<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-39205
PROSPECTUS
6,000,000 SHARES
SUPERIOR ENERGY SERVICES, INC.
[LOGO APPEARS HERE]
COMMON STOCK
----------------
Of the 6,000,000 shares of common stock, $0.001 par value per share (the
"Common Stock"), of Superior Energy Services, Inc. (the "Company") offered
hereby (the "Offering"), 3,900,000 shares are being sold by the Company and
2,100,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Common
Stock is traded on the Nasdaq National Market under the symbol "SESI." On
November 20, 1997, the last reported sales price of the Common Stock as
reported by the Nasdaq National Market was $10.125.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $10.0625 $0.50 $9.5625 $9.5625
- ------------------------------------------------------------------------------
Total (3).......... $60,375,000 $3,000,000 $37,293,750 $20,081,250
- ------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed separately to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Selling Stockholders have granted to the Underwriters an option for 30
days to purchase up to an additional 900,000 shares of Common Stock at the
Price to Public, less Underwriting Discount, solely to cover over-
allotments, if any. If such option is exercised in full, the Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $69,431,250, $3,450,000, $37,293,750 and $28,687,500,
respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made at the offices of
Johnson Rice & Company L.L.C., New Orleans, Louisiana on or about November 26,
1997.
----------------
JOINT LEAD MANAGERS
JOHNSON RICE & COMPANY L.L.C. JEFFERIES & COMPANY, INC.
GAINES, BERLAND INC.
The date of this Prospectus is November 20, 1997.
<PAGE>
[MAP OF THE COMPANY'S LOCATIONS THROUGHOUT THE GULF COAST REGION APPEARS HERE]
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information and the historical and pro forma financial statements and other
information included elsewhere in this Prospectus and incorporated herein by
reference. Unless otherwise indicated, the information in this Prospectus
assumes that there will be no exercise of the Underwriters' over-allotment
option. Unless the context indicates otherwise, references in this Prospectus
to the "Company" mean Superior Energy Services, Inc. and its subsidiaries and
predecessors. Unless otherwise indicated, the information contained herein
gives effect to the acquisitions of Fastorq, Inc., Stabil Drill Specialties,
Inc. and Sub-Surface Tools, Inc. (collectively, the "Recent Acquisitions"),
which are described herein.
THE COMPANY
GENERAL
Superior Energy Services, Inc. provides a broad range of specialized oilfield
services and equipment primarily to major and independent oil and gas companies
engaged in the exploration, production and development of oil and gas
properties offshore in the Gulf of Mexico and throughout the Gulf Coast region.
These services and equipment include the rental of specialized oilfield
equipment, oil and gas well plug and abandonment ("P&A") services, electric and
mechanical wireline services, the manufacture, sale and rental of drilling
instrumentation and the manufacture and sale of oil spill containment
equipment. Over the last two years, the Company has significantly expanded its
operations through both internal growth and strategic acquisitions. This
expansion has enabled the Company to broaden the range of products and services
that it offers to its customers and to expand its operations geographically
throughout the Gulf Coast region.
As a result of its expansion and increased demand for its services and
products, the Company has experienced significant growth in revenue, EBITDA (as
defined herein) and net income. For the nine months ended September 30, 1997,
the Company generated revenue of $33.3 million, EBITDA of $11.0 million and net
income of $5.7 million. These amounts represent increases of approximately
119%, 142% and 119%, respectively, over the comparable period in 1996. On a pro
forma basis for the nine months ended September 30, 1997, assuming all the
acquisitions completed in 1997, including the Recent Acquisitions, were
completed on January 1, 1996, the Company would have generated revenue, EBITDA
and net income of $59.1 million, $20.4 million and $8.3 million, respectively.
BUSINESS
Rental Tools. The Company manufactures, sells and rents specialized equipment
for use with offshore and onshore oil and gas well drilling, completion,
production and workover activities. The Company's rental tool inventory
includes tubulars, blowout preventers, pipe handling equipment, mills, hole
openers, stabilizers, power swivels and tongs, gauges, hoses, pumps and spools.
The Company has aggressively pursued a strategy of expansion in its rental tool
operations, both geographically and in terms of product lines. As a result of
this expansion and the Recent Acquisitions, the Company currently offers a
broad range of rental tools from 19 rental tool facilities strategically
located along the Gulf Coast from Corpus Christi, Texas to Venice, Louisiana.
On a pro forma basis for the nine months ended September 30, 1997, assuming all
the acquisitions completed in 1997, including the Recent Acquisitions, were
completed on January 1, 1996, approximately $33.3 million of revenue was
generated by the Company's rental tool operations, representing 56% of total
pro forma revenue for the period.
Plug and Abandonment Services. Oil and gas wells that are no longer producing
commercially are required by governmental authorities to be plugged and
abandoned. The Company is the leading provider of P&A services in the Gulf of
Mexico. The Company uses custom-built, skid-mounted P&A spreads that allow the
Company to
3
<PAGE>
plug and abandon a well without the presence of a drilling rig ("rig-less
P&A"). Rig-less P&A offers a cost advantage over P&A methods that require a
drilling rig, and management believes that the large majority of the wells in
the Gulf of Mexico can be plugged and abandoned using the rig-less P&A method.
In delivering its P&A services, the Company has combined both wireline and
pumping expertise, which traditionally have been provided separately, and
believes that this combined expertise gives it a competitive advantage over
many of its competitors. The Company currently operates 14 P&A crews, each of
which is comprised of four to five members, and intends to expand its number of
P&A crews to as many as 20 during 1998. On a pro forma basis for the nine
months ended September 30, 1997, assuming all the acquisitions completed in
1997, including the Recent Acquisitions, were completed on January 1, 1996,
approximately $16.7 million of revenue was generated by the Company's P&A
operations, representing 28% of total pro forma revenue for the period.
Wireline Services. The Company provides electric and mechanical wireline
services to its customer base. While the Company provides these services
primarily in connection with P&A jobs, it also provides wireline services for
non-P&A jobs such as logging and pipe recovery. The Company's wireline
personnel are trained to perform both P&A and wireline services. In the third
quarter of 1997, the Company began expanding its electric wireline capacity by
purchasing four electric wireline units that will be dedicated solely to non-
P&A operations. On a pro forma basis for the nine months ended September 30,
1997, assuming all the acquisitions completed in 1997, including the Recent
Acquisitions, were completed on January 1, 1996, approximately $3.1 million of
revenue was generated by the Company's non-P&A wireline operations,
representing 5% of total pro forma revenue for the period.
Other Services. The Company designs, manufactures and sells specialized
drilling rig instrumentation and data acquisition systems and computerized
electronic torque and pressure control equipment. The Company's torque and
pressure control equipment is used in drilling and workover operations, as well
as in the manufacture of oilfield tubular goods. The Company also sells, rents
and licenses oil spill containment equipment, including its patented inflatable
boom, to domestic and foreign oil companies, oil spill response companies and
cooperatives, the United States Coast Guard and foreign governments and their
agencies. On a pro forma basis for the nine months ended September 30, 1997,
assuming all the acquisitions completed in 1997, including the Recent
Acquisitions, were completed on January 1, 1996, approximately $5.9 million of
revenue was generated from these operations, representing 10% of total pro
forma revenue for the period.
INDUSTRY
Demand for the Company's rental tools and wireline services is primarily a
function of oil and gas exploration and workover activity in the Gulf of Mexico
and along the Gulf Coast. Over the past several years, improvements in
production techniques and seismic and drilling technology, together with
relatively stable oil and gas prices, have resulted in increased drilling
activity in the Gulf of Mexico and along the Gulf Coast. According to reports
published by Offshore Data Services, the number of offshore drilling rigs under
contract in the Gulf of Mexico has increased from approximately 130 in January
1995 to approximately 170 in October 1997. In addition, the Minerals Management
Service ("MMS") has reported that the number of offshore leases in the Gulf of
Mexico awarded to operators increased from 835 in 1995, covering approximately
4.3 million acres, to 1,836 in 1997, covering approximately 10.0 million acres.
Lease sales often serve as a precursor to drilling and exploration activity in
the Gulf of Mexico.
Demand for the Company's P&A services is primarily a function of the number
of offshore producing wells that have ceased to be commercially productive,
increased environmental awareness and the desire of oil and gas companies to
minimize abandonment liabilities. The number of depleted wells in the Gulf of
Mexico that were plugged and abandoned has grown significantly in the last two
years. According to an independent industry report, approximately 560 depleted
wells were plugged and abandoned in 1995 compared to approximately 855 in 1996.
The MMS estimated that as of September 1997, there had been approximately
34,850 well bores drilled in the Gulf of Mexico, approximately 15,800 of which
have not yet been plugged and abandoned due to the existence of oil and gas
production or other factors. The Company believes that strong demand will
continue for its P&A services as many of these wells are approaching the end of
their productive lives.
4
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to combine internal growth and strategic
acquisitions to expand the scope of the services and equipment that the Company
provides for its customers. Key elements of the Company's business strategy are
as follows:
Continue Expansion of Rental Tool Operations. The Company intends to continue
to expand its rental tool operations to meet the increased demand for its
rental tool products in the Gulf Coast region. The Company plans to increase
the amount and types of equipment available to its customers by expanding its
rental tool inventory. Management believes that an expanded rental tool
inventory will enable the Company to further expand its existing customer
relationships within the consolidating rental tool industry. Management also
believes that growth in this segment is not subject to the personnel
constraints that are currently present in other segments of the oilfield
services industry.
Capitalize on Leading Position in P&A Services. The Company intends to
capitalize on its leading position in, and the increased demand for, P&A
services in the Gulf of Mexico by significantly increasing the number of crews
dedicated to P&A services. The Company plans to purchase or manufacture the
equipment necessary to operate as many as six new P&A crews. The Company
intends to base these crews out of its Houston, Texas and Lafayette, Louisiana
locations, further expanding the geographic scope of its P&A operations, which
are currently conducted from Belle Chasse, Louisiana.
Expand Electric Wireline Services. Historically, the Company primarily
offered its electric wireline services as a complement to its P&A services. The
Company's customers, however, are increasingly seeking electric wireline
services from the Company independent of P&A operations. The Company intends to
purchase or manufacture additional electric wireline units that will be
dedicated solely to non-P&A operations, which management believes will offer
another avenue of growth for the Company.
Acquire Complementary Businesses. The Company continually evaluates
opportunities to acquire businesses which offer products and services
complementary to the Company's existing operations. Management believes that
acquisition candidates are available that will allow the Company to increase
both market share in its existing lines of business and the geographic scope of
its operations. The Company intends to continue to seek acquisition candidates
with strong existing management and to structure the acquisitions to create
incentives for the key personnel of the acquired businesses to remain with the
Company and expand their operations.
RECENT ACQUISITIONS
Since September 30, 1997, the Company has closed three acquisitions, each of
which will expand the size and geographic scope of the Company's rental tool
operations.
. Sub-Surface. In November 1997, the Company completed its acquisition of
Sub-Surface Tools, Inc. ("Sub-Surface") for $17.5 million in cash and a
contingent payment of up to $7.5 million plus interest, the amount of
which is dependent upon Sub-Surface's financial performance over the next
three years. Sub-Surface rents specialized equipment including tubulars,
tubular handling tools and pressure control equipment for drilling,
completion and workover operations that it provides through four
facilities along the Gulf Coast.
. Stabil Drill. In October 1997, the Company completed its acquisition of
Stabil Drill Specialties, Inc. ("Stabil Drill") for $17.5 million in cash
and a contingent payment of up to $7.5 million plus interest, the amount
of which is dependent upon Stabil Drill's financial performance over the
next three years. Stabil Drill specializes in the sale and rental of
drilling stabilizers along with a full range of tools used in bottom hole
assemblies that it provides through five facilities located throughout
the Gulf Coast.
5
<PAGE>
. Fastorq. In October 1997, the Company completed its acquisition of
Fastorq, Inc. ("Fastorq") for $4.8 million in cash and a contingent
payment of up to $2.6 million plus interest, the amount of which is
dependent upon Fastorq's financial performance over the next three years.
Fastorq provides hydraulic nipple up, wrench bolting, bolt turning, nut
splitting, bolt removal and mechanical pipe cutting services along with
hydrostatic test pump rentals to the Gulf Coast region from its two
Louisiana facilities.
The Company is incorporated under the laws of the State of Delaware, its
principal executive offices are located at 1503 Engineers Road, P. O. Box 6220,
New Orleans, Louisiana 70174, and its telephone number is (504) 393-7774.
6
<PAGE>
THE OFFERING
Common Stock offered:
By the Company.............. 3,900,000 shares
By the Selling
Stockholders................ 2,100,000 shares
Total.................... 6,000,000 shares
Common Stock to be outstanding
after the Offering(/1/)......... 29,156,190 shares
Nasdaq National Market Symbol... SESI
Use of Proceeds................. The Company intends to use the net proceeds
of the Offering to repay a portion of the
indebtedness incurred in connection with the
Recent Acquisitions. See "Use of Proceeds."
The Company will not receive any proceeds
from the sale of Common Stock by the Selling
Stockholders.
