steel_8ka-053112.htm

0001437749-12-008548.txt : 20120815 0001437749-12-008548.hdr.sgml : 20120815 20120815160336 ACCESSION NUMBER: 0001437749-12-008548 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20120531 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20120815 DATE AS OF CHANGE: 20120815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Steel Excel Inc. CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942748530 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15071 FILM NUMBER: 121037157 BUSINESS ADDRESS: STREET 1: 2603 CAMINO RAMON, SUITE 200 CITY: SAN RAMON STATE: CA ZIP: 94583 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 2603 CAMINO RAMON, SUITE 200 CITY: SAN RAMON STATE: CA ZIP: 94583 FORMER COMPANY: FORMER CONFORMED NAME: ADPT Corp DATE OF NAME CHANGE: 20100624 FORMER COMPANY: FORMER CONFORMED NAME: ADAPTEC INC DATE OF NAME CHANGE: 19920703 8-K/A 1 steel_8ka-053112.htm FORM 8-K/A steel_8ka-053112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

Amendment No. 1

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): May 31, 2012

Steel Excel Inc.

(Exact name of Registrant as specified in its charter)

Delaware	0-15071	94-2748530
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File Number)	Identification No.)

2603 Camino Ramon, Suite 200, San Ramon, California 94583

(Address of principal executive offices including zip code)

(408) 945-8600

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01.

Completion of Acquisition or Disposition of Assets.

On May 31, 2012, Steel Excel Inc. (“Steel Excel”) acquired all of the capital stock of SWH, Inc. (“SWH”) pursuant to a Share Acquisition Agreement, dated as of April 30, 2012 (the “Acquisition Agreement”), by and among Steel Excel, BNS Holding, Inc. (“BNS”), SWH and SPH Group Holdings LLC (“SPH”). The acquisition of SWH constituted the acquisition of substantially all of BNS’s operating assets. The aggregate acquisition price consisted of the issuance of 2,027,500 shares of Steel Excel common stock (provisionally valued at $27 per share, the closing price on May 30, 2012) and cash of $7.9 million.

Affiliates of Steel Partners Holdings L.P., including SPH (collectively, the “Steel Parties”), owned approximately 40% of Steel Excel and approximately 85% of BNS prior to the execution of the Acquisition Agreement. As a result of the transaction, the Steel Parties beneficially own approximately 51.1% of the outstanding common stock of Steel Excel. Steel Partners Holdings L.P., a Delaware corporation (“SPLP”), is deemed to beneficially own the shares owned directly by the Steel Parties. Therefore, as a result of the transaction, SPLP beneficially owned approximately 51.1% of the outstanding common stock of Steel Excel.

Following the closing of the transaction, on June 18, 2012, BNS distributed cash to its shareholders other than the Steel Parties, and distributed to SPH the shares of Steel Excel common stock that BNS received in the transaction.

SWH was acquired by BNS on February 2, 2011. The historical financial statements of SWH through February 2, 2011 are considered those of the Predecessor, while the historical financial statements of SWH subsequent to February 2, 2011 are considered those of the Successor to reflect the difference basis of accounting resulting from the push down of the fair value of the assets acquired and liabilities assumed as of the acquisition date by BNS.

The transaction is more fully described in Steel Excel’s Current Report on Form 8-K filed with the United States Securities and Exchange Commission on June 5, 2012. This Amendment No. 1 on Form 8-K/A amends that Form 8-K to provide the historical financial statements and pro forma financial information that is required to be filed under Item 9.01 and that was excluded from the original filing.

Item 9.01.

Financial Statements and Exhibits.

(a)	Financial Statements of Businesses Acquired.

The financial statements required by Item 9.01(a) of Form 8-K with respect to the acquisition described in Item 2.01 herein, are attached as Exhibits 99.1, 99.2 and 99.3.

(b)	Pro Forma Financial Information.

The pro forma financial information required by Item 9.01(b) of Form 8-K with respect to the acquisition described in Item 2.01 herein, is attached as Exhibit 99.5. This consists of the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2011 and the three months ended March 31, 2012, giving effect to the acquisition of SWH by Steel Excel, as if it had been completed on January 1, 2011. A pro forma balance sheet as of March 31, 2012 has not been presented herein since the historical balance sheet of Steel Excel as of June 30, 2012 included in Steel Excel’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2012, already reflects the acquisition of SWH.

(d)

Exhibits

Number		Description
23.1		Consent of Brady, Martz & Associates, P.C., independent certified public accountants.
23.2		Consent of Grant Thornton LLP, independent certified public accountants.
99.1		Audited Consolidated Financial Statements of SWH, Inc. (Predecessor) as of December 31, 2010 and for the year then ended.
99.2		Audited Consolidated Financial Statements of SWH, Inc. (Predecessor) as of February 2, 2011 and for the period of January 1, 2011 through February 2, 2011.
99.3		Audited Consolidated Financial Statements of SWH, Inc. (Successor) as of December 31, 2011 and for the period of February 2, 2011 through December 31, 2011.
99.4		Unaudited Interim Consolidated Financial Statements of SWH, Inc. as of March 31, 2012 and for the quarter then ended (Successor), for the period from January 1 to February 2, 2011 (Predecessor) and for the period from February 2 to March 31, 2011 (Successor).
99.5		Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2011 and the three months ended March 31, 2012, giving effect to the acquisition of SWH, Inc. by Steel Excel Inc., as if it was completed on January 1, 2011.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Steel Excel Inc.

	By:	/s/ Mark A. Zorko
		Name: Mark A. Zorko
		Title: Chief Financial Officer

Dated: August 15, 2012

Exhibits

Number		Description
23.1		Consent of Brady, Martz & Associates, P.C., independent certified public accountants.
23.2		Consent of Grant Thornton LLP, independent certified public accountants.
99.1		Audited Consolidated Financial Statements of SWH, Inc. (Predecessor) as of December 31, 2010 and for the year then ended.
99.2		Audited Consolidated Financial Statements of SWH, Inc. (Predecessor) as of February 2, 2011 and for the period of January 1, 2011 through February 2, 2011.
99.3		Audited Consolidated Financial Statements of SWH, Inc. (Successor) as of December 31, 2011 and for the period of February 2, 2011 through December 31, 2011.
99.4		Unaudited Interim Consolidated Financial Statements of SWH, Inc. as of March 31, 2012 and for the quarter then ended (Successor), for the period from January 1 to February 2, 2011 (Predecessor) and for the period from February 2 to March 31, 2011 (Successor).
99.5		Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2011 and the three months ended March 31, 2012, giving effect to the acquisition of SWH, Inc. by Steel Excel Inc., as if it was completed on January 1, 2011.

EX-23.1 2 ex23-1.htm EXHIBIT 23.1 ex23-1.htm

Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our reports dated November 4, 2011 and August 6, 2012, with respect to the consolidated financial statements of SWH, Inc. as of December 31, 2010 and for the year ended, and as of February 2, 2011 and for the period of January 1, 2011 through February 2, 2011, respectively, included in the Current Report of Steel Excel Inc. on Form 8-K/A dated August 15, 2012. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Steel Excel Inc. on Form S-8 (File No. 333-137397, File No. 333-119271 and File No. 333-118090).

/s/ BRADY, MARTZ & ASSOCIATES, P.C.

Minot, North Dakota

August 15, 2012

EX-23.2 3 ex23-2.htm EXHIBIT 23.2 ex23-2.htm

Exhibit 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated July 20, 2012, with respect to the consolidated financial statements of SWH, Inc. as of December 31, 2011 and for the period from February 2, 2011 through December 31, 2011, included in the Current Report of Steel Excel Inc. on Form 8-K/A dated August 15, 2012. We hereby consent to the incorporation by reference of said report in the Registration Statements of Steel Excel Inc. on Forms S-8 (File No. 333-137397, File No. 333-119271 and File No. 333-118090).

/s/ GRANT THORNTON LLP

Wichita, Kansas

August 15, 2012

EX-99.1 4 ex99-1.htm EXHIBIT 99.1 ex99-1.htm

Exhibit 99.1

SWH, INC. AND SUBSIDIARY

FINANCIAL STATEMENTS

AS OF

DECEMBER 31, 2010

AND

INDEPENDENT AUDITOR’S REPORT

SWH, INC. AND SUBSIDIARY

TABLE OF CONTENTS

	Page

Independent Auditor’s Report	1

Consolidated Balance Sheet as of December 31, 2010	2

Consolidated Statement of Operations for the year ended December 31, 2010	3

Consolidated Statement of Shareholders’ Equity for the year ended December 31, 2010	4

Consolidated Statement of Cash Flows for the year ended December 31, 2010	5

Notes to Consolidated Financial Statements	6

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Shareholders

of SWH, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of SWH, Inc. and Subsidiary (a North Dakota Corporation) as of December 31, 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 SWH, Inc. and Subsidiary as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Brady, Martz & Associates, P.C.

November 4, 2011

SWH, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2010

ASSETS

Current assets
Cash and cash equivalents	$	2,115,019
Accounts receivable		4,623,077
Due from related party		225,000
Inventories		31,717
Prepaid expenses		60,737
Total current assets		7,055,550

Property and equipment, net		17,544,850
Goodwill		18,566,498
Other long-term assets, net		495,480

TOTAL ASSETS	$	43,662,378

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	1,034,918
Income taxes payable		220,000
Capital lease obligations, current portion		2,159,081
Deferred tax liability, current portion		28,000
Total current liabilities		3,441,999

Deferred gain		386,623
Capital lease obligations, net of current portion		9,536,411
Deferred tax liability, net of current portion		4,991,000
Total liabilities		18,356,033

Shareholders’ equity
Common stock, $0.001 par value, 51,100 shares authorized, 12,775 shares issued and outstanding		–
Additional paid-in capital		20,418,241
Retained earnings		4,888,104
Total shareholders’ equity		25,306,345

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	43,662,378

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

Well servicing income	$	26,014,941

Cost of well servicing		14,325,955

Gross profit		11,688,986

Operating expenses		4,003,404

Income from operations		7,685,582

Other income (expense):
Other income		71,205
Interest expense		(1,307,575	)
Total other income (expense)		(1,236,370	)

Income before provision for income taxes		6,449,212

Provision for income taxes		2,484,722

Net income	$	3,964,490

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2010

	Common stock		Additional paid-in capital		Retained earnings		Total

Balance, December 31, 2009		–		20,418,241		923,614		21,341,855

Net income		–		–		3,964,490		3,964,490

Balance, December 31, 2010	$	–	$	20,418,241	$	4,888,104	$	25,306,345

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2010

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,964,490
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		1,776,995
Amortization		198,192
Amortization of deferred gain		(30,323	)
Gain on sale of assets		(9,972	)
Deferred income taxes		569,000
Changes in assets and liabilities:
Accounts receivable		(2,021,401	)
Inventories		17,470
Prepaid expenses		(12,142	)
Accounts payable		572,757
Income taxes payable		220,000
Other liabilities		(115,000	)
Net cash provided by operating activities		5,130,066

CASH FLOWS FROM INVESTING ACTIVITIES
Advance to related party		(225,000	)
Proceeds from sale of equipment		40,311
Purchase of property and equipment		(2,757,701	)
Net cash used for investing activities		(2,942,390	)

CASH FLOWS FROM FINANCING ACTIVITIES
Long-term financing repayments		(1,850,379	)
Net cash used for financing activities		(1,850,379	)

Net increase in cash and cash equivalents		337,297

Beginning cash and cash equivalents		1,777,722

ENDING CASH AND CASH EQUIVALENTS	$	2,115,019

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations – SWH, Inc. (the Company), through its wholly-owned operating subsidiary, Sun Well Service, Inc. (the Subsidiary), provides a variety of services to the oil and gas industry. These services include: well servicing and workover, completion services, plug and abandonment services, hydrostatic tubing testing, as well as rentals of various types of well servicing equipment. The Company’s operations are primarily concentrated in the Williston basin in North Dakota and eastern Montana.

Ownership – The Company was formed and acquired the Subsidiary in October 2008.

Basis of Presentation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.

