NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
1.
|
Business and Basis of Presentation
|
Union Drilling, Inc. (Union Drilling, Company or we) provides contract land drilling services and
equipment to oil and natural gas producers in the United States. The accompanying unaudited condensed financial statements relate solely to the accounts of Union Drilling, Inc. The interim period condensed financial statements, including the notes
thereto, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for a full year. These interim period condensed financial statements should be read in conjunction
with the financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
To conform
to the presentation of the September 30, 2012 statement of cash flows, certain balances have been reclassified on the comparative September 30, 2011 statement.
On September 24, 2012, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Sidewinder Drilling Inc. (Sidewinder) and Fastball Acquisition Inc.
(Fastball), a wholly-owned subsidiary of Sidewinder, under which Sidewinder will acquire all of the Companys outstanding shares of common stock for $6.50 per share. The merger is expected to be consummated during the fourth quarter
of 2012. On October 5, 2012, a tender offer was filed with the Securities and Exchange Commission by Sidewinder, detailing the purchase of the Company. The tender offer is set to expire at 12:00 midnight (New York time) at the end of the day on
November 2, 2012, unless the tender offer is extended.
The Merger Agreement contains representations and warranties and covenants
customary for a transaction of this nature, including a covenant of the Company to conduct its business in the ordinary course and not to take certain specified actions prior to consummation of the merger. The Merger Agreement can also be terminated
by us or Sidewinder under certain other circumstances. In connection with certain terminations, we will be required to pay Sidewinder a termination fee equal to $5.0 million, and in connection with certain other terminations, Sidewinder will be
required to pay us a termination fee equal to $10.0 million. Additionally, the Company will be required to pay the reasonable expenses of Sidewinder in an amount not to exceed $2.0 million in connection with certain terminations.
Beginning on October 3, 2012, two putative class action lawsuits were filed in the District Court of Tarrant County, Texas against the Company, its
board of directors, Sidewinder and Fastball challenging the proposed transaction. The two actions, which have been consolidated under the caption
In re Union Drilling, Inc. Shareholder Litigation
, Cause No. 342-262036-12 (the
Consolidated Action), allege that the Company's board of directors breached their fiduciary duties to the public shareholders of the Company by approving the proposed transaction and by failing to take steps to maximize the value of the
Company, and that the Company, Sidewinder, and Fastball aided and abetted such breaches. The actions also allege that the Schedule 14D-9 filed by the Company on October 5, 2012 omitted certain material information. On October 18,
2012, the parties to the Consolidated Action reached an agreement in principle providing for the settlement of the action on the terms and conditions set forth in a memorandum of understanding, dated October 18, 2012 (the
MOU). Pursuant to the MOU, the defendants made and publicly filed certain supplemental disclosures in an amendment to the Schedule 14D-9 in exchange for dismissal of the Consolidated Action on the merits and a customary release of
defendants. The proposed settlement is conditioned on, among other things, consummation of the proposed transaction, completion of certain confirmatory discovery, class certification, and final approval by the Court following notice to the
Companys shareholders.
5
On October 19, 2012, another purported stockholder of the Company filed a lawsuit in the United States
District Court for the Northern District of Texas, captioned
Lewis. v. O'Neill
, No: 3:12-cv-04213-G, against the same defendants who are named in the Consolidated Action. The lawsuit filed in federal court contains similar allegations as
set forth in the Consolidated Action, and asserts individual and class action claims under state law and the Securities Exchange Act of 1934.
On October 24, 2012, the parties to the federal action filed an agreed motion to stay that
action pending the outcome of the final settlement hearing in the Consolidated Action. It is possible that other similar lawsuits may be filed, and following the consummation of the merger, would be the successor companys liability.
During the three and nine months ended September 30, 2012, we incurred $1.4 million and $1.7 million of acquisition-related expenses
that have been included in general and administrative expenses in the accompanying condensed statements of operations.
We periodically assess
the need for an impairment of our property, buildings and equipment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We performed an impairment test at September 30, 2012, to determine
whether our carrying value exceeds the estimated undiscounted future cash flows. Cash flows under a held and used methodology were estimated by management considering factors such as expectations of future industry trends and the impact on dayrates,
utilization and operating expenses; historical performance of the asset; the remaining expected life of the asset; any cash investment required to make the asset more marketable; suitability, specification and size of the rig; and terminal value, as
well as overall competitive dynamics. No impairment was required for the three and nine months ended September 30, 2012. Use of different assumptions could result in an impairment charge.