- --------
(1) Excludes approximately 1,575,000 shares of Common Stock issuable upon the
exercise of outstanding stock options and 8,333 shares of Common Stock
issuable upon the exercise of outstanding warrants.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In particular, prospective investors should be aware of the effect on the
Company of the risks presented by the factors listed under "Risk Factors."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The summary financial data for the two years ended December 31, 1996 are
derived from the Company's financial statements which have been audited by KPMG
Peat Marwick LLP. The summary financial data as of September 30, 1997 and for
the nine month periods ended September 30, 1996 and 1997, respectively, are
derived from the unaudited consolidated financial statements of the Company for
such periods. In the opinion of management, the unaudited financial statements
of the Company reflect all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of the financial condition and
results of operations for these periods. The pro forma financial data set forth
below does not purport to represent what the Company's financial condition or
results of operations actually would have been had the acquisitions that are
given pro forma effect in fact occurred on the assumed dates or to project the
Company's financial condition or results of operations for any future period or
date. The following information should be read in conjunction with "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical and pro forma financial
statements and notes thereto included elsewhere in this Prospectus and
incorporated herein by reference.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------- -----------------------------
PRO FORMA PRO FORMA
1995 1996 1996(1) 1996 1997 1997(1)
------- ------- ----------- ------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue................. $12,338 $23,638 $64,163 $15,240 $33,309 $59,059
Costs of services....... 7,487 11,040 28,471 7,129 14,735 24,930
Depreciation and
amortization........... 259 1,323 5,483 936 1,992 4,301
Impairment of long-lived
assets(2).............. 4,042 -- -- -- -- --
General and
administrative expense. 3,258 5,737 17,085 3,548 7,556 13,749
------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (2,708) 5,538 13,124 3,627 9,026 16,079
Other income (expense).. (7) 79 (3,455) 114 (463) (2,963)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (2,715) 5,617 9,669 3,741 8,563 13,116
Provision for income
taxes.................. 131 1,685 3,674 1,122 2,826 4,859
------- ------- ------- ------- ------- -------
Net income (loss)....... $(2,846) $ 3,932 $ 5,995 $ 2,619 $ 5,737 $ 8,257
======= ======= ======= ======= ======= =======
Net income (loss) per
common share and common
share equivalent....... $ (0.38)(3) $ 0.22 $ 0.30 $ 0.15 $ 0.28 $ 0.39
======= ======= ======= ======= ======= =======
Weighted average common
shares and common share
equivalents
outstanding............ 8,848 17,619 20,167 17,259 20,259 20,958
OTHER FINANCIAL DATA(4):
EBITDA.................. $ 1,593 $ 6,861 $18,607 $ 4,563 $11,018 $20,380
EBITDA margin........... 12.9% 29.0% 29.0% 30.0% 33.1% 34.5%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $11,551 $15,811 $17,531
Property, plant and equipment, net......... 23,193 45,114 45,114
Total assets............................... 58,374 108,826 108,826
Long-term debt, excluding current
maturities................................ 1,412 42,631 7,457
Stockholders' equity....................... 48,161 48,161 85,055
</TABLE>
8
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(1) Gives effect to all of the acquisitions completed by the Company in 1996
and 1997, including the Recent Acquisitions, each as if consummated on
January 1, 1996.
(2) On December 31, 1995, the Company elected the early adoption of Statement
of Financial Accounting Standards (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The undiscounted net cash flows from a joint venture were less than
the carrying value of the fixed assets devoted to the joint venture and
associated goodwill, indicating that an impairment had taken place. This
resulted in the Company recognizing a non-cash charge in 1995 for the
impairment of long-lived assets of $4.0 million, consisting of the write-
off of $3.5 million of goodwill and $0.5 million of property, plant and
equipment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview -- Revenue Recognition."
(3) Gives pro forma effect to income taxes for the full year. Prior to the
Share Exchange (as defined herein), the Company was an S corporation and,
as a result, paid no federal or state income taxes at the corporate level.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
(4) The Company calculates EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) as operating income plus depreciation
and amortization and impairment of long-lived assets. EBITDA margin is
calculated by dividing EBITDA by revenue. Neither EBITDA nor EBITDA margin
should be considered as an alternative to net income or any other measure
of operating performance calculated in accordance with generally accepted
accounting principles. EBITDA and EBITDA margin are widely used by
financial analysts as a measure of financial performance. The Company's
measurement of EBITDA and EBITDA margin may not be comparable to similarly
titled measures reported by other companies.
(5) Gives pro forma effect to the completion of the Recent Acquisitions, as if
each was consummated on September 30, 1997.
(6) Gives pro forma effect to the completion of the Recent Acquisitions, as if
each was completed on September 30, 1997, and as adjusted to give effect to
the Offering and the application of the net proceeds therefrom as described
in "Use of Proceeds."
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to other information contained in or incorporated by reference in
this Prospectus, regarding an investment in the Common Stock offered hereby.
DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY VOLATILITY
The Company's business depends in large part on the conditions of the oil
and gas industry, and specifically on the capital expenditures of the
Company's customers. The demand for oilfield services has traditionally been
cyclical, as purchases of products and services such as those provided by the
Company are, to a substantial extent, deferrable in the event oil and gas
companies reduce capital expenditures as a result of conditions existing in
the oil and gas industry or general economic downturns.
Demand for the Company's P&A services is primarily a function of the number
of offshore producing wells that have ceased to be commercially productive,
the level of environmental awareness and the desire of oil and gas companies
to minimize future P&A liabilities. Demand for the Company's rental tool and
wireline services is primarily a function of oil and gas exploration and
workover activity in the Gulf of Mexico and along the Gulf Coast. The level of
oilfield activity is affected in turn by the willingness of oil and gas
companies to make capital expenditures for the exploration, development and
production of oil and natural gas. The levels of such capital expenditures are
influenced by oil and gas prices, the cost of exploring for, producing and
delivering oil and gas, the sale and expiration dates of leases in the United
States, the discovery rate of new oil and gas reserves, local and
international political and economic conditions and the ability of oil and gas
companies to generate capital. Although the production sector of the oil and
gas industry is less immediately affected by changing prices, and, therefore,
less volatile than the exploration sector, producers would likely react to
declining oil and gas prices by reducing expenditures, which could adversely
affect the business of the Company. No assurance can be given as to the future
price of oil and natural gas, the level of oil and gas industry activity, the
perceived level of enforcement of laws requiring the P&A of wells or levels of
environmental awareness. Fluctuations in demand for the Company's products and
services may have a material adverse effect on the Company's business and
operations.
RISKS OF RAPID GROWTH
The Company has grown rapidly over the last two years through internal
growth and acquisitions of other companies. Managing the rapid growth
experienced by the Company will be important for the Company's future success
and will demand increased responsibility for management personnel. Several
factors, including the lack of sufficient executive-level personnel, increased
administrative burdens and the increased logistical problems of large,
expansive operations, could present difficulties to the Company, which if not
managed successfully, could have a material adverse effect on the Company's
financial condition and results of operations. Neither the historical nor the
pro forma financial information included herein is necessarily indicative of
the results that would have been achieved had the Company been operated on a
fully integrated basis or the results that may be realized in the future.
RISKS OF ACQUISITION STRATEGY
Acquisitions have been and may continue to be a key element of the Company's
business strategy. There can be no assurance that the Company will be able to
identify and acquire acceptable acquisition candidates on terms favorable to
the Company. Although the Company will be substantially debt free after the
application of the net proceeds of the Offering, the Company may be required
to incur substantial indebtedness to finance future acquisitions and also may
issue equity securities in connection with such acquisitions. Such additional
debt service requirements may represent a significant burden on the Company's
results of operations and financial condition. The issuance of additional
equity securities could result in significant dilution to stockholders. There
also can be no assurance that the Company will successfully consolidate the
operations and assets of any acquired
10
<PAGE>
business with its own or that the Company's management will be able to
effectively manage the increased size of the Company or operate a new line of
business. Any inability on the part of the Company to consolidate and manage
acquired businesses could have a material adverse effect on the Company's
results of operations and financial condition.
SEASONALITY AND ADVERSE WEATHER CONDITIONS
The Company's P&A operations are directly affected by the weather conditions
in the Gulf of Mexico. Due to seasonal differences in weather patterns, the
Company's P&A crews may operate more days in the spring, summer and fall
periods and less in the winter months. The Company's rental tool operations
and sales of equipment are affected by the seasonality of oil and gas drilling
activity in the Gulf Coast region. Due to exposure to weather, higher drilling
activity is generally experienced in the spring, summer and fall months with
the lowest activity experienced in winter months. Operations may also be
affected by the rainy weather, hurricanes and other storms prevalent in the
Gulf of Mexico and along the Gulf Coast throughout the year. Accordingly, the
Company's operating results may vary from quarter to quarter, depending upon
factors outside of its control, and full year results are not likely to be a
direct multiple of any particular quarter or combination of quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
ABILITY TO ATTRACT AND RETAIN SKILLED WORKERS
The Company's ability to remain productive and profitable will depend
substantially on its ability to attract and retain skilled workers. The
Company's ability to expand its operations is in part impacted by its ability
to increase its labor force. The demand for skilled workers in the Gulf Coast
region is high and the supply is limited. A significant increase in the wages
paid by competing employers could result in a reduction in the Company's
skilled labor force, increases in the wage rates paid by the Company, or both.
If either of these events occurred, the capacity and profitability of the
Company could be diminished and the growth potential of the Company could be
impaired.
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
The Company derives a significant amount of its revenue from a small number
of major and independent oil and gas companies. In 1995 and 1996, Chevron USA
accounted for 23.7% and 34.5%, respectively, of the Company's revenue and
Conoco, Inc. accounted for 16.4% and 8.9%, respectively. On a pro forma basis,
giving effect to all of the acquisitions completed by the Company in 1997,
including the Recent Acquisitions, Chevron USA and Shell Oil Company accounted
for 20.3% and 14.0%, respectively, of the Company's pro forma revenue for the
nine months ended September 30, 1997. The inability of the Company to continue
to perform services for a number of its large existing customers, if not
offset by sales to new or other existing customers, could have a material
adverse effect on the Company's business and operations. See "Business--
Customers."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and continued active
participation of its President and Chief Executive Officer, Terence E. Hall,
and the key employees of its operating subsidiaries. The loss of the services
of any of these persons could have a material adverse effect on the Company's
business and operations. See "Management."
OPERATING RISKS AND INSURANCE
The operations of the Company involve the use of heavy equipment and
exposure to inherent risks, including blowouts, explosions and fire, with
attendant significant risks of liability for personal injury and property
damage, pollution or other environmental hazards or loss of production. In
addition, certain of the
11
<PAGE>
Company's employees who perform services on offshore platforms and vessels are
covered by provisions of the Jones Act, the Death on the High Seas Act and
general maritime law. These laws operate to make the liability limits
established by state workers' compensation laws inapplicable to these
employees and, instead, permit them or their representatives to pursue actions
against the Company for damages on job-related injuries, with generally no
limitations on the Company's potential liability.
Failure of the Company's equipment could result in property damage, personal
injury, environmental pollution and resulting damage for which the Company
could be liable. Litigation arising from a catastrophic occurrence at a
location where the Company's equipment and services are used may in the future
result in large claims. The frequency and severity of such incidents affect
the Company's operating costs, insurability and relationships with customers,
employees and regulators. Any increase in the frequency or severity of such
incidents, or the general level of compensation awards with respect thereto,
could affect the ability of the Company to obtain projects from oil and gas
companies or insurance and could have a material adverse effect on the
Company. In addition, no assurance can be given that the Company will be able
to maintain adequate insurance in the future at rates it considers reasonable.
See "Business--Insurance."
INTENSE COMPETITION
The Company competes in highly competitive areas of the oilfield business.
The volatility of oil and gas prices has led to a consolidation of the number
of companies providing services similar to the Company. This reduced number of
companies competes intensely for available projects. Many of the Company's
competitors are larger and have greater marketing, distribution, financial and
other resources than the Company. There can be no assurance that the Company's
operations will continue at current volumes or prices if its current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than the
Company's products and services. Competitive pressures or other factors also
may result in significant price competition that could have a material adverse
effect on the Company's results of operations and financial condition.
Furthermore, competition among oilfield service and equipment providers is
also based on a provider's reputation for safety and quality. Although the
Company believes that its reputation for safety and quality service is good,
there can be no assurance that the Company will be able to maintain its
competitive position. See "Business--Competition."
REGULATORY AND ENVIRONMENTAL MATTERS
The Company's business is significantly affected by state and federal laws
and other regulations relating to the oil and gas industry, by changes in such
laws and by changing administrative regulations and the level of enforcement
thereof. The Company cannot predict the level of enforcement of existing laws
and regulations or how such laws and regulations may be interpreted by
enforcement agencies or court rulings, whether additional laws and regulations
will be adopted, or the effect such changes may have on it, its businesses or
financial condition.
Demand for the Company's P&A services is substantially dependent upon
federal and state laws that require owners of non-producing wells to plug the
well and remove all exposed piping and rigging before the well is permanently
abandoned. The timing and need for P&A services for wells situated on the
federal outer continental shelf are regulated by the MMS. The MMS generally
requires wells to be permanently plugged and abandoned within one year of
lease expiration. State regulatory agencies similarly regulate P&A services
within state coastal waters. State regulatory timeframes for P&A can be as
long as one year for wells in Texas coastal waters or as short as 90 days
after the drilling or production operations cease in Louisiana coastal waters.
The MMS and state regulatory agencies will routinely grant extensions of time
for P&A requirements when a well has future leasehold potential or when it is
consistent with prudent operating practices, economic considerations or other
special circumstances. A decrease in the level of enforcement of such laws and
regulations in the future would adversely affect the demand for the Company's
services and products. Numerous state and federal laws and regulations also
affect the level of purchasing activity of oil spill containment equipment and
consequently the
12
<PAGE>
Company's business. There can be no assurance that a decrease in the level of
enforcement of state and federal laws and regulations in the future would not
adversely affect the demand for the Company's products. In addition, the
Company depends on the demand for its services from the oil and gas industry,
and such demand is affected by changing taxes, price controls and other laws
and regulations relating to the oil and gas industry generally. The adoption
of laws and regulations curtailing exploration and development drilling for
oil and gas in the Company's areas of operations for economic, environmental
or other policy reasons would adversely affect the Company's operations by
limiting demand for its services.
