate obligations | 32,486 |
| | 592 |
| | (3,441 | ) | | 29,637 |
|
| Total available-for-sale securities | 195,958 |
| | 12,675 |
| | (27,495 | ) | | 181,138 |
|
| Amounts classified as cash equivalents | (42,681 | ) | | — |
| | — |
| | (42,681 | ) |
| Amounts classified as marketable securities | $ | 153,277 |
| | $ | 12,675 |
| | $ | (27,495 | ) | | $ | 138,457 |
|
Marketable securities at December 31, 2013, consisted of the following:
|
| | | | | | | | | | | | | | | |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| | (in thousands) |
| Short-term deposits | $ | 60,909 |
| | $ | — |
| | $ | — |
| | $ | 60,909 |
|
| Mutual funds | 15,722 |
| | 5,061 |
| | — |
| | 20,783 |
|
| United States government securities | 50,356 |
| | 23 |
| | — |
| | 50,379 |
|
| Corporate securities | 69,806 |
| | 9,961 |
| | (5,208 | ) | | 74,559 |
|
| Corporate obligations | 31,356 |
| | 885 |
| | (276 | ) | | 31,965 |
|
| Commercial paper | 1,799 |
| | — |
| | — |
| | 1,799 |
|
| Total available-for-sale securities | 229,948 |
| | 15,930 |
| | (5,484 | ) | | 240,394 |
|
| Amounts classified as cash equivalents | (61,909 | ) | | — |
| | — |
| | (61,909 | ) |
| Amounts classified as marketable securities | $ | 168,039 |
| | $ | 15,930 |
| | $ | (5,484 | ) | | $ | 178,485 |
|
Proceeds from sales of marketable securities were $116.3 million, $75.8 million, and $574.1 million for the years ended December 31, 2014, 2013, and 2012, respectively. The company determines gains and losses from sales of marketable securities based on specific identification of the securities sold. Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of "Other income (expense), net" in the consolidated statements of operations, were as follows:
|
| | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
| | | | | 2014 | | 2013 | | 2012 |
| | | | | (in thousands) |
| Gross realized gains | | | | $ | 8,065 |
| | $ | 6,984 |
| | $ | 628 |
|
| Gross realized losses | | | | (4,300 | ) | | (4,376 | ) | | (346 | ) |
| Realized gains, net | |
| | $ | 3,765 |
| | $ | 2,608 |
| | $ | 282 |
|
The fair value of the Company’s marketable securities with unrealized losses at December 31, 2014, all of which had unrealized losses for periods of less than twelve months, were as follows:
|
| | | | | | | |
| | Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Corporate securities | $ | 39,869 |
| | $ | (23,732 | ) |
| Corporate obligations | 13,530 |
| | (3,441 | ) |
| Mutual funds | $ | 4,873 |
| | $ | (322 | ) |
| Total | $ | 58,272 |
| | $ | (27,495 | ) |
The fair value of the Company’s marketable securities with unrealized losses at December 31, 2013, and the duration of time that such losses had been unrealized, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (in thousands) |
| Corporate securities | $ | 15,609 |
| | $ | (4,757 | ) | | $ | 803 |
| | $ | (451 | ) | | $ | 16,412 |
| | $ | (5,208 | ) |
| Corporate obligations | 10,477 |
| | (276 | ) | | — |
| | — |
| | 10,477 |
| | (276 | ) |
| Total | $ | 26,086 |
| | $ | (5,033 | ) | | $ | 803 |
| | $ | (451 | ) | | $ | 26,889 |
| | $ | (5,484 | ) |
Gross unrealized losses primarily related to losses on corporate securities. The Company has evaluated such securities, which primarily consist of investments in equity securities of publicly-traded entities, as of December 31, 2014, and has determined that there was no indication of other-than-temporary impairments. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the entity, and the Company's intent and ability to hold the corporate securities for a period of time sufficient to allow for any anticipated recovery in market value.
The amortized cost and estimated fair value of available-for-sale debt securities and marketable securities with no contractual maturities at December 31, 2014, by contractual maturity, were as follows:
|
| | | | | | | |
| | Cost | | Estimated Fair Value |
| | (in thousands) |
| Debt securities: | | | |
| Mature in one year or less | $ | 212 |
| | $ | 186 |
|
| Mature after one year through three years | — |
| | — |
|
| Mature in more than three years | 32,274 |
| | 29,451 |
|
| Total debt securities | 32,486 |
| | 29,637 |
|
| Securities with no contractual maturities | 163,472 |
| | 151,501 |
|
| Total | $ | 195,958 |
| | $ | 181,138 |
|
Financial Instrument Obligations
In 2014, the Company entered into short sale transactions on certain financial instruments in which the Company received proceeds from the sale of such financial instruments and incurred obligations to deliver or purchase securities at a later date. Upon initially entering into such short sale transactions the Company recognizes a liability equal to the fair value of the obligation, with a comparable amount of the Company's cash and cash equivalents reclassified as restricted cash. Subsequent changes in the fair value of such obligations, determined based on the closing market price of the financial instruments, are recognized currently as gains or losses, with a comparable reclassification made between the amounts of the Company's unrestricted and restricted cash. The Company's obligations for such transactions are reported as "Financial instrument obligations" with a comparable amount reported as "Restricted cash" in the Company's consolidated balance sheet. As of December 31, 2014, the Company's financial instrument obligations consisted of the following:
|
| | | | | | | |
| | Initial Obligation | | Estimated
Fair Value |
| | (in thousands) |
| Corporate securities | $ | 666 |
| | $ | 621 |
|
| Market indices | 18,685 |
| | 20,451 |
|
| Covered call options | 7 |
| | 4 |
|
| Naked put options | 109 |
| | 235 |
|
| Total | $ | 19,467 |
| | $ | 21,311 |
|
For the year ended December 31, 2014, the Company incurred losses on outstanding financial instrument obligations and settled transactions totaling $1.8 million, which are included as a component of "Other income (expense), net" in the Company's consolidated statements of operations.
Equity-Method Investments
In January 2013, the Company acquired a 40% membership interest in Again Faster LLC, a fitness equipment company, for total cash consideration of $4.0 million. The Company accounts for its investment in Again Faster under the equity method as the Company owns more than 20%, providing the Company with significant influence, but does not have a controlling financial interest or other control over the operations of Again Faster. The Company accounts for its investment in Again Faster using the traditional method of accounting for equity-method investments, with the Company recognizing its equity in the losses of Again Faster on a one-quarter lag basis.
On August 23, 2013, the Company acquired 1,316,866 shares of the common stock of iGo, Inc. (“iGo”), in a cash tender offer for total consideration of $5.2 million. The shares of common stock of iGo acquired by the Company represented approximately 44.7% of the issued and outstanding shares of iGo. In 2014, the Company's ownership interest in iGo increased to 46.9% as a result of iGo repurchasing shares of its common stock in connection with a reverse/forward split. Pursuant to the Stock Purchase and Sale Agreement between the Company and iGo entered into on July 11, 2013, two members of iGo’s four-member board of directors were replaced by two designees of the Company. The Company accounts for its investment in iGo under the equity method as the Company’s voting interest and board representation provide it with significant influence, but do not provide the Company with control over iGo’s operations. The Company accounts for its investment in iGo using the traditional method of accounting for equity-method investments, with the Company recognizing its equity in the losses of iGo on a one-quarter lag basis.
In May 2014, the Company increased its holdings of the common stock of API Technologies Corp. (“API”), a designer and manufacturer of high performance systems, subsystems, modules, and components, to 11,377,192 shares through the acquisition and additionalof 1,666,666 shares acquired on the open market. Upon acquiring such shares, the Company held approximately 20.6% of the total outstanding common stock of API. Effective as of that date, the investment in API has been accounted for as an equity-method investment using the fair value option, with changes in fair value based on the market price of API's common stock recognized currently as income or loss from equity method investees. The Company elected the fair value option to account for its investment in API in order to more appropriately reflect the value of API in its financial statements. Prior to such time, the investment in API was accounted for as an available-for-sale security, and upon the change in classification the Company recognized a loss of approximately $0.6 million that had previously been included as a component of "accumulated other comprehensive income".
The following table summarizes the Company's equity-method investments.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Ownership | | Carrying Value | | Income (Loss) Recognized |
| | December 31, | | December 31, | | Fiscal Year Ended December 31, |
| | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | (in thousands) |
| Traditional equity method | | | | | | | | | | | |
| Again Faster | 40.0 | % | | 40.0 | % | | 3,105 |
| | 3,671 |
| | (566 | ) | | (329 | ) |
| iGo | 46.9 | % | | 44.7 | % | | 2,600 |
| | 4,668 |
| | (2,068 | ) | | (533 | ) |
| | | | | | | | | | | | |
| Fair value option | | | | | | | | | | | |
| API | 20.6 | % | | | | 24,355 |
| | — |
| | (3,436 | ) | | — |
|
| Total | | | | | $ | 30,060 |
| | $ | 8,339 |
| | $ | (6,070 | ) | | $ | (862 | ) |
Based on the closing market price of iGo's publicly-traded shares, the value of the Company's investment in iGo was approximately $3.4 million at December 31, 2014.
The following table presents summarized financial statement information for the Company's equity-method investees as of and for the year ended December 31, 2014. The summarized balance sheet information is as of the most recent
practicable date for equity-method investments accounted for using the fair value option and as of the date through which Company has recognized its equity in the income of the investee for equity-method investments accounted for using the traditional method. The summarized balance sheet and income statement information is included for the periods during which such investments were accounted for as equity-method investments.
|
| | | | |
| | | Amount |
| | | (in thousands) |
| Current assets | | $ | 115,532 |
|
| Non-current assets | | $ | 179,161 |
|
| Current liabilities | | $ | 42,200 |
|
| Non-current liabilities | | $ | 132,681 |
|
| Revenues | | $ | 131,290 |
|
| Gross profit | | $ | 29,841 |
|
| Net loss | | $ | (8,046 | ) |
In January 2015, two members of the Company's board of directors were appointed to the board of directors of Aviat Networks, Inc. ("Aviat"), a global provider of microwave networking solutions. At the time of the appointment, the Company held 8,041,892 shares of Aviat, or approximately 12.9% of the total outstanding common stock of Aviat. Effective as of the date of the appointment, the Company will account for its investment in Aviat under the equity method as the Company’s voting interest and board representation will provide it with significant influence over Aviat's operations. As of December 31, 2014, the Company's investment in Aviat was accounted for as an available-for-sale security. Upon the change in classification of its investment in Aviat in January 2015 the Company expects to recognize a loss of approximately $2.8 million.
Other Investments
The Company's other investments at December 31, 2014, include a $25.0 million cost-method investment in a limited partnership that co-invested with other private investment funds in a public company. The investment in the limited partnership had an approximate fair value of $28.6 million at December 31, 2014, based on the net asset value indicated in the monthly statement received from the partnership. The Company's other investments at December 31, 2014, also include investments in a venture capital fund totaling $0.5 million and a promissory note with an amortized cost of $3.0 million, which approximates fair value at December 31, 2014.
| |
| 6. | Fair Value Measurements |
Fair values of assets and liabilities are determined based on a three-level measurement input hierarchy.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date.
Level 2 inputs are other than quoted market prices that are observable, either directly or indirectly, for an asset or liability. Level 2 inputs can include quoted prices in active markets for similar assets or liabilities, quoted prices in a market that is not active for identical assets or liabilities, or other inputs that can be corroborated by observable market data. The Company uses quoted prices of similar instruments with an active market to determine the fair value of its Level 2 investments.
Level 3 inputs are unobservable for the asset or liability when there is little, if any, market activity for the asset or liability. Level 3 inputs are based on the best information available, and may include data developed by the Company. The Company uses the net asset value included in quarterly statements it receives in arrears from a venture capital fund to determine the fair value of such fund. The Company determines the fair vale of certain corporate securities and corporate obligations by incorporating and reviewing prices provided by third-party pricing services based on the specific features of the underlying securities.