6
2.
|
Recent Accounting Pronouncements
|
In June 2011, ASU No. 2011-05,
Comprehensive Income (Topic 220);
was issued. ASU
No. 2011-05 is intended to create consistency between U.S. GAAP and International Financial Reporting Standards (IFRS) on the definition of comprehensive income, and how to present comprehensive income. Under ASU No. 2011-5,
for companies that report items of other comprehensive income, there is a requirement to present comprehensive income along with net income in either a single continuous statement or two separate but consecutive statements. Effective January 1,
2012, we adopted ASU No. 2011-05 which did not have an impact to our financial position or results of operation. There were no differences between comprehensive income (loss) and reported net income (loss) in the periods presented.
3.
|
Fair Value Measurement
|
The Fair Value Measurements and Disclosures Topic of the FASB Codification utilizes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
|
|
Level 1:
|
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
|
|
|
Level 2:
|
|
Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs;
|
|
|
Level 3:
|
|
Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or
liabilities.
|
We use the following methods and assumptions in estimating our fair value disclosures for financial instruments. The
carrying amount of cash and cash equivalents approximates fair value due to the short-term maturity of these instruments. For accounts and other receivables, accounts payable, financed insurance premiums and accrued liabilities, we believe that
recorded amounts approximate fair value due to the relatively short maturity period. Further, the pricing mechanisms in our debt agreements combined with the short-term nature of the equipment financing arrangements result in the carrying values of
these obligations approximating their respective fair values.
We do not have any financial instruments for which estimates of fair value
utilize Level 3 inputs.
7
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Billed receivables
|
|
$
|
38,709
|
|
|
$
|
45,320
|
|
Unbilled receivables
|
|
|
860
|
|
|
|
1,743
|
|
Reserve for sales credits
|
|
|
(148
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
39,421
|
|
|
|
46,796
|
|
Allowance for doubtful accounts
|
|
|
(538
|
)
|
|
|
(1,409
|
)
|
|
|
|
|
|
|
|
|
|
Net receivables
|
|
$
|
38,883
|
|
|
$
|
45,387
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables represent recorded revenue for contract drilling services performed that is billable by the Company at future
dates based on contractual payment terms, and is anticipated to be billed and collected in the quarter following the balance sheet date.
5.
|
Related Party Transactions
|
On March 9, 2012, we entered into a six month drilling contract with Jones Energy, Ltd. (Jones), an entity in which
Metalmark Capital LLC has an equity ownership interest. Two managing directors of Metalmark Capital LLC are members of our Board of Directors and also serve on Jones Board of Directors. This drilling contract, which ended September 20,
2012, resulted in $958,000 and $2.7 million of revenue for the three and nine months ended September 30, 2012, respectively. The related accounts receivable balance with Jones at September 30, 2012, was $725,000.
6.
|
Property, Buildings and Equipment
|
Major classes of property, buildings and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Land
|
|
$
|
1,935
|
|
|
$
|
1,935
|
|
Buildings
|
|
|
3,058
|
|
|
|
2,921
|
|
Drilling and related equipment
|
|
|
478,646
|
|
|
|
448,715
|
|
Vehicles
|
|
|
15,198
|
|
|
|
12,484
|
|
Furniture and fixtures
|
|
|
190
|
|
|
|
190
|
|
Information systems
|
|
|
4,176
|
|
|
|
3,786
|
|
Leasehold improvements
|
|
|
126
|
|
|
|
126
|
|
Construction in progress
|
|
|
50,372
|
|
|
|
31,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,701
|
|
|
|
501,602
|
|
Accumulated depreciation
|
|
|
(238,709
|
)
|
|
|
(212,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
314,992
|
|
|
$
|
289,429
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2012, additions to drilling equipment included $5.9 million in payments toward three new
electric rigs, the first of which was placed into service in September 2012, the second of which was mobilizing at September 30, 2012, and the remaining rig is under construction and is expected to be delivered in November 2012. Other capital
additions for the three months ended September 30, 2012, included generators, hydraulic catwalks, and topdrives, as well as other rig upgrades and capital additions.