In addition to the importance of environmental regulations on demand for the
Company's services, the Company also has potential environmental liabilities
with respect to its offshore and onshore operations. Certain environmental
laws provide for joint and several strict liabilities for remediation of
spills and releases of hazardous substances. In addition, companies may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances. The Company believes that its
present operations substantially comply with applicable federal and state
pollution control, and environmental protection laws and regulations and that
compliance with such laws has had no material adverse effect upon its
operations to date. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties and
criminal prosecution. No assurance can be given that environmental laws will
not, in the future, materially adversely affect the Company's operations and
financial condition. Some environmental statutes impose strict liability,
rendering a person liable for environmental damage without regard to
negligence or fault on the part of such person. See "Business--Governmental
Regulation."
TECHNOLOGY RISKS
Sales of certain of the Company's products, primarily its oil spill
containment equipment, are based primarily on its proprietary technology. The
Company's success in the sales of these products depends to a significant
extent on the development and implementation of new product designs and
technologies. Whether the Company can continue to develop products and
technology to meet evolving industry standards at levels of capability and
price acceptable to its customers will be a significant factor in determining
the Company's ability to complete. Many of the Company's competitors have
greater resources devoted to research and development of new products and
technologies than does the Company. While the Company has patents on certain
of its technologies and products, there is no assurance that any patents
secured by the Company will not be successfully challenged by others or will
protect it from the development of similar products by others. See "Business--
Properties."
CONCENTRATION OF COMMON STOCK OWNERSHIP
Upon completion of the Offering, the Company's directors and executive
officers and certain of their affiliates will beneficially own approximately
24.3% (21.3% if the over-allotment option is exercised in full) of the
outstanding shares of Common Stock. Accordingly, these stockholders will have
the ability to influence the election of the Company's directors and the
outcome of most other matters submitted to a vote of the Company's
stockholders, which may have the effect of delaying or preventing a change of
control of the Company. See "Principal and Selling Stockholders."
POSSIBLE VOLATILITY OF SECURITIES PRICES
The market price of the Common Stock has in the past been, and may in the
future continue to be, volatile. A variety of events, including quarter to
quarter variations in operating results, news announcements by the Company or
its competitors, as well as market conditions in the oil and gas industry, or
changes in earnings estimates by securities analysts may cause the market
price of the Common Stock to fluctuate significantly. In addition, the stock
market in recent years has experienced significant price and volume
fluctuations which have particularly affected the market prices of equity
securities of many companies that service the oil and gas industry and which
often have been unrelated to the operating performance of such companies.
These market fluctuations may adversely affect the price of the Common Stock.
See "Dividends and Price Range of the Common Stock."
13
<PAGE>
DIVIDENDS
The Company has not declared or paid cash dividends on its Common Stock in
the past and currently intends to retain earnings, if any, to meet its working
capital requirements and to finance the future operation and growth of the
Company. The Company does not plan to declare or pay cash dividends to holders
of its Common Stock in the foreseeable future. In addition, the terms of the
Company's Bank Credit Facility (as defined herein) prohibit the payment of
dividends or other distributions by the Company to its stockholders. The
Company's ability to declare or pay cash dividends is also affected by the
ability of the Company's present and future subsidiaries to declare and pay
dividends or otherwise transfer funds to the Company since the Company
conducts its operations entirely through subsidiaries. See "Dividends and
Price Range of Common Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BY-LAWS AND THE DELAWARE GENERAL CORPORATION LAW
Certain provisions of the Company's Certificate of Incorporation and By-laws
and of the Delaware General Corporation Law (the "DGCL"), may tend to deter
potential unsolicited offers or other efforts to obtain control of the Company
that are not approved by the Board of Directors. In particular, the Company's
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares
of preferred stock, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of the holders of the
Common Stock and, in certain circumstances, depress the market price of the
Common Stock. In the event of issuance, the preferred stock could be utilized
under certain circumstances as a method of discouraging, delaying or
preventing a change in control of the Company. There can be no assurance that
the Company will not issue shares of preferred stock in the future. The
ability of the Board of Directors to issue preferred stock together with other
provisions of the Company's Certificate of Incorporation, By-laws and of the
DGCL may deprive the holders of the Common Stock of opportunities to sell
shares of Common Stock at a premium to then prevailing market prices in
connection with a takeover attempt. See "Description of Capital Stock--
Preferred Stock" and "--Certain Charter and By-law Provisions."
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements, other than statements
of historical fact included or incorporated by reference in this Prospectus
that address activities, events or developments that the Company intends,
expects, projects, believes or anticipates will or may occur in the future,
including, without limitation, statements regarding the Company's business
strategy, plans and objectives; statements expressing beliefs and expectations
regarding future demand for the Company's products and services and other
events and conditions that may influence the oilfield services market and the
Company's performance in the future; statements concerning future expansion
plans, including the anticipated level of capital expenditures for, and the
nature and scheduling of, purchases or manufacture of rental tool inventory
and P&A or wireline equipment and other such matters are forward-looking
statements. Such statements are based on certain assumptions and analyses made
by management of the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes to be appropriate. The forward-looking statements included
in this Prospectus are also subject to a number of material risks and
uncertainties. Important factors that could cause actual results to differ
materially from the Company's expectations are discussed herein under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Prospective investors are cautioned that
such forward-looking statements are not guarantees of future performance and
that actual results, developments and business decisions may differ from those
envisaged by such forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to the Company from the Offering, after deducting
underwriting discounts and estimated offering expenses, will be approximately
$36.9 million. The Company intends to use the net proceeds of the Offering to
repay a portion of the indebtedness incurred under the Company's revolving
credit facility with Whitney National Bank, as amended (the "Bank Credit
Facility"), to fund the Recent Acquisitions.
Upon completion of the Offering and the application of the net proceeds
therefrom as described herein, the Company will have approximately $7.5
million in outstanding indebtedness under the Bank Credit Facility. As
amended, the Bank Credit Facility provides for a revolving line of credit up
to $30.0 million, subject to certain borrowing base calculations, which will
mature on March 31, 1999 and bear interest at LIBOR (London Interbank Offered
Rate) plus a margin that depends on the Company's debt coverage ratio
(currently 7.27%). The remainder of the Bank Credit Facility will be available
to the Company for possible future acquisitions, working capital and general
corporate purposes. Although the Company is continually evaluating potential
acquisitions, it does not have any contracts, understandings or arrangements
with respect to any material acquisitions, other than those described herein.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholders.
15
<PAGE>
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"SESI." The following table sets forth the high and low closing bid prices per
share of the Common Stock as reported by the Nasdaq National Market for each
fiscal quarter during the past three calendar years. Quotes represent "inter-
dealer" prices without adjustments for mark-ups, mark-downs or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter.................................................. $3.500 $2.500
Second Quarter................................................. 2.750 2.000
Third Quarter.................................................. 2.750 1.750
Fourth Quarter................................................. 2.500 1.750
1996
First Quarter.................................................. $2.563 $2.125
Second Quarter................................................. 2.813 2.063
Third Quarter.................................................. 2.688 2.000
Fourth Quarter................................................. 3.375 2.625
1997
First Quarter.................................................. $4.875 $2.875
Second Quarter................................................. 5.188 4.375
Third Quarter.................................................. 9.125 5.000
Fourth Quarter (through November 20, 1997)..................... 14.313 8.875
</TABLE>
On November 20, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $10.125 per share. At October 30, 1997, there
were approximately 115 record holders of the Common Stock.
The Company has not declared or paid cash dividends on its Common Stock in
the past and currently intends to retain earnings, if any, to meet its working
capital requirements and to finance the future operation and growth of the
Company. The Company does not plan to declare or pay cash dividends to holders
of its Common Stock in the foreseeable future. In addition, the terms of the
Company's Bank Credit Facility prohibit the payment of dividends or other
distributions by the Company to its stockholders. The Company's ability to
declare or pay cash dividends is also affected by the ability of the Company's
subsidiaries to declare and pay dividends or otherwise transfer funds to the
Company since the Company conducts its operations entirely through its
subsidiaries. Subject to such limitations, the payment of cash dividends on
the Common Stock will be within the discretion of the Company's Board of
Directors and will depend upon the earnings of the Company, the Company's
capital requirements, the requirements of the Company's credit arrangements,
applicable laws and other factors that are considered relevant by the
Company's Board of Directors. See "Risk Factors--Dividends."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, on a pro forma basis giving effect to the Recent
Acquisitions as if each of them had been completed on September 30, 1997, and
pro forma as adjusted to reflect the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical and pro forma
financial statements and the notes thereto included elsewhere in this
Prospectus and incorporated herein by reference.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, excluding current maturities....... $ 1,412 $42,631 $ 7,457
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value per share;
5,000,000 shares authorized; no shares
outstanding..................................... -- -- --
Common Stock, $.001 par value per share;
40,000,000 shares authorized; 25,143,985 shares
issued and outstanding (actual and pro forma);
29,043,985 shares issued and outstanding (pro
forma as adjusted)(1)........................... 25 25 29
Additional paid-in capital....................... 41,620 41,620 78,510
Retained earnings................................ 6,516 6,516 6,516
------- ------- -------
Total stockholders' equity..................... 48,161 48,161 85,055
------- ------- -------
Total capitalization........................... $49,573 $90,792 $92,512
======= ======= =======
</TABLE>
- --------
(1) Excludes approximately 1,575,000 shares of Common Stock issuable upon the
exercise of outstanding stock options and 8,333 shares of Common Stock
issuable upon the exercise of outstanding warrants.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data for the two years ended December 31, 1996 and as
of December 31, 1995 and 1996 are derived from the Company's financial
statements which have been audited by KPMG Peat Marwick LLP. The selected
financial data as of September 30, 1997 and for the nine month periods ended
September 30, 1996 and 1997, respectively, are derived from the unaudited
consolidated financial statements of the Company for such periods. In the
opinion of management, the unaudited financial statements of the Company
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the financial condition and results of
operations for these periods. The pro forma financial data set forth below does
not purport to represent what the Company's financial condition or results of
operations actually would have been had the acquisitions that are given pro
forma effect in fact occurred on the assumed dates or to project the Company's
financial condition or results of operations for any future period or date. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical and pro forma financial statements and notes thereto included
elsewhere in this Prospectus and incorporated herein by reference.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------------
PRO FORMA PRO FORMA
1995 1996 1996(1) 1996 1997 1997(1)
------- ------- ----------- ------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $12,338 $23,638 $64,163 $15,240 $33,309 $59,059
Costs of services...... 7,487 11,040 28,471 7,129 14,735 24,930
Depreciation and
amortization.......... 259 1,323 5,483 936 1,992 4,301
Impairment of long-
lived assets(2)....... 4,042 -- -- -- -- --
General and
administrative
expense............... 3,258 5,737 17,085 3,548 7,556 13,749
------- ------- ------- ------- ------- -------
Income (loss) from
operations............ (2,708) 5,538 13,124 3,627 9,026 16,079
Other income (expense). (7) 79 (3,455) 114 (463) (2,963)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (2,715) 5,617 9,669 3,741 8,563 13,116
Provision for income
taxes................. 131 1,685 $ 3,674 1,122 2,826 4,859
------- ------- ------- ------- ------- -------
Net income (loss)...... $(2,846) $ 3,932 $ 5,995 $ 2,619 $ 5,737 $ 8,257
======= ======= ======= ======= ======= =======
Net income (loss) per
common share and
common share
equivalent............ $ (0.38)(3) $ 0.22 $ 0.30 $ 0.15 $ 0.28 $ 0.39
======= ======= ======= ======= ======= =======
Weighted average common
shares and common
share equivalents
outstanding........... 8,848 17,619 20,167 17,259 20,259 20,958
OTHER FINANCIAL DATA(4):
EBITDA................. $ 1,593 $ 6,861 $18,607 $ 4,563 $11,018 $20,380
EBITDA margin.......... 12.9% 29.0% 29.0% 30.0% 33.1% 34.5%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 976 $ 2,594 $11,551
Property, plant and equipment, net.......... 6,904 9,894 23,193
Total assets................................ 22,984 28,337 58,374
Long-term debt, excluding current
maturities................................. -- 250 1,412
Stockholders' equity........................ 13,094 20,349 48,161
</TABLE>
18
<PAGE>
- --------
(1) Gives effect to all of the acquisitions completed by the Company in 1996
and 1997, including the Recent Acquisitions, each as if consummated on
January 1, 1996.
(2) On December 31, 1995, the Company elected the early adoption of Statement
of Financial Accounting Standards (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The undiscounted net cash flows from a joint venture were less than
the carrying value of the fixed assets devoted to the joint venture and
associated goodwill, indicating that an impairment had taken place. This
resulted in the Company recognizing a non-cash change in 1995 for the
impairment of long-lived assets of $4.0 million, consisting of the write-
off of $3.5 million of goodwill and $0.5 million of property, plant and
equipment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Revenue Recognition."