Revenue recognition – The Company's well servicing and workover services are generally short term in nature and revenue is recognized upon completion of each service.

Cash equivalents - Cash equivalents include time deposits, money market mutual funds, and all highly liquid debt instruments with original maturities of three months or less.

Trade receivables - Trade receivables are carried at original invoice. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due receivables. As of December 31, 2010, management believes its receivables are substantially all collectable and therefore has not provided for an allowance for uncollectability.

Inventories – Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Prepaid expenses - Prepaid expenses include items such as insurance and other miscellaneous items. The prepaid expenses are recognized as an operating expense in the period they benefit.

Property and Equipment - Property and equipment is stated at cost less accumulated depreciation using straight-line methods. The estimated lives used to compute depreciation are as follows:

Equipment

2 - 15 years

Vehicles

4 years

Office equipment

5 years

Intangible assets - Intangible assets consist of loan fees and goodwill. Loan fees are amortized on a straight-line basis over the life of the loan. Goodwill represents the excess of cost over fair value of net assets acquired through acquisition. In accordance with professional standards, the Company does not amortize goodwill, but evaluates the goodwill on an annual basis for potential impairment. Professional standards require the Company to test goodwill for impairment.

Advertising - Advertising costs are expensed as incurred.

Accrued compensated absences - Compensated absences are accrued and charged to expense in the period in which it is earned.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 1 (Continued)

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Sales Taxes - The Company presents its revenues net of any sales taxes collected from its customers that are required to be remitted to local or state governmental taxing authorities.

Variable Interest Entities – The Company consolidates all variable interest entities in which it holds a variable interest and is deemed to be the primary beneficiary of the variable interest entity. Generally, a variable interest entity, or VIE, is an entity with at least one of the following conditions: (a) the total equity investment at risk is insufficient to allow the entity to finance it activities without additional subordinated financial support or (b) the holders of the equity investment at risk, as a group, lack any one of the following three characteristics: (i) the power to direct the entity’s activities that most significantly impact its economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity. The primary beneficiary of a VIE is an entity that has a variable interest or a combination of variable interests that provide the entity with a controlling financial interest in the VIE. An entity is deemed to have a controlling financial interest in a VIE if it has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of December 31, 2010, the Company has determined that it does not have interests in VIE’s that require consolidation.

Share-Based Compensation – The Company accounts for share-based compensation in accordance with professional standards. The Company records share-based compensation as a component of general and administrative expense.

Income Taxes - The Subsidiary is included in the Company’s consolidated income tax returns.

Certain items of income and expense are recognized in different periods for financial reporting purposes than for purposes of computing income taxes currently payable. The income tax effects of transactions are recognized for financial reporting purposes in the year in which they enter into the determination of reported income, regardless of when they are recognized for income tax purposes. Accordingly, applicable deferred income taxes relate to these timing differences. The timing differences relate primarily to differences in the depreciable/amortizable costs associated with its property and equipment, accrued assets and accrued liabilities, and a net operating loss carryforward. Deferred taxes are computed using the asset and liability approach as prescribed in the professional standards.

For all open tax years and all major taxing jurisdictions, management of the Company has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore, management of the Company is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

NOTE 2 - OFF-BALANCE-SHEET RISK

The Company has cash deposits at financial institutions which periodically exceed the FDIC insurance coverage limits. The Company has not experienced any losses in these accounts and believes that its cash is not exposed to any significant credit risk.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 3 – PROPERTY AND EQUIPMENT

Details pertaining to property and equipment as of December 31, 2010 are as follows:

	Cost		Accumulated Depreciation		Net
Equipment	$	22,391,171	$	5,987,700	$	16,403,471
Vehicles		745,502		382,406		363,096
Office equipment		151,382		108,072		43,310
Assets in progress		734,973		–		734,973
	$	24,023,028	$	6,478,178	$	17,544,850

Depreciation expense for the year ended December 31, 2010 was $1,776,995.

NOTE 4 – OTHER LONG-TERM ASSETS

In accordance with FASB Accounting Standards Codification Topic 350-20, the Company is required to classify its intangible assets subject to amortization and assets not subject to amortization. The following is a summary of the Company's intangible assets.

	Cost		Accumulated Amortization		Net
Subject to amortization:
Capitalized loan fees	$	919,794	$	424,314	$	495,480

Not subject to amortization:
Goodwill		18,566,498		–		18,566,498
	$	19,486,292	$	424,314	$	19,061,978

Amortization expense on all amortizable intangible assets totaled $198,192 for the year ended December 31, 2010.

Estimated aggregate future amortization expenses are as follows:

Years ending December 31,	Amount
2011	$	198,192
2012		198,192
2013		99,096
	$	495,480

Professional standards require the Company to test goodwill for impairment. There were no changes in the carrying amount of goodwill due to impairment for the year ended December 31, 2010.

NOTE 5 – CAPITAL LEASES AND LONG TERM DEBT

To facilitate the funding of the Company’s acquisition of the Subsidiary’s stock in October of 2008, the Subsidiary sold substantially all its capital assets for $13,500,000. The Subsidiary subsequently entered into an agreement with an independent financing institution, NewStar Financial, Inc. (NewStar), to lease the same assets. The lease is classified as a capital lease and as such, the gain generated from the sale (approximately $454,000) was deferred and is recognized into income over the estimated lives of the leased assets. The total gain recognized during the year ended December 31, 2010 was $30,323.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 5 (Continued)

The lease payments provide for a quarterly base rental payment with additional quarterly payments due based on a variable applicable interest rate as defined under the lease agreement. As of December 31, 2010, the applicable interest rate was 9.5%. The lease is secured by all of the leased assets. The total balance outstanding on the lease as of December 31, 2010 was $10,087,484.

The lease agreement also provided funding authorization of $2,500,000 from NewStar to finance subsequent capital expenditures. As of December 31, 2010 the outstanding balance was $1,185,712.

The capital lease obligation and capital expenditures financing described above were repaid subsequent to December 31, 2010. See Note 17 for subsequent event disclosure.

During 2010, the Company entered into a commitment to acquire a new rig. The commitment for the core rig was approximately $800,000. Total in-service cost of the rig is estimated to be approximately $1,000,000. Financing for the rig was obtained through a capital lease arrangement. As of December 31, 2010, the Company had incurred costs of $308,813, which was capitalized as assets in progress and included in the December 31, 2010 capital lease obligations. The rig is scheduled to be completed in early 2011, at which time the financing terms will be finalized. See Note 17 for subsequent event disclosure.

In 2010, the Company acquired a loader through a capital lease agreement. The lease requires monthly principal and interest payments of $3,849 through August 2013. The interest rate is 6.042%. The total amount outstanding related to this capital lease was $113,483 as of December 31, 2010.

The following is a schedule of the future annual minimum payments of the leases described above as of December 31, 2010.

Years ending December 31,	Amount
2011	$	3,163,860
2012		3,530,087
2013		6,882,680
Total		13,576,627
Interest included in above		(2,189,948	)
Present value of minimum lease payments		11,386,679
Amounts advanced under new rig capital lease		308,813
Total outstanding capital lease obligations *	$	11,695,492

Current portion of long-term capital lease obligations *	$	2,159,081

*See Note 17 for subsequent event disclosures

NOTE 6 – WORKING CAPITAL AGREEMENT

As of December 31, 2010, the Company had $2,000,000 of credit available under a working capital facility agreement with a financial institution. The agreement matures on October 15, 2013. Substantially all the Company’s assets were pledged as collateral under the agreement. There was no outstanding balance as of December 31, 2010. This agreement was terminated subsequent to year-end. See Note 17 for subsequent event disclosures.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 7 - MAJOR CUSTOMERS

The Company derived 10 percent or more of its revenue during the year ended December 31, 2010 from the following customers:

Customer A	$	5,201,159
Customer B		6,452,417
Customer C		2,702,432

The Company had the following receivable amounts from these customers as of December 31, 2010:

Customer A	$	1,076,660
Customer B		1,722,890
Customer C		593,283

NOTE 8 - ADVERTISING COSTS

Advertising costs, which were expensed as incurred, totaled $45,728 for the year ended December 31, 2010.

NOTE 9 – RELATED PARTY TRANSACTIONS

The Company leases its shop facility from Confluence Land Company, which is owned by a shareholder of the Company. The lease requires monthly rental payments of $2,500 through January 31, 2012. Total rent expense was $30,000 for the year ended December 31, 2010. See footnote 10 for the required future minimum lease payments. See Note 17 for subsequent events related to this lease.

The Company received management and various other services from UIB Capital, Inc. (an affiliate) and a shareholder of the Company. Fees for these services totaled $607,759 for the year ended December 31, 2010.

The Company has a note receivable due from a shareholder in the amount of $225,000 as of December 31, 2010. The note is non-interest bearing and is due on demand.

NOTE 10 – OPERATING LEASES

The Company leases real estate from a related entity as described in Note 9. Total rent expense on this related party lease was $30,000 for the year ended December 31, 2010.

In September 2009, the Company entered into a facility operating lease. The lease required monthly payments of $650 through September 2010, and was extended at the same rate through September 15, 2011. The rent expense under these lease totaled $7,800 for the year ended December 31, 2010.

In November 2009, the Company entered into another facility operating lease. The lease required a monthly payment of $3,500 through November 14, 2010, and was extended at the same rate through November 14, 2011. The rent expense under this lease totaled $42,000 for the year ended December 31, 2010.

Expected future minimum lease payments for the above leases are as follows:

Years ending December 31,	Amount
2011	$	70,200
2012		2,500
	$	72,700

The Company has a lease for office space on a month-to-month basis. The total rent expense for this lease was approximately $16,450 in the year ended December 31, 2010.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 11 - PENSION PLAN

The Company's employees are eligible to participate in a defined contribution 401(k) plan after meeting specific age and period of service requirements. The Company's match is limited to a maximum of 3% of each participating employee’s wages. Pension expense for the year ended December 31, 2010 was $87,358.

NOTE 12 - INCOME TAXES

The income tax provision reported in the statement of operations for the year ended December 31, 2010 includes the following components:

Current income tax expense	$	1,915,722
Deferred income tax expense		569,000
	$	2,484,722

The source of the timing differences resulting in deferred income tax are primarily associated with different tax and financial accounting policies associated with the Company's property and equipment, accrued assets and accrued liabilities, and net operating loss carryforwards. Deferred income tax balances as of December 31, 2010 are categorized as follows:

Deferred tax assets	$	–
Deferred tax liabilities		(5,019,000	)
	$	(5,019,000	)

Net deferred income taxes are classified as follows:

Current asset	$	–
Current liability		(28,000	)
Long-term liability		(4,991,000	)
	$	(5,019,000	)

The Company had a net operating loss carryforward of approximately $594,000 as of December 31, 2009. This loss was used to offset a portion of the Company’s taxable income for the year ended December 31, 2010.

NOTE 13 – DEFERRED COMPENSATION PLAN

In 2010, the Company established a deferred compensation plan to provide certain key employees with cash retention awards. The Company has accrued $315,000 as of December 31, 2010 for vested benefits due to employees under this plan.

NOTE 14 – PHANTOM SHARE PLAN

Prior to 2010, the Company had implemented a phantom share plan, in which a certain employee was granted phantom shares. The phantom shares vested at specified levels over a ten-year period and conveyed the right to the grantee to receive a cash payment based on a liquidity event as defined under the plan. The value of the cash payment ranged from the terminal value, as defined in the plan, up to 3% of the equity value of the Company. The phantom shares were a “liability” type award under professional standards. As of December 31, 2009, the employee was no longer employed by the Company and as of that date, the Company had accrued $115,000 for its estimated obligation under the plan.

During 2010, the Company paid the employee a total of $150,000, which constituted the entire balance due to the employee under the plan. As of December 31, 2010, the Company had terminated this phantom share plan.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 15 – COMMITMENTS

See Note 5 for a description of the commitment related to the entity’s purchase of a rig as of December 31, 2010. Under this same financing agreement, the Company has the option to finance the purchase of up two additional rigs under the same terms. As of December 31, 2010, the Company had not entered into purchase agreements for the two additional rigs.