Assets measured at fair value on a recurring basis at December 31, 2014, summarized by measurement input category, were as follows:
|
| | | | | | | | | | | | | | | |
| | Total | |
Level 1 | |
Level 2 | |
Level 3 |
| | (in thousands) |
| Assets | | | | | | | |
Cash, including short-term deposits(1) | $ | 51,910 |
| | $ | 51,910 |
| | $ | — |
| | $ | — |
|
| Restricted cash | | | | | | | |
Mutual funds(2) | 20,970 |
| | 20,970 |
| | — |
| | — |
|
Corporate securities(2) | 87,850 |
| | 72,798 |
| | — |
| | 15,052 |
|
Corporate obligations(2) | 29,637 |
| | — |
| | 10,793 |
| | 18,844 |
|
Investments in certain funds(3) | 525 |
| | — |
| | — |
| | 525 |
|
| | $ | 190,892 |
| | $ | 145,678 |
| | $ | 10,793 |
| | $ | 34,421 |
|
| | | | | | | | |
| Liabilities | | | | | | | |
| Financial instrument obligations | $ | (21,311 | ) | | $ | (21,311 | ) | | $ | — |
| | $ | — |
|
| |
| (1) | Reported within "Cash and cash equivalents." |
| |
| (2) | Reported within “Marketable securities.” |
| |
| (3) | Reported within "Other investments." |
Assets and liabilities measured at fair value on a recurring basis at December 31, 2013, summarized by measurement input category, were as follows:
|
| | | | | | | | | | | | | | | |
| | Total | |
Level 1 | |
Level 2 | |
Level 3 |
| | (in thousands) |
| Assets | | | | | | | |
Cash, including short-term deposits(1) | $ | 72,602 |
| | $ | 72,602 |
| | $ | — |
| | $ | — |
|
Mutual funds(2) | 20,783 |
| | 20,783 |
| | — |
| | — |
|
United States government securities(2) | 50,379 |
| | 50,379 |
| | — |
| | — |
|
Corporate securities(2) | 74,559 |
| | 68,624 |
| | — |
| | 5,935 |
|
Commercial paper(3) | 1,799 |
| | — |
| | 1,799 |
| | — |
|
Corporate obligations(2) | 31,965 |
| | — |
| | 14,535 |
| | 17,430 |
|
Investments in certain funds(4) | 844 |
| | — |
| | — |
| | 844 |
|
| | $ | 252,931 |
| | $ | 212,388 |
| | $ | 16,334 |
| | $ | 24,209 |
|
| |
| (1) | Reported within "Cash and cash equivalents." |
| |
| (2) | Reported within “Marketable securities.” |
| |
| (3) | $1.0 million reported within "Cash and cash equivalents" and $0.8 million reported within "Marketable securities." |
| |
| (4) | Reported within "Other investments". |
There were no transfers of securities among the various measurement input levels during the year ended December 31, 2014.
Changes in the fair value of assets valued using Level 3 measurement inputs during the years ended December 31, 2014 and 2013, were as follows:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
| Balance, beginning of period | $ | 24,209 |
| | $ | 2,804 |
|
| Purchases | 13,294 |
| | 45,383 |
|
| Sales | (5,001 | ) | | (23,034 | ) |
| Realized gain on sale | (129 | ) | | 1,556 |
|
| Change in fair value | 2,048 |
| | (2,500 | ) |
| Balance, end of period | $ | 34,421 |
| | $ | 24,209 |
|
Realized gains and losses on the sale of investments using Level 3 measurement inputs are recognized as a component of "Other income (expense), net". Unrealized gains and losses on investments using Level 3 measurement inputs are recognized as a component of "Other comprehensive income".
In November 2012, the Company invested $6.0 million in convertible debentures of School Specialty Inc. (“School Specialty”) with a face amount of $11.9 million. On January 28, 2013, School Specialty filed for protection under Chapter 11 of the United States Bankruptcy Code, and in subsequent months the Company invested approximately $21.3 million as part of the debtor-in-possession loan to School Specialty. Upon School Specialty emerging from bankruptcy on June 11, 2013, the Company received 26,457 shares of common stock of the post-bankruptcy entity in exchange for the convertible debentures, and received $17.5 million in cash and 49,136 shares of common stock of the post-bankruptcy entity in exchange for its investment in the debtor-in-possession loan. The fair value of the common stock of the post-bankruptcy entity received was $109 per share. In connection with these transactions, the Company recognized a loss on disposal of the subordinated debentures of approximately $3.2 million and a gain on disposal of the investment in the debtor-in-possession loan of approximately $1.6 million, both of which are included as a component of “Other income (expense), net” in the consolidated statements of operations for the year ended December 31, 2013. In addition, the Company invested $9.8 million in senior secured notes of the post-bankruptcy entity in June 2013. The Company's investments in the common stock and senior secured notes of the post-bankruptcy entity are included as Level 3 corporate securities and Level 3 corporate obligations, respectively, as of December 31, 2014 and 2013.
The carrying value of the Company's long-term debt (see Note Note 9) is a reasonable approximation of its fair value since it is a variable-rate obligation. The Company’s 3/4% Convertible Senior Notes due December 22, 2023, had a carrying value of approximately $0.3 million as of December 31, 2013, which was a reasonable approximation of fair value. The Company redeemed all outstanding Convertible Senior Notes in January 2014 with a cash payment of $0.3 million.
| |
| 7. | Property and Equipment, Net |
Property and equipment at December 31, 2014 and 2013, consisted of the following:
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | (in thousands) |
| Rigs and other equipment | $ | 115,391 |
| | $ | 100,859 |
|
| Buildings and improvements | 18,977 |
| | 17,923 |
|
| Land | 1,893 |
| | 1,893 |
|
| Vehicles | 2,197 |
| | 1,869 |
|
| Furniture and fixtures | 673 |
| | 494 |
|
| Assets in progress | 644 |
| | 1,114 |
|
| | 139,775 |
| | 124,152 |
|
| Accumulated depreciation | (32,588 | ) | | (18,262 | ) |
| Property and equipment, net | $ | 107,187 |
| | $ | 105,890 |
|
Depreciation expense was $14.6 million, $10.5 million, and $7.8 million for the years ended December 31, 2014, 2013, and 2012, respectively, and includes the depreciation associated with assets under capital leases (see Note 10).
| |
| 8. | Goodwill and Other Intangible Assets |
The Company's intangible assets at December 31, 2014 and 2013, all of which are subject to amortization, consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| | (in thousands) |
| Energy segment: | | | | | |
| | | | | | |
| Customer relationships | $ | 54,430 |
| | $ | (21,938 | ) | | $ | 32,492 |
| | $ | 54,430 |
| | $ | (13,700 | ) | | $ | 40,730 |
|
| Trade names | 4,860 |
| | (3,161 | ) | | 1,699 |
| | 4,860 |
| | (2,315 | ) | | 2,545 |
|
| Non-compete agreement | 120 |
| | (25 | ) | | 95 |
| | 120 |
| | — |
| | 120 |
|
| | 59,410 |
| | (25,124 | ) | | 34,286 |
| | 59,410 |
| | (16,015 | ) | | 43,395 |
|
| | | | | | | | | | | | |
| Sports segment: | | | | | | | | | | | |
| Customer relationships | 2,089 |
| | (678 | ) | | 1,411 |
| | 1,163 |
| | (230 | ) | | 933 |
|
| Trade names | 122 |
| | (37 | ) | | 85 |
| | 122 |
| | (12 | ) | | 110 |
|
| | 2,211 |
| | (715 | ) | | 1,496 |
| | 1,285 |
| | (242 | ) | | 1,043 |
|
| | | | | | | | | | | | |
| Total | $ | 61,621 |
| | $ | (25,839 | ) | | $ | 35,782 |
| | $ | 60,695 |
| | $ | (16,257 | ) | | $ | 44,438 |
|
Amortization expense was $9.6 million, $8.7 million, and $7.6 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Estimated aggregate amortization expense related to the intangible assets for the next five years and thereafter is as follows:
|
| | | | | | | |
| | | | | | Amount |
| | | | | | (in thousands) |
| For the year ended December 31: | | | | | |
| 2015 | | | | | $ | 8,211 |
|
| 2016 | | | | | 7,202 |
|
| 2017 | | | | | 5,972 |
|
| 2018 | | | | | 5,229 |
|
| 2019 | | | | | 2,814 |
|
| Thereafter | | | | | 6,354 |
|
| | | | | | $ | 35,782 |
|
The changes to the Company’s carrying amount of goodwill were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 | | Year Ended December 31, 2013 |
| | Energy | | Sports | | Total | | Energy | | Sports | | Total |
| | (in thousands) |
| Balance at beginning of period | $ | 65,359 |
| | $ | 2,171 |
| | $ | 67,530 |
| | $ | 52,939 |
| | $ | 154 |
| | $ | 53,093 |
|
| Acquisitions | — |
| | — |
| | — |
| | 10,576 |
| | 5,594 |
| | 16,170 |
|
| Adjustment to fair value | — |
| | — |
| | — |
| | 1,844 |
| | — |
| | 1,844 |
|
| Impairments | (36,666 | ) | | — |
| | (36,666 | ) | | — |
| | (3,577 | ) | | (3,577 | ) |
| Balance at end of period | $ | 28,693 |
| | $ | 2,171 |
| | $ | 30,864 |
| | $ | 65,359 |
| | $ | 2,171 |
| | $ | 67,530 |
|
In connection with its annual goodwill impairment test and the adverse effects of the recent developments in the oil services industry, the Company recognized an impairment charge of $36.7 million in the fourth quarter of 2014 related to the goodwill associated with its Energy segment. The impairment resulted from the adverse effects the decline in energy prices had on the oil services industry and the projected results of operations of the Energy segment. The fair values of the reporting units used in determining the goodwill impairment were based on valuations using a combination of the income approach (discounted cash flows) and the market approach (guideline public company method and guideline transaction method). The goodwill impairment charge consisted of an impairment of the goodwill at Sun Well, inclusive of the goodwill related to Eagle Well, of approximately $30.4 million and an impairment charge of the goodwill at Rogue of $6.3 million. No impairment was recognized related to the goodwill at Black Hawk. At December 31, 2014, the remaining goodwill associated with the Energy segment was $28.7 million, which consisted of $18.1 million at Sun Well and $10.6 million at Black Hawk.
The adjustment to fair value in 2013 represents an adjustment to reflect additional acquisition-date deferred income tax liabilities and non-current deferred compensation obligations related to the acquisition of Sun Well (see Note 3). During the year ended December 31, 2013, the Company recognized a goodwill impairment of $3.6 million related to the shutdown of Ruckus that is included in “Income (loss) from discontinued operations" in the consolidated statement of operations (see Note 4). The accumulated goodwill impairment was $42.2 million and $5.6 million at December 31, 2014 and 2013, respectively.
The components of goodwill at December 31, 2014 and 2013, were as follows:
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | (in thousands) |
| Goodwill | $ | 73,095 |
| | $ | 73,095 |
|
| Accumulated impairment | (42,231 | ) | | (5,565 | ) |
| Net goodwill | $ | 30,864 |
| | $ | 67,530 |
|
On July 3, 2013, Steel Energy Services entered into a credit agreement (the “Energy Credit Agreement”) with Wells Fargo Bank National Association, RBS Citizens, N.A., and Comerica Bank. The Energy Credit Agreement provided for a borrowing capacity of $80.0 million consisting of a $70.0 million secured term loan (the “Term Loan”) that was fully drawn by Steel Energy Services on July 3, 2013, and up to $10.0 million in revolving loans (the “Revolving Loans”) subject to a borrowing base of 85% of the eligible accounts receivable. The proceeds of the Term Loan at closing, along with proceeds from intercompany loans to Steel Energy Services from Sun Well and Rogue, were used to pay the Company a dividend of $80.0 million and certain fees and expenses related to the Energy Credit Agreement.