(3) Gives pro forma effect to income taxes for the full year. Prior to the
Share Exchange (as defined herein), the Company was an S corporation and,
as a result, paid no federal or state income taxes at the corporate level.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
(4) The Company calculates EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) as operating income plus
depreciation and amortization and impairment of long-lived assets. EBITDA
margin is calculated by dividing EBITDA by revenue. Neither EBITDA nor
EBITDA margin should be considered as an alternative to net income or any
other measure of operating performance calculated in accordance with
generally accepted accounting principles. EBITDA and EBITDA margin are
widely used by financial analysts as measures of financial performance.
The Company's measurement of EBITDA and EBITDA margin may not be
comparable to similarly titled measures reported by other companies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background. In December 1995, the Company completed a share exchange (the
"Share Exchange"), pursuant to which the Company acquired the stock of (i)
several private companies owned by the Company's current management team (the
"Superior Companies") and (ii) Oil Stop, Inc. ("Oil Stop") in exchange for an
aggregate of 10,200,000 shares of the Company's Common Stock and $2.0 million
in cash. Upon completion of the Share Exchange, the stockholders of the
Superior Companies received a controlling interest in the Company, and the
Company's current management team assumed control of the Company. As a result,
the Share Exchange was accounted for as a reverse acquisition (i.e., a
purchase of the Company by the Superior Companies) under the purchase method
of accounting. Accordingly, the Company's financial statements and other
financial information, including the information in this section, reflect the
historical operations of the Superior Companies for periods and dates prior to
the Share Exchange. Pursuant to the purchase method of accounting, the value
of the net assets of the Company and Oil Stop were adjusted to their estimated
fair value at the time of the Share Exchange, and the net assets of the
Superior Companies were reflected at their historical book values.
General. Over the past several years, improvements in production techniques
and seismic and drilling technology, together with relatively stable oil and
gas prices, have resulted in increased drilling activity in the Gulf of Mexico
and along the Gulf Coast. According to reports published by Offshore Data
Services, the number of offshore drilling rigs under contract in the Gulf of
Mexico has increased from approximately 130 in January 1995 to approximately
170 in October 1997. In addition, the MMS reported that the number of offshore
leases in the Gulf of Mexico awarded to operators increased from 835 in 1995,
covering approximately 4.3 million acres, to 1,836 in 1997, covering
approximately 10.0 million acres. Lease sales often serve as a precursor to
drilling and exploration activity in the Gulf of Mexico. If oil and gas
companies commit the resources necessary to explore these leases and develop
the fields which may be discovered thereon, there should be increased demand
for the Company's products and services over the next few years. However,
there can be no assurance that drilling activity will continue at such levels
or that oil and gas companies will actively explore and develop the fields
recently leased. Whether these trends continue and the resulting increase in
demand for the Company's products and services actually occurs, is dependent
in large part on the factors listed above.
Demand for the Company's rental tools and wireline services is primarily a
function of oil and gas exploration and workover activity in the Gulf of
Mexico and along the Gulf Coast. The level of oilfield activity is affected in
turn by the willingness of oil and gas companies to make capital expenditures
for the exploration, development and production of oil and natural gas. The
levels of such capital expenditures are influenced by oil and gas prices, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of leases in the United States, the discovery rate of new oil
and gas reserves, local and international political and economic conditions
and the ability of oil and gas companies to generate capital. See "Risk
Factors--Dependence on Oil and Gas industry; Industry Volatility."
Demand for the Company's P&A services is primarily a function of the number
of offshore producing wells that have ceased to be commercially productive,
increased environmental awareness and the desire of oil and gas companies to
minimize abandonment liabilities. The number of depleted wells in the Gulf of
Mexico that were plugged and abandoned has grown significantly in the last two
years. According to an independent industry report, approximately 560 depleted
wells were plugged and abandoned in 1995 compared to approximately 855 in
1996. The MMS estimated that as of September 1997, there had been
approximately 34,850 well bores drilled in the Gulf of Mexico, approximately
15,800 of which had not yet been plugged and abandoned due to the existence of
oil and gas production or other factors. The Company believes that strong
demand will continue for its P&A services as many of these wells are
approaching the end of their productive lives. Even though P&A projects
represent non-revenue producing expenditures for oil and gas companies,
management believes that the large number of wells in the Gulf of Mexico will
present a steady stream of P&A projects for the Company, provided the current
level of regulatory enforcement continues.
Revenue Recognition. For the Company's P&A, wireline and rental tool
operations, revenue is recognized when services or equipment are provided. The
Company contracts for P&A and wireline projects either on a day
20
<PAGE>
rate or turnkey basis, with the majority of its projects conducted on a day
rate basis. The Company's rental tools are leased on a day rate basis, and
revenue from the sale of equipment is recognized when the equipment is
shipped. Reimbursement from customers for the cost of rental tools that are
damaged or lost downhole are reflected as revenue at the time of the incident.
See "Business--Customers and Contracting."
In January 1996, the Company's unprofitable fishing and rental tool business
in West Texas was placed into a joint venture with G&L Tool Company, Inc. (the
"Joint Venture"). In consideration for the contribution of assets to the Joint
Venture, the Joint Venture is required to make monthly payments of $110,000 to
the Company, which the Company recognizes as revenue when received. The Joint
Venture has made all required payments to the Company through September 30,
1997. After 1997, the monthly payments will be reduced to $80,000 for the life
of the Joint Venture, which survives until the end of 2000. Upon termination
of the Joint Venture, G&L Tool Company, Inc. has the option to purchase all of
the assets contributed by the Company to the Joint Venture for $2.0 million.
The Company recognizes no expenses with respect to the operations of the Joint
Venture other than depreciation on the assets originally contributed to the
Joint Venture.
Seasonality. The Company's P&A operations are directly affected by the
weather conditions in the Gulf of Mexico. Due to the seasonal differences in
weather patterns, the Company's P&A crews may operate more days in the spring,
summer and fall periods and less in the winter months. The Company's rental
tool operations and sales of equipment are affected by the seasonality of oil
and gas drilling activity in the Gulf Coast region. Due to exposure to
weather, higher drilling activity is generally experienced in the spring,
summer and fall with the lowest activity experienced in the winter months.
Operations may also be affected by the rainy weather, hurricanes, and other
storms prevalent in the Gulf of Mexico and along the Gulf Coast throughout the
year. Accordingly, the Company's operating results may vary from quarter to
quarter, depending on factors outside of its control, and full year results
for the Company are not likely to be a direct multiple of any particular
quarter or combination of quarters. See "Risk Factors--Seasonality and Adverse
Weather Conditions."
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Nine Months Ended September 30,
1996 and 1997
The Company experienced significant growth in revenue and net income in the
first nine months of 1997 as compared to the same period in 1996 due to
continued strong demand for its products and services, internal growth and
growth through acquisitions.
The Company's revenue increased 119% from $15.2 million for the nine months
ended September 30, 1996, to $33.3 million for the same period in 1997. Of
this increase, approximately 39% was the result of internal growth of the
Company's operations and approximately 61% was the result of the acquisitions
that the Company completed since July 1996.
The Company's gross margin increased from 53.2% for the nine months ended
September 30, 1996, to 55.8% for the nine months ended September 30, 1997.
This increase was primarily due to the increase in the percentage of the
Company's revenue that was generated by its rental tool and data acquisition
businesses, which tend to have higher gross margins than the Company's other
businesses.
Depreciation and amortization increased 113%, from $936,600 for the nine
months ended September 30, 1996, to $2.0 million for the nine months ended
September 30, 1997. Most of the increase resulted from the larger asset base
that has resulted from the Company's acquisitions. General and administrative
expenses as a percentage of revenue decreased slightly from 23.3% of revenue
for the nine months ended September 30, 1996 to 22.7% for the nine months
ended September 30, 1997.
Net income increased 119% from $2.6 million for the nine months ended
September 30, 1996 to $5.7 million for the comparable period in 1997, while
earnings per share increased 87% from $0.15 to $0.28. The strong earnings
growth experienced by the Company is a result of both increased revenue and
higher profit margins. The increase in earnings per share during the period
was not commensurate with the increase in net
21
<PAGE>
income for the period as the average number of shares outstanding during the
first nine months of 1997 increased primarily as a result of the issuance of
approximately 4.5 million shares upon the exercise of the Company's Class B
Warrants, which were redeemed on September 25, 1997.
Comparison of Results of Operations for the Years Ended December 31, 1995 and
1996
The year ended December 31, 1996 was the first full year the Company had
under new management since the Share Exchange. The Company's 1996 results were
impacted by three main factors: an increase in the Company's internal growth
as a result of increased levels of activity in the Gulf of Mexico; the
creation of the Joint Venture, which resulted in the realization of profits by
the Company in 1996 from its fishing and rental tool business in West Texas as
compared to losses in 1995; and the acquisitions the Company completed in the
second half of the year.
The Company's revenue increased 92% from $12.3 million for the year ended
December 31, 1995 as compared to $23.6 million for the year ended December 31,
1996. In comparing 1995 to 1996, without giving effect to acquisitions or the
Joint Venture, revenue increased 36% as a result of increased levels of
activity in the Gulf of Mexico. Of the increase in revenue, $5.8 million was
generated by businesses acquired by the Company in late 1995 and 1996, and
$1.3 million from the Joint Venture.
The Company's gross margin increased from 39.3% for the year ended December
31, 1995 to 53.3% for the year ended December 31, 1996. In comparing 1995 to
1996, without giving effect to acquisitions or the Joint Venture, gross
margins increased from 37.8% in 1995 to 46.3% in 1996. The significant
increase in gross margins was primarily the result of a decrease in the amount
of marine equipment rented by the Company for its P&A operations during the
period, the cost of which is billed to the customer without the usual mark-up
and collected as revenue, as well as an increase in the percentage of the
Company's revenue attributable to the rental tool and data acquisition
businesses, which tend to have higher margins than the Company's other
businesses.
Depreciation and amortization increased 402%, from $259,000 for the year
ended December 31, 1995 compared to $1.3 million for the year ended December
31, 1996. The increase was due primarily to the inclusion of Oil Stop and the
assets contributed to the Joint Venture for a full year in 1996 as compared to
only two weeks in 1995 and, to a lesser extent, the increase in the Company's
asset base as a result of the acquisitions completed in 1996. General and
administrative expenses were 26.4% of revenue for the year ended December 31,
1995 as compared to 24.3% of revenue for the year ended December 31, 1996.
Effective as of December 31, 1995, the Company elected the early adoption of
Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The undiscounted net cash flows from the Joint Venture were less than the
carrying value of the fixed assets devoted to the joint venture and associated
goodwill, indicating that an impairment had taken place. As a result, the
Company recognized a non-cash charge in 1995 for the impairment of long-lived
assets of $4.0 million, consisting of the write-off of $3.5 million of
goodwill and $0.5 million of property, plant and equipment.
Net income for the year ended December 31, 1996 was $3.9 million resulting
in earnings of $0.22 per share. This compares to a net loss, as adjusted for
pro forma income taxes, of $3.4 million or a loss per share of $0.38 for the
year ended December 31, 1995. Prior to the Share Exchange, the Superior
Companies were S corporations for federal income tax purposes and thus paid no
federal income tax at the corporate level. Results for the year ended December
31, 1995, also include a one-time charge of $4.0 million for the impairment of
long-lived assets discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $11.6 million in working capital as
compared to $2.6 million at December 31, 1996. For the nine months ended
September 30, 1997, the Company had net income of $5.7
22
<PAGE>
million and net cash provided by operating activities of $696,000, compared to
$2.6 million and $2.0 million, respectively, for the same period in 1996. The
Company's EBITDA increased from $4.6 million for the nine months ended
September 30, 1996 to $11.0 million for the same period in 1997. The increase
in working capital, net income, cash flow and EBITDA was the result of the
Company's internal growth as well as the impact of the acquisitions completed
in 1996 and during the first nine months of 1997. Other sources of cash
included approximately $14.7 million from the issuance of shares of Common
Stock in connection with the exercise of the Company's Class B Warrants, which
were redeemed on September 25, 1997, and stock option exercises.
In the first nine months of 1997, the Company's capital expenditures have
been primarily for acquisitions. During this period, the Company completed
three acquisitions for an aggregate of $10.4 million in cash, 1,520,000 shares
of Common Stock and promissory notes providing for contingent payments of up
to $3.0 million plus interest. The amounts due under the promissory notes, if
any, will be payable on December 31, 1999, and are contingent upon the
achievement of certain financial goals by the acquired companies during the
period from their acquisition until December 31, 1999. These acquisitions were
funded through borrowings of approximately $9.5 million which were repaid with
a portion of the proceeds from the warrant exercise described above. In
connection with the Recent Acquisitions, the Company has issued or will issue
additional promissory notes that provide for contingent payments of up to
$17.6 million, which are payable in 2000 and contingent upon the achievement
of financial goals by the acquired companies.
In October 1997, the Company established the Bank Credit Facility with
Whitney National Bank. Borrowings under the Bank Credit Facility are available
for letters of credit, working capital, general corporate purposes and certain
acquisitions. Indebtedness under the Bank Credit Facility is guaranteed by the
Company's subsidiaries and collateralized by accounts receivable, equipment,
inventory and contract rights of the Company and its subsidiaries. Pursuant to
the Bank Credit Facility, the Company has agreed to maintain certain financial
ratios. The Bank Credit Facility also imposes certain limitations on the
ability of the Company to make capital expenditures, pay dividends or other
distributions to its stockholders, make acquisitions or incur indebtedness
outside of the Bank Credit Facility.