NOTE 16 – STATEMENT OF CASH FLOWS INFORMATION

For the year ended December 31, 2010, the Company paid cash for interest expense totaling $1,298,825. The Company paid cash for income taxes of $1,671,000 in the year ended December 31, 2010.

During the year ended December 31, 2010, the Company purchased $435,241 of property and equipment through capital lease obligations.

NOTE 17 – SUBSEQUENT EVENTS

On February 2, 2011, BNS Holding Inc. acquired all of the outstanding shares of the Company. Under the terms of the purchase agreement, approximately $13,768,000 of the sale proceeds were reserved to satisfy certain obligations of the Company, as described below:

Approximately $11,421,000 was reserved to retire the existing debt obligations and accrued interest on the NewStar financing described in Note 5. The funds were remitted to NewStar on February 3, 2011.

Approximately $2,347,000 was reserved to fund certain employee retention payments that were created as a result of the sale. As defined in the purchase agreement, one third of the retention payments were paid to eligible employees in February 2011 and the remaining balance was paid in June 2011 to employees still with the Company.

In conjunction with the financing of the BNS Holding, Inc. transaction, the Company guaranteed approximately $14,000,000 of BNS Holding Inc.’s outstanding debt. This debt was paid off in September 2011.

As described in Note 5, the Company acquired a rig through a capital lease agreement. This rig and lease were finalized in March 2011 for $996,185. The lease requires monthly principal and interest payments of $19,466 through March 2016, with an interest rate is 6.446%. The Company completed a second rig through a capital lease agreement in May 2011 for $968,887. The lease requires monthly principal and interest payments of $18,702 through May 2016, with an interest rate of 5.936%.

As described in Note 9, the Company has a shop facility lease with Confluence Land Company through January 31, 2012. The Company has subsequently obtained an option to extend the lease for one year beyond January 21, 2012. If the Company exercises this option, the monthly rent will be $10,000 beginning in February 2012.

Subsequent to December 31, 2010, the Company also committed to pay a total of $690,000 to certain key employees under the Company’s deferred compensation plan. These payments were made in February 2011. Of this balance, $315,000 related to the 2010 award year and was accrued for as of December 31, 2010. The remaining $375,000 relates to the 2011 award year and as such was not accrued as of December 31, 2010.

In April 2011, the Company implemented a new phantom stock plan in which certain employees were granted phantom shares. The phantom shares vest at equal levels over a three-year period and convey the right to the grantees to receive cash payments based on EBITDA (earnings before interest, income taxes, depreciation, and amortization expenses) as defined under the plan. The phantom shares are a “liability” type award under professional standards.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

NOTE 17 (Continued)

In May 2011, the Company signed a contract to commence construction of a new headquarters building in June 2011. The contract is for $4,528,581 and estimates a completion date in February 2012. The Company shall make progress payments as requested by the contractor based on percentage of completion calculations.

In June 2011, the Subsidiary signed a credit agreement with Wells Fargo Bank, National Association that included a $20,000,000 term loan and a revolving line of credit for up to $5,000,000. The loans are secured by the assets of Subsidiary and bear interest at the option of the Subsidiary 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 term loan is repayable in $1,000,000 quarterly installments from September 30, 2011 through June 30, 2015. Borrowings under the revolving line, which are determined based on eligible accounts receivable, mature on June 30, 2015. The Company has not used the revolving line of credit to date. In July 2011, the Company borrowed the full term loan and paid BNS Holding, Inc. a dividend of $20,000,000.

No other significant events occurred subsequent to the Company’s year end. Subsequent events have been evaluated through November 4, 2011, which is the date these financial statements were available to be issued.

NOTE 18 – CONTINGENCIES

BNS Holding Inc. has submitted claims for damages of approximately $1,780,000 to the previous shareholders of the Company. These claims relate to representations made by the previous shareholders of the Company in the purchase agreement described in Note 17. The ultimate resolution of the claims and their impact to the Company’s financial statements, if any, cannot be reasonably determined. As such, the financial statements do not reflect any adjustments for this contingency.

EX-99.2 5 ex99-2.htm EXHIBIT 99.2 ex99-2.htm

EXHIBIT 99.2

SWH, INC. AND SUBSIDIARY

FINANCIAL STATEMENTS

AS OF

FEBRUARY 2, 2011

AND

INDEPENDENT AUDITOR’S REPORT

SWH, INC. AND SUBSIDIARY

TABLE OF CONTENTS

	Page

Independent Auditor’s Report	1

Consolidated Balance Sheet as of February 2, 2011	2

Consolidated Statement of Operations for the period January 1, 2011 through February 2, 2011	3

Consolidated Statement of Shareholders’ Equity for the period January 1, 2011 through February 2, 2011	4

Consolidated Statement of Cash Flows for the period January 1, 2011 through February 2, 2011	5

Notes to Consolidated Financial Statements	6

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Shareholders

of SWH, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of SWH, Inc. (a North Dakota Corporation) and Subsidiary as of February 2, 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the period of January 1, 2011 through February 2, 2011. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SWH, Inc. and Subsidiary as of February 2, 2011, and the results of its consolidated operations and cash flows for the period of January 1, 2011 through February 2, 2011 in conformity with accounting principles generally accepted in the United States of America.

BRADY, MARTZ & ASSOCIATES, P.C.

August 6, 2012

SWH, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

FEBRUARY 2, 2011

ASSETS

Current assets
Unrestricted cash and cash equivalents	$	2,153,169
Restricted cash and cash equivalents		2,347,026
Accounts receivable		5,039,765
Due from related party		225,000
Inventories		67,454
Prepaid expenses		395,333
Tax refund receivable		410,000
Total current assets		10,637,747

Property and equipment, net		18,146,928
Goodwill		18,566,498

TOTAL ASSETS	$	47,351,173

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses		849,120
Retention payable		774,519
Deferred compensation payable		690,000
Capital lease obligation, current portion		170,000
Income taxes payable		245,947
Total current liabilities		2,729,586


Capital lease obligations, net of current portion		936,374
Deferred tax liability		5,135,000
Total liabilities		8,800,960

Shareholders’ equity
Common stock, $0.001 par value, 51,100 shares authorized, 12,775 shares issued and outstanding		-
Additional paid-in capital		34,154,657
Retained earnings		4,395,556
Total shareholders’ equity		38,550,213

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	47,351,173

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD JANUARY 1, 2011 THROUGH FEBRUARY 2, 2011

Well servicing income	$	2,577,457

Cost of well servicing		1,490,669

Gross profit		1,086,788

Operating expenses		263,746

Income from operations		823,042

Other income (expense):
Other income		387,438
Other expenses		(1,853,827	)
Interest expense		(117,254	)
Total other income (expense)		(1,583,643	)

Loss before provision for income taxes		(760,601	)

Income tax benefit		268,053

Net loss	$	(492,548	)

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE PERIOD JANUARY 1, 2011 THROUGH FEBRUARY 2, 2011

	Common stock		Additional paid-in capital		Retained earnings			Total

Balance, December 31, 2010		–		20,418,241	$	4,888,104		$	25,306,345

Capital contributions				13,736,416					13,736,416

Net loss		–		–		(492,548	)		(492,548	)

Balance, February 2, 2011	$	–	$	34,154,657	$	4,395,556		$	38,550,213

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD JANUARY 1, 2011 THROUGH FEBRUARY 2, 2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(492,548	)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		163,742
Amortization/charge off of loan fees		495,480
Charge off deferred gain		(386,623	)
Deferred income taxes		116,000
Changes in assets and liabilities:
Accounts receivable		(416,688	)
Inventory		(35,737	)
Prepaid expenses		(334,596	)
Tax refund receivable		(410,000	)
Accounts payable		(185,798	)
Retention payable		774,519
Deferred compensation payable		690,000
Income taxes payable		25,947
Net cash provided by operating activities		3,698

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(78,449	)
Net cash used for investing activities		(78,449	)

CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions		13,736,416
Repayment of capital lease obligations		(11,276,489	)
Net cash provided by financing activities		2,459,927

Net increase in cash and cash equivalents		2,385,176

Beginning cash and cash equivalents		2,115,019

ENDING CASH AND CASH EQUIVALENTS	$	4,500,195

Cash and cash equivalents at February 2, 2011 is comprised of:
Unrestricted cash and cash equivalents	$	2,153,169
Restricted cash and cash equivalents		2,347,026

ENDING CASH AND CASH EQUIVALENTS	$	4,500,195

See Notes to Consolidated Financial Statements.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Ownership – The Company was originally formed and acquired the Subsidiary in October 2008. Effective February 2, 2011, the Company was acquired by BNS Holding, Inc for an aggregate purchase price of $51,100,000 in cash. These statements are prior to the change in the basis of accounting due to the change in control under which the Company subsequently stepped up its assets and liabilities to their fair values as of the acquisition date. See Note 16.

Revenue recognition – The Company's well servicing and workover services are generally short term in nature and revenue is recognized upon completion of each service.

Cash equivalents - Cash equivalents include time deposits, money market mutual funds, and all highly liquid debt instruments with original maturities of three months or less.

Trade receivables - Trade receivables are carried at original invoice. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due receivables. As of February 2, 2011, management believes its receivables are substantially all collectable and therefore has not provided for an allowance for uncollectability.

Inventories – Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Prepaid expenses - Prepaid expenses include items such as insurance and other miscellaneous items. The prepaid expenses are recognized as an operating expense in the period they benefit.

Property and Equipment - Property and equipment is stated at cost less accumulated depreciation using straight-line methods. The estimated lives used to compute depreciation are as follows:

Equipment

2 - 15 years

Vehicles

4 years

Office equipment

5 years

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

Advertising - Advertising costs are expensed as incurred.

Accrued compensated absences - Compensated absences are accrued and charged to expense in the period in which it is earned.

Sales Taxes - The Company presents its revenues net of any sales taxes collected from its customers that are required to be remitted to local or state governmental taxing authorities.

Variable Interest Entities – The Company consolidates all variable interest entities in which it holds a variable interest and is deemed to be the primary beneficiary of the variable interest entity. Generally, a variable interest entity, or VIE, is an entity with at least one of the following conditions: (a) the total equity investment at risk is insufficient to allow the entity to finance it activities without additional subordinated financial support or (b) the holders of the equity investment at risk, as a group, lack any one of the following three characteristics: (i) the power to direct the entity’s activities that most significantly impact its economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity. The primary beneficiary of a VIE is an entity that has a variable interest or a combination of variable interests that provide the entity with a controlling financial interest in the VIE. An entity is deemed to have a controlling financial interest in a VIE if it has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of February 2, 2011, the Company has determined that it does not have interests in VIE’s that require consolidation.

Income Taxes - The Company and its subsidiary are included in its parent company’s consolidated income tax returns.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized.

NOTE 2 - OFF-BALANCE-SHEET RISK

NOTE 3 – PROPERTY AND EQUIPMENT

Details pertaining to property and equipment as of February 2, 2011 are as follows:

	Cost		Accumulated Depreciation		Net
Equipment	$	23,891,964	$	6,136,654	$	17,755,310
Vehicles		745,502		395,895		349,607
Office equipment		151,382		109,371		42,011

	$	24,788,848	$	6,641,920	$	18,146,928

Depreciation expense for the period January 1, 2011 through February 2, 2011 was $163,742.

NOTE 4 – OTHER LONG-TERM ASSETS

	Cost		Accumulated Amortization		Net
Subject to amortization:
None	$	-	$	-	$	-

Not subject to amortization:
Goodwill		18,566,498		-		18,566,498
	$	18,566,498	$	-	$	18,566,498

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

In conjunction with the acquisition of the Company by BNS Holding, Inc., as described in Note 1, certain debt obligations were retired as of February 2, 2011. The Company recognized the remaining unamortized balance of $495,840 of associated loan fees as amortization expense during the period ended February 2, 2011.

Professional standards require the Company to test goodwill for impairment. There were no changes in the carrying amount of goodwill due to impairment for the period January 1, 2011 through February 2, 2011.