In December 2013, Steel Energy Services entered into an amendment to the Energy Credit Agreement (together with the Energy Credit Agreement, the "Amended Credit Agreement") pursuant to which the borrowing capacity for the Term Loan was increased by an additional $25.0 million. The additional amounts under the Term Loan were fully drawn by Steel Energy Services upon closing and the proceeds, together with cash provided by the Company and Steel Energy Services, were used to fund the acquisition of the business and substantially all of the assets of Black Hawk Inc. (see Note 3). The Company incurred fees totaling approximately $1.4 million in connection with the Amended Credit Agreement that are being amortized over the life of the arrangement as a component of interest expense.
Borrowings under the Amended Credit Agreement are collateralized by substantially all the assets of Steel Energy Services and its wholly-owned subsidiaries Sun Well, Rogue, and Black Hawk Ltd., and a pledge of all of the issued and
outstanding shares of capital stock of Sun Well, Rogue, and Black Hawk Ltd. Borrowings under the Amended Credit Agreement are fully guaranteed by Sun Well, Rogue, and Black Hawk Ltd. The carrying values as of December 31, 2014, of the assets pledged as collateral by Steel Energy Services and its subsidiaries under the Amended Credit Agreement were as follows:
|
| | | |
| | Amount |
| | (in thousands) |
| Cash and cash equivalents | $ | 29,198 |
|
| Accounts receivable | 26,741 |
|
| Property and equipment, net | 99,034 |
|
| Intangible assets, net | 34,286 |
|
| Total | $ | 189,259 |
|
The Amended Credit Agreement has a term that runs through July 2018, with the Term Loan amortizing in quarterly installments of $3.3 million and a balloon payment due on the maturity date. At December 31, 2014, $79.3 million was outstanding under the Term Loan and no amount was outstanding under the Revolving Loans. Principal payments under the Amended Credit Agreement for subsequent years are as follows:
|
| | | | | |
| | | | Amount |
| | | | (in thousands) |
| 2015 | | | $ | 13,214 |
|
| 2016 | | | 13,214 |
|
| 2017 | | | 13,214 |
|
| 2018 | | | 39,643 |
|
| Total | | | 79,285 |
|
| Less current portion | | | 13,214 |
|
| Total long-term debt | | | $ | 66,071 |
|
Borrowings under the Amended Credit Agreement bear interest at annual rates of either (i) the Base Rate plus an applicable margin of 1.50% to 2.25% or (ii) LIBOR plus an applicable margin of 2.50% to 3.25%. The “Base Rate” is the greatest of (i) the prime lending rate, (ii) the Federal Funds Rate plus 0.5%, and (iii) the one-month LIBOR plus 1.0%. The applicable margin for both Base Rate and LIBOR is determined based on the leverage ratio calculated in accordance with the Amended Credit Agreement. LIBOR-based borrowings are available for interest periods of one, three, or six months. In addition, the Company is required to pay commitment fees of between 0.375% and 0.50% per annum on the daily unused amount of the Revolving Loans. The interest rate on the borrowings under the Amended Credit Agreement was 2.8% at December 31, 2014. For the years ended December 31, 2014 and 2013, the Company incurred interest expense of $3.1 million and $1.4 million, respectively, in connection with the Amended Credit Agreement.
The Amended Credit Agreement contains certain financial covenants, including (i) a leverage ratio not to exceed 3.00:1 for quarterly periods through June 15, 2015, 2.75:1 for quarterly periods through June 30, 2017, and 2.5:1 thereafter and (ii) a fixed charge coverage ratio of 1.15:1 for quarterly periods through December 31, 2016, and 1.25:1 thereafter. The Company was in compliance with all financial covenants as of December 31, 2014.
The Amended Credit Agreement also contains representations, warranties and non-financial covenants, including, among other things, covenants relating to (i) financial reporting and notification, (ii) payment of obligations, (iii) compliance with law, (iv) maintenance of properties and (v) payment of restricted payments. The repayment of the Term Loan can be accelerated upon (i) a change in control, which would include Steel Energy Services owning less than 100% of the equity of Sun Well, Rogue, or Black Hawk Ltd. or Steel Partners owning, directly or indirectly, less than 35% of Steel Energy Services or (ii) other events of default, including payment failure, false representations, covenant breaches, and bankruptcy.
Sun Well previously had a credit agreement (the "Sun Well Credit Agreement") with Wells Fargo Bank, National Association, that included a term loan of $20.0 million and a revolving line of credit for up to $5.0 million. All amounts due under the Sun Well Credit Agreement were fully repaid during 2013 and the facility was terminated as of July 3, 2013, upon closing of the Energy Credit Agreement. For the years ended December 31, 2013 and 2012, the Company incurred interest
expense of $0.3 million and $0.4 million, respectively, in connection with the Sun Well Credit Agreement. Upon termination of the Sun Well Credit Agreement, the Company recognized a loss on extinguishment of $0.5 million from the write off of unamortized deferred financing costs, which was reported as a component of "Other income (expense), net" in the consolidated statements of operations for the year ended December 31, 2013.
The Company leases certain property and equipment used in its operations under agreements that are classified as both capital and operating leases. Such agreements generally include provisions for inflation-based rate adjustments and, in the case of leases for buildings and office space, payments of certain operating expenses and property taxes.
Future minimum rental payments required under capital leases and operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:
|
| | | | | | | |
| | Operating | | Capital |
| | (in thousands) |
| For the year ended December 31, | | | |
| 2015 | $ | 1,092 |
| | $ | 437 |
|
| 2016 | 1,043 |
| | 178 |
|
| 2017 | 664 |
| | — |
|
| 2018 | 347 |
| | — |
|
| 2019 | 254 |
| | — |
|
| Thereafter | 782 |
| | — |
|
| Total minimum lease payments | $ | 4,182 |
| | 615 |
|
| Less amount representing interest | | | (26 | ) |
| Present value of net minimum lease payments | | | 589 |
|
| Less current portion | | | (412 | ) |
| Capital lease obligations, net of current portion | | | $ | 177 |
|
Assets recorded under capital leases are included in property and equipment (see Note 7) as follows:
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
| Rigs and other equipment | $ | 1,871 |
| | $ | 1,871 |
|
| Accumulated depreciation | (559 | ) | | (343 | ) |
| Net | $ | 1,312 |
| | $ | 1,528 |
|
Total rental expense under operating leases was $7.7 million, $3.3 million, and $4.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.
“Accrued expenses and other current liabilities” consisted of the following:
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | (in thousands) |
| Tax-related | $ | 238 |
| | $ | 385 |
|
| Accrued compensation and related taxes | 5,471 |
| | 4,517 |
|
| Deferred revenue | 1,308 |
| | 857 |
|
| Professional services | 763 |
| | 608 |
|
| Accrued fuel and rig-related charges | 601 |
| | 889 |
|
| Other | 535 |
| | 507 |
|
| | $ | 8,916 |
| | $ | 7,763 |
|
“Other long-term liabilities” at December 31, 2014 and 2013, primarily consisted deferred compensation arrangements that are expected to be paid out in 2016. In 2013, the Company reversed approximately $7.2 million of tax-related liabilities that represented uncertain tax positions relating to foreign jurisdictions in which the Predecessor Business previously operated. Such reserves for foreign taxes were reversed upon the expiration of the statute of limitations (see Note 13).
| |
| 12. | Other Income (Expense), net |
“Other income (expense), net” consisted of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Investment income | $ | 6,621 |
| | $ | 4,804 |
| | $ | 1,903 |
|
| Realized gain on sale of marketable securities, net | 3,765 |
| | 2,608 |
| | 282 |
|
| Realized loss on financial instrument obligation | (1,821 | ) | | — |
| | — |
|
| Realized loss upon change to equity method at fair value | (568 | ) | | — |
| | — |
|
| Foreign exchange loss | (1,059 | ) | | — |
| | — |
|
| Gain (loss) on sale of property and equipment | 191 |
| | 132 |
| | (819 | ) |
| Loss on extinguishment of debt | — |
| | (463 | ) | | — |
|
| Other | (71 | ) | | (7 | ) | | (299 | ) |
| Other income (expense), net | $ | 7,058 |
| | $ | 7,074 |
| | $ | 1,067 |
|
The Company recognized a benefit for income taxes of $1.3 million for the year ended December 31, 2014, primarily as a result of a foreign tax benefit of $1.7 million recognized upon the conclusion of tax examinations by a foreign tax authority offsetting the domestic current and deferred provision for the year. The Company recognized a benefit for income taxes of $9.3 million for the year ended December 31, 2013, primarily as a result of a reversal of $7.2 million of reserves for foreign taxes upon the expiration of the statute of limitations. In addition, in 2013 the Company reversed a portion of its valuation allowance for deferred tax assets as a result of deferred tax liabilities recognized in connection with unrealized gains on marketable securities included as a component of other comprehensive income. The Company recognized a benefit for income taxes of $15.7 million for the year ended December 31, 2012, primarily from a reversal of a portion of its valuation allowance for deferred tax assets as a result of deferred tax liabilities recognized on the identifiable intangible assets acquired in connection with the acquisition of Sun Well.
The components of the benefit from income taxes were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Federal: | | | | | |
| Current | $ | (191 | ) | | $ | 14 |
| | $ | 34 |
|
| Deferred | 105 |
| | 3,402 |
| | 15,066 |
|
| | (86 | ) | | 3,416 |
| | 15,100 |
|
| | | | | | |
| Foreign: | | | | | |
| Current | 1,719 |
| | 7,281 |
| | 1,373 |
|
| Deferred | — |
| | (1,696 | ) | | — |
|
| | 1,719 |
| | 5,585 |
| | 1,373 |
|
| | | | | | |
| State: | | | | | |
| Current | (403 | ) | | 509 |
| | (979 | ) |
| Deferred | 93 |
| | (168 | ) | | 218 |
|
| | (310 | ) | | 341 |
| | (761 | ) |
| | | | | | |
| | $ | 1,323 |
| | $ | 9,342 |
| | $ | 15,712 |
|
The components of income (loss) from continuing operations before income taxes were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Domestic | $ | (25,580 | ) | | $ | 6,990 |
| | $ | 6,326 |
|
| Foreign | (12 | ) | | 59 |
| | 141 |
|
| | $ | (25,592 | ) | | $ | 7,049 |
| | $ | 6,467 |
|
The benefit for income taxes varied from the Federal statutory income tax rate due to the following:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | | | | | |
| Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | (0.5 | )% | | (8.1 | )% | | 15.1 | % |
| Foreign losses not benefited | — | % | | (0.3 | )% | | (0.6 | )% |
| Changes in tax reserves | 0.2 | % | | (78.6 | )% | | (53.9 | )% |
| Change in valuation allowance | 30.3 | % | | (78.7 | )% | | (263.5 | )% |
| Permanent differences | (64.6 | )% | | (1.8 | )% | | 24.6 | % |
| Foreign tax refund | 6.5 | % | | — | % | | — | % |
| Other | (1.7 | )% | | — | % | | 0.3 | % |
| | 5.2 | % | | (132.5 | )% | | (243.0 | )% |
The components of the deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
| Deferred tax assets | | | |
| Net operating loss carryforward | $ | 49,096 |
| | $ | 61,212 |
|
| Research and development credits | 33,484 |
| | 33,484 |
|
| Compensatory and other accruals | 2,698 |
| | 1,800 |
|
| Unrealized losses on investments | 5,265 |
| | — |
|
| Intangible assets | 819 |
| | — |
|
| Foreign tax credits | 201 |
| | — |
|
| Other, net | 3,725 |
| | 1,785 |
|
| Gross deferred tax assets | 95,288 |
| | 98,281 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Unremitted foreign earnings | — |
| | 7,001 |
|
| Unrealized gains on investments | — |
| | 3,704 |
|
| Intangible assets | — |
| | 6,525 |
|
| Fixed assets | 19,128 |
| | 13,354 |
|
| Gross deferred tax liabilities | 19,128 |
| | 30,584 |
|
| | | | |
| Net deferred tax asset before valuation allowance | 76,160 |
| | 67,697 |
|
| Valuation Allowance | (78,018 | ) | | (69,753 | ) |
| | | | |
| Net deferred tax liability | $ | (1,858 | ) | | $ | (2,056 | ) |
The components of the Company's deferred tax assets and deferred tax liabilities were classified in the consolidated balance sheets as follows:
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
| Deferred income tax assets - current | $ | 1,696 |
| | $ | — |
|
| Deferred income tax assets - non-current | 80 |
| | 1,556 |
|
| Total deferred income tax assets | 1,776 |
| | 1,556 |
|
| | | | |
| Deferred income tax liabilities - current | 85 |
| | 3,612 |
|
| Deferred income tax liabilities - non-current | 3,549 |
| | — |
|
| Total deferred income tax liabilities | 3,634 |
| | 3,612 |
|
| | | | |
| Net deferred income tax liability | $ | (1,858 | ) | | $ | (2,056 | ) |
At December 31, 2014, the Company had Federal net operating loss carryforwards of approximately $113.0 million that expire in 2020 through 2031, and domestic state net operating loss carryforwards of approximately $159.9 million that expire in 2015 through 2031. The Company also had Federal research and development credit carryforwards of approximately $30.3 million that expire in 2018 through 2029, and domestic state research and development credit carryforwards of approximately $17.7 million that do not expire. Of the total Federal net operating loss carryforwards, approximately $10.5 million related to deductions for stock-based compensation, the tax benefit of which will be credited to additional paid-in capital when realized. The Company's ability to utilize its net operating loss and other credit carryforwards would be subject to
limitation upon a change in control. Federal income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have been fully provided.