As of November 5, 1997, there was approximately $40.8 million outstanding
under the Bank Credit Facility. Amounts outstanding under the Bank Credit
Facility were used to repay indebtedness incurred to fund the acquisitions
completed during the first nine months of 1997 and to fund the Recent
Acquisitions. The Company intends to use the net proceeds of the Offering to
repay a portion of the indebtedness incurred under the Bank Credit Facility to
fund the Recent Acquisitions. Upon completion of the Offering and the
application of the net proceeds therefrom as described herein, the Company
will have approximately $7.5 million in outstanding indebtedness under the
Bank Credit Facility. As amended, the Bank Credit Facility provides for a
revolving line of credit up to $30.0 million, subject to certain borrowing
base calculations, which will mature on March 31, 1999 and bear interest at an
annual rate of LIBOR plus a margin that depends on the Company's debt coverage
ratio (currently 7.27%). The remainder of the Bank Credit Facility will be
available to the Company for future acquisitions, if any, working capital and
general corporate purposes. Although the Company is continually evaluating
potential acquisitions, it does not have any contracts, understandings or
arrangements with respect to any material acquisitions, other than those
described herein. See "Use of Proceeds."
Management currently believes that the Company will have capital
expenditures, excluding acquisitions, of approximately $15 to $20 million
during the remainder of 1997 and in 1998, primarily for additional rental tool
inventory and additional P&A and wireline equipment. The Company believes that
cash generated from operations and availability under the Bank Credit Facility
will provide sufficient funds for the Company's identified capital projects
and working capital requirements. However, part of the Company's strategy
involves the acquisition of companies which have products and services
complementary to the Company's existing base of operations. Depending on the
size of any future acquisitions, the Company may require additional debt
financing, possibly in excess of the limits of the Bank Credit Facility, or
additional equity financing.
23
<PAGE>
BUSINESS
THE COMPANY
General. The Company provides a broad range of specialized oilfield services
and equipment primarily to major and independent oil and gas companies engaged
in the exploration, production and development of oil and gas properties
offshore in the Gulf of Mexico and throughout the Gulf Coast region. These
services and equipment include the rental of specialized oilfield equipment,
oil and gas well P&A services, electric and mechanical wireline services, the
manufacture, sale and rental of drilling instrumentation and the manufacture
and sale of oil spill containment equipment. Over the last two years, the
Company has significantly expanded its operations through both internal growth
and strategic acquisitions. This expansion has enabled the Company to broaden
the range of products and services that it offers to its customers and to
expand its operations geographically throughout the Gulf Coast region.
As a result of its expansion and increased demand for its services and
products, the Company has experienced significant growth in revenue, EBITDA
and net income. For the nine months ended September 30, 1997, the Company
generated revenue of $33.3 million, EBITDA of $11.0 million and net income of
$5.7 million. These amounts represent increases of approximately 119%, 142%
and 119%, respectively, over the comparable period in 1996. On a pro forma
basis for the nine months ended September 30, 1997, assuming all the
acquisitions completed in 1997, including the Recent Acquisitions, were
completed on January 1, 1996, the Company would have generated revenue, EBITDA
and net income of $59.1 million, $20.4 million and $8.3 million, respectively.
Background. In 1989, the Company's management started Superior Well
Services, Inc. and began offering P&A services offshore in the Gulf of Mexico.
As the Company's P&A business grew, the Company also expanded into wireline
services and rental tool operations and continued the data acquisition and
monitoring business that its founders had started in the mid-1980s. In
December 1995, the Company completed the Share Exchange, pursuant to which the
stock of (i) the Superior Companies and (ii) Oil Stop was acquired by the
Company in exchange for an aggregate of 10,200,000 shares of Common Stock and
$2.0 million in cash. Upon completion of the Share Exchange, the Company's
current management team assumed control of the Company, and in January 1996
the assets related to the Company's unprofitable fishing and rental tool
business in West Texas were placed into the Joint Venture.
Acquisition Growth. The Company has completed several acquisitions of
companies with products and services similar or complementary to those already
offered by the Company. These acquisitions have allowed the Company to expand
its P&A, wireline, rental tool and data monitoring operations both in terms of
size and geographic scope. The Company completed a total of five acquisitions
during 1996 and the first nine months of 1997.
<TABLE>
<CAPTION>
DATE OF
ACQUIRED COMPANY ACQUISITION BUSINESS
- ------------------------------------- -------------- -----------------------------
<S> <C> <C>
Baytron, Inc. July 1996 Data Acquisition
Dimensional Oilfield Services, Inc. September 1996 P&A Services
Concentric (Nautilus) Pipe & Tool
Rentals February 1997 Rental Tools
F.&F. Wireline Services, Inc. April 1997 Wireline Services (Mechanical)
Tong Rentals and Supply Company, Inc. May 1997 Rental Tools
</TABLE>
Recent Acquisitions. Since September 30, 1997, the Company has closed three
acquisitions, each of which will expand the size and geographic scope of the
Company's rental tool operations.
. Sub-Surface. In November 1997, the Company completed its acquisition of
Sub-Surface for $17.5 million in cash and a contingent payment of up to
$7.5 million plus interest, the amount of which is dependent upon Sub-
Surface's financial performance over the next three years. Sub-Surface
rents specialized equipment including tubulars, tubular handling tools and
pressure control equipment for drilling, completion and workover operations
that it provides through four facilities along the Gulf Coast.
24
<PAGE>
. Stabil Drill. In October 1997, the Company completed its acquisition of
Stabil Drill for $17.5 million in cash and a contingent payment of up to
$7.5 million plus interest, the amount of which is dependent upon Stabil
Drill's financial performance over the next three years. Stabil Drill
specializes in the sale and rental of drilling stabilizers along with a
full range of tools used in bottom hole assemblies that it provides through
five facilities located throughout the Gulf Coast.
. Fastorq. In October 1997, the Company completed its acquisition of Fastorq
for $4.8 million in cash and a contingent payment of up to $2.6 million
plus interest, the amount of which is dependent upon Fastorq's financial
performance over the next three years. Fastorq provides hydraulic nipple
up, wrench bolting, bolt turning, nut splitting, bolt removal and
mechanical pipe cutting services along with hydrostatic test pump rentals
to the Gulf Coast region from its two Louisiana facilities.
BUSINESS STRATEGY
The Company's business strategy is to combine internal growth and strategic
acquisitions to expand the scope of the services and equipment that the
Company provides for its customers. Key elements of the Company's business
strategy are as follows:
Continue Expansion of Rental Tool Operations. The Company intends to
expand its rental tool operations to meet the increased demand for its
rental tool products in the Gulf Coast region. The Company plans to
increase the amount and types of equipment available to its customers by
expanding its rental tool inventory. Management believes that an expanded
rental tool inventory will enable the Company to further expand its
existing customer relationships within the consolidating rental tool
industry. Management also believes that growth in this segment is not
subject to the personnel constraints that are currently present in other
segments of the oilfield services industry.
Capitalize on Leading Position in P&A Services. The Company intends to
capitalize on its leading position in, and the increased demand for, P&A
services in the Gulf of Mexico by significantly increasing the number of
crews dedicated to P&A services. The Company plans to purchase or
manufacture the equipment necessary to operate as many as six new P&A
crews. The Company intends to base these crews out of its Houston, Texas
and Lafayette, Louisiana locations, further expanding the geographic scope
of its P&A operations, which are currently conducted from Belle Chasse,
Louisiana.
Expand Electric Wireline Services. Historically, the Company primarily
offered its electric wireline services as a complement to its P&A services.
The Company's customers, however, are increasingly seeking electric
wireline services from the Company independent of P&A operations. The
Company intends to purchase or manufacture additional electric wireline
units that will be dedicated solely to non-P&A operations, which management
believes will offer another avenue of growth for the Company.
Acquire Complementary Businesses. The Company continually evaluates
opportunities to acquire businesses which offer products and services
complementary to the Company's existing operations. Management believes
that acquisition candidates are available that will allow the Company to
increase both market share in its existing lines of business and the
geographic scope of its operations. The Company intends to continue to seek
acquisition candidates with strong existing management and to structure the
acquisitions to create incentives for the key personnel of the acquired
businesses to remain with the Company and expand their operations.
OPERATIONS
Rental Tools. The Company sells and rents specialized equipment for use with
onshore and offshore oil and gas well drilling, completion, production and
workover activities. Certain specialized tools are also manufactured by the
Company. Operators and drilling contractors generally find it more economical
to supplement their inventories with rental tools instead of maintaining a
complete inventory of tools, due to the variety of equipment required by the
different wells the operator may have in operation. The equipment needed for a
well is in large part determined by the geological features of the well area
and the size of the well itself.
25
<PAGE>
Through its internal growth and through acquisitions, the Company has
increased the size and breadth of its rental tool inventory and now has 19
locations throughout the Gulf Coast from Corpus Christi, Texas to Venice,
Louisiana, which serve all of the major staging points for oil and gas
activities along the Gulf Coast. The Company has recently initiated rental
tool operations in Venezuela and currently has a limited inventory of rental
tools in this market. Management believes that this region may represent an
active market for the Company in the future; however, there can be no
assurance that the Company will maintain or expand its operations in
Venezuela. The Company's broad range of rental tools includes, but is not
limited to the following:
<TABLE>
<S> <C>
Blowout
Preventers Hydraulic Torque Wrenches
Casing Jacks Power Swivels
Casing Saws Power Tongs
Coflexip Hoses Pressure Control Equipment
Drill Collars Stabilizers
Drill Pipe Test Pumps
Gravel Pack
Equipment Tubulars
Handling Tools Tubular Handling Tools
Hole Openers
</TABLE>
Plug and Abandonment Services. The Company is the leading provider of P&A
services in the Gulf of Mexico. The Company currently operates 14 P&A crews,
each of which is comprised of four to five members, and intends to expand its
number of P&A crews to as many as 20 during 1998.
The Company performs both permanent and temporary P&A services. The basic
steps in the permanent P&A process include: (i) entering the well and pulling
the safety plug using wireline; (ii) running wireline through production
tubing in order to identify any obstructions; (iii) rigging up pumps and
pumping salt water into the bottom zone to confirm that cement injection is
possible; (iv) pumping cement through tubing into the bottom zone; (v) re-
entering the well with wireline and perforating the tubing midway in the well
bore; (vi) pumping cement through tubing to establish a balanced plug at the
point of perforation to create an intermediate plug; (vii) re-entering the
well with wireline, cutting the tubing at 300 feet and pulling that portion of
the tubing from the well; (viii) setting a cast iron bridge plug at 300 feet;
(ix) pumping 150 feet of cement on top of the cast iron bridge plug; (x)
cutting and removing all casing 20 feet from surface or mudline. A temporary
abandonment typically involves steps (i) through (vi), with the upper half of
the well bore left intact to be re-entered or for a side track well to be
drilled at some future date.
The Company constructs all of its P&A spreads and thus has the flexibility
to build its spreads to satisfy market demand. Its custom-built, skid-mounted
P&A spreads are generally smaller than those used by many of its competitors
and allow the P&A process to be completed from liftboats and other work
platforms with low-lift capacities. Rig-less P&A offers a cost advantage over
P&A methods that require a drilling rig, and management believes that the
large majority of the wells in the Gulf of Mexico can be plugged and abandoned
using the rig-less P&A method. In delivering its P&A services, the Company has
combined both wireline and pumping expertise, which traditionally have been
provided separately, and believes that this combined expertise gives it a
competitive advantage over many of its competitors.
Wireline Services. The Company also provides electric and mechanical
wireline services to its customer base. These services are used to access a
well to assist in data acquisition, fishing tool operations, pipe recovery and
remedial activities. While the Company provides these services in connection
with P&A jobs, it also provides wireline services for non-P&A jobs, such as
logging and pipe recovery. The Company's wireline personnel are trained to
perform both P&A jobs and wireline services. In the third quarter of 1997, the
Company began expanding its electric wireline capacity by purchasing four
electric wireline units that will be dedicated solely to non-P&A operations.
Other Services. Other services provided by the Company include (i) data
acquisition and monitoring for the oil and gas industry and (ii) the
manufacture, sale and rental of oil spill containment equipment.
26
<PAGE>
The Company designs, manufactures and sells specialized drilling rig
instrumentation and data acquisition systems and computerized electronic
torque and pressure control equipment. The Company's data acquisition systems
are offered in connection with the use of a dispatcher to gather and record
data and maintain equipment on drilling rigs. The Company's torque and
pressure control equipment is used in connection with drilling and workover
operations, as well as the manufacture of oilfield tubular goods. The torque
control equipment monitors the relationship between size, weight, grade, rate
of makeup, torque and penetration of tubular goods to ensure a leak-free
connection within the pipe manufacturer's specification. The electronic
pressure control equipment monitors and documents internal and external
pressure testing of tubular connections.
The Company also, through third-party manufacturers who work on a
contractual basis pursuant to the Company's specifications, manufactures and
sells oil spill containment inflatable boom and ancillary
storage/deployment/retrieval equipment. The Company's inflatable boom utilizes
continuous single-point inflation technology with air feeder sleeves in
combination with mechanical check valves to permit continuous inflation of the
boom material. The Company sells, rents and licenses oil spill containment
technology to domestic and foreign oil companies, oil spill response companies
and cooperatives, the United States Coast Guard and to foreign governments and
their agencies.