NOTE 5 – CAPITAL LEASES AND LONG TERM DEBT

To facilitate the funding of the Company’s acquisition of the Subsidiary’s stock in October of 2008, the Subsidiary sold substantially all its capital assets for $13,500,000. The Subsidiary subsequently entered into an agreement with an independent financing institution, NewStar Financial, Inc. (NewStar), to lease the same assets. The lease was classified as a capital lease and as such, the gain generated from the sale (approximately $454,000) was deferred and was recognized into income over the estimated lives of the leased assets.

On February 2, 2011, in conjunction with the acquisition of the Company by BNS Holding, Inc. as described in Note 1, the capital lease obligation was repaid. As a result of the repayment of the capital lease, the Company recognized the $386,623 unamortized balance of the deferred gain as other income during the period ended February 2, 2011.

The Company acquired a new rig through a capital lease agreement. The lease requires monthly principal and interest payments of $19,466 beginning in April of 2011 through March of 2016. The lease carries an interest rate of 6.678% and has an outstanding balance of $996,184 as of February 2, 2011.

The following is a schedule of the future annual minimum payments of the leases described above as of February 2, 2011:

	Amount
For the 11 months ending December 31, 2011	$	217,533
For the 12 months ending December 31:
2012		279,781
2013		264,386
2014		233,597
2015		233,597
Thereafter		58,383
Total		1,287,277
Interest included in above		180,903
Present value of minimum lease payments		1,106,374

Current portion of long-term capital lease obligations	$	170,000

NOTE 6 – WORKING CAPITAL AGREEMENT

As of February 2, 2011, the Company had $2,000,000 of credit available under a working capital facility agreement with a financial institution. The agreement was set to mature on October 15, 2013. Substantially all the Company’s assets were pledged as collateral under the agreement. There was no outstanding balance as of February 2, 2011. This agreement was terminated subsequent to February 2, 2011 upon the acquisition of the Company by BNS Holding Inc.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

NOTE 7 - MAJOR CUSTOMERS

The Company derived 10 percent or more of its revenue during the period January 1, 2011 through February 2, 2011 from the following customers:

Customer A	$	778,503
Customer B		683,783
Customer C		368,360

The Company had the following receivable amounts from these customers as of February 2, 2011:

Customer A	$	2,198,099
Customer B		1,147,646
Customer C		569,641

NOTE 8 – RELATED PARTY TRANSACTIONS

Prior to BNS Holding Inc.’s acquisition of the Company, the following related party transactions occurred between the Company and either the selling shareholders or entities controlled by the selling shareholders:

The Company received management and various other services from UIB Capital, Inc. (an affiliate) and a shareholder of the Company. Fees for these services totaled $12,500 for the period January 1, 2011 through February 2, 2011.

The Company has a note receivable due from a shareholder in the amount of $225,000 as of February 1, 2011. The note is non-interest bearing and is due on demand.

NOTE 9 - PENSION PLAN

NOTE 10 - INCOME TAXES

The income tax provision reported in the statement of operations for the period January 1, 2011 through February 2, 2011 includes the following components:

Current income tax expense	$	-
Deferred income tax benefit		268,053
	$	268,053

Deferred income tax balances as of February 2, 2011 are categorized as follows:

Tax refund receivable-comprised of accruals and net operating loss carryback claims	$	410,000
Deferred tax liabilities-comprised of fixed assets		(5,135,000	)
	$	(4,725,000	)

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

Net deferred income taxes are classified as follows:

Current asset	$	410,000
Current liability		–
Long-term liability		(5,135,000	)
	$	(4,725,000	)

The Company incurred a net operating loss for income tax purposes during the reporting period ended February 2, 2011 of approximately $1,182,000. The loss was carried back to previous tax years to obtain a refund of income taxes previously paid.

As of February 2, 2011, the Company had the following amounts due to (from) federal and state entities associated with its income taxes for the year-ended December 31, 2010:

Refund – U.S. Treasury	$	(82,107	)
Payable – MT Dept of Revenue		43,563
Payable – ND Tax Commissioner		284,491
	$	245,947

NOTE 11 – DEFERRED COMPENSATION PLAN

In 2010, the Company established a deferred compensation plan to provide certain key employees with cash retention awards. The Company has accrued a total of $690,000 at February 2, 2011, including $375,000 charged to expense for the period January 1, 2011 to February 2, 2011 for vested benefits due to employees under this plan.

NOTE 12 – CAPITAL CONTRIBUTIONS

The Company was acquired by BNS Holding Inc on February 2, 2011. See Note 1. As provided under the terms of the purchase agreement, certain obligations of the Company’s subsidiary were required to be settled with or reserved from the consideration paid to the sellers.

Capital lease obligations and accrued interest	$	11,389,390
Employee retentions payable		2,347,026
	$	13,736,416

A total of $2,347,026 of the acquisition proceeds was set aside as restricted funds to fund employee retention obligations. In accordance with the purchase agreement, $774,519 of the retention payments were due and paid to eligible employees in February 2011. The remaining balance was payable to eligible employees meeting various employment requirements as of June 30, 2011.

An additional $11,389,390 of the acquisition proceeds were utilized to repay the outstanding capital lease obligations with NewStar described in Note 5.

NOTE 14 – STATEMENT OF CASH FLOWS INFORMATION

For the period January 1, 2011 through February 2, 2011, the Company paid cash for interest expense totaling $125,450. The Company did not utilize any cash for income taxes during the period of January 1, 2011 through February 2, 2011.

The Company purchased $687,371 of equipment financed through capital lease obligations during the period of January 1, 2011 through February 2, 2011.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

NOTE 15 – OTHER EXPENSES

In conjunction with BNS Holding, Inc.’s acquisition of the Company on February 2, 2011, certain additional compensation related expenses became due. The Company also charged off the remaining unamortized loan fees related to the capital leases that were repaid – see Note 12. The items included in “Other Expenses” in the Company’s statement of operations are as follows:

Retention expense	$	774,519
Charged off of loan fees		495,480
Deferred compensation expense		375,000
Payroll taxes related to deferred compensation and retention expenses		208,828
Total	$	1,853,827

NOTE 16 – SUBSEQUENT EVENTS

In conjunction with BNS Holding, Inc.’s acquisition of the Company on February 2, 2011, the Company guaranteed approximately $14,000,000 of BNS Holding, Inc.’s debt. This debt was paid off in September 2011.

In March 2011, the Company and BNS Holding, Inc. entered into a tax-sharing agreement where the Company will be included in both the Federal and State tax returns of BNS Holding, Inc. This agreement defines the methodology for determining the amount of current taxes due by each of the parties as a result of the Company being included in the consolidated tax returns of BNS Holding, Inc. The Company’s tax expense will be determined as if separate tax returns were to be filed. The tax sharing agreement does not require intercompany reimbursement or settlement of tax benefits related to filing a consolidated tax return. Accordingly, the cash flow benefits realized by the Company, as a result of filing the consolidated tax returns, will be recorded as additional paid-in capital. Any tax expense incurred by the Company, after benefits of the tax-sharing agreement, will be paid by the Company.

On April 29, 2011, the Company adopted a phantom stock plan in which certain employees were granted phantom shares. The phantom shares vest at equal levels over a three-year period and convey the right to the grantees to receive cash payments based on EBITDA (earnings before interest, income taxes, depreciation, and amortization expenses) as defined under the plan. The phantom shares are a “liability” type award under professional standards. Phantom shareholders are entitled to receive a cash payment for their vested shares based on an EBIDTA valuation formula contained in the Phantom Plan. The board has issued a total of 8,500 phantom shares to be issued under the Phantom Plan. Effective May 30, 2012, the plan was amended to remove the EBIDTA performance targets required for vesting of the shares and to provide that the cash payment for vested shares be based on the per share consideration received by the shareholders of BNS Holding Inc. for the sale of the Company. As of August 6, 2012, 6,300 shares were outstanding, representing an estimated maximum obligation under the plan of $3,420,000, net of forfeitures for terminations. Payments for vested shares will be made to eligible participants on February 1, 2016 unless there is a change of control or employee death.

Effective April 29, 2011, the shareholder approval of a 12.755-for-one stock split was recorded. All share data, except par value, has been retroactively adjusted to reflect the effect of the stock split for the period presented.

The Company purchased a rig through a capital lease agreement in May 2011 for $968,887. The lease requires monthly principal and interest payments of $18,702 through May 2016, with an interest rate of 5.936%.

In May 2011, the Company signed a contract for construction of an administration/shop facility. The facility was completed in February 2012 for a cost of approximately $5,000,000.

SWH, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 2, 2011

In June 2011, the Company signed a credit agreement with Wells Fargo Bank, National Association that included a $20,000,000 term loan and a revolving line of credit for up to $5,000,000. The loans are secured by the assets of Company and bear interest at the option of the Company 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 term loan is repayable in $1,000,000 quarterly installments from September 30, 2011 through June 30, 2015. Borrowings under the revolving line, which are determined based on eligible accounts receivable, mature on June 30, 2015. The Company advanced and subsequently repaid $1,000,000 on the revolving line of credit to date. In July 2011, the Company borrowed the full term loan and paid BNS Holding, Inc. a dividend of $20,000,000.

The Company used the services of SP Corporate Services LLC (“SPCS”), an affiliate of SPH Group LLC, the parent company of BNS Holding, Inc., in connection with the negotiation of this credit agreement. The Company paid SPCS $500,000 for such services during the year ended December 31, 2011 and has capitalized this amount as deferred financing costs to be amortized over the term of the loan.

On January 20, 2012, the Company agreed to sell its tubular testing fixed assets for $1,000,000 cash. These assets are included as equipment in Note 3 with a net book value of $894,862 as of February 2, 2011. The sale was finalized in May 2012.

On May 31, 2012, BNS Holding Inc. sold the Company to Steel Excel Inc., a related party through common ownership by SPH Group LLC, for an aggregate amount of $62,664,433, comprised of 2,207,500 common shares of Steel Excel Inc., valued at $54,742,500 and cash of $7,921,933. In June 2012, Steel Excel Inc. consolidated certain of its energy services subsidiaries, including SWH Inc. into a newly formed entity, Steel Energy Ltd., a wholly owned subsidiary of Steel Excel Inc.

In June of 2012, the Company signed a contract to commence construction on a building to be rented to a related party through common ownership. The total contract price is $800,000. As of August 6, 2012, the Company has incurred costs totaling $300,000.

The Company paid cash for and placed in service 3 workover rigs for an approximate total cost of $3,300,000. The Company also has entered into a purchase commitment for an additional rig. The rig is expected to cost approximately $1,200,000.

No other significant events occurred subsequent to the Company’s year-end. Subsequent events have been evaluated through August 6, 2012, which is the date these financial statements were available to be issued.

EX-99.3 6 ex99-3.htm EXHIBIT 99.3 ex99-3.htm

Exhibit 99.3

SWH, INC.

AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF

DECEMBER 31, 2011

AND

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

SWH, Inc. and Subsidiary

TABLE OF CONTENTS

				Page

Report of Independent Certified Public Accountants				1

Consolidated Balance Sheet				2

Consolidated Statement of Earnings				3

Consolidated Statement of Shareholder's Equity				4

Consolidated Statement of Cash Flows				5

Notes to Consolidated Financial Statements				6

REPORT OF INDEPENENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

SWH, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of SWH, Inc. and Subsidiary (the “Company”) as of December 31, 2011 and the related consolidated statements of earnings, shareholder’s equity and cash flows for the period February 2, 2011 through December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America established by the American Institute of Certified Public Accountants. Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 SWH, Inc. and Subsidiary as of December 31, 2011 and the results of operations and their cash flows for the period February 2, 2011 through December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Wichita, Kansas

July 20, 2012

SWH, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEET

December 31, 2011

ASSETS
Current Assets:
Cash and cash equivalents	$	2,274,939
Accounts receivable		7,223,240
Prepaid expenses and other current assets		348,330
Income tax receivable		566,292
Deferred income taxes		53,755
Total current assets		10,466,556

Property and equipment, net		26,081,846
Goodwill		24,836,817
Intangible assets, net		8,513,986
Deferred financing costs, net		810,542

TOTAL ASSETS	$	70,709,747

LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses	$	2,931,933
Note payable, current portion		4,000,000
Capital lease obligation, current portion		400,000
Total current liabilities		7,331,933

Phantom stock liability		1,009,723
Note payable, net of current portion		14,000,000
Capital lease obligation, net of current portion		1,386,753
Deferred income taxes		10,384,348
Total liabilities		34,112,757

Commitments and contigencies

SHAREHOLDER'S EQUITY:
Common stock, $0.001 par value, 51,100 authorized, 12,775 issued and outstanding		13
Additional paid-in capital		27,332,950
Retained earnings		9,264,027
Total shareholder's equity		36,596,990

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY	$	70,709,747

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF EARNINGS

For the Period from February 2, 2011 through December 31, 2011

Net revenues	$	32,984,070

Cost of revenues		18,200,633

Gross margin		14,783,437

Selling, general and administrative expenses		6,184,501

Income from operations		8,598,936

Other income (expense):
Other income		30,035
Interest expense		(528,100	)
Total other income (expense)		(498,065	)

Income before provision for income taxes		8,100,871

Provision for income taxes		3,232,426

Net income	$	4,868,445

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY

For the Period from February 2, 2011 through December 31, 2011

	Common Stock				Additional Paid-in			Retained
	Shares		Amount		Capital			Earnings		Total

Balance, February 2, 2011		1,000	$	1	$	46,068,115		$	4,395,582	$	50,463,698

Stock split		11,775		12		(12	)		-		-

Return of capital		-		-		(20,000,000	)		-		(20,000,000	)

Contributed capital - benefit of tax-sharing agreement		-		-		1,264,847			-		1,264,847

Net income		-		-		-			4,868,445		4,868,445

Balance, December 31, 2011		12,775	$	13	$	27,332,950		$	9,264,027	$	36,596,990

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Period from February 2, 2011 through December 31, 2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,868,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,392,664
Amortization of deferred financing costs		115,792
Phantom stock expense		1,009,723
Deferred income taxes		1,736,864
Benefit of tax-sharing agreement		1,264,847
Change in operating assets and liabilities:
Restricted cash		2,572,026
Accounts receivable		(2,183,475	)
Prepaid expenses and other current assets		114,456
Income tax receivable/payable		(402,239	)
Accounts payable and accrued expenses		114,216
Net cash provided by operating activities		11,603,319
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(8,266,690	)
Net cash used in investing activities		(8,266,690	)
CASH FLOWS FROM FINANCING ACTIVITIES
Return of capital		(20,000,000	)
Proceeds from note payable		20,000,000
Payments on note payable		(2,000,000	)
Payments of deferred financing costs		(926,334	)
Payments on capital lease obligations		(288,525	)
Net cash used in financing activities		(3,214,859	)
Net increase in cash and cash equivalents		121,770
Cash and cash equivalents, beginning of period		2,153,169
Cash and cash equivalents, ending of period	$	2,274,939


Supplemental cash flow information:
Income taxes paid	$	632,954
Interest paid	$	501,724

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 1.

Summary of Significant Accounting Policies

Description – SWH, Inc. is the sole shareholder of Sun Well Service, Inc. (“Sun Well”), which is the Company’s only subsidiary, (collectively “the Company”). Sun Well provides a variety of services to the oil and gas industry, including well servicing and workover completion services, plug and abandonment services, and hydrostatic tubing testing, as well as rentals of various types of well servicing equipment. Sun Well’s operations are primarily concentrated in the Williston basin in North Dakota and eastern Montana.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sun Well. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents – Cash equivalents include time deposits, money market mutual funds, and all highly liquid instruments with original maturities of three months or less.

Fair Value Measurements – The Company measures fair value as 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.

Concentration of Credit Risk – The Company has cash deposits at financial institutions that periodically exceed the FDIC insurance coverage limits. The Company has not experienced any losses in these accounts and believes that its cash is not exposed to any significant credit risk.

Accounts Receivable – Accounts receivable are carried at the original invoice amount. Management determines the allowance for doubtful accounts by regularly evaluating the current economic climate and each individual customer’s receivables, credit history, and financial condition. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. An account is considered past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due accounts. As of December 31, 2011, management believes its accounts receivable are collectible. Therefore, it has not provided an allowance for doubtful accounts.

Prepaid Expenses and Other Current Assets – Prepaid expenses include items such as insurance, licenses, and other miscellaneous items. Other current assets include inventory that is valued at the lower of cost or market. Cost is determined using the first-in, first-out method.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 1 (Continued)

Property and Equipment – As a result of the business combination at February 2, 2011, all property and equipment was adjusted to fair market value, thus resetting accumulated depreciation to $0 as of the date of the acquisition. Property and equipment additions since the acquisition date are stated at cost. Depreciation is computed using the straight-line method and the following estimated lives:

Equipment	2 to 15 years
Vehicles	4 years
Office equipment	5 years

Maintenance and repairs are charged to expense as incurred. The cost of additions and betterments are capitalized. The cost and related accumulated depreciation of property retired or sold are removed from the applicable accounts and any gain or loss is recorded. Amortization expense for leased assets is included with depreciation expense.

Long-Lived Assets – Long-lived assets, including intangible assets with definite lives, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Goodwill and Other Intangible Assets – The purchase price of the Company was allocated to the net assets acquired based on their fair values at the date of acquisition. The purchase price of the Company in excess of the fair value of the Company’s net assets acquired was recorded as goodwill as of February 2, 2011. The Company does not amortize goodwill, but evaluates it for impairment on an annual basis or whenever an impairment indicator is identified. The Company performs its annual impairment test at year-end, involving a two-step approach.

The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a Company’s reporting units to their carrying amounts. If the fair value of the reporting unit exceeds its carrying amounts, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting units’ goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit fair value (as determined in step one) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

The Company has only one reporting unit for purposes of the goodwill impairment test. The Company has determined its annual impairment test will be performed at the end of the fiscal year. The Company has concluded that no impairment existed at December 31, 2011.

Trade names are also not amortized, but are evaluated for impairment on an annual basis or whenever an impairment indicator is identified. The Company had concluded that no impairment existed at December 31, 2011.

Intangible assets include two non-compete agreements with previous owners, a favorable lease agreement, customer relationships and trade name. All intangible assets, except the trade name, are amortized on a straight-line basis over the following periods:

Favorable lease	2 years
Non-compete agreements	5 years
Customer relationships	10 years

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 1 (Continued)

The Company evaluates its amortizable intangible assets for impairment whenever events and circumstances indicate that such assets might be impaired. The Company has concluded that no impairment existed at December 31, 2011.

Deferred Financing Costs – Deferred financing costs are third-party costs incurred to secure debt financing, which are capitalized and shown on the balance sheet as deferred financing costs. These costs include, but are not limited to, bank commitment fees, legal costs, appraisals and title surveys. The costs are amortized over the term of the debt using the straight-line method, which approximates the effective-interest method.

Stock Split – Effective April 29, 2011, the shareholder approval of a 12.775-for-one stock split was recorded. All share data, except par value, has been adjusted to reflect the effect of the stock split for the period presented.

Revenue Recognition – The Company’s well servicing and workover services are generally short-term in nature and revenue is recognized upon completion of each service.

Advertising – Advertising costs are expensed as incurred. Advertising expenses included in “Selling, general and administrative expenses” were $12,345 for the report period ended December 31, 2011.

Sales Taxes – The Company presents its revenues net of any sales taxes collected from its customers that are required to be remitted to local or state governmental taxing authorities.

Fair Value of Financial Instruments – The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, accounts receivable, income taxes receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value due to short-term maturities. The carrying amount of the note payable approximates fair value based on the applicable variable rates, which approximate market.

Phantom Stock Compensation – Phantom stock issued to employees who participate in this plan are valued at an amount based upon earnings of the Company, as defined. The shares vest over a three-year period. The Company records compensation expense based on the fair value of the shares outstanding, adjusted on an annual basis, amortized over the three-year period using a straight-line method.

Income Taxes – The Company files consolidated income tax returns with its parent company.

Deferred income taxes are provided using the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment. The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the consolidated statement of earnings. There has been no interest or penalties recognized in the accompanying consolidated financial statements. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet, along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized.

Subsequent Events – The Company evaluated and disclosed subsequent events, if any, through July 20, 2012, which represents the date as of which the financial statements were available to be issued.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 2.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated guidance allowing the use of a qualitative approach to test goodwill for impairment. The updated guidance would permit the Company to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of one of our reporting units is less than its carrying value. If the Company concludes that this is the case, it is then necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The implementation of this updated guidance is not expected to have a material effect on the Company’s financial statements.

In June 2011, FASB issued guidance that requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. Under the continuous statement approach, the statement would include the components and total of net income, the components and total of other comprehensive income, and the total of comprehensive income. Under the two statement approach, the first statement would include the components and total of net income and the second statement would include the components and total of other comprehensive income and the total of comprehensive income. This guidance does not change the items that must be reported in other comprehensive income and is effective retrospectively for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s financial statements, although it will change the Company’s presentation of comprehensive income in its financial statements.

Note 3.

Step-Up of Financial Statements

On February 2, 2011 the Company was acquired by BNS Holding, Inc. for an aggregate purchase price of $50,463,698 in cash. Due to the change of control, the Company has elected to establish a new basis of accounting and, therefore, has stepped up its assets and liabilities to their fair values.

The fair values of the assets acquired and liabilities assumed at the date of change of control are summarized below. The fair value step-up adjustments are based on a valuation performed by a third party.

	Historical Balances		Step-Up Adjustments		Fair Value Balances
	(Unaudited)
Current assets	$	8,065,720	$	-	$	8,065,720
Property and equipment		18,146,928		110,714		18,257,642
Goodwill		18,177,999		6,658,818		24,836,817
Intangible assets		-		8,991,205		8,991,205
Other assets		2,572,026		-		2,572,026
Total assets	$	46,962,673	$	15,760,737	$	62,723,410

Current liabilities	$	2,559,609	$	-	$	2,559,609
Capital lease obligations		1,106,374		-		1,106,374
Deferred income taxes		5,135,000		3,458,729		8,593,729
Shareholder's equity		38,161,690		12,302,008		50,463,698
Total liabilities and shareholder's equity	$	46,962,673	$	15,760,737	$	62,723,410

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 4.

Property and Equipment

The Company’s property and equipment as of December 31, 2011 is summarized below:

	Cost		Accumulated Depreciation			Net

Equipment	$	19,683,286	$	(1,696,517	)	$	17,986,769
Equipment under capital lease (see Note 6)		2,362,383		(138,010	)		2,224,373
Vehicles		663,934		(60,053	)		603,881
Office equipment		85,760		(20,865	)		64,895
Assets in progress		5,201,928		-			5,201,928

Property and equipment, net	$	27,997,291	$	(1,915,445	)	$	26,081,846

Depreciation expense for the report period ended December 31, 2011 was $1,915,445.

Note 5.

Intangible Assets

The following is a summary of the Company's intangible assets as of December 31, 2011:

	Cost		Accumulated Amortization			Net

Trade name	$	4,990,000	$	-		$	4,990,000
Customer relationships		3,220,000		(295,167	)		2,924,833
Non-compete agreements		640,000		(117,333	)		522,667
Favorable lease		141,205		(64,719	)		76,486

	$	8,991,205	$	(477,219	)	$	8,513,986

Amortization expense of intangible assets for the report period ended December 31, 2011 was $477,219.

Estimated aggregate future amortization expenses for the next five years for the intangible assets are as follows:

For the year ending December 31:
2012	$	520,603
2013		455,883
2014		450,000
2015		450,000
2016		332,667

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 6.