The Company established a valuation allowance to reserve its net deferred tax assets at December 31, 2014 and 2013, based on its assessment that it is more likely than not that such benefit will not be fully realized. This assessment was based on, but not limited to, the Company’s operating results for the past three years, uncertainty in the Company’s projections of taxable income, uncertainty in general economic conditions in general and in the oil and gas industry in particular, and the effects of multiple acquisitions and the Company’s ability to effectively integrate the acquired entities.
The changes in unrecognized tax positions were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Balance at beginning of period | $ | 19,121 |
| | $ | 26,419 |
| | $ | 29,903 |
|
| Tax positions related to prior year: | | | | | |
| Additions | — |
| | — |
| | — |
|
| Expiration of statute of limitations | (45 | ) | | (7,298 | ) | | — |
|
| Settlements | — |
| | — |
| | (3,484 | ) |
| Balance at ending of period | $ | 19,076 |
| | $ | 19,121 |
| | $ | 26,419 |
|
As of December 31, 2014, the Company’s total gross unrecognized tax benefits were $19.1 million, of which $0.1 million, if recognized, would affect the provision for income taxes. In 2014, the Company reversed approximately $45,000 of reserves for foreign taxes upon the expiration of the statute of limitations. The Company recognizes interest and penalties related to uncertain tax positions as a component of “Benefit from income taxes” in its consolidated statements of operations. For the years ended December 31, 2014. 2013, and 2012, the amount of such interest and penalties recognized was immaterial.
The Company is subject to Federal income tax as well as income taxes in many domestic states and foreign jurisdictions in which the Company operates or formerly operated. As of December 31, 2014, fiscal years from 1999 onward remain open to examination by the United States taxing authorities. In 2014, tax examinations were completed for fiscal years 2009 through 2013 in Singapore, resulting in a refund to the Company of $1.7 million. The Company is not currently under tax examination in any foreign jurisdictions.
14. Stock Benefit Plans
The Company grants equity-based awards to employees under its 2004 Equity Incentive Plan, as amended (the “2004 Plan”). Stock options granted under the 2004 Plan have a term of up to seven years from the grant date, with the exception of incentive stock options granted to employees who own more than 10% of the voting power of all classes of stock of the Company, which have a term of up to five years. The exercise price and vesting period of stock options granted under the 2004 Plan is determined by the board of directors or its delegates, subject to certain provisions of the 2004 Plan. The exercise price of incentive stock options granted to employees who own more than 10% of the voting power of all classes of stock of the Company shall not be less than 110% of the fair market value of the Company’s common stock on the grant date. The exercise price of incentive stock options granted to other employees shall be no less than 100% of the fair market value of the Company’s common stock on the grant date. The exercise price of non-qualified stock options granted to employees shall be no less than 100% of the fair market value of the Company’s common stock on the grant date, but in certain circumstances could be as low as 85% of the fair market value of the Company’s common stock on the grant date.
The 2004 Plan also allows for the granting of stock appreciation rights, restricted stock awards, and restricted stock units, the terms of such grants being determined by the board of directors or its delegates subject to certain provisions of the 2004 Plan. Stock appreciation rights granted under the 2004 Plan shall have a term of up to seven years and an exercise price of no less than 100% of the fair market value of the Company’s common stock on the grant date. Restricted stock awards and restricted stock units (collectively, “restricted stock”) granted under the 2004 Plan shall have a purchase price of at least $0.001 per share.
The Company grants equity-based awards to non-employee directors under its 2006 Director Plan, as amended (the "2006 Plan", and together with the “2004 Plan”, the "Equity Plans"). The terms of all stock-based awards granted under the
2006 Plan are determined by the compensation committee of the board of directors, subject to certain provisions of the 2006 Plan. All options granted under the 2006 Plan are non-qualified stock options, and shall have a term of up to ten years and an exercise price of no less than 100% of the fair market value of the Company’s common stock on the grant date. The 2006 Plan also allows for the granting of stock appreciation rights, restricted stock awards, and restricted stock units. Stock appreciation rights granted under the 2006 Plan shall have a term of up to ten years and an exercise price of no less than 100% of the fair market value of the Company’s common stock on the grant date. Restricted stock granted under the 2006 Plan shall have a purchase price equal to at least the par value of the Company’s common stock on the grant date.
There are 1,805,613 shares and 1,200,000 shares of the Company’s common stock reserved for the issuance of equity-based awards under the 2004 Plan and the 2006 Plan, respectively. Under the 2004 Plan, 1,543,891 shares remained available for the issuance of equity-based awards and 73,969 equity-based awards were outstanding at December 31, 2014. Under the 2006 Plan, 401,545 shares remained available for the issuance of equity-based awards and 38,250 equity-based awards were outstanding at December 31, 2014.
The Company recognizes stock-based compensation based on the estimated fair values of equity-based awards on the grant dates. Stock-based compensation is recognized ratably over the requisite service or vesting period of the equity-based awards and is adjusted for estimated forfeitures. Certain grants of restricted stock to non-employee directors vest in full when the individual ceases being a member of the board of directors for any reason. The fair value of such grants are recognized as stock-based compensation on the grant date. The fair value of restricted stock is based on the closing price of the Company’s common stock on the grant date. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options. No stock options were granted in 2014 and 2013. The following weighted average assumptions were used in calculating the fair value of the stock options granted in 2012 under the Equity Plans:
|
| | | | |
| Expected life (in years) | | 1.1 |
| Risk-free interest rate | | 0.2% |
| Expected volatility | | 58% |
| Dividend yield | | — |
The expected term of stock options was based on historical data used to estimate the period of time that options were expected to be outstanding. The expected volatility is based on the historical volatility of the Company’s common stock. The expected dividends are based on the historical dividends paid and the dividends the Company expects to pay in future periods. The risk-free interest rate is based on the yields of United States Treasury Notes at the time stock options are granted.
Stock-based compensation expense by type of equity-based award, all of which was recognized as a component of "Selling, general, and administrative expenses" in the consolidated statements of operations for the years ended December 31, 2014, 2013, and 2012, was as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Stock options | $ | 36 |
| | $ | 91 |
| | $ | 92 |
|
| Restricted stock | 2,770 |
| | 1,949 |
| | 1,395 |
|
| Total stock-based compensation | $ | 2,806 |
| | $ | 2,040 |
| | $ | 1,487 |
|
There was no stock option activity under the Equity Plans during the year ended December 31, 2014. Information relating to outstanding and exercisable stock options under the Equity Plans at December 31, 2014, is summarized in the following table. All stock option grants had exercise prices equal to or greater than the market price on the grant date.
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| | (in thousands) | | | | | | (in thousands) |
| Outstanding, December 31, 2014 | 56 |
| | $ | 30.14 |
| | 4.2 | | $ | — |
|
| | | | | | | | |
| Exercisable, December 31, 2014 | 55 |
| | $ | 30.17 |
| | 4.2 | | $ | — |
|
Information relating to restricted stock activity in the Equity Plans for the year ended December 31, 2014, is summarized in the following table.
|
| | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | |
| Non-vested stock, January 1, 2014 | 142 |
| | $ | 28.19 |
|
| Awarded | 24 |
| | $ | 32.69 |
|
| Vested | (97 | ) | | $ | 28.21 |
|
| Forfeited | (12 | ) | | $ | 28.07 |
|
| Non-vested stock, December 31, 2014 | 57 |
| | $ | 30.10 |
|
Information relating to the fair value of grants of equity awards and the fair value of restricted shares vested for the years ended December 31, 2014, 2013, and 2012 is summarized in the following table. No stock options were exercised for the years ended December 31, 2014, 2013, and 2012.
|
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | 2014 | | 2013 | | 2012 |
| | | | (in thousands) |
| Weighted average fair value on grant date: | | | | | | | |
| Options | | | $ | — |
| | $ | — |
| | $ | 27 |
|
| Restricted stock | | | $ | 788 |
| | $ | 3,977 |
| | $ | 2,795 |
|
| | | | | | | | |
| Fair value of restricted stock vested | | | $ | 2,739 |
| | $ | 2,797 |
| | $ | 415 |
|
Compensation expense related to equity-based awards granted under the Equity Plans that was not recognized as of December 31, 2014, totaled $1.1 million and is expected to be recognized over a weighted average period of 1.2 years. The Company did not receive any proceeds from the exercise of equity-based awards during the years ended December 31, 2014, 2013, and 2012. The Company has a policy of issuing new shares of common stock upon the exercise of stock options.
| |
| 15. | Net Income (Loss) Per Share |
Basic net income (loss) attributable to Steel Excel per share of common stock is computed by dividing net income (loss) attributable to Steel Excel by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to Steel Excel gives effect to all potentially dilutive common shares outstanding during the period.
Amounts used in the calculation of basic and diluted net income (loss) per share of common stock for the years ended December 31, 2014, 2013. and 2012, were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands, except per share data) |
| Numerators: | | | | | |
| Net income (loss) from continuing operations | $ | (24,269 | ) | | $ | 16,391 |
| | $ | 22,179 |
|
| Non-controlling interest | 235 |
| | 156 |
| | 22 |
|
| Net income (loss) from continuing operations attributable to Steel Excel Inc. | $ | (24,034 | ) | | $ | 16,547 |
| | $ | 22,201 |
|
| | | | | | |
| Income (loss) from discontinued operations | $ | 506 |
| | $ | (5,540 | ) | | $ | (1,935 | ) |
| Non-controlling interest | (279 | ) | | 3,188 |
| | 427 |
|
| Income (loss) from discontinued operations attributable to Steel Excel Inc. | $ | 227 |
| | $ | (2,352 | ) | | $ | (1,508 | ) |
| | | | | | |
| Net income (loss) attributable to Steel Excel Inc. | $ | (23,807 | ) | | $ | 14,195 |
| | $ | 20,693 |
|
| | | | | | |
| Denominators: | | | | | |
| Basic weighted average common shares outstanding | 11,678 |
| | 12,584 |
| | 12,110 |
|
| Effect of dilutive securities - stock-based awards | — |
| | 18 |
| | 23 |
|
| Diluted weighted average common shares outstanding | 11,678 |
| | 12,602 |
| | 12,133 |
|
| | | | | | |
| Basic income (loss) per share attributable to Steel Excel Inc.: | | | | | |
| Net income (loss) from continuing operations | $ | (2.06 | ) | | $ | 1.31 |
| | $ | 1.83 |
|
| Income (loss) from discontinued operations, net of taxes | $ | 0.02 |
| | $ | (0.19 | ) | | $ | (0.12 | ) |
| Net income (loss) | $ | (2.04 | ) | | $ | 1.13 |
| | $ | 1.71 |
|
| | | | | | |
| Diluted income (loss) per share attributable to Steel Excel Inc.: | | | | | |
| Net income (loss) from continuing operations | $ | (2.06 | ) | | $ | 1.31 |
| | $ | 1.83 |
|
| Income (loss) from discontinued operations, net of taxes | $ | 0.02 |
| | $ | (0.19 | ) | | $ | (0.12 | ) |
| Net income (loss) | $ | (2.04 | ) | | $ | 1.13 |
| | $ | 1.71 |
|
The number of shares used in the calculation of diluted earnings (loss) per share for the year ended December 31, 2014, excluded 20,000 incremental shares related to stock options and restricted stock. Such incremental shares were excluded from the calculation of diluted earnings (loss) per share due to their anti-dilutive effect.