CUSTOMERS; CONTRACTING AND MARKETING
The Company's P&A and wireline services are contracted for specific projects
on either a day rate or turnkey basis. Rental tools are leased to customers on
an as-needed basis pursuant to a day rate. The Company derives a significant
amount of its revenue from a small number of major and independent oil and gas
companies, in particular, Chevron USA and Conoco, Inc. In 1995 and 1996,
Chevron USA accounted for 23.7% and 34.5% of the Company's revenue,
respectively, and Conoco, Inc. accounted for 16.4% and 8.9%, respectively. On
a pro forma basis, giving effect to all of the acquisitions completed in 1997,
including the Recent Acquisitions, Chevron USA and Shell Oil Company accounted
for 20.3% and 14.0%, respectively, of the Company's pro forma revenue for the
nine months ended September 30, 1997. The inability of the Company to continue
to perform services for a number of its large existing customers, if not
offset by sales to new or existing customers, could have a material adverse
effect on the Company's business and financial condition. See "Risk Factors--
Dependence Upon Significant Customers."
Marketing for the Company's rental tools operations is conducted by the
Company's sales force which operates out of Belle Chasse, Lafayette and Houma,
Louisiana, as well as Houston, Texas. The Company's primary customers are oil
and gas companies, well operators and drilling contractors. Marketing for the
company's other activities is primarily conducted by personnel located at the
Company's facilities in Belle Chasse and Harvey, Louisiana.
COMPETITION
The Company competes in highly competitive areas of the oilfield services
industry. The volatility of oil and gas prices has led to a consolidation of
the number of companies providing services similar to the Company. This
reduced number of companies competes intensely for available projects. Many of
the Company's competitors are larger and have greater marketing, distribution,
financial and other resources than the Company. In the rental tool market, the
Company faces competition from a number of companies that have larger
inventories of equipment than the Company and many more facilities than the
Company.
There can be no assurance that the Company's operations will continue at
current volumes or prices if its current competitors or new market entrants
introduce new products or services with better features, performance, prices
or other characteristics than the Company's products and services. Competitive
pressures or other factors also may result in significant price competition
that could have a material adverse effect on the Company's results of
operations and financial condition. Furthermore, competition among oilfield
service and equipment providers is also based on provider's reputation for
safety and quality. Although the Company believes that its reputation for
safety and quality service is good, there can be no assurance that the Company
will be able to maintain its competitive position. See "Risk Factors--Intense
Competition."
27
<PAGE>
POTENTIAL LIABILITIES AND INSURANCE
The Company's operations involve a high degree of operational risk,
particularly of personal injuries and damage to equipment. Failure of the
Company's equipment could result in property damages, personal injury,
environmental pollution and resulting damage for which the Company could be
liable. Litigation arising from a catastrophic occurrence at a location where
the Company's equipment and services are used may in the future result in case
claims. The Company maintains insurance against risks that are consistent with
industry standards and required by its customers. Although management believes
that the Company's insurance protection is adequate, and that the Company has
not experienced a loss in excess of policy limits, there can be no assurance
that the Company will be able to maintain adequate insurance at rates which
management considers commercially reasonable, nor can there be any assurance
such coverage will be adequate to cover all claims that may arise. See "Risk
Factors--Operating Risks and Insurance."
GOVERNMENTAL REGULATION
The Company's business is significantly affected by state and federal laws
and other regulations relating to the oil and gas industry, by changes in such
laws and by changing administrative regulations and the level of enforcement
thereof. The Company cannot predict the level of enforcement of existing laws
and regulations or how such laws and regulations may be interpreted by
enforcement agencies or court rulings, whether additional laws and regulations
will be adopted, or the effect such changes may have on it, its businesses or
financial condition.
Federal and state laws require owners of non-producing wells to plug the
well and remove all exposed piping and rigging before the well is permanently
abandoned. The timing and need for P&A services for wells situated on the
federal outer continental shelf are regulated by the MMS. The MMS generally
requires wells to be permanently plugged and abandoned within one year of
lease expiration. State regulatory agencies similarly regulate P&A services
within state coastal waters. State regulatory timeframes for P&A can be as
long as one year for wells in Texas coastal waters or as short as 90 days
after the drilling or production operations cease in Louisiana coastal waters.
The MMS and state regulatory agencies will routinely grant extensions of time
for P&A requirements when a well has future leasehold potential or when it is
consistent with prudent operating practices, economic considerations or other
special circumstances. A decrease in the level of enforcement of such laws and
regulations in the future would adversely affect the demand for the Company's
services and products. Numerous state and federal laws and regulations also
affect the level of purchasing activity of oil containment equipment and
consequently the Company's business. There can be no assurance that a decrease
in the level of enforcement of laws and regulations in the future would not
adversely affect the demand for the Company's products. In addition, the
Company depends on the demand for its services from the oil and gas industry,
and such demand is affected by changing taxes, price controls and other laws
and regulations relating to the oil and gas industry generally. The adoption
of laws and regulations curtailing exploration and development drilling for
oil and gas in the Company's areas of operations for economic, environmental
or other policy reasons would adversely affect the Company's operations by
limiting demand for its services.
Certain of the Company's employees who perform services on offshore
platforms and vessels are covered by the provisions of the Jones Act, the
Death on the High Seas Act and general maritime law. These laws operate to
make the liability limits established under state workers' compensation laws
inapplicable to these employees and, instead, permit them or their
representatives to pursue actions against the Company for damages or job
related injuries, with generally no limitations on the Company's potential
liability. See "Risk Factors--Operating Risks and Insurance."
The Company believes that its present operations substantially comply with
applicable federal and state pollution control, and environmental protection
laws and regulations and that compliance with such laws has had no material
adverse effect upon its operations to date. Sanctions for noncompliance may
include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. Certain
28
<PAGE>
environmental laws provide for joint and several strict liabilities for
remediation of spills and releases of hazardous substances. In addition,
companies may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances. No assurance can be
given that environmental laws will not, in the future, materially adversely
affect the Company's operations and financial condition. Some environmental
statements impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. See "Risk Factors--Regulatory and Environmental Matters."
EMPLOYEES
As of October 2, 1997, the Company had approximately 320 employees. None of
the Company's employees is represented by a union or covered by a collective
bargaining agreement. The Company believes that its relations with its
employees is good.
PROPERTIES
Facilities. The Company owns certain facilities and leases other office,
service and assembly facilities under various operating leases, including 19
rental tool facilities located throughout the Gulf Coast from Corpus Christi,
Texas to Venice, Louisiana. The Company believes that all of its leases are at
competitive or market rates and does not anticipate any difficulty in leasing
suitable additional space upon expiration of its current lease terms.
The Company has recently purchased an approximately 26,000 square-foot
office building in Harvey, Louisiana. The Company is currently renovating this
facility and expects to consolidate all of its New Orleans-area sales and
administrative functions in this office by the end of the second quarter of
1998.
Intellectual Property. The Company uses several patented items in its
operations, which management believes are important but are not indispensable
to the Company's business. Although the Company anticipates seeking patent
protection when possible, it relies to a greater extent on the technical
expertise and know-how of its personnel to maintain its competitive position.
See "Risk Factors--Technology Risks."
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings primarily
involving commercial claims, workers' compensation claims and claims for
personal injury under the General Maritime Laws of the United States and the
Jones Act. While the outcome of these lawsuits, legal proceedings and claims
cannot be predicted with certainty, management believes that the outcome of
all such proceedings, even if determined already, would not have a material
adverse effect on the Company's business or financial condition.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of September 30, 1997
with respect to the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Terence E. Hall.............. 52 Chairman of the Board, Chief Executive Officer
and President
Ernest J. Yancey, Jr......... 48 Director and Vice President
James E. Ravannack........... 37 Director and Vice President
Richard J. Lazes............. 49 President of Oil Stop, Inc. and Director
Robert S. Taylor............. 43 Chief Financial Officer
Kenneth C. Boothe............ 52 Director
Bradford Small............... 35 Director
Justin L. Sullivan........... 58 Director
</TABLE>
Terence E. Hall has served as the Chairman of the Board, Chief Executive
Officer and President of the Company since December 1995. Since 1989, he has
served as President and Chief Executive Officer of Superior Well Service, Inc.
Ernest J. Yancey, Jr. has served as a Vice President and Director of the
Company since December 1995. Since 1989, he has served as Vice President--
Operations of Superior Well Service, Inc.
James E. Ravannack has served as a Vice President and Director of the
Company since December 1995. Since 1989, he has served as Vice President--
Sales of Superior Well Service, Inc.
Richard J. Lazes has served as a Director of the Company since December
1995, Mr. Lazes founded Oil Stop, Inc. in May 1990 and has served as its
President since its founding.
Robert S. Taylor has served as Chief Financial Officer of the Company since
January 1996. From May 1994 to January 1996, he served as Chief Financial
Officer of Kenneth Gordon (New Orleans), Ltd., an apparel manufacturer. From
November of 1989 to May 1994, he served as Chief Financial Officer of Plywood
Panels, Inc., a manufacturer and distributor of plywood paneling and related
wood products.
Kenneth C. Boothe has served as a director since 1991. Mr. Boothe served as
Chief Executive Officer and President of the Company from October 1993 until
December 1995 and as President of the Company's operating subsidiary, Superior
Fishing and Rental Tools, Inc. until May 1996. Mr. Boothe is now the senior
partner with Boothe, Vassar, Fox & Fox, certified public accountants, Big
Spring, Texas.
Bradford Small has served as a Director of the Company since December 1993.
From May 1996 to the present, Mr. Small has been a minister of Amarillo South
Church of Christ in Amarillo, Texas. From May 1995 to May 1996 he served as
minister of Highlands Church of Christ in Lakeland, Florida. From January 1991
until May 1995 he served as minister of Western Hills Church of Christ in
Amarillo, Texas.
Justin L. Sullivan has served as a Director of the Company since December
1995. Mr. Sullivan has been a business consultant to various companies since
May 1993. From October 1992 to May 1993, Mr. Sullivan served as President of
Plywood Panels, Inc., a manufacturer and distributor of plywood paneling and
related wood products. From 1967 to September 1992, he served as Vice
President, Treasurer and Director of Plywood Panels, Inc. and its predecessor
entities.
30
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation and the Bylaws of the Company contain
provisions to indemnify the directors, officers, employees or other agents to
the fullest extent permitted by the DGCL. In addition, the Company has entered
into indemnity contracts with its directors and executive officers, which
provide for indemnification of such officers and directors in certain
circumstances, including for liabilities under the Securities Act. The Company
believes that these provisions and contracts are necessary to attract and
retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
31
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of October 30, 1997 certain information
regarding beneficial ownership (determined in accordance with Rule 13d-3 under
the Exchange Act) of the Common Stock by (i) each stockholder known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company, (iv) each Selling Stockholder and (v) all of the Company's directors
and executive officers as a group. Unless otherwise indicated, the Company
believes that the stockholders listed below have sole investment and voting
power with respect to their shares based on information furnished to the
Company by such owners.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
COMMON STOCK
SHARES TO BE --------------------------
NAME OF BENEFICIAL NUMBER OF SHARES SOLD IN THE BEFORE AFTER
OWNER(1) BENEFICIALLY OWNED OFFERING(2) OFFERING OFFERING
- ------------------ ------------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Terence E. Hall......... 3,019,065(3) 618,902 12.0% 8.2%
Ernest J. Yancey, Jr.... 2,039,377(3)(4) 418,068 8.1% 5.6%
James E. Ravannack...... 2,047,377(3) 419,708 8.1% 5.6%
Richard J. Lazes........ 1,618,181 331,724 6.4% 4.4%
Rufus L. Patin.......... 1,100,000 225,498 4.4% 3.0%
John C. Gordon.......... 420,000 86,100 1.7% 1.1%
Justin L. Sullivan...... -- -- -- --
Kenneth C. Boothe....... 157,385(5) -- * *
Bradford Small.......... --(6) -- * *
Robert S. Taylor........ 25,000(7) -- * *
All Directors and
Executive Officers as a
group
(8 persons)............ 8,906,385(8) 1,788,402 35.1% 24.3%
</TABLE>
- --------
* Less than 1%.
(1) The address of Messrs. Hall, Yancey and Ravannack is 1503 Engineers Road,
Belle Chasse, Louisiana 70037. Mr. Lazes' address is 804 First Avenue,
Harvey, Louisiana 70058. Mr. Patin's address is 101 W. Saul Drive, Scott,
Louisiana 70583.
(2) If the Underwriters' over-allotment is exercised in full, Mr. Hall will
sell an additional 800,648 shares, Mr. Yancey, 28,044 shares, Mr.
Ravannack, 28,154 shares, Mr. Lazes, 22,252 shares, Mr. Patin, 15,126
shares and Mr. Gordon, 5,776 shares.
(3) Includes 44,000 shares of Common Stock that may be acquired upon the
exercise of options granted under the Incentive Plan.
(4) Includes 24,000 shares of Common Stock held by Mr. Yancey's children, of
which Mr. Yancey is deemed to be the beneficial owner, and 1,823,377 held
by a limited liability company controlled by Mr. Yancey.
(5) Represents 58,441 shares of Common Stock held of record by Mr. Boothe,
41,926 shares of Common Stock held in a trust, of which Mr. Boothe is the
sole voting trustee, 57,018 shares of Common Stock held in a corporation
for the benefit of Mr. Boothe, Bradford Small and Darnell Small with
respect to which Mr. Boothe has sole voting discretion.
(6) Does not include 41,926 shares of Common Stock held in trust for the
benefit of Mr. Small and his siblings, of which Mr. Boothe is the sole
voting trustee, or 57,018 shares of Common Stock held in a corporation for
the benefit of Mr. Booth, Bradford Small and Darnell Small with respect to
which Mr. Boothe has sole voting discretion.
(7) Includes 25,000 shares of Common Stock that may be acquired upon the
exercise of options.