Capital and Operating Lease Obligations

The Company leases certain equipment under capital lease obligations. The following is a schedule of the future annual minimum payments for these leases as of December 31, 2011:

For the year ending December 31:
2012	$	504,210
2013		488,815
2014		458,026
2015		458,026
2016		141,756
Total minimum lease payments		2,050,833
Less amount representing interest		(264,080	)
Present value of net minimum lease payments		1,786,753
Less current portion		(400,000	)
Capital lease obligations, net of current portion	$	1,386,753

The Company leases its shop facility from a former shareholder. The lease requires monthly rental payments of $2,500 through January 31, 2012. Total rent expense was $27,500 for the report period ended December 31, 2011. This lease has been extended through January 31, 2013 at a monthly rate of $10,000. The future minimum lease payments on this lease are as follows:

For the year ending December 31:
2012	$	112,500
2013		10,000
Total future minimum operating lease payments	$	122,500

The Company has two other facility leases on a month-to-month basis. The rent expense under these leases totaled $57,150 for the report period ended December 31, 2011.

Note 7.

Note Payable

Sun Well signed a credit agreement with Wells Fargo Bank, National Association on June 30, 2011. The agreement 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 $2,000,000 in scheduled principal payments through December 31, 2011. Borrowings under the revolving loan, which are determined based on eligible accounts receivable, mature on June 30, 2015. There have been no advances on the revolving line of credit through December 31, 2011. Under the agreement, Sun Well is subject to certain financial covenants. As of December 31, 2011, Sun Well was in compliance with all such covenants.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 7

(Continued)

The future principal payments due on the notes payable are as follows:

For the year ending December 31:
2012	$	4,000,000
2013		4,000,000
2014		4,000,000
2015		6,000,000
	$	18,000,000

Note 8.

Major Customers

For the report period ended December 31, 2011, the Company derived 10 percent or more of its net revenues from the following customers (with corresponding accounts receivable balance as of December 31, 2011):

	Percent of Net Revenues			Percent of Accounts Receivable
Customer A		29	%		33	%
Customer B		17	%		10	%
Customer C		12	%		11	%
Customer D		10	%		9	%

Note 9.

Income Taxes

The provision for income taxes for the report period ended December 31, 2011 consists of the following:

Current expense	$	1,495,562
Deferred expense		1,736,864
		3,232,426

The following summarizes the difference between the Company’s income tax expense and the amount computed by applying the Federal statutory rate of 34 percent to the income before provision for income taxes for the report period ended December 31, 2011:

Federal income tax at statutory rate	$	2,754,296
State taxes, net of federal benefit		317,844
Other, net		160,286
	$	3,232,426

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 9

(Continued)

Deferred tax assets and liabilities at December 31, 2011 are comprised of the following:

Deferred tax assets:
Compensation and other accruals	$	382,701
Other, net		3,589
Gross deferred tax assets		386,290
Deferred tax liabilities:
Property and equipment	$	(7,455,785	)
Intangible assets		(3,261,098	)
Gross deferred tax liabilities		(10,716,883	)
Total deferred tax liabilities, net		(10,330,593	)
Current portion of deferred tax assets, net		(53,755	)
Deferred tax liabilities, net of current portion	$	(10,384,348	)

In March 2011, the Company and BNS Holding, Inc. entered into a tax-sharing agreement where the Company will be included in both the Federal and State tax returns of BNS Holding, Inc. This agreement defines the methodology for determining the amount of current taxes due by each of the parties as a result of the Company being included in the consolidated tax returns of BNS Holding, Inc. The Company’s tax expense was determined as if separate tax returns were to be filed. The tax sharing agreement does not require intercompany reimbursement or settlement of tax benefits related to filing a consolidated tax return. Accordingly, the cash flow benefits realized by the Company, as a result of filing the consolidated tax returns, are recorded as additional paid-in capital. Any tax expense incurred by the Company, after benefits of the tax-sharing agreement, will be paid by the Company.

Note 10.

Employee Benefits

The Company’s employees are eligible to participate in a defined contribution 401(k) plan after meeting specific age and period of service requirements. The Company’s matching contribution is limited to a maximum of 3% of each participating employee’s wages. The Company’s matching contributions for the report period ended December 31, 2011 aggregated $122,246.

The Company has a deferred compensation plan to provide certain key employees with cash retention awards. The Company has accrued $93,971 as of December 31, 2011 for vested benefits due to employees under this plan.

Phantom Stock Plan

Effective April 29, 2011, the Company adopted 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 phantom shares are set to vest over a three-year period and the vesting is determined on an annual basis. The annual vesting is based on attainment of specified levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”), as contained in the Phantom Plan for the year, and continued employment. If employees or consultants terminate, their unvested shares are returned to the Phantom Plan. Shares under this plan fully vest if there is a change of control or upon the death of a phantom stockholder employee.

Phantom stockholders are entitled to receive a cash payment for their vested shares based on an EBITDA valuation formula contained in the Phantom Plan. Payments for vested shares will be made on February 1, 2016, unless there is a change of control or employee death.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Note 10

(Continued)

The board has authorized a total of 8,500 phantom shares to be issued under the Phantom Plan. At December 31, 2011, 7,500 shares were outstanding, all of which were 33% vested. The value of the vested shares at December 31, 2011 has been estimated at $1,009,723, using the formula as defined in the Phantom Plan.

Subsequent to year-end, effective May 30, 2012, the Phantom Plan was amended to remove the EBITDA performance targets required for vesting of the shares and to provide that the cash payment for vested shares be based on the per share consideration received by the shareholders of BNS Holding Inc. for the sale of the Company (see Note 14).

Note 11.

Related Party Transactions

Beginning in April 2011, the Company began using the resources of BNS Holding, Inc. for management and related services and pays a monthly fee of $30,000 for such services. For the report period ended December 31, 2011, the Company has paid $270,000 for these services.

The Company used the services of SP Corporate Services LLC (“SPCS”), an affiliate of SPH Group LLC, the parent company of BNS Holding, Inc., in connection with the negotiation of the credit agreement disclosed in Note 7. The Company paid SPCS $500,000 for such services during the report period ended December 31, 2011 and has capitalized this amount as deferred financing costs. There was no balance due at December 31, 2011.

The Company’s chief executive officer is a consultant that is also an employee of an affiliate of SPH Group LLC. He received $93,000 for his services during the report period ended December 31, 2011.

On February 2, 2011, BNS Holding, Inc. acquired all of the Company’s outstanding shares. In conjunction with the financing of the BNS Holding, Inc. transaction, the Company guaranteed approximately $14,000,000 of BNS Holding Inc.’s outstanding debt. This debt and accrued interest was paid in full in September 2011.

Sun Well had a note receivable due from a prior shareholder in the amount of $225,000 as of February 2, 2011. The note was non-interest bearing and was due on demand. Payment of this note was received in June 2011.

Note 12.

Commitments

In May 2011, the Company entered into an agreement with a construction contractor to build a new headquarters and shop building for an estimated price of $5.0 million. The building was completed in February 2012. As of December 31, 2011, the Company had spent $4.2 million on the new building, which was included in Assets in Progress.

Note 13.

Supplemental Cash Flows Information

During the report period ended December 31, 2011, the Company purchased $968,904 of property and equipment through capital lease obligations.

As of December 31, 2011, the Company’s accounts payable and accrued expenses included property and equipment purchases of $504,055.

Note 14.

Subsequent Events

On January 20, 2012, the Company agreed to sell its tubular testing fixed assets and business for $1,000,000 cash. These assets are included in Equipment in Note 4 with a net book value of $729,244. The sale was finalized in May 2012.

EX-99.4 7 ex99-4.htm EXHIBIT 99.4 ex99-4.htm

Exhibit 99.4

SWH, INC.

AND SUBSIDIARY

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE PERIOD ENDED

MARCH 31, 2012

SWH, Inc. and Subsidiary

TABLE OF CONTENTS

	Page

Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011	1

Consolidated Statements of Earnings for the quarter ended March 31, 2012, the period from January 1 to February 2, 2011 and the period from February 2 to March 31, 2011	2

Consolidated Statement of Equity for the quarter ended March 31, 2012	3

Consolidated Statements of Cash Flows for the quarter ended March 31, 2012, the period from January 1 to February 2, 2011 and the period from February 2 to March 31, 2011	4

Notes to Consolidated Financial Statements	5

SWH, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

March 31, 2012 and December 31, 2011

(Unaudited)

	March 31, 2012		December 31, 2011

ASSETS
Current Assets:
Cash and cash equivalents	$	3,832,413	$	2,274,939
Accounts receivable		7,732,000		7,223,240
Prepaid expenses and other current assets		678,686		348,330
Income tax receivable		569,094		566,292
Deferred income taxes		53,755		53,755
Total current assets		12,865,948		10,466,556

Property and equipment, net		28,178,007		26,081,846
Goodwill		24,836,817		24,836,817
Intangible assets, net		8,383,836		8,513,986
Deferred financing costs, net		752,647		810,542

TOTAL ASSETS	$	75,017,255	$	70,709,747

LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES
Current Liabilities:
Line of credit	$	1,000,000	$	-
Accounts payable and accrued expenses		2,516,773		2,931,933
Note payable, current portion		4,000,000		4,000,000
Capital lease obligation, current portion		400,000		400,000
Total current liabilities		7,916,773		7,331,933

Phantom stock liability		1,866,343		1,009,723
Note payable, net of current portion		14,000,000		14,000,000
Capital lease obligation, net of current portion		1,288,748		1,386,753
Deferred income taxes		10,384,348		10,384,348
Total liabilities		35,456,212		34,112,757

Commitments and contingencies

SHAREHOLDER'S EQUITY:
Common stock, $0.001 par value, 51,100 authorized, 12,775 issued and outstanding		13		13
Additional paid-in capital		28,300,950		27,332,950
Retained earnings		11,260,080		9,264,027
Total shareholder's equity		39,561,043		36,596,990

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY	$	75,017,255	$	70,709,747

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Quarter Ended March 31, 2012, the Period From January 1 to February 2, 2011

and the Period From February 2, 2011 to March 31, 2011

(Unaudited)

				Period From			Period From
				January 1 to			February 2 to
	Quarter Ended			February 2,			March 31,
	March 31, 2012			2011			2011
	(Successor)			(Predecessor)			(Successor)

Net revenues	$	12,361,489		$	2,577,457		$	5,078,302

Cost of revenues		6,548,454			1,490,669			2,919,312

Gross margin		5,813,035			1,086,788			2,158,990

Selling, general and administrative expenses		2,368,769			263,746			506,498

Income (loss) from operations		3,444,266			823,042			1,652,492

Other income (expense):
Other income		1,380			387,439			3,032
Other expense		-			(1,853,827	)		-
Interest expense		(191,593	)		(117,254	)		(7,921	)
Total other income (expense)		(190,213	)		(1,583,643	)		(4,889	)

Income (loss) before provision for income taxes		3,254,053			(760,601	)		1,647,603

Provision for income taxes		1,258,000			(268,053	)		74,712

Net income (loss)	$	1,996,053		$	(492,548	)	$	1,572,891

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF EQUITY

For the Quarter Ended March 31, 2012

(Unaudited)

	Common Stock				Additional Paid-in		Retained
	Shares		Amount		Capital		Earnings		Total

Balance, December 31, 2011		12,775	$	13	$	27,332,950	$	9,264,027	$	36,596,990

Capital contribution		-		-		968,000		-		968,000

Net income		-		-		-		1,996,053		1,996,053

Balance, March 31, 2012		12,775	$	13	$	28,300,950	$	11,260,080	$	39,561,043

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Quarter Ended March 31, 2012, the Period from January 1 to February 2, 2011

and the Period from February 2 to March 31, 2011

(Unaudited)

				Period From			Period From
				January 1 to			February 2 to
	Quarter Ended			February 2,			March 31,
	March 31, 2012			2011			2011
	(Successor)			(Predecessor)			(Successor)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,996,053		$	(492,548	)	$	1,572,891
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		716,377			659,222			393,083
Amortization of deferred financing costs		57,896			-			-
Amortization of deferred gain		-			(386,623	)		-
Phantom stock expense		856,620			-			-
Deferred income taxes		-			116,000			(32,952	)
Change in operating assets and liabilities:
Restricted cash		-			(2,347,026	)		-
Accounts receivable		(508,760	)		(416,688	)		33,227
Prepaid expenses and other current assets		(330,356	)		(370,333	)		68,892
Income tax receivable/payable		(790,159	)		(384,053	)		107,664
Accounts payable and accrued expenses		1,340,198			1,278,721			1,258,047
Net cash provided by (used in) operating activities		3,337,869			(2,343,328	)		3,400,852

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(2,682,389	)		(78,449	)		(1,523,666	)
Restricted cash		-			-			(1,572,508	)
Net cash used in investing activities		(2,682,389	)		(78,449	)		(3,096,174	)

CASH FLOWS FROM FINANCING ACTIVITIES
Additional capital contributed		-			13,736,416			-
Repayments on capital lease obligations		(98,005	)		-			-
Proceeds from line of credit		1,000,000			-			1,179,298
Repayments on long-term financing		-			(11,276,489	)		-
Net cash provided by financing activities		901,995			2,459,927			1,179,298

Net increase in cash and cash equivalents		1,557,475			38,150			1,483,976

Cash and cash equivalents, beginning of period	$	2,274,939			2,115,019			2,153,169

Cash and cash equivalents, ending of period	$	3,832,414		$	2,153,169		$	3,637,145

Supplemental Cash Flows Information:

Interest expense paid in cash	$	152,128		$	7,400		$	116,700

See accompanying Notes to Consolidated Financial Statements.