| |
| 16. | Accumulated Other Comprehensive Income (Loss) |
Changes in the components of "Accumulated other comprehensive income (loss)" were as follows:
|
| | | | | | | | | | | |
| | Unrealized
Gain (Loss) on
Securities | | Cumulative
Translation
Adjustment | | Total |
| | (in thousands) |
| Balance at December 31, 2013 | $ | 6,921 |
| | $ | (405 | ) | | $ | 6,516 |
|
| | | | | | |
| Other comprehensive income (loss) before reclassifications | (20,043 | ) | | 20 |
| | (20,023 | ) |
| Reclassifications from accumulated other comprehensive income | (5,223 | ) | | — |
| | (5,223 | ) |
| Current period other comprehensive income (loss) | (25,266 | ) | | 20 |
| | (25,246 | ) |
| | | | | | |
| Balance at December 31, 2014 | $ | (18,345 | ) | | $ | (385 | ) | | $ | (18,730 | ) |
Amounts reclassified for realized gains on marketable securities for the year ended December 31, 2014, are reported as a component of "Other income (expense), net" in the consolidated statement of operations.
| |
| 17. | Supplemental Cash Flow Information |
Cash paid for interest and income taxes and non-cash investing and financing activities for the years ended December 31, 2014, 2013, and 2012, were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Interest paid | $ | 2,707 |
| | $ | 1,304 |
| | $ | 434 |
|
| Income taxes paid (refunded) - net | $ | (1,507 | ) | | $ | 916 |
| | $ | (1,130 | ) |
| | | | | | |
| Non-cash investing and financing activities: | | | | | |
| Reclassification of available-for-sale securities to equity method investment | $ | 27,647 |
| | $ | — |
| | $ | — |
|
| Securities received in exchange for financial instrument obligations | $ | 20,007 |
| | $ | — |
| | $ | — |
|
| Securities delivered in exchange for settlement of financial instrument obligations | $ | 520 |
| | $ | — |
| | $ | — |
|
| Contribution of note payable by non-controlling interest | $ | 268 |
| | $ | — |
| | $ | — |
|
| Restricted stock awards returned in connection with net-share settlement upon vesting | $ | 120 |
| | $ | — |
| | $ | — |
|
| Non-controlling interests recognized in connection with acquisitions | $ | — |
| | $ | 2,896 |
| | $ | 82 |
|
| Issuance of common stock for acquisition of Sun Well | $ | — |
| | $ | — |
| | $ | 60,825 |
|
| |
| 18. | Commitments and Contingencies |
From time to time, we are subject to litigation or claims that arise in the normal course of business. While the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, and results of operations could be materially and adversely affected.
The Company entered into agreements in connection with the sale of portions of the Predecessor Business that included certain indemnification obligations. These indemnification obligations generally required the Company to compensate the other party for certain damages and costs incurred as a result of third party claims. The Company is not aware of any claims under the indemnification provisions and no liabilities have been recognized in connection with such contingent obligations.
| |
| 19. | Related Party Transactions |
SPLP beneficially owned approximately 51.1%58.0% of the Company’s outstanding common stock.stock as of December 31, 2014. The power to vote and dispose of the securities held by SPLP is controlled by Steel Partners Holdings GP Inc. (“SPH GP”). Warren G. Lichtenstein, the Chairman of the Board of Directors and President of the Company's Sports segment, is also the Executive Chairman of SPH GP. Certain other affiliates of SPH GP hold positions with the Company, including Jack Howard, as Vice Chairman and principal executive officer, James F. McCabe, Jr., as Chief Financial Officer, and Leonard J. McGill, as Vice President, General Counsel, and Secretary. Each of Warren G. Lichtenstein and Jack L. Howard John J. Quicke, and Warren G. Lichtenstein are directors of the Company and each such person is deemed to be an affiliate of Steel Partners under the rules of the Securities Exchange Act of 1934, as amended. Each of the three directors is compensated with cash compensation and equity awards or equity-based awards in amounts that are consistent with the Company’s Non-employee Director Compensation Policy. In addition, Mr. Quicke currently serves as the Interim President and CEO of the Company. He was previously compensated $30,000 by the Company per month in connection with this role (which was in addition to the compensation he receives as a non-employee Board member) prior to the entry into the Amended and Restated Management Services Agreement described below. Mr. Quicke also serves as an executive of other affiliates of Steel Partners.
EffectiveIn October 1, 2011, the Company contracted with SP Corporate Services LLC (“SP Corporate”), a SPLP affiliate, to provide financial management and administrative services, including the services of a CFO. Underchief financial officer. Through July 2012, the terms of the services agreement,Company paid SP Corporate was receiving $35,000 monthly$35,000 per month for the provision of such services. Effective August 1, 2012, the agreement was amended and restated wherebyservices SP Corporate providesprovided were expanded to include executive and financial management services includingin the positionsareas of CEO and CFO, responsibility for financing,finance, regulatory reporting, and other administrative and operational functions. The Company paid SP Corporate receives $300,000$300,000 per month for these expanded services through December 31, 2013. Effective January 1, 2014, the services SP Corporate provides were further expanded, and the Company paid SP Corporate $667,000 per month for such services. ThisEffective October 1, 2014, the
fees paid the Company to SP Corporate increased to $679,000 per month to cover the costs of additional services provided to the Sports business. The services agreement waswith SP Corporate and subsequent amendments were approved by a committee of the Company’s independent directors. During the years ended December 31, 2012 and 2011, the Company incurred $2.1 million and $0.3 million, respectively, under the terms of the services agreements with SP Corporate. In addition, the Company reimburses SP Corporate and other Steel PartnersSPLP affiliates for certain expenses incurred on the Company’s behalf. During the years ended December 31, 20122014, 2013, and 2011,2012, the Company incurred $0.6expenses of $9.1 million, $4.4 million, and $0.1$2.7 million, respectively, for services provided by SP Corporate and for reimbursement of expense reimbursements, respectively.expenses incurred on its behalf by SP Corporate and its affiliates. As of December 31, 20122014 and 2011,2013, the Company owed SP Corporate and other SPLP affiliates $0.3 million and $0.3 million, respectively.
The Company uses several firms to execute trades of its marketable securities and certain of its other investments. The Company uses Mutual Securities, Inc. ("Mutual Securities"), to execute certain trades, including repurchases of the Company's common stock. Jack L. Howard, the Company's principal executive officer, is a registered principal of Mutual Securities and receives commission payments from Mutual Securities after deductions for fees and expenses. During the years ended December 31, 2014, 2013, and 2012, the Company paid commissions to Mutual Securities totaling $0.3 million, $0.2 million, and $0.1 million, respectively.
In October 2013, iGo contracted with SP Corporate to provide certain executive, other employee, and corporate services for a fixed annual fee of $0.4 million. In addition, iGo will reimburse SP Corporate for reasonable and necessary business expenses incurred on iGo’s behalf. The services agreement was approved by the independent directors of iGo.
The Company holds $15.1 million ofmaintained short-term deposits at WebBank, an affiliate of Steel Partners,SPLP, totaling $12.3 million and recorded$15.2 million at December 31, 2014 and 2013, respectively. The Company recognized interest income ofon such deposits totaling $0.1 million from them in fiscal 2012.and $0.1 million for the years ended December 31, 2014 and 2013, respectively.
The Company has determined that its two reportable segments are Energy and Sports. The Energy segment provides drilling and production services to the oil and gas industry. The Sports segment provides event-based sports services and other health-related services.
The Investment CommitteeCompany identifies its operating segments based on the services provided by its various operations and the financial information used by its chief operating decision maker to make decisions regarding the allocation of resources to and the financial performance of the Boardoperating segments. The reporting segments represent an aggregation of Directorsindividual operating segments with similar economic characteristics. The Energy segment is responsible for selecting executing brokers. Securities transactions foran aggregation of the individual operating segments represented by Sun Well, Rogue, and Black Hawk Ltd. The Sports segment is an aggregation of the individual operating segments represented by Baseball Heaven LLC, a provider of baseball facility services, UK Elite, and the Crossfit® entities.
In 2014, the Company changed its measurement method to measure the profit or loss of its segments to be based on operating income before goodwill impairments. The measurement method had previously been operating income. Operating income before goodwill impairments of the segments is determined in the same manner as operating income under generally accepted accounting principles, with the sole exception of excluding amounts for goodwill impairments. The accounting policies used to measure operating income before goodwill impairments of the segments are allocatedthe same as those used in preparing the Company’s consolidated financial statements (see Note 2).
Segment information relating to brokers on the basisCompany's results of reliabilitycontinuing operations was as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | (in thousands) |
| Revenues | | | | | |
| Energy | $ | 191,608 |
| | $ | 109,624 |
| | $ | 97,191 |
|
| Sports | 18,540 |
| | 10,404 |
| | 2,913 |
|
| Total revenues | $ | 210,148 |
| | $ | 120,028 |
| | $ | 100,104 |
|
| | | | | | |
| Operating income (loss) before goodwill impairments | | | | | |
| Energy | $ | 29,889 |
| | $ | 12,381 |
| | $ | 16,837 |
|
| Sports | (2,161 | ) | | (1,408 | ) | | (1,869 | ) |
| Total segment operating income | 27,728 |
| | 10,973 |
| | 14,968 |
|
| Corporate and other business activities | (14,465 | ) | | (8,411 | ) | | (8,959 | ) |
| Impairment of goodwill | (36,666 | ) | | — |
| | (192 | ) |
| Interest expense | (3,177 | ) | | (1,725 | ) | | (417 | ) |
| Other income (expense), net | 7,058 |
| | 7,074 |
| | 1,067 |
|
| Income (loss) from continuing operations before income taxes | $ | (19,522 | ) | | $ | 7,911 |
| | $ | 6,467 |
|
| | | | | | |
| Depreciation and amortization expense: | | | | | |
| Energy | $ | 22,530 |
| | $ | 18,392 |
| | $ | 14,785 |
|
| Sports | $ | 1,626 |
| | 793 |
| | 518 |
|
| Total depreciation and amortization expense | $ | 24,156 |
| | $ | 19,185 |
| | $ | 15,303 |
|
For the year ended December 31, 2014, revenues from the two largest customers in the Company’s Energy segment were approximately $43.5 million and best price$42.7 million, representing 20.7% and execution. During fiscal 2012, the Investment Committee selected Mutual Securities as an introducing broker and may direct a substantial portion20.3%, respectively, of the Company’s trades to such firm among others. A memberconsolidated revenues. For the year ended December 31, 2013, revenues from the two largest customers in the Company’s Energy segment were approximately $20.4 million and $12.7 million, representing 17.0% and 10.5%, respectively, of the Investment Committee is affiliated with Mutual Securities. The Investment Committee only uses Mutual Securities when such use would not compromiseCompany’s consolidated revenues. For the Investment Committee's obligation to seek best price and execution. The Company may pay commissions to Mutual Securities, which are higher than those that can be obtained elsewhere, provided that it believes thatyear ended December 31, 2012, revenues from the rates paid are competitive institutional rates. Mutual Securities also served as an introducing broker fortwo largest customers in the Company's trades. The Commissions paid by the Company to Mutual securitiesEnergy segment were approximately $0.1$11.2 million for fiscal 2012. Such commissions are included in the net investment gains (losses) included in “Interest and other income, net” in the Consolidated Statement of Operations. The portion$11.0 million, representing 11.1% and 11.0%, respectively, of the commission paid to Mutual Securities ultimately received by such Investment committee member is net of clearing and other charges.Company's consolidated revenues.