(8) Includes 157,000 shares of Common Stock that may be acquired upon exercise
of options.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
common stock, $.001 par value per share (the "Common Stock"), and 5,000,000
shares of preferred stock, $.01 par value per share, issuable in series (the
"Preferred Stock"). As of October 30, 1997, 25,256,190 shares of Common Stock
were outstanding and held of record by approximately 115 persons, and no
shares of Preferred Stock were outstanding. The following description of the
capital stock of the Company is qualified in its entirety by reference to the
Company's Certificate and Bylaws, copies of which are incorporated herein by
reference as exhibits to the registration statement of which this Prospectus
forms a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of Common
Stock held of record on all matters on which stockholders are entitled to
vote; stockholders may not cumulate votes for the election of directors.
Stockholders may act upon any matter at a duly called meeting or by written
consent. Subject to the preferences accorded to the holders of the Preferred
Stock, if and when issued by the Board of Directors, holders of Common Stock
are entitled to dividends at such times and in such amounts as the Board of
Directors may determine. The Company has never paid cash dividends on its
Common Stock and does not intend to pay dividends for the foreseeable future.
In addition, the Company's Bank Credit Facility contains provisions that
prohibit the Company from paying dividends on its Common Stock. See "Risk
Factors--No Dividends" and "Dividends and Price Range of Common Stock." Upon
the dissolution, liquidation or winding up of the Company, after payment of
debts and expenses and payment of the liquidation preference plus any accrued
dividends on any outstanding shares of Preferred Stock, the holders of Common
Stock will be entitled to receive all remaining assets of the Company ratably
in proportion to the number of shares held by them. Holders of shares of
Common Stock have no preemptive, subscription, conversion or redemption rights
and are not subject to further calls or assessments, or rights of redemption
by the Company. The outstanding shares of Common Stock are, and the shares of
Common Stock being sold in the Offering will be, validly issued, fully paid
and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority, without approval of the
stockholders, to issue shares of Preferred Stock in one or more series and to
fix the number of shares and rights, preferences and limitations of each
series. Among the specific matters that may be determined by the Board of
Directors are the dividend rights, the redemption price, if any, the terms of
a sinking fund, if any, the amount payable in the event of any voluntary
liquidation, dissolution or winding up of the affairs of the Company's
conversion rights, if any, and voting powers, if any.
One of the effects of the existence of authorized but unissued Common Stock
and undesignated Preferred Stock may be to enable the Board of Directors to
make more difficult or to discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise, and
thereby to protect the continuity of the Company's management. If, in the
exercise of its fiduciary obligations, the Board of Directors were to
determine that a takeover proposal was not in the Company's best interest,
such shares could be issued by the Board of Directors without stockholder
approval in one or more transactions that might prevent or make more difficult
or costly the completion of the takeover transaction by diluting the voting or
other rights of the proposed acquiror or insurgent stockholder group, by
creating a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, the Company's Certificate grants the Board of
Directors broad power to establish the rights and preferences of the
authorized and unissued Preferred Stock, one or more series of which could be
issued entitling holders (i) to vote separately as a class on any proposed
merger or consolidation, (ii) to cast a proportionately larger vote together
with the Common Stock on any such transaction or for all purposes, (iii) to
elect directors having terms of office or voting
33
<PAGE>
rights greater than those of other directors, (iv) to convert Preferred Stock
into a greater number of shares of Common Stock or other securities, (v) to
demand redemption at a specified price under prescribed circumstances related
to a change of control or (vi) to exercise other rights designated to impede a
takeover. The issuance of shares of Preferred Stock pursuant to the Board of
Directors' authority described above may adversely effect the rights of
holders of the Common Stock.
In addition, certain other charter provisions that are described below may
have the effect of either alone, in combination with each other or with the
existence of authorized but unissued capital stock of making more difficult or
discouraging an acquisition of the Company deemed undesirable by the Board of
Directors.
CERTAIN CHARTER AND BYLAW PROVISIONS
Size of the Board of Directors; Removal of Directors; Filling of Vacancies
on the Board of Directors. The Company's Bylaws provide that the number of
directors shall be fixed from time to time by the Board of Directors but shall
not be less than three nor more than eleven. The Company's Bylaws also provide
that a newly created directorship resulting from an increase in the number of
directors and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause may be filled by the affirmative vote of
the majority of the remaining directors then in office, although less than a
quorum, or by a sole remaining director. In addition, these provisions specify
that directors elected to fill a vacancy or a newly created directorship on
the Board of Directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier resignation or removal.
Amendment of the Bylaws. Under the DGCL, the power to adopt, amend or repeal
bylaws is conferred upon the stockholders; however, a corporation may in its
certificate of incorporation also confer upon the board of directors the power
to adopt, amend or repeal its bylaws. The Company's Certificate and Bylaws
grant the Board of Directors the power to adopt, amend and repeal the Bylaws.
Delaware Anti-Takeover Statute. The Company is also subject to Section 203
of the DGCL, which prohibits Delaware corporations from engaging in a wide
range of specified transactions with any interested stockholder, defined to
include, among others, any person other than such corporation and any of its
majority-owned subsidiaries who own 15% or more of any class or series of
stock entitled to vote generally in the election of directors, unless, among
other exceptions, the transaction is approved by (i) the Board of Directors
prior to the date the interested stockholder obtained such status, or (ii) the
holders of two-thirds of the outstanding shares of each class or series of
stock entitled to vote generally in the election of directors, not including
those shares owned by the interested stockholder.
The provisions described above may tend to deter any potential unfriendly
offers or other efforts to obtain control of the Company that are not approved
by the Board of Directors and thereby deprive the stockholders of
opportunities to sell shares of Common Stock at prices higher than the
prevailing market price. On the other hand, these provisions will tend to
assure continuity of management and corporate policies and to induce any
person seeking control of the Company or a business combination with the
Company to negotiate or terms acceptable to the then elected Board of
Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York
10005.
34
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Johnson Rice
& Company L.L.C., Jefferies & Company, Inc. and Gaines, Berland Inc., are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders, the respective number
of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Johnson Rice & Company L.L.C.................................... 1,800,000
Jefferies & Company, Inc........................................ 1,800,000
Gaines, Berland Inc............................................. 900,000
Bear, Stearns & Co. Inc......................................... 120,000
BT Alex, Brown Incorporated..................................... 120,000
Goldman, Sachs & Co............................................. 120,000
Howard, Weil, Labouisse, Friedrichs Incorporated................ 120,000
Oppenheimer & Co., Inc.......................................... 120,000
PaineWebber Incorporated........................................ 120,000
Prudential Securities Incorporated.............................. 120,000
Schroder & Co. Inc.............................................. 120,000
Morgan Keegan & Company, Inc.................................... 60,000
Petrie Parkman & Co., Inc....................................... 60,000
Principal Financial Securities, Inc............................. 60,000
Rauscher Pierce Refsnes, Inc.................................... 60,000
Raymond James & Associates, Inc................................. 60,000
Sanders Morris Mundy Inc........................................ 60,000
Scott & Stringfellow, Inc....................................... 60,000
Simmons & Company International................................. 60,000
Van Kasper & Company............................................ 60,000
---------
Total......................................................... 6,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $0.30 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, "passive" market making and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase from the
Company and the Selling Shareholders in the Offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the shares of Common Stock sold
in the Offering for their account may be reclaimed by the syndicate if such
shares of Common Stock are repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Common Stock, which may be higher than the
price that might otherwise prevail in the open market; and these activities,
if commenced, may be discontinued at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market
makers") in the Common Stock may make bids for or purchases
35
<PAGE>
of the Common Stock in the Nasdaq National Market until such time, if any,
when a stabilizing bid for such securities has been made. Rule 103 generally
provides that (i) a passive market maker's net daily purchases of the Common
Stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months (or any 60 consecutive
days ending within the 10 days) immediately preceding the filing date of the
registration statement of which this Prospectus forms a part, (ii) a passive
market maker may not effect transactions or display bids for the Common Stock
at a price that exceeds the highest independent bid for the Common Stock by
persons who are not passive market makers and (iii) bids made by passive
market makers must be identified as such.
The Selling Stockholders have granted to the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 900,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
6,000,000 shares of Common Stock offered.
The Company and the Selling Stockholders have agreed not to offer to sell,
sell, grant any option to purchase or otherwise dispose of any shares of any
capital stock of the Company (or securities convertible into, or exchangeable
for capital stock of the Company), directly or indirectly, for a period of 120
days after the date of this Prospectus, without the prior written consent of
Johnson Rice & Company L.L.C., except for grants of stock options by the
Company to its officers, directors and employees and issuance of stock upon
exercise of options held by such persons, and except for shares of capital
stock issued by the Company in connection with the acquisition of assets or
capital stock of any company engaged in the oil and gas service business.
Certain of the Underwriters have from time to time provided investment
banking and financial advisory services to the Company, and such firms may in
the future provide similar services to the Company, for which they have
received or are expected to receive customary fees.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New
Orleans, Louisiana. Certain legal matters in connection with the shares of
Common Stock offered hereby are being passed upon for the Underwriters by
Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1996, and for the two years ended December 31, 1996 have been included in
this Prospectus and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the Company's
consolidated financial statements refers to the adoption in 1995 of the method
of accounting for the impairment of long-lived assets and long-lived assets to
be disposed of prescribed by Statement of Financial Accounting Standards No.
121.
The financial statements of Nautilus (Concentric) Pipe and Rental Tool, Inc.
and Tong Rentals & Supply Co., Inc. as of December 31, 1996, and for the year
then ended have been incorporated by reference into this Registration
Statement in reliance upon the reports, of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated herein by reference and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Stabil Drill as of August 31, 1996 and 1997 and
for the two years then ended, and of Sub-Surface as of July 31, 1997, and for
the year then ended have been included in this Prospectus and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
36
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
documents with the Securities and Exchange Commission (the "Commission").
Documents filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the
regional offices of the Commission at the following locations: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048
and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
Commission (http://www.sec.gov). The Company's Common Stock is traded on the
Nasdaq National Market. Reports, proxy statements and other information may
also be inspected at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
The Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Company and the Common Stock. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed or incorporated by reference as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in
its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated herein by reference:
(i) the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996; (ii) the Company's Quarterly Reports on Form 10-QSB for the
fiscal quarters ended March 31, 1997, June 30, 1997 and September 30, 1997;
(iii) the description of the Company's Common Stock set forth in its
registration statement under the Exchange Act on Form 8-A/A dated October 29,
1997; and (iv) the Company's Current Reports on Form 8-K dated May 31, 1997
(as amended on Form 8-K/A dated June 13, 1997), February 28, 1997 (as amended
on Form 8-K/A dated March 14, 1997), October 3, 1997 and October 31, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference herein and to be made a part hereof
from their respective dates of filing. Information appearing herein or in any
particular document incorporated herein by reference is not necessarily
complete and is qualified in its entirety by the information and financial
statements appearing in all of the documents incorporated herein by reference
and should be read together therewith. Any statements contained in a document
incorporated or deemed to be incorporated by reference shall be deemed to be
modified or superseded to the extent that a statement contained herein or in
any other document subsequently filed or incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of any
such person, a copy of any of the documents incorporated herein by reference,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests for such copies should
be directed to Superior Energy Services, Inc., 1503 Engineers Road, Attention:
Investor Relations, P.O. Box 6220, New Orleans, Louisiana 70174, telephone
(504) 393-7774.
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Condensed Financial Statements
Unaudited Pro Forma Condensed Balance Sheet as of September 30, 1997.... F-3
Unaudited Pro Forma Condensed Statement of Earnings for the nine months
ended September 30, 1997............................................... F-4
Unaudited Pro Forma Condensed Statement of Earnings for the year ended
December 31, 1996...................................................... F-5
Notes to Unaudited Pro Forma Condensed Financial Statements............. F-6
Superior Energy Services, Inc.
Independent Auditors' Report............................................ F-8
Consolidated Balance Sheets at December 31, 1995 and 1996............... F-9
Consolidated Statements of Operations for the years ended December 31,
1995 and 1996.......................................................... F-10
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995 and 1996....................................... F-11
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996.......................................................... F-12
Notes to Consolidated Financial Statements.............................. F-13
Condensed Consolidated Balance Sheet as of September 30, 1997
(unaudited)............................................................ F-23
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1996 and 1997 (unaudited).............. F-24
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 (unaudited).......................... F-25
Notes to Condensed Consolidated Financial Statements.................... F-26
Stabil Drill Specialties, Inc.
Independent Auditors' Report............................................ F-28
Balance Sheets at August 31, 1996 and 1997.............................. F-29
Statements of Income and Retained Earnings for the years ended August
31, 1996 and 1997...................................................... F-30
Statements of Cash Flows for the years ended August 31, 1996 and 1997... F-31
Notes to Financial Statements........................................... F-32
Sub-Surface Tools, Inc.
Independent Auditors' Report............................................ F-38
Balance Sheet at July 31, 1997.......................................... F-39
Statement of Income and Retained Earnings for the year ended July 31,
1997................................................................... F-40
Statement of Cash Flows for the year ended July 31, 1997................ F-41
Notes to Financial Statements........................................... F-42
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information has been
prepared by management utilizing the historical financial statements of
Superior Energy Services, Inc. (Superior), Baytron, Inc. (Baytron) through
July 31, 1996, Dimensional Oilfield Services, Inc. (Dimensional) through
September 15, 1996, Nautilus Pipe and Rental Tools, Inc. (Nautilus) through
February 28, 1997, F.&F. Wireline Services, Inc. (F.&F.) through April 30,
1997, Tong Rentals and Supply Co., Inc. (Tong) through May 31, 1997, Fastorq,
Stabil Drill and Sub-Surface. Adjustments have been made to reflect the
financial impact of purchase accounting and other items had the acquisitions
taken place on January 1, 1996 with respect to operating data and September
30, 1997 with respect to balance sheet data. The pro forma adjustments are
described in the accompanying notes and are based upon preliminary estimates
and certain assumptions that management of the companies believe reasonable
under the circumstances.