8
During the nine months ended September 30, 2012, additions to drilling equipment included progress
payments of $28.6 million toward the purchase and construction of four new rigs, two of which were completed and placed into service in the Fayetteville and Marcellus shales. Of the remaining two rigs, one was mobilizing as of September 30,
2012, and the remaining rig is under construction and expected to be delivered in November 2012. Other capital additions for the nine months ended September 30, 2012, included topdrives, mudpumps, generators and hydraulic catwalks, iron
roughnecks and drillpipe and collars as well as other rig upgrades and capital additions.
During the nine months ended September 30,
2012, and 2011, we capitalized $889,000 and $402,000, respectively, of interest costs incurred during the construction periods of certain drilling equipment.
7.
|
Accrued Expenses and Other Liabilities
|
A detail of accrued expenses and other liabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Payroll and bonus
|
|
$
|
3,655
|
|
|
$
|
3,900
|
|
Workers compensation
|
|
|
2,145
|
|
|
|
2,373
|
|
Medical claims
|
|
|
1,628
|
|
|
|
1,099
|
|
Deferrred revenue
|
|
|
800
|
|
|
|
1,925
|
|
Other taxes
|
|
|
1,238
|
|
|
|
483
|
|
Other
|
|
|
2,146
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,612
|
|
|
$
|
10,811
|
|
|
|
|
|
|
|
|
|
|
Other taxes include sales and use, franchise and property taxes.
On April 27, 2011, we entered into an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, for itself and
as agent for a group of lenders (Credit Facility). The Credit Facility matures April 27, 2016 and provides for a borrowing base equal to $150 million. Amounts outstanding bear interest, depending upon facility usage, at either
(i) the higher of the Federal Funds Open Rate plus 50 to 100 basis points or PNC Banks base commercial lending rate (4.0% at September 30, 2012) or (ii) LIBOR plus 225 to 275 basis points (2.7% at September 30, 2012).
Interest on outstanding loans is due monthly for domestic rate loans and at the end of the relevant interest period for LIBOR loans. Depending upon our facility usage, we are assessed an unused line fee of 25 to 50 basis points on the available
borrowing capacity, which was $45.2 million at September 30, 2012. There is a $10.0 million sublimit for letters of credit issued under the Credit Facility. We will incur a prepayment penalty if the Credit Facility is terminated prior to April
2014 unless there is a change in control, such as the acquisition of the Company by Sidewinder, as more fully discussed in Note 1. As of September 30, 2012, we had a loan balance of $100.6 million under the Credit Facility, and an additional
$4.2 million of the total capacity was utilized to support our letter of credit requirements.
In general, the Credit Facility is secured by
substantially all of our assets. The forced liquidation value of our assets serving as collateral is determined at least annually by an independent appraisal, with adjustments for acquisitions and dispositions between appraisals. The Credit Facility
contains affirmative and negative covenants and also provides for events of default typical for such an agreement. Among the affirmative covenants are requirements to maintain a specified tangible net worth. As of September 30, 2012, our actual
tangible net worth was $187.6 million compared to the required minimum tangible net worth of $159.0 million. Among the negative covenants are restrictions on major corporate transactions, incurrence of indebtedness and amendments to our
organizational documents. Events of default would include a change in control and any change in our operations or a condition which has a material adverse effect. As discussed in Note 1, the Company is expected to be acquired by Sidewinder during
the fourth quarter of 2012, and at closing, Sidewinder intends to repay all borrowings under the credit facility. As of September 30, 2012, we were in compliance with all of our covenants.
9
We use our Credit Facility to pay for rig acquisitions and for working capital requirements and it may also
be used, subject to certain conditions, to repurchase our common stock and/or pay a cash dividend. See Note 10 for discussion of our share repurchase program.
In addition, the Company has entered into various equipment-specific financing agreements with various third-party financing institutions. The terms of these agreements have initial terms ranging from 18
to 24 months. As of September 30, 2012, and December 31, 2011, the total outstanding balance under these arrangements was approximately $267,000 and $190,000, respectively, and is classified, according to payment date, in current portion
of notes payable for equipment and long-term notes payable for equipment in the accompanying balance sheets. At September 30, 2012, the stated interest rate on these borrowings is zero percent.
9.
|
Commitments and Contingencies
|
From time to time, we are a party to claims, litigation or other legal or administrative proceedings that we consider to arise in the
ordinary course of our business. While no assurances can be given regarding the outcome of these or any other pending proceedings, or the ultimate effect such outcomes may have, we do not believe we are a party to any legal or administrative
proceedings which, if determined adversely to us, individually or in the aggregate, would have a material effect on our financial position, results of operations or cash flows.