Note 19. Supplemental Disclosures of Cash Flows
Segment information related to the Company's assets was as follows:
| | | Fiscal Year Ended December 31, | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Interest paid | | $ | 434 | | | $ | 3 | | | $ | 4 | |
| Income taxes paid | | $ | 364 | | | $ | 2 | | | $ | 759 | |
| Income tax refund received | | $ | 1,494 | | | $ | 544 | | | $ | 1,649 | |
| | | | | | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | | | | | |
| Acquisition of SWH, Inc. through issuance of common stock | | $ | 60,825 | | | $ | - | | | $ | - | |
| Unrealized gains (losses) on available-for-sale securities | | $ | 303 | | | $ | 260 | | | $ | (1,566 | ) |
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | (in thousands) |
| Total assets | | | |
| Energy | $ | 220,262 |
| | $ | 244,401 |
|
| Sports | 18,625 |
| | 20,495 |
|
| Corporate and other business activities | 240,467 |
| | 273,798 |
|
| Total assets | $ | 479,354 |
| | $ | 538,694 |
|
| | | | |
| Capital expenditures | | | |
| Energy | $ | 15,313 |
| | $ | 5,846 |
|
| Sports | $ | 626 |
| | $ | 3,086 |
|
| Total capital expenditures | $ | 15,939 |
| | $ | 8,932 |
|
Through its acquisitionTotal assets of Sun Well, the Company assumed long-term debtSports segment and capital lease obligations for equipment.Corporate and other business activities at December 31, 2014, include investments in equity-method investees of $3.1 million and $27.0 million, respectively.
Note 20. Subsequent Events
On January 30, 2013, the Company acquired a 40% membership interest in Again Faster LLC (“Again Faster”) for a cash price of $4.0 million. On January 31, 2013, the Company acquired a 20% membership interest in Ruckus Sports LLC (“Ruckus”) for a cash price of $1.0 million. Again Faster and Ruckus provide a wide variety of fitness and athletic products and services.
In February 2013,June 2014, following stockholder approval and authorization from its board of directors, the Company made an extra principaleffected a 1-for-500 reverse stock split (the "Reverse Split"), immediately followed by a 500-for-1 forward stock split (the "Forward Split", and together with the Reverse Split, the "Reverse/Forward Split"), of its common stock effective as of the close of business on June 18, 2014. As a result of the Reverse Split, stockholders holding fewer than 500 shares received a cash payment for all of $10.0their outstanding shares based on a per share price equal to the closing price of the Company’s common stock on June 18, 2014, the effective date of the Reverse/Forward Split. Stockholders holding 500 or more shares as of the effective date of the Reverse/Forward Split did not receive any payments for fractional shares resulting from the Reverse Split, and therefore the total number of shares held by such holders did not change as a result of the Reverse/Forward Split. In connection with the Reverse Split, the Company paid $10.1 million on its term loan with Wells Fargo. See Note 11in July 2014 for additional details.295,659 shares of common stock and the return of 1,388 non-vested restricted stock awards previously awarded to employees.
| |
| 22. | Selected Quarterly Financial Data (Unaudited) |
|
| | | | | | | | | | | | | | | |
| | Quarter Ended: |
| | March 31 | | June 30 | | September 30 | | December 31 (A) |
| | (in thousands, except per-share data) |
| Year Ended December 31, 2014 | | | | | | | |
| Net revenues | $ | 45,159 |
| | $ | 51,924 |
| | $ | 58,583 |
| | $ | 54,482 |
|
| Gross profits | $ | 10,849 |
| | $ | 15,738 |
| | $ | 17,984 |
| | $ | 14,598 |
|
| Net income (loss) from continuing operations | $ | 4,065 |
| | $ | 8,732 |
| | $ | (945 | ) | | $ | (36,121 | ) |
| Net income (loss) | $ | 4,065 |
| | $ | 8,732 |
| | $ | (945 | ) | | $ | (35,615 | ) |
| Net income (loss) attributable to Steel Excel Inc. | $ | 4,391 |
| | $ | 8,743 |
| | $ | (1,183 | ) | | $ | (35,758 | ) |
| Net income (loss) from continuing operations attributable to Steel Excel Inc. | $ | 4,391 |
| | $ | 8,743 |
| | $ | (1,183 | ) | | $ | (35,985 | ) |
| Net income (loss) from continuing operations attributable to Steel Excel Inc. per share of common stock | | | | | | | |
| Basic | $ | 0.37 |
| | $ | 0.74 |
| | $ | (0.10 | ) | | $ | (3.15 | ) |
| Diluted | $ | 0.37 |
| | $ | 0.73 |
| | $ | (0.10 | ) | | $ | (3.15 | ) |
| | | | | | | | |
| Year Ended December 31, 2013 | | | | | | | |
| Net revenues | $ | 26,351 |
| | $ | 28,761 |
| | $ | 31,420 |
| | $ | 33,496 |
|
| Gross profits | $ | 7,686 |
| | $ | 8,705 |
| | $ | 8,080 |
| | $ | 10,172 |
|
| Net income from continuing operations | $ | 3,369 |
| | $ | 1,080 |
| | $ | 3,047 |
| | $ | 8,895 |
|
| Net income | $ | 2,974 |
| | $ | 886 |
| | $ | 2,159 |
| | $ | 4,832 |
|
| Net income attributable to Steel Excel Inc. | $ | 3,310 |
| | $ | 1,071 |
| | $ | 2,470 |
| | $ | 7,344 |
|
| Net income from continuing operations attributable to Steel Excel Inc. | $ | 3,389 |
| | $ | 1,116 |
| | $ | 2,869 |
| | $ | 9,173 |
|
| Net income from continuing operations attributable to Steel Excel Inc. per share of common stock | | | | | | | |
| Basic | $ | 0.26 |
| | $ | 0.09 |
| | $ | 0.23 |
| | $ | 0.75 |
|
| Diluted | $ | 0.26 |
| | $ | 0.09 |
| | $ | 0.23 |
| | $ | 0.75 |
|
In November 2012, the Company purchased $11.9(A) Includes goodwill impairments of $36.7 million face amountand a foreign tax benefit of 3.75% Unsecured Convertible Subordinated Debentures Due 2026 in School Specialty Inc., a market leader in school supplies and educational materials (“School Specialties”), at a total cost of $6.0$1.7 million. On January 28, 2013, School Specialties filed a Chapter 11 bankruptcy petition. Subsequently, on February 26, 2013, the Company committed to participate, with a share in the amount of approximately $22.0 million, in a $155.0 million debtor-in-possession loan to School Specialties. The Company believes the loan, in conjunction with other sources of financing, will enable School Specialties to successfully execute a plan of reorganization or other alternative transaction.
Note 21. Comparative Quarterly Financial Data (unaudited)
The following table summarizes the Company’s quarterly financial data, which included reclassifications made to prior period reported amounts to conform to the current period presentation and to reflect discontinued operations:Exhibit Index
| | | Three-Month Period Ended: | |
| | | | | | | | | | | | | |
| | | (in thousands, except per share amounts) | |
| | | | | | | | | | | | | |
| Net revenues | | $ | 14,445 | | | $ | 24,450 | | | $ | 34,294 | | | $ | 26,915 | |
| Gross profit (loss) | | $ | 5,686 | | | $ | 9,482 | | | $ | 12,204 | | | $ | 6,668 | |
Income (loss) from continuing operations, net of taxes | | $ | (120 | ) | | $ | 17,429 | | | $ | 4,866 | | | $ | 4 | |
Income (loss) from discontinued operations, net of taxes | | $ | (2,348 | ) | | $ | (121 | ) | | $ | 483 | | | $ | 51 | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | (1,888 | ) | | $ | 17,308 | | | $ | 5,349 | | | $ | (76 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations, net of taxes | | $ | (0.01 | ) | | $ | 1.50 | | | $ | 0.37 | | | $ | 0.00 | |
Income (loss) from discontinued operations, net of taxes | | $ | (0.22 | ) | | $ | (0.01 | ) | | $ | 0.04 | | | $ | 0.00 | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | (0.17 | ) | | $ | 1.49 | | | $ | 0.41 | | | $ | (0.01 | ) |
| Diluted | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations, net of taxes | | $ | (0.01 | ) | | $ | 1.50 | | | $ | 0.37 | | | $ | 0.00 | |
Income (loss) from discontinued operations, net of taxes | | $ | (0.22 | ) | | $ | (0.01 | ) | | $ | 0.04 | | | $ | 0.00 | |
| Net income (loss) attributable to Steel Excel Inc. | | $ | (0.17 | ) | | $ | 1.49 | | | $ | 0.41 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
Shares used for computing income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | | 10,891 | | | | 11,588 | | | | 12,982 | | | | 12,984 | |
| Diluted | | | 10,891 | | | | 11,605 | | | | 13,001 | | | | 13,007 | |
|
| | | | | |
| Exhibit # | Exhibit Description | Form | File # | Exhibit | File Date |
| 2.1 | Asset Purchase Agreement between the Company and PMC-Sierra, Inc., dated as of May 8, 2010 | 10-Q | 000-15071 | 2.1 | 08/11/10 |
| 2.2 | Amended Asset Purchase Agreement between the Company and PMC-Sierra, Inc., dated as of June 8, 2010 | 10-Q | 000-15071 | 2.2 | 08/11/10 |
| 2.3 | Second Amendment to the Asset Purchase Agreement between the Company and PMC-Sierra, Inc., dated as of September 23, 2010 | 10-Q | 000-15071 | 2.1 | 11/05/10 |
| 2.4 | Stock Purchase and Sale Agreement, dated as of July 11, 2013, between Steel Excel Inc. and iGo, Inc. | SC 13-D | 005-60065
| 2 | 7/22/13 |
| 2.5 | Asset Purchase Agreement, dated as of October 29, 2013 by and among Black Hawk Acquisition, Inc., Black Hawk Energy Services, Inc. and Chris Beal, Stuart Buckingham, Kenneth Stevens, Jeff Thomas and Gregory M. Tucker. | 8-K | 000-15071 | 2.1 | 11/4/13 |
| 3.1 | Unofficial Composite Certificate of Incorporation of Steel Excel Inc. as currently in effect | 10-Q | 000-15071 | 3.1 | 11/08/12 |
| 3.2 | Certificate of Designation of Series B Preferred Stock filed with the Delaware Secretary of State on December 20, 2011 | 8-K | 000-15071 | 3.1 | 12/22/11 |
| 3.3 | Amended and Restated Bylaws of the Company, effective October 14, 2010 | 8-K | 000-15071 | 3.1 | 10/20/10 |
| 4.1 | Specimen Common Stock Certificate | 10-Q | 000-15071 | 4.1 | 08/09/12 |
| 4.2 | Tax Benefits Preservation Plan, dated December 21, 2011 | 8-K | 000-15071 | 4.1 | 12/22/11 |
| 4.3 | First Amendment to the Tax Benefits Preservation Plan, dated as of May 1, 2012, by and between Steel Excel Inc. and Registrar and Transfer Company, as Rights Agent | 10-Q | 000-15071 | 4.2 | 08/09/12 |
| 4.4 | Indenture, dated as of December 22, 2003, by and between the Registrant and Wells Fargo Bank, National Association | 10-Q | 000-15071 | 4.01 | 02/09/04 |
| 4.5 | Form of 3/4% Convertible Senior Subordinated Note | 10-Q | 000-15071 | 4.02 | 02/09/04 |
| 10.1† | 2004 Equity Incentive Plan, as amended and restated on August 20, 2008 | Def 14A | 000-15071 | A | 09/08/08 |
| 10.2† | Amendment No. 2 to 2004 Equity Incentive Plan, dated as of November 17, 2011 | 10-Q | 000-15071 | 10.2 | 11/08/12 |
| 10.3† | Amendment No. 3 to 2004 Equity Incentive Plan, dated as of August 7, 2012 | 10-Q | 000-15071 | 10.3 | 11/08/12 |
| 10.4† | Form of Restricted Stock Award Agreement for 2004 Equity Incentive Plan, as amended August 7, 2012 | 10-Q | 000-15071 | 10.4 | 11/08/12 |
| 10.5† | Form of Stock Option Agreement under the 2004 Equity Incentive Plan | 10-Q | 000-15071 | 10.02 | 11/10/04 |
| 10.6† | Adaptec, Inc. 2006 Director Plan | Def 14A | 000-15071 | A | 07/28/06 |
| 10.7† | Amendment No. 1 to 2006 Director Plan, dated November 17, 2011 | 10-Q | 000-15071 | 10.1 | 11/08/12 |
| 10.8† | Form of Restricted Stock Award Agreement under 2006 Director Plan, as amended on August 7, 2012 | 10-Q | 000-15071 | 10.5 | 11/08/12 |
| 10.9† | Stock Option Award Agreement under 2006 Director Plan, as amended on December 7, 2010 | 10-KT | 000-15071 | 10.25 | 03/03/11 |
| 10.10† | Stock Appreciation Right Award Agreement under 2006 Director Plan as amended on February 7, 2008 | 8-K | 000-15071 | 10.03 | 02/11/08 |
| 10.11† | SNAP Appliance, Inc. 2002 Stock Option and Restricted Stock Purchase Plan, effective November 14, 2002 | S-8 | 333-118090 | 4.04 | 08/10/04 |
| 10.12† | Director Compensation Policy, dated May 25, 2011 | 10-Q | 000-15071 | 10.5 | 08/09/11 |
| 10.13† | Fiscal 2010 Incentive Plan, effective for fiscal 2010 | 10-K | 000-15071 | 10.29 | 05/27/10 |
| 10.14 | Form of Indemnification Agreement entered into between the Company and its officers and directors | 10-K | 000-15071 | 10.47 | 06/06/07 |
| 10.15 | Settlement Agreement, dated as of October 26, 2007, among the Registrant, Steel Partners, L.L.C. and Steel Partners II, L.P. | 8-K | 000-15071 | 10.01 | 10/31/07 |
(1) The Company recorded a benefit from income taxes of $15.1 million during the second quarter of fiscal, 2012, primarily due to the release of a portion of the valuation allowance as a result of acquired deferred tax liabilities.