SWH, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation – The Company was acquired by BNS Holding, Inc. on February 2, 2011. These financial statements present the Company’s financial condition and results of operations of the successor since this change of control through March 31, 2012 and of the predecessor for the period from January 1 to February 2, 2011. Accordingly, the results of operations presented include the quarter ended March 31, 2012, the period from January 1 to February 2, 2011 and the period from February 2 to March 31, 2011 (the “report periods”). The December 31, 2011 consolidated balance sheet was derived from audited financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Cash Equivalents – Cash equivalents include time deposits, money market mutual funds, and all highly liquid instruments with original maturities of three months or less.

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.

Note 1 (Continued)

Accounts Receivable – Accounts receivable are carried at the original invoice amount. Management determines the allowance for doubtful accounts by regularly evaluating the current economic climate and each individual customer’s receivables, credit history, and financial condition. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. An account is considered past due if any portion of the receivable balance is outstanding for more than 30 days. Interest is not charged on past due accounts. As of March 31, 2012, management believes its accounts receivable are collectible. Therefore, it has not provided an allowance for doubtful accounts.

Property and Equipment – Property and equipment is stated at cost. As a result of the business combination at February 2, 2011, all property and equipment was adjusted to fair market value, thus resetting accumulated depreciation to $0 as of the date of the acquisition. Property and equipment additions since the acquisition date are stated at cost. Depreciation is computed using the straight-line method and the following estimated lives:

Equipment	2 to 15 years
Vehicles	4 years
Office equipment	5 years

Trade names are also not amortized, but are evaluated for impairment on an annual basis or whenever an impairment indicator is identified. The Company has concluded that no impairment existed at March 31, 2012.

Note 1 (Continued)

Favorable lease	2 years
Non-compete agreements	5 years
Customer relationships	10 years

Revenue Recognition – The Company’s well servicing and workover services are generally short-term in nature and revenue is recognized upon completion of each service.

Advertising – Advertising costs are expensed as incurred. Advertising expenses included in “Selling, general and administrative expenses” were $26,069, $8,690 and $6,671 for the report periods ended March 31, 2012, February 2, 2011 and March 31, 2011, respectively.

Sales Taxes – The Company presents its revenues net of any sales taxes collected from its customers that are required to be remitted to local or state governmental taxing authorities.

Income Taxes – The Company files consolidated income tax returns with its parent company.

Note 2.

Recent Accounting Pronouncements

In June 2011, FASB issued guidance that requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. Under the continuous statement approach, the statement would include the components and total of net income, the components and total of other comprehensive income, and the total of comprehensive income. Under the two statement approach, the first statement would include the components and total of net income and the second statement would include the components and total of other comprehensive income and the total of comprehensive income. This guidance does not change the items that must be reported in other comprehensive income and is effective retrospectively for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have a material effect on the Company’s financial statements.

Note 3.

Step-Up of Financial Statements

On February 2, 2011 the Company was acquired by BNS Holding, Inc. for an aggregate purchase price of $50,463,698 in cash. Due to the change of control, the Company elected to establish a new basis of accounting and, therefore, stepped up its assets and liabilities to their fair values for the period from February 2, 2011 to March 31, 2012.

	Historical Balances		Step-Up Adjustments		Fair Value Balances
	(Unaudited)

Current assets	$	8,065,720	$	-	$	8,065,720
Property and equipment		18,146,928		110,714		18,257,642
Goodwill		18,177,999		6,658,818		24,836,817
Intangible assets		-		8,991,205		8,991,205
Other assets		2,572,026		-		2,572,026
Total assets	$	46,962,673	$	15,760,737	$	62,723,410

Current liabilities	$	2,559,609	$	-	$	2,559,609
Capital lease obligations		1,106,374		-		1,106,374
Deferred income taxes		5,135,000		3,458,729		8,593,729
Shareholder's equity		38,161,690		12,302,008		50,463,698
Total liabilities and shareholder's equity	$	46,962,673	$	15,760,737	$	62,723,410

Note 4.

Property and Equipment

The Company’s property and equipment as of March 31, 2012 is summarized below:

	Cost		Accumulated Depreciation			Net

Equipment	$	22,976,932	$	(2,219,346	)	$	20,757,586
Building		4,864,510		(10,684	)		4,853,826
Land and improvements		1,038,428		(200	)		1,038,228
Vehicles		772,414		(238,256	)		534,158
Office equipment		225,868		(30,094	)		195,774
Assets in progress		798,435		-			798,435

Property and equipment, net	$	30,676,587	$	(2,498,580	)	$	28,178,007

The Company’s property and equipment as of December 31, 2011 is summarized below:

	Cost		Accumulated Depreciation			Net

Equipment	$	22,045,669	$	(1,834,527	)	$	20,211,142
Vehicles		663,934		(60,053	)		603,881
Office equipment		85,760		(20,865	)		64,895
Assets in progress		5,201,928		-			5,201,928

Property and equipment, net	$	27,997,291	$	(1,915,445	)	$	26,081,846

Depreciation expense for the report periods ended March 31, 2012, February 2, 2011 and March 31, 2011 was $586,227, $163,742 and $311,316, respectively. The assets in progress at March 31, 2012 consist of payments towards a new rig while the assets in progress at December 31, 2011 were the Company’s new building, which was completed in February 2012.

Note 5.

Intangible Assets

The following is a summary of the Company’s intangible assets as of March 31, 2012:

	Cost		Accumulated Amortization			Net

Trade name	$	4,990,000	$	-		$	4,990,000
Customer relationships		3,220,000		(375,666	)		2,844,334
Non-compete agreements		640,000		(149,333	)		490,667
Favorable lease		141,205		(82,370	)		58,835

	$	8,991,205	$	(607,369	)	$	8,383,836

Note 5 (Continued)

The following is a summary of the Company's intangible assets as of December 31, 2011:

	Cost		Accumulated Amortization			Net

Trade name	$	4,990,000	$	-		$	4,990,000
Customer relationships		3,220,000		(295,167	)		2,924,833
Non-compete agreements		640,000		(117,333	)		522,667
Favorable lease		141,205		(64,719	)		76,486

	$	8,991,205	$	(477,219	)	$	8,513,986

Amortization expense of intangible assets for the report periods ended March 31, 2012 and 2011 was $130,150 and $81,767, respectively. There were no intangible assets requiring amortization for the report period ended February 2, 2011.

Estimated aggregate future amortization expenses for the next five years for the intangible assets are as follows:

For the year ending December 31:
2012 (remaining 9 months)	$	390,454
2013		455,883
2014		450,000
2015		450,000
2016		332,667

Note 6.

Capital and Operating Lease Obligations

The Company leases certain equipment under capital lease obligations. The following is a schedule of the future annual minimum payments for these leases as of March 31, 2012:

For the year ending December 31:
2012 (remaining 9 months)	$	378,158
2013		488,815
2014		458,026
2015		458,026
2016		141,756
Total minimum lease payments		1,924,781
Less amount representing interest		(236,033	)

Present value of net minimum lease payments		1,688,748
Less current portion		(400,000	)

Capital lease obligations, net of current portion	$	1,288,748

Note 6 (Continued)

For the year ending December 31:
2012 (remaining 9 months)	$	90,000
2013		10,000

Total future minimum operating lease payments	$	100,000

Note 7.

Note Payable

Sun Well borrowed $20,000,000 on the term loan in July 2011 and has made $2,000,000 in scheduled principal payments through March 31, 2012. Borrowings under the revolving loan, which are determined based on eligible accounts receivable, mature on June 30, 2015. There is a $1,000,000 balance on the revolving line of credit as of March 31, 2012. Under the agreement, Sun Well is subject to certain financial covenants. As of March 31, 2012, Sun Well was in compliance with all such covenants.

The future principal payments due on the notes payable are as follows:

For the year ending December 31:
2012 (remaining 9 months)	$	4,000,000
2013		4,000,000
2014		4,000,000
2015		6,000,000

	$	18,000,000

Note 8.

Income Taxes

In March 2011, the Company and BNS Holding, Inc. entered into a tax-sharing agreement where the Company will be included in both the Federal and State tax returns of BNS Holding, Inc. This agreement defines the methodology for determining the amount of current taxes due by each of the parties as a result of the Company being included in the consolidated tax returns of BNS Holding, Inc. The Company’s tax expense was determined as if separate tax returns were to be filed. The tax sharing agreement does not require intercompany reimbursement or settlement of tax benefits related to filing a consolidated tax return. Accordingly, the cash flow benefits realized by the Company, as a result of filing the consolidated tax returns, are recorded as additional paid-in capital. Any tax expense incurred by the Company, after benefits of the tax-sharing agreement, will be paid by the Company.

Note 9.

Phantom Stock Plan

Note 9 (Continued)

The board has authorized a total of 8,500 phantom shares to be issued under the Phantom Plan. At March 31, 2012, 7,700 shares were outstanding, all of which were 33% vested. The value of the vested shares at March 31, 2012 has been estimated at $1,866,343, using the formula as defined in the Phantom Plan.

Note 10.

Related Party Transactions

Beginning in April 2011, the Company began using the resources of BNS Holding, Inc. for management and related services and pays a monthly fee of $30,000 for such services. For the quarter ended March 31, 2012, the Company has paid $90,000 for these services.

The Company’s chief executive officer is a consultant that is also an employee of an affiliate of SPH Group LLC. He received $33,000 and $10,000 for his services during the report periods ended March 31, 2012 and 2011.

Note 11.

Commitments

Note 12.

Subsequent Events

As a result of the Company’s sale to Steel Excel, Inc., the Phantom Plan was amended to remove the EBITDA performance targets required for vesting of the shares and to provide that the cash payment for vested shares be based on the per share consideration received by the shareholders of BNS Holding Inc. for the sale of the Company

In June of 2012, the Company signed a contract to commence construction on a building to be rented to a related party through common ownership. The total contract price is $552,751.

EX-99.5 8 ex99-5.htm EXHIBIT 99.5 ex99-5.htm

Exhibit 99.5

Unaudited Pro Forma Condensed Combined Financial Information

of Steel Excel Inc. and SWH, Inc.

This exhibit provides the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2011 and the three months ended March 31, 2012, giving effect to the acquisition of SWH by Steel Excel, as if it had been completed on January 1, 2011. A pro forma balance sheet as of March 31, 2012 has not been presented herein since the historical balance sheet of Steel Excel as of June 30, 2012 included in Steel Excel’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2012, already reflects the acquisition of SWH.

The unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Steel Excel and SWH. SWH was acquired by BNS on February 2, 2011. The historical financial statements of SWH through February 2, 2011 are considered those of the Predecessor, while the historical financial statements of SWH subsequent to February 2, 2011 are considered those of the Successor to reflect the difference basis of accounting resulting from the push down of the fair value of the assets acquired and liabilities assumed as of the acquisition date by BNS. There were no intercompany balances or transactions between Steel Excel and SWH for the periods presented in these unaudited pro forma condensed combined financial statements.