The unaudited pro forma condensed financial information is for comparative
purposes only and does not purport to be indicative of the results which would
actually have been obtained had the acquisitions been effected on the pro
forma dates, or of the results which may be obtained in the future. The
unaudited pro forma condensed financial information in the opinion of
management reflect all adjustments necessary to present fairly the data for
such periods.
With respect to the unaudited pro forma condensed financial information
prepared for the nine months ended September 30, 1997, for purposes of
simplicity, and as permitted by the rules and regulations of the Commission,
the financial information for Stabil Drill is as of and for the nine months
ended August 31, 1997 and the financial information for Sub-Surface is as of
and for the nine months ended July 31, 1997.
The unaudited pro forma condensed financial information should be read in
conjunction with the historical financial statements appearing elsewhere in
this Prospectus or incorporated herein by reference.
F-2
<PAGE>
SUPERIOR ENERGY SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL STABIL SUB- ---------------
ASSETS SUPERIOR FASTORQ DRILL SURFACE DR. CR. PRO FORMA
------ ---------- ------- ------ ------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................... $ 1,103 760 749 627 3,239
Accounts receivable--
net.................... 13,183 1,349 4,250 2,143 20,925
Inventories............. 1,474 -- -- -- 1,474
Deferred income taxes... 137 -- -- -- 137
Other................... 885 10 13 34 942
------- ----- ----- ------ -------
Total current assets. 16,782 2,119 5,012 2,804 26,717
Property, plant &
equipment--net......... 23,193 925 4,225 13,770 A 267 45,114
B 1,994
C 810
Goodwill................ 17,347 -- 474 -- A 2,402 35,895
B 11,506
C 4,166
Other assets............ 1,052 -- 39 9 1,100
------- ----- ----- ------ -------
Total assets......... $58,374 3,044 9,750 16,513 108,826
======= ===== ===== ====== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Notes payable......... -- -- 336 1,384 1,720
Trade accounts
payable.............. 2,244 -- 1,004 1,226 4,474
Notes payable other... 296 -- -- -- 296
Unearned income....... 173 -- -- -- 173
Accrued expenses...... 2,166 -- 251 -- 2,417
Income taxes payable.. 352 519 753 -- 1,624
Deferred income taxes. -- -- 174 -- 174
Other................. -- 28 -- -- 28
------- ----- ----- ------ -------
Total current
liabilities......... 5,231 547 2,518 2,610 10,906
Notes payable........... 1,412 165 1,244 -- A 4,810 42,631
B 17,500
C 17,500
Deferred income taxes... 3,570 92 1,250 1,079 A 99 7,128
B 738
C 300
Stockholders' equity:
Common stock.......... 25 1 -- (4)A 1 25
C 4
Additional paid-in
capital.............. 41,620 -- 39 -- B 39 41,620
Retained earnings..... 6,516 2,239 4,699 12,828 A 2,239 6,516
B 4,699
C 12,828
------- ----- ----- ------ -------
Total stockholders'
equity.............. 48,161 2,240 4,738 12,824 48,161
------- ----- ----- ------ -------
Total liabilities and
stockholders'
equity.............. $58,374 3,044 9,750 16,513 108,826
======= ===== ===== ====== =======
</TABLE>
F-3
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL SUPERIOR HISTORICAL HISTORICAL
HISTORICAL HISTORICAL F&F TONG PRO FORMA PRE-RECENT HISTORICAL STABIL SUB
SUPERIOR NAUTILUS WIRELINE RENTAL ADJUSTMENTS ACQUISITIONS FASTORQ DRILL SURFACE
---------- ---------- ---------- ---------- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $33,309 575 336 1,523 35,743 3,934 11,536 7,846
------- --- --- ----- --- ------ ----- ------ -----
Costs and expenses:
Costs of
services.......... 14,735 264 137 532 15,668 1,658 4,881 2,723
Depreciation and
amortization...... 1,992 109 5 77 D 81 2,264 85 606 1,339 E
General and
administrative.... 7,556 209 48 545 8,358 1,732 2,619 2,010 K
Total costs and
expenses........ 24,283 582 190 1,154 81 26,290 3,475 8,106 6,072
------- --- --- ----- --- ------ ----- ------ -----
Income from
operations......... 9,026 (7) 146 369 (81) 9,453 459 3,430 1,774
Other income
(expense):
Interest expense.. (463) (27) (2) -- (492) -- (55) (122)L
Other............. -- -- -- -- -- -- 20 --
------- --- --- ----- --- ------ ----- ------ -----
Income before
income taxes.... 8,563 (34) 144 369 (81) 8,961 459 3,395 1,652
Income taxes....... 2,826 -- -- 129 H (12) 2,943 165 1,392 608 I
------- --- --- ----- --- ------ ----- ------ -----
Net income........ $ 5,737 (34) 144 240 (69) 6,018 294 2,003 1,044
======= === === ===== === ====== ===== ====== =====
Net income per
common share and
common share
equivalent......... $ 0.28 $ 0.29
======= ======
Weighted average
shares outstanding. 20,259 20,958
======= ======
<CAPTION>
PRO FORMA PRO
ADJUSTMENTS FORMA
----------- -------
<S> <C> <C>
Revenues........... 59,059
----------- -------
Costs and expenses:
Costs of
services.......... 24,930
Depreciation and
amortization...... 7 4,301
General and
administrative.... (970) 13,749
Total costs and
expenses........ (968) 42,980
----------- -------
Income from
operations......... 968 16,079
Other income
(expense):
Interest expense.. (2,314) (2,983)
Other............. 20
----------- -------
Income before
income taxes.... (1,346) 13,116
Income taxes....... (249) 4,859
----------- -------
Net income........ (1,097) 8,257
=========== =======
Net income per
common share and
common share
equivalent......... $ 0.39
=======
Weighted average
shares outstanding. 20,958
=======
</TABLE>
F-4
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL SUPERIOR
HISTORICAL HISTORICAL HISTORICAL HISTORICAL F&F TONG PRO FORMA PRE-RECENT STABIL
SUPERIOR BAYTRON DIMENSIONAL NAUTILUS WIRELINE RENTAL ADJUSTMENTS ACQUISITIONS FASTORQ DRILL
---------- ---------- ----------- ---------- ---------- ---------- ----------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $23,638 1,277 4,053 4,424 1,269 5,061 39,722 3,687 10,140
------- ----- ----- ----- ----- ----- ---- ------ ----- ------
Costs and expenses:
Costs of
services.......... 11,040 367 2,982 1,401 674 1,269 17,733 1,748 4,596
Depreciation and
amortization...... 1,323 40 26 556 32 274 F 515 2,766 88 726
General and
administratiave... 5,737 773 584 1,560 372 2,391 11,417 861 3,091
------- ----- ----- ----- ----- ----- ---- ------ ----- ------
Total costs and
expenses........ 18,100 1,180 3,592 3,517 1,078 3,934 515 31,916 2,697 8,413
------- ----- ----- ----- ----- ----- ---- ------ ----- ------
Income from
operations......... 5,538 97 461 907 191 1,127 (515) 7,806 990 1,727
Other income
(expense):
Interest expense.. (127) (8) (45) (125) (35) -- (340) -- (132)
Other............. 206 (16) -- -- -- -- 190 -- --
------- ----- ----- ----- ----- ----- ---- ------ ----- ------
Income before
income taxes.... 5,617 73 416 782 156 1,127 (515) 7,656 990 1,595
Income taxes....... 1,685 -- -- 301 65 428 H (49) 2,410 356 638
J (20)
------- ----- ----- ----- ----- ----- ---- ------ ----- ------
Net income........ $ 3,932 73 416 481 91 699 (446) 5,246 634 957
======= ===== ===== ===== ===== ===== ==== ====== ===== ======
Net income per
common share and
common share
equivalent......... $ 0.22 $ 0.26
======= ======
Weighted average
shares outstanding. 17,619 20,167
======= ======
<CAPTION>
SUPERIOR
SUB PRO FORMA PRO
SURFACE ADJUSTMENTS FORMA
--------- ----------- --------
<S> <C> <C> <C>
Revenues........... 10,614 64,163
--------- ----------- --------
Costs and expenses:
Costs of
services.......... 4,394 28,471
Depreciation and
amortization...... 2,016 G (113) 5,483
General and
administratiave... 1,858 K (142) 17,085
--------- ----------- --------
Total costs and
expenses........ 8,268 (255) 51,039
--------- ----------- --------
Income from
operations......... 2,346 255 13,124
Other income
(expense):
Interest expense.. (88)L (3,085) (3,645)
Other............. -- 190
--------- ----------- --------
Income before
income taxes.... 2,258 (2,830) 9,669
Income taxes....... 813 (543) 3,674
--------- ----------- --------
Net income........ 1,445 (2,287) 5,995
========= =========== ========
Net income per
common share and
common share
equivalent......... $ 0.30
========
Weighted average
shares outstanding. 20,167
========
</TABLE>
F-5
<PAGE>
A) To reflect the purchase price adjustments related to the acquisition of
Fastorq, Inc. The purchase price is the sum of $4,810,000 cash and a
promissory note, contingent on future earnings, of $2,590,000. Amounts to
be paid under the promissory note are subject to certain minimum earnings
requirements and are not reflected in the purchase price which approximates
$4,810,000. The property and equipment were valued at their approximate
fair value of $1,192,000. Deferred taxes have been provided for the
difference between the book and tax basis of the property, plant and
equipment acquired. The excess purchase price over the fair value of net
assets of Fastorq at September 30, 1997 of approximately $2,402,000 was
allocated to goodwill to be amortized over 20 years.
B) To reflect the purchase price adjustments related to the acquisition of
Stabil Drill, Inc. The purchase price is the sum of $17,500,000 cash and a
promissory note, contingent on future earnings, of $7,500,000. Amounts to
be paid under the promissory note are subject to certain minimum earnings
requirements and is not reflected in the purchase price which approximated
$17,500,000. The property and equipment were valued at their approximate
fair value of $6,219,000. Deferred taxes have been provided for the
difference between the book and tax basis of the property, plant and
equipment acquired. The excess purchase price over the fair value of net
assets of Stabil Drill at September 30, 1997 of approximately $11,506,000
was allocated to goodwill to be amortized over 20 years.
C) To reflect the purchase price adjustments related to the acquisition of
Sub-Surface, Inc. The purchase price is the sum of $17,500,000 cash and a
promissory note, contingent on future earnings, of $7,500,000. Amounts to
be paid under the promissory note are subject to certain minimum earnings
requirements and are not reflected in the purchase price which approximates
$17,500,000. The property and equipment were valued at their approximate
fair value of $14,580,000. Deferred taxes have been provided for the
difference between the book and tax basis of the property, plant and
equipment acquired. The excess purchase price over the fair value of net
assets of Sub-Surface at September 30, 1997 of approximately $4,166,000 was
allocated to goodwill be amortized over 20 years.
D) To reflect depreciation and amortization of goodwill associated with the
acquisitions of Nautilus, F&F Wireline and Tong for the pro forma nine-
months ended September 30, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Adjustments For: Nautilus F&F Wireline Tong Total
-------- ------------ ------- -------
Depreciation........................ $(18,000) 14,000 (21,000) (25,000)
Amortization........................ 22,000 5,000 79,000 106,000
-------- ------------ ------- -------
Total............................. $ 4,000 19,000 58,000 81,000
======== ============ ======= =======
</TABLE>
E) To reflect the depreciation and amortization of goodwill associated with
the acquisitions of Fastorq, Stabil Drill and Sub-Surface for the pro forma
nine-months ended September 30, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Adjustments For: Fastorq Stabil Drill Sub-Surface Total
------- ------------ ----------- --------
Depreciation.................... $ 5,000 (178,000) (497,000) (670,000)
Amortization.................... 90,000 431,000 156,000 677,000
------- ------------ ----------- --------
Total......................... $95,000 253,000 (341,000) 7,000
======= ============ =========== ========
</TABLE>
F-6
<PAGE>
F) To reflect the depreciation and amortization of goodwill associated with
the acquisitions of Nautilus, F&F Wireline, Tong, Dimensional and Baytron
for the pro forma year 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Adjustments For: Nautilus F&F Wireline Tong Dimensional Baytron Total
--------- ------------ ------- ----------- ------- -------
Depreciation............ $(110,000) 54,000 (85,000) 38,000 18,000 (85,000)
Amortization............ 131,000 20,000 317,000 94,000 38,000 600,000
--------- ------------ ------- ----------- ------- -------
Total................. $ 21,000 74,000 232,000 132,000 56,000 515,000
========= ============ ======= =========== ======= =======
</TABLE>
G) To reflect the depreciation and amortization of goodwill associated with
the acquisitions of Fastorq, Stabil Drill and Sub-Surface for the pro forma
year 1996.
<TABLE>
<S> <C> <C> <C> <C>
Adjustment For: Fastorq Stabil Drill Sub-Surface Total
-------- ------------ ----------- ----------
Depreciation................. $ 33,000 (155,000) (894,000) (1,016,000)
Amortization................. 120,000 575,000 208,000 903,000
-------- ------------ ----------- ----------
Total...................... $153,000 420,000 (686,000) (113,000)
======== ============ =========