| | | Three-Month Period Ended: | |
| | | | | | | | | | | | | |
| | | (in thousands, except per share amounts) | |
| | | | | | | | | | | | | |
| Net revenues | | $ | - | | | $ | - | | | $ | 707 | | | $ | 1,795 | |
| Gross profit (loss) | | $ | - | | | $ | - | | | $ | 531 | | | $ | 512 | |
Income (loss) from continuing operations, net of taxes | | $ | 1,817 | | | $ | (1,550 | ) | | $ | (1,543 | ) | | $ | 1,344 | |
Income (loss) from discontinued operations, net of taxes | | $ | - | | | $ | 6,830 | | | $ | 85 | | | $ | (286 | ) |
| Net income (loss) attributable to Steel Excel | | $ | 1,817 | | | $ | 5,280 | | | $ | 1,335 | | | $ | (1,663 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations, net of taxes | | $ | 0.17 | | | $ | (0.14 | ) | | $ | (0.14 | ) | | $ | 0.09 | |
Income (loss) from discontinued operations, net of taxes | | $ | - | | | $ | 0.63 | | | $ | 0.01 | | | $ | (0.03 | ) |
| Net income (loss) attributable to Steel Excel | | $ | 0.17 | | | $ | 0.48 | | | $ | 0.12 | | | $ | (0.15 | ) |
| Diluted | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations, net of taxes | | $ | 0.17 | | | $ | (0.14 | ) | | $ | (0.14 | ) | | $ | 0.09 | |
Income (loss) from discontinued operations, net of taxes | | $ | - | | | $ | 0.63 | | | $ | - | | | $ | (0.03 | ) |
| Net income (loss) | | $ | 0.17 | | | $ | 0.48 | | | $ | 0.12 | | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | | |
Shares used for computing income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | | 10,880 | | | | 10,881 | | | | 10,881 | | | | 10,887 | |
| Diluted | | | 10,887 | | | | 10,895 | | | | 10,905 | | | | 10,905 | |
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS |
| | | | | |
| Exhibit # | Exhibit Description | Form | File # | Exhibit | File Date |
| 10.16 | Management Services Agreement, dated October 1, 2011, between the Company and SP Corporate Services LLC | 8-K | 000-15071 | 10.1 | 10/06/11 |
| 10.17 | Amended and Restated Management Services Agreement, dated as of August 1, 2012, between the Company and SP Corporate Services LLC | 8-K | 000-15071 | 10.6 | 8/10/12 |
| 10.18 | Share Acquisition Agreement, dated as of April 30, 2012, by and among the Company and BNS Holding, Inc., SWH, Inc. and SPH Group Holdings LLC | 8-K | 000-15071 | 2.1 | 04/30/12 |
| 10.19 | Amendment No. 1 to the Amended and Restated Management Services Agreement between Steel Excel Inc. and SP Corporate Services LLC, dated as of April 5, 2013 | 8-K | 000-15071 | 10.1 | 4/5/13 |
| 10.20 | Credit Agreement, dated as of July 3, 2013, among Steel Energy Ltd., and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender, a Revolving Lender, a Swing Line Lender and a Term Lender, RBS Citizens, N.A., as a Revolving Lender and a Term Lender and Comerica Bank, as a Revolving Lender and a Term Lender | 8-K | 000-15071 | 99.1 | 7/10/13 |
| 10.21† | Amendment No. 4 to 2004 Equity Incentive Plan, dated as of May 21, 2013 | 10-Q | 000-15071 | 10.2 | 8/7/13 |
| 10.22† | Form of Restricted Stock Unit Agreement under the 2004 Equity Incentive Plan, as amended May 21, 2013 | 10-Q | 000-15071 | 10.3 | 8/7/13 |
| 10.23 | Commitment Increase Agreement and Amendment to Credit Documents, dated as of December 17, 2013, among Steel Energy Ltd., and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender, a Revolving Lender, a Swing Line Lender and a Term Lender, RBS Citizens, N.A., as a Revolving Lender and a Term Lender and Comerica Bank, as a Revolving Lender and a Term Lender. | 8-K | 000-15071 | 10.1 | 12/20/13 |
| 10.24 | Amendment No. 2 to the Amended and Restated Management Services Agreement between Steel Excel Inc. and SP Corporate Services LLC, dated as of January 1, 2014 | 8-K | 000-15071 | 10.1 | 1/14/14 |
| 10.25 | Amendment No. 3 to the Amended and Restated Management Services Agreement between Steel Excel Inc. and SP Corporate Services LLC, dated as of January 1, 2014 | 10-Q | 000-15071 | 10.1 | 11/6/2014 |
| 21* | Subsidiaries of Registrant | | | | |
| 23* | Consent of Independent Registered Public Accounting Firm, BDO USA, LLP | | | | |
| 31.1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
| 31.2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | |
| 32* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | |
| 101.INS** | XBRL Instance Document | | | | |
| 101.SCH** | XBRL Taxonomy Extension Schema Document | | | | |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbased Document | | | | |
| 101.LAB** | XBRL Taxonomy Extension Labels Linkbase Document | | | | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
The following table includes the activity in the Company’s valuation and qualifying accounts for the fiscal years ended December 31, 2012 and 2011, and the nine-month transition period ended December 31, 2010:
| | | | | | Additions | | | Deductions | | | | |
| | | (in thousands) | |
| Fiscal year ended December 31, 2012: | | | | | | | | | | | | |
Allowance for doubtful accounts(1)(2) | | $ | 80 | | | $ | - | | | $ | (80 | ) | | $ | - | |
| Valuation allowance for deferred tax assets | | $ | 69,508 | | | $ | - | | | $ | (32,335 | ) | | $ | 37,173 | |
| | | | | | | | | | | | | | | | | |
| Fiscal year ended December 31, 2011: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts(1)(2) | | $ | - | | | $ | 80 | | | $ | - | | | $ | 80 | |
| Valuation allowance for deferred tax assets | | $ | 70,449 | | | $ | - | | | $ | (941 | ) | | $ | 69,508 | |
| | | | | | | | | | | | | | | | | |
| Transition Period ended December 31, 2010: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts(2) | | $ | 34 | | | $ | - | | | $ | (34 | ) | | $ | - | |
Sales reserves(2) | | $ | 668 | | | $ | 270 | | | $ | (938 | ) | | $ | - | |
Allowances(2) | | $ | 941 | | | $ | 703 | | | $ | (1,644 | ) | | $ | - | |
| Valuation allowance for deferred tax assets | | $ | 81,218 | | | $ | - | | | $ | (10,769 | ) | | $ | 70,449 | |
(1) | Amount relates to accounts receivables from our Steel Energy segment. | |
(2) | Amounts are included in “Accounts receivable” in the Consolidated Balance Sheets. All other schedules are omitted because they are not applicable or the amounts are immaterial or the required information is presented in the Consolidated Financial Statements and Notes thereto. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Steel Excel Inc. |
| |
| /s/ JOHN J. QUICKE |
| John J. Quicke
Interim President and Chief Executive Officer
|
Date: March 8, 2013 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | |
/s/ JOHN J. QUICKE | | Interim President and Chief Executive Officer, and Director | | March 8, 2013 |
John J. Quicke | | (principal executive officer) | | |
| | | | |
/s/ MARK ZORKO | | Chief Financial Officer | | March 8, 2013 |
Mark Zorko | | (principal financial and accounting officer) | | |
| | | | |
/s/ WARREN G. LICHTENSTEIN | | Chairman | | March 8, 2013 |
Warren G. Lichtenstein | | | | |
| | | | |
/s/ JACK L. HOWARD | | Director | | March 8, 2013 |
Jack L. Howard | | | | |
| | | | |
/s/ JOHN MUTCH | | Director | | March 8, 2013 |
John Mutch | | | | |
| | | | |
/s/ GARY ULLMAN | | Director | | March 8, 2013 |
Gary Ullman | | | | |
| | | | |
/s/ ROBERT VALENTINE | | Director | | March 8, 2013 |
Robert Valentine | | | | |
| | | | |
INDEX TO EXHIBITS
| Exhibit | | | | | | File | | | | |
| Number | | Exhibit Description | | Form | | Number | | Exhibit | | File Date |
| | | | | | | | | | | |
| 2.1 | | Asset Purchase Agreement between the Company and PMC-Sierra, Inc., | | 10-Q | | 000-15071 | | 2.1 | | 08/11/10 |
| | | dated as of May 8, 2010 | | | | | | | | |
| | | | | | | | | | | |
| 2.2 | | Amended Asset Purchase Agreement between the Company and | | | | | | | | |
| | | PMC-Sierra, Inc., dated as of June 8, 2010 | | 10-Q | | 000-15071 | | 2.2 | | 08/11/10 |
| | | | | | | | | | | |
| 2.3 | | Second Amendment to the Asset Purchase Agreement between the | | | | | | | | |
| | | Company and PMC-Sierra, Inc., dated as of September 23, 2010 | | 10-Q | | 000-15071 | | 2.1 | | 11/05/10 |
| | | | | | | | | | | |
| 3.1 | | Unofficial Composite Certificate of Incorporation of Steel Excel Inc. | | | | | | | | |
| | | as currently in effect | | 10-Q | | 000-15071 | | 3.1 | | 11/08/12 |
| | | | | | | | | | | |
| 3.2 | | Certificate of Designation of Series B Preferred Stock filed with the | | | | | | | | |
| | | Delaware Secretary of State on December 20, 2011 | | 8-K | | 000-15071 | | 3.1 | | 12/22/11 |
| | | | | | | | | | | |
| 3.3 | | Amended and Restated Bylaws of the Company, effective | | | | | | | | |
| | | October 14, 2010 | | 8-K | | 000-15071 | | 3.1 | | 10/20/10 |
| | | | | | | | | | | |
| 4.1 | | Specimen Common Stock Certificate | | 10-Q | | 000-15071 | | 4.1 | | 08/09/12 |
| | | | | | | | | | | |
| 4.2 | | Tax Benefits Preservation Plan, dated December 21, 2011 | | 8-K | | 000-15071 | | 4.1 | | 12/22/11 |
| | | | | | | | | | | |
| 4.3 | | First Amendment to the Tax Benefits Preservation Plan, dated as of | | | | | | | | |
| | | May 1, 2012, by and between Steel Excel Inc. and Registrar and | | | | | | | | |
| | | Transfer Company, as Rights Agent | | 10-Q | | 000-15071 | | 4.2 | | 08/09/12 |
| | | | | | | | | | | |
| 4.4 | | Indenture, dated as of December 22, 2003, by and between the Registrant | | | | | | | | |
| | | and Wells Fargo Bank, National Association | | 10-Q | | 000-15071 | | 4.01 | | 02/09/04 |
| | | | | | | | | | | |
| 4.5 | | Form of 3/4% Convertible Senior Subordinated Note | | 10-Q | | 000-15071 | | 4.02 | | 02/09/04 |