The acquisition is reflected in the unaudited pro forma condensed combined financial statements according to the acquisition method required by the Financial Accounting Standard Board’s Accounting Standard Codification Topic 805, Business Combinations (“ASC 805”). Under the acquisition method, the acquisition-date fair value of consideration transferred to effect the transactions, as described in Note 2, is allocated to the assets acquired and liabilities assumed based on their fair values. Steel Excel has made significant estimates and assumptions in determining the fair value of non-cash consideration and the preliminary allocation of the acquisition consideration in the unaudited pro forma condensed combined financial statements. These estimates are based on key assumptions of the acquisition. Due to the fact that the unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates, the final amounts recorded may differ materially from the information presented. The initial estimate of acquisition consideration and allocation of the consideration are subject to change based on further review of the fair value of the assets acquired and liabilities assumed. In accordance with ASC 805, any subsequent changes to the acquisition consideration allocation during the acquisition measurement period that result in material changes to our consolidated financial statements will be adjusted retrospectively.

These unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements, and are prepared by management only for informational purposes in accordance with Article 11 of Regulation S-X and are not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor are they indicative of future operating results. The unaudited pro forma condensed combined financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition and also do not include any integration costs or any additional expenses that may be incurred.

STEEL EXCEL INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS1

FOR THE YEAR ENDED DECEMBER 31, 2011

(in thousands, except per share data)

				SWH, Inc.
	Steel			Period From January 1 to February 2, 2011			Period from February 2 to December 31, 2011			Pro Forma				Pro Forma
	Excel Inc.			(Predecessor)			(Successor)			Adjustments				Combined

Net revenues	$	2,593		$	2,578		$	32,984		$	-			$	35,577
Cost of revenues		1,477			1,491			18,201			3,829		Y1		23,507

Gross margin		1,116			1,087			14,783			(3,829	)			12,070

Operating expenses:
Selling, general and administrative		9,944			264			6,185			5,925		Y2		22,054
Restructuring charges		(31	)		-			-			-				(31	)
Total operating expenses		9,913			264			6,185			5,925				22,023

Income (loss) from continuing operations		(8,797	)		823			8,598			(9,754	)			(9,953	)

Interest and other income (expense), net		8,353			(1,584	)		(498	)		-				7,855

Income (loss) from continuing operations before taxes		(444	)		(761	)		8,100			(9,754	)			(2,098	)

(Provision for) benefit from income taxes		226			268			(3,232	)		2,639		Y3		(367	)

Income (loss) from continuing operations, net of taxes		(218	)		(493	)		4,868			(7,115	)			(2,465	)

Income from discontinued operations, net of taxes		1,910			-			-			-				1,910
Gain on disposal of discontinued operations, net of taxes		5,005			-			-			-				5,005
Net income from discontinued operations, net of taxes		6,915			-			-			-				6,915

Net income (loss)		6,697			(493	)		4,868			(7,115	)			4,450

Net loss attributable to non-controlling interest		(72	)		-			-			-				(72	)

Net income (loss) attributable to Steel Excel Inc.	$	6,769		$	(493	)	$	4,868		$	(7,115	)		$	4,522

Basic income per share:
Income from continuing operations, net of taxes	$	(0.02	)											$	(0.19	)
Net income from discontinued operations, net of taxes	$	0.64												$	0.54
Net income attributable to Steel Excel Inc.	$	0.62												$	0.35

Diluted income per share:
Income from continuing operations, net of taxes	$	(0.02	)											$	(0.19	)
Net income from discontinued operations, net of taxes	$	0.63												$	0.54
Net income attributable to Steel Excel Inc.	$	0.62												$	0.35

Shares used in computing income (loss) per share:
Basic		10,882									2,027		Y4		12,909
Diluted		10,897									2,027		Y4		12,924

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

(1)	Assumes acquisition date of January 1, 2011.

STEEL EXCEL INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS1

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(in thousands, except per share data)

	Steel Excel Inc.			SWH, Inc. (Successor)			Pro Forma Adjustments				Pro Forma Combined

Net revenues	$	14,807		$	12,361		$	-			$	27,168
Cost of revenues		9,063			6,548			960		Q1		16,571

Gross margin		5,744			5,813			(960	)			10,597

Operating expenses:
Selling, general and administrative		7,845			2,369			496		Q2		10,710

Income (loss) from operations		(2,101	)		3,444			(1,456	)			(113	)

Interest and other income (expense), net		(229	)		(190	)		-				(419	)

Income (loss) before income taxes		(2,330	)		3,254			(1,456	)			(532	)

(Provision for) benefit from income taxes		(138	)		(1,258	)		1,233		Q3		(163	)

Net income (loss)		(2,468	)		1,996			(223	)			(695	)

Net loss attributable to non-controlling interest		(580	)		-			-				(580	)

Net income (loss) attributable to Steel Excel Inc.	$	(1,888	)	$	1,996		$	(223	)		$	(115	)

Income (loss) per share attributable to Steel Excel Inc.:
Basic	$	(0.17	)								$	(0.01	)
Diluted	$	(0.17	)								$	(0.01	)

Shares used to compute income (loss) per share:
Basic		10,891						2,027		Q4		12,918
Diluted		10,891						2,027		Q4		12,918

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

(1)	Assumes acquisition date of January 1, 2011.

STEEL EXCEL INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1.	Description of the Transaction and Basis of Presentation

The acquisition is reflected in the unaudited pro forma condensed combined financial statements according to the acquisition method required by the Financial Accounting Standard Board’s Accounting Standard Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Under the acquisition method, the acquisition-date fair value of consideration transferred to effect the transactions, as described in Note 2, is allocated to the assets acquired and liabilities assumed based on their fair values. Steel Excel has made significant estimates and assumptions in determining the fair value of non-cash consideration and the preliminary allocation of the acquisition consideration in the unaudited pro forma condensed combined financial statements. These estimates are based on key assumptions of the acquisition. Due to the fact that the unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates, the final amounts recorded may differ materially from the information presented. The initial estimate of acquisition consideration and allocation of the consideration are subject to change based on further review of the fair value of the assets acquired and liabilities assumed. In accordance with ASC 805, any subsequent changes to the acquisition consideration allocation during the acquisition measurement period that result in material changes to our consolidated financial statements will be adjusted retrospectively.

The unaudited pro forma condensed combined financial statements, which combine the historical operating results of Steel Excel and SWH for the year ended December 31, 2011 and the three months ended March 31, 2012, with pro forma adjustments, assume the acquisition was completed on January 1, 2011. SWH was previously acquired by BNS on February 2, 2011. As such, SWH’s audited historical financial statements for the year ended December 31, 2011 include a statement of operations of the Predecessor for the period January 1 through February 2, 2011 and a statement of operations of the Successor for the period February 2 through December 31, 2011. A pro forma balance sheet as of March 31, 2012 has not been presented herein since the historical balance sheet of Steel Excel as of June 30, 2012 included in Steel Excel’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2012, already reflects the acquisition of SWH.

Under ASC 805, acquisition-related costs (such as advisory, legal, valuation and other professional fees) that are not expected to recur are not included as a component of consideration transferred and are excluded from the unaudited pro forma condensed combined statements of operations. Steel Excel expects to incur total acquisition-related costs of approximately $1.2 million.

The pro forma adjustments are based on information available as of the date of this report. The unaudited pro forma condensed combined financial statements also do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition. The pro forma adjustments are based on information available as of the date of this report and are described in the accompanying notes.

The unaudited pro forma condensed combined statements of operations are not necessarily indicative of what the actual results of operations would have been had the acquisition taken place on the date indicated, nor are they indicative of the future consolidated results of operations of the combined companies. They should be read in conjunction with the historical consolidated financial statements and the notes thereto of Steel Excel and SWH.

2.	Acquisition Consideration and Estimated Fair Value of Assets Acquired and Liabilities Assumed

Total consideration transferred for Steel Excel to acquire SWH was $62.7 million, comprised of cash of $7.9 million and 2,027,500 shares of its common stock (provisionally valued at $27 per share).

The preliminary estimate of non-consideration and allocation of the consideration transferred to the tangible and intangible assets acquired and liabilities assumed is based on various preliminary estimates. Since these unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates, the actual amounts recorded for the acquisition may differ from the information presented.

For the purpose of the Pro Forma Financial Data, Steel Excel has made a preliminary estimated allocation of the consideration to the assets acquired and liabilities assumed as follows:

	Allocation of
	Consideration
	Transferred

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		(6,074	)
Long-term debt		(16,000	)
Capital lease obligations		(1,622	)
Deferred tax liabilities		(5,510	)
Total net identifiable assets		39,135

Goodwill		23,529

Net assets acquired	$	62,664

Details of acquired definite-lived intangibles are as follows (in thousands, except for years):

	Intangible Fair Value Acquired		Useful Life (in Years)		First Year Amortization

Trade name	$	3,200		5	$	1,280
Customer relationships		24,100		10		4,820
	$	27,300			$	6,100

Weighted average life of intangibles				9.4

The amortization of the definite-lived identifiable intangible assets on an accelerated basis for the first five years after acquisition and thereafter is as follows (in thousands):

	Amortization Expense
For the year ended December 31:
2011	$	6,100
2012		4,624
2013		3,492
2014		2,917
2015		2,334
Thereafter		7,833
	$	27,300

Identifiable Intangible Assets – Trade name is primarily related to the Sun Well Service, Inc. (“Sun Well”) name, which is SWH’s sole business. Sun Well 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. Customer relationships represent existing contracted relationships with oil and exploration companies. The trade name and customer relationships will be amortized on an accelerated basis over their estimated useful lives, which management believes is the best representation of their expected impact on related cash flows.

The estimated fair values of the trade name and customer relationships were primarily determined using either the relief-from-royalty or excess earnings methods. The rates utilized to discount net cash flows to their present values were determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows.

The acquisition will be treated for tax purposes as a non-taxable transaction and, as such, the historical tax bases of the acquired assets and assumed liabilities, net operating losses, and other tax attributes of SWH will carryover. As a result, no new tax-deductible goodwill will be created in connection with the acquisition as there is no step-up to fair value of the underlying tax bases of the acquired net assets. Acquisition accounting includes the establishment of net deferred tax assets and liabilities resulting from book-tax basis differences related to assets acquired and liabilities assumed on the date of acquisition.

Goodwill – Approximately $23.5 million has been allocated to goodwill. Goodwill represents the excess of the consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets acquired. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event our management determines that the value of goodwill has become impaired, we may incur an accounting charge for the amount of impairment during the quarter in which the determination was made. We believe the growth potential of SWH along with the expected synergies with Steel Excel’s other oilfield services businesses support the amount of goodwill recorded.

3.	Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the acquisition and has been prepared for informational purposes only. The unaudited pro forma condensed combined financial information is based upon the historical consolidated financial statements of Steel Excel and SWH and should be read in conjunction with the historical financial statements of Steel Excel and SWH.

The pro forma adjustments included in the unaudited pro forma condensed combined statements of operations are as follows:

		Adjustments Twelve-Month Period Ended December 31, 2011				Three Months Ended March 31, 2012
		(in thousands)
Cost of revenues
To eliminate historical step-up depreciation of fixed assets		$	109			$	30
To record step-up depreciation of fixed assets acquired			3,720				930
	Y1	$	3,829		Q1	$	960

Selling, general and administrative expenses
To eliminate historical amortization of intangible assets		$	(477	)		$	(130	)
To record amortization of acquired intangible assets			6,100				1,156
To eliminate historical step-up depreciation of fixed assets			(37	)			(10	)
To eliminate historical phantom stock expense based on EBITDA			(1,009	)			(857	)
To record phantom stock expense based on fixed value			1,348				337
	Y2	$	5,925		Q2	$	496

(Provision for) benefit from income taxes
To adjust income taxes to reflect estimated effective tax rate	Y3	$	2,639		Q3	$	1,233

Shares used in computing income (loss) per share:
To reflect shares issued as consideration in acquistion	Y4		2,027		Q4		2,027