As of September 30, 2012, we have agreements with Integrated Drilling Equipment Holdings, Inc. for the construction and completion of two new electric rigs and the remaining commitment associated
with these rigs, and related equipment, along with a withhold payment for the first rig, is approximately $5.3 million.
As of September 30, 2012, the number of authorized shares of common stock was 75,000,000 shares, of which 21,398,534 were
outstanding, and 1,604,273 were reserved for future issuance through the Companys equity based plans. The number of authorized shares of preferred stock was 100,000 shares at September 30, 2012. No shares of preferred stock were
outstanding or reserved for future issuance.
On September 29, 2011, the Companys Board of Directors approved the 2011 Union
Drilling, Inc. Share Repurchase Program under which up to three million shares of the Companys outstanding common stock may be repurchased. On June 8, 2012, we suspended this repurchase program; as such, no shares were repurchased
during the three months ended September 30, 2012, and 1,749,582 shares were repurchased at an average price, including commission, of $5.25 for the nine months ended September 30, 2012.
10
11.
|
Earnings (Loss) Per Common Share
|
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding during the period. Diluted
earnings (loss) per share includes the dilutive effect of stock options and restricted stock.
The following table presents a reconciliation
of the numerators and denominators of basic earnings per share and diluted earnings per share computations for the three months ended September 30, 2012, and September 30, 2011 when the Companys stock compensation awards were not
antidilutive (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
486
|
|
|
$
|
617
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
21,398,534
|
|
|
|
23,191,345
|
|
Incremental shares from assumed conversion of stock options and RSUs
|
|
|
250,663
|
|
|
|
57,900
|
|
|
|
|
|
|
|
|
|
|
Weighted average and assumed incremental shares
|
|
|
21,649,197
|
|
|
|
23,249,245
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share have been computed by dividing net income by weighted average shares outstanding.
Diluted earnings per share have been computed by dividing net income by weighted average and assumed incremental shares.
Approximately 1,198,000 and 630,000 weighted average options and restricted stock units to purchase shares of our common stock were excluded from the
computation of diluted income per share for the three months ended September 30, 2012, and 2011, respectively, because the effect of including them would have been antidilutive.
Because we incurred a net loss in the nine months ended September 30, 2012, and September 30, 2011, basic and diluted loss per share for these periods were calculated as our net loss divided by
the weighted average shares outstanding. Approximately 1,096,000 and 630,000 weighted average options and restricted stock units to purchase shares of our common stock were excluded from the computation of diluted loss per share for the nine
months ended September 30, 2012, and 2011, respectively, because the effect of including them would have been antidilutive.
12.
|
Management Compensation
|
Equity based plans
The Company has two equity based compensation plans, the Amended and Restated 2000 Stock Option Plan and the Amended and Restated 2005 Stock Incentive
Plan. Given that more than 10 years have elapsed since the approval of the 2000 Stock Option Plan, no future stock option awards can be made under this plan. In addition to grants of incentive and non-qualified stock options to directors and
employees, restricted stock and restricted stock units may also be granted under the Amended and Restated 2005 Stock Incentive Plan.
11
For the three and nine months ended September 30, 2012, the Company recorded stock-based compensation
expense of $328,000 ($209,000, net of tax) and $975,000 ($618,000, net of tax), respectively, which is included in general and administrative expense. For the three and nine months ended September 30, 2011, the Company recorded stock-based
compensation expense of $318,000 ($207,000 net of tax) and $990,000 ($655,000 net of tax), respectively. Total unamortized stock-based compensation was $2.4 million at September 30, 2012, and will be recognized over a weighted average service
period of 2.0 years.
Stock options
. Stock options typically vest over a three or four year period and, unless earlier exercised or
forfeited, expire on the tenth anniversary of the grant date. A summary of stock option activity for the nine months ended September 30, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2012
|
|
|
895,091
|
|
|
$
|
9.80
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,000
|
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,500
|
)
|
|
$
|
6.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
915,591
|
|
|
$
|
9.70
|
|
|
|
5.3
|
|
|
$
|
359,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2012
|
|
|
749,735
|
|
|
$
|
10.46
|
|
|
|
4.8
|
|
|
$
|
293,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the nine months ended September 30, 2012 was $3.47. The fair value of
option grants is determined using the Black-Scholes option valuation model. The key input variables used in valuing these options were: risk free interest rate of 0.83%; stock price volatility of 84.97%; dividend yield of zero; and expected term of
five years. No options were granted during the three months ended September 30, 2012 and no options were granted during the three and nine months ended September 30, 2011.