| | | | | | | | | | | |
| | | Employment Agreements, Offer Letters and Separation Agreements | | | | | | | | |
| | | | | | | | | | | |
10.1† | | Separation Agreement of John M. Westfield, effective November 17, 2009 | | 10-Q | | 000-15071 | | 10.3 | | 02/03/10 |
| | | | | | | | | | | |
10.2† | | Separation Agreement of Subramanian Sundaresh, effective January 4, 2010 | | 10-Q | | 000-15071 | | 10.1 | | 02/03/10 |
| | | | | | | | | | | |
10.3† | | Consulting Service Agreement of Subramanian Sundaresh, effective | | | | | | | | |
| | | January 4, 2010‡ | | 10-Q | | 000-15071 | | 10.2 | | 02/03/10 |
| | | | | | | | | | | |
10.4† | | Separation Agreement of John Noellert, effective February 4, 2010 | | 10-K | | 000-15071 | | 10.11 | | 05/27/10 |
| | | | | | | | | | | |
10.5† | | Separation Agreement of Marcus Lowe, effective March 4, 2010 | | 10-K | | 000-15071 | | 10.12 | | 05/27/10 |
| | | | | | | | | | | |
10.6† | | Separation Agreement of Mary L. Dotz, effective July 16, 2010 | | 10-Q | | 000-15071 | | 10.1 | | 08/11/10 |
| | | | | | | | | | | |
10.7† | | Amended Separation Agreement of Mary L. Dotz, effective | | | | | | | | F |
| | | September 29, 2010 | | 10-Q | | 000-15071 | | 10.1 | | 11/05/10 |
| | | | | | | | | | | |
10.8† | | Amended Separation Agreement of Mary L. Dotz, effective | | | | | | | | |
| | | December 10, 2010 | | 10-KT | | 000-15071 | | 10.10 | | 03/03/11 |
10.9†
| | Mary L. Dotz Retention Bonus Letter, effective June 15, 2010 | | 10-KT | | 000-15071 | | 10.11 | | 03/03/11 |
| | | | | | | | | | |
10.10†
| | Independent Contractor Agreement with John J. Quicke, effective | | 10-KT | | 000-15071 | | 10.12 | | 03/03/11 |
| | February 2, 2010 | | | | | | | | |
| | | | | | | | | | |
10.11†
| | Amendment No. 1 to the Independent Contractor Agreement with | | | | | | | | |
| | John J. Quicke, effective June 25, 2010 | | 10-KT | | 000-15071 | | 10.13 | | 03/03/11 |
| | | | | | | | | | |
10.12†
| | Amendment No. 2 to the Independent Contractor Agreement with | | | | | | | | |
| | John J.Quicke, effective December 7, 2010 | | 10-KT | | 000-15071 | | 10.14 | | 03/03/11 |
| | | | | | | | | | |
10.13†
| | Amendment No. 3 to the Independent Contractor Agreement with | | 8-K | | 000-15071 | | 10.1 | | 04/04/12 |
| | John J.Quicke, effective April 3, 2012 | | | | | | | | |
| | | | | | | | | | |
10.14†
| | Independent Contractor Agreement with Mary L. Dotz, effective | | 10-Q | | 000-15071 | | 10.4 | | 08/09/11 |
| | June 1, 2011 | | | | | | | | |
| | | | | | | | | | |
| | Stock Plans and Related Forms | | | | | | | | |
| | | | | | | | | | |
10.15†
| | 2004 Equity Incentive Plan, as amended and restated on August 20, 2008 | | Def 14A | | 000-15071 | | A | | 09/08/08 |
| | | | | | | | | | |
10.16†
| | Amendment No. 2 to 2004 Equity Incentive Plan, dated as of | | | | | | | | |
| | November 17, 2011 | | 10-Q | | 000-15071 | | 10.2 | | 11/08/12 |
| | | | | | | | | | |
10.17†
| | Amendment No. 3 to 2004 Equity Incentive Plan, dated as of | | | | | | | | |
| | August 7, 2012 | | 10-Q | | 000-15071 | | 10.3 | | 11/08/12 |
| | | | | | | | | | |
10.18†
| | Form of Restricted Stock Award Agreement for 2004 Equity Incentive | | | | | | | | |
| | Plan, as amended August 7, 2012 | | 10-Q | | 000-15071 | | 10.4 | | 11/08/12 |
| | | | | | | | | | |
10.19†
| | Form of Stock Option Agreement under the 2004 Equity Incentive Plan | | 10-Q | | 000-15071 | | 10.02 | | 11/10/04 |
| | | | | | | | | | |
10.20†
| | Adaptec, Inc. 2006 Director Plan | | Def 14A | | 000-15071 | | A | | 07/28/06 |
| | | | | | | | | | |
10.21†
| | Amendment No. 1 to 2006 Director Plan, dated November 17, 2011 | | 10-Q | | 000-15071 | | 10.1 | | 11/08/12 |
| | | | | | | | | | |
10.22†
| | Form of Restricted Stock Award Agreement under 2006 Director Plan, | | | | | | | | |
| | as amended on August 7, 2012 | | 10-Q | | 000-15071 | | 10.5 | | 11/08/12 |
| | | | | | | | | | |
10.23†
| | Stock Option Award Agreement under 2006 Director Plan, as amended on | | | | | | | | |
| | December 7, 2010 | | 10-KT | | 000-15071 | | 10.25 | | 03/03/11 |
| | | | | | | | | | |
10.24†
| | Stock Appreciation Right Award Agreement under 2006 Director Plan as | | | | | | | | |
| | amended on February 7, 2008 | | 8-K | | 000-15071 | | 10.03 | | 02/11/08 |
| | | | | | | | | | |
10.25†
| | SNAP Appliance, Inc. 2002 Stock Option and Restricted Stock | | | | | | | | |
| | Purchase Plan, effective November 14, 2002 | | S-8 | | 333-118090 | | 4.04 | | 08/10/04 |
| | | | | | | | | | |
| | Other Compensatory Plans | | | | | | | | |
| | | | | | | | | | |
10.26†
| | Director Compensation Policy, dated May 25, 2011 | | 10-Q | | 000-15071 | | 10.5 | | 08/09/11 |
| | | | | | | | | | |
10.27†
| | Fiscal 2010 Incentive Plan, effective for fiscal 2010 | | 10-K | | 000-15071 | | 10.29 | | 05/27/10 |
| | | | | | | | | | |
10.28 | | Form of Indemnification Agreement entered into between the Company | | | | | | | | |
| | and its officers and directors | | 10-K | | 000-15071 | | 10.47 | | 06/06/07 |
| | | | | | | | | | |
| | Other Material Agreements | | | | | | | | |
| | | | | | | | | | |
10.29 | | Settlement Agreement, dated as of October 26, 2007, among the Registrant, | | | | | | | | |
| | Steel Partners, L.L.C. and Steel Partners II, L.P. | | 8-K | | 000-15071 | | 10.01 | | 10/31/07 |
10.30 | | Management Services Agreement, dated October 1, 2011, between the | | | | | | | | |
| | Company and SP Corporate Services LLC | | 8-K | | 000-15071 | | 10.1 | | 10/06/11 |
| | | | | | | | | | |
10.31 | | Amended and Restated Management Services Agreement, dated as of | | | | | | | | |
| | August 1, 2012, between the Company and SP Corporate Services LLC | | 10-Q | | 000-15071 | | 10.6 | | 11/08/12 |
| | | | | | | | | | |
10.32 | | Share Acquisition Agreement, dated as of April 30, 2012, by and among | | | | | | | | |
| | the Company and BNS Holding, Inc., SWH, Inc. and SPH Group | | | | | | | | |
| | Holdings LLC | | 8-K | | 000-15071 | | 2.1 | | 04/30/12 |
| | | | | | | | | | |
10.33 | | Agreement of Purchase and Sale and Escrow Instructions, dated | | | | | | | | |
| | March 26, 2011, between the Company and Swift Realty Partners, LLC | | 10-Q | | 000-15071 | | 10.1 | | 08/09/11 |
| | | | | | | | | | |
10.34 | | First Amendment to the Agreement of Purchase and Sale and Escrow | | | | | | | | |
| | Instructions, dated May 4, 2011, between the Company and | | | | | | | | |
| | Swift Realty Partners, LLC | | 10-Q | | 000-15071 | | 10.2 | | 08/09/11 |
| | | | | | | | | | |
10.35 | | Second Amendment to the Agreement of Purchase and Sale and Escrow | | | | | | | | |
| | Instructions, dated May 26, 2011, between the Company and | | | | | | | | |
| | Swift Realty Partners, LLC | | 10-Q | | 000-15071 | | 10.3 | | 08/09/11 |
| | | | | | | | | | |
21.1* | | Subsidiaries of Registrant | | | | | | | | |
| | | | | | | | | | |
23.1* | | Consent of Independent Registered Public Accounting Firm, BDO USA, LLP | | | | | | | | |
| | | | | | | | | | |
23.2* | | Consent of Predecessor Independent Registered Public Accounting Firm, | | | | | | | | |
| | PricewaterhouseCoopers LLP | | | | | | | | |
| | | | | | | | | | |
31.1* | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| | | | | | | | | | |
31.2* | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| | | | | | | | | | |
32.1* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
| | | | | | | | | | |
101.INS** | | XBRL Instance Document | | | | | | | | |
| | | | | | | | | | |
101.SCH** | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| | | | | | | | | | |
101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbased Document | | | | | | | | |
| | | | | | | | | | |
101.LAB** | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | |
| | | | | | | | | | |
101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
† Management contract or compensatory plan or arrangement.
‡ Confidential treatment has been granted for portions of this agreement.
* Filed herewith.
** Furnished with this Form 10-K. In accordance with Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for the purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
Steel Excel Inc.
Schedule II - Valuation and Qualifying Accounts
29For the years ended December 31, 2014, 2013, and 2012
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Additions | | | | |
| Description | | Balance at beginning of period | | Charged to costs and expenses | | Charged to other accounts | | Deductions (1) | | Balance at end of period |
| | | | | | | | | | | |
| Allowances deducted in the balance sheet from assets to which they apply: | | | | | | | | | | |
| | | | | | | | | | | |
| For the year ended December 31, 2014: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Valuation allowance on deferred tax assets | | $ | 69,753 |
| | $ | 8,265 |
| | $ | — |
| | $ | — |
| | $ | 78,018 |
|
| | | | | | | | | | | |
| For the year ended December 31, 2013: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Valuation allowance on deferred tax assets | | $ | 37,173 |
| | $ | 32,580 |
| | $ | — |
| | $ | — |
| | $ | 69,753 |
|
| | | | | | | | | | | |
| For the year ended December 31, 2012: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 80 |
| | $ | — |
| | $ | — |
| | $ | (80 | ) | | $ | — |
|
| Valuation allowance on deferred tax assets | | $ | 69,508 |
| | $ | — |
| | $ | — |
| | $ | (32,335 | ) | | $ | 37,173 |
|
| | | | | | | | | | | |
| (1) Recognized as a reduction of expense | | | | | | | | | | |