New shares of common stock are issued to satisfy options exercised. No stock options were exercised during the three and nine months ended September 30, 2012. During the three and nine months ended
September 30, 2011, zero and 9,000 options, respectively, were exercised. Cash received from the exercise of options for the nine months ended September 30, 2011 was $57,000. The total intrinsic value of options exercised during the nine
months ended September 30, 2011 was $29,000.
A summary of options outstanding as of September 30, 2012, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average Years
of Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
$3.80 to $9.89
|
|
|
457,936
|
|
|
|
6.5
|
|
|
$
|
5.89
|
|
|
|
292,080
|
|
|
$
|
5.71
|
|
$12.75 to $14.62
|
|
|
457,655
|
|
|
|
4.0
|
|
|
$
|
13.50
|
|
|
|
457,655
|
|
|
$
|
13.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915,591
|
|
|
|
|
|
|
|
|
|
|
|
749,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
. Restricted stock awards consist of restricted stock unit grants of our common stock and are time vested
over three to seven years and for a certain award granted to our Chief Executive Officer (CEO) contain a performance requirement. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of
restricted stock unit awards is determined based on the closing price of our shares on the grant date. As of September 30, 2012, there was $2.0 million of total unrecognized compensation cost related to unvested restricted stock awards. The
cost is expected to be recognized over a weighted average period of 2.2 years.
12
As of September 30, 2012, 367,000 restricted stock units were outstanding, at a weighted average grant
date fair value of $12.37 per unit. No restricted stock units were granted during the three and nine months ended September 30, 2012, and no restricted stock unit awards vested. During the nine months ended September 30, 2012, 3,000
restricted stock units were forfeited at a weighted average grand date fair value of $7.10.
Of the outstanding restricted stock unit awards,
200,000 restricted stock units are subject to both performance and service criteria, of which the performance criteria for 50,000 restricted stock units were vested as of September 30, 2012.
As part of the Merger Agreement, as more fully described in Note 1, all outstanding stock options and restricted stock units will be cancelled. In
consideration for this cancellation, each option holder will receive an amount in cash, for each share of the Companys common stock subject to an option outstanding at the time of the mergers completion, equal to the product obtained by
multiplying (x) the aggregate number of shares underlying each stock option held by an option holder and (y) $6.50, less the per share exercise price for such option; each restricted stock unit holder will receive $6.50 per outstanding
restricted stock unit.
Employee retirement plan
The Company has a 401(k) plan available to all eligible employees. Company contributions to the plan are discretionary. The Company made matching cash contributions of $107,000 and $294,000 for the three
and nine months ended September 30, 2012, respectively, and $105,000 and $279,000 during the three and nine months ended September 30, 2011, respectively.
Income tax expense for the three months ended September 30, 2012, was $907,000 at an effective tax rate of 65.1% of pre-tax book
income. Income tax expense for the nine months ended September 30, 2012, was $651,000 at an effective rate of (138.5)% of pre-tax book loss. Income tax expense for the three months ended September 30, 2011, was $400,000, which represented
an effective rate of (184.3)% of pre-tax book income. Income tax benefit for the nine months ended September 30, 2011, was $2.9 million which represented an effective rate of 28.3% of pre-tax book loss. These rates differ from the statutory
rate of 35% primarily due to state income taxes, permanent book/tax differences such as those associated with the 50% deduction limitation on per diem payments for meals, and non-cash compensation.
At September 30, 2012, and December 31, 2011, we did not have any unrecognized tax benefits.
Interest and penalties related to uncertain tax positions are classified as interest expense and general and administrative expenses, respectively. There
were no interest and penalties related to uncertain tax positions for the three or nine months ended September 30, 2012. During the three and nine months ended September 30, 2011, the Company recognized interest cost reversals of $22,500
and $17,500 in interest expense, respectively, related to unrecognized tax benefits.
The Company files U.S. federal income tax returns and
income tax returns in various state jurisdictions. The tax years 2006 to 2011 remain open to examination by the major taxing jurisdictions to which we are subject. In addition, tax years 1999, 2000, 2002 and 2003 remain open due to utilized losses
in some jurisdictions.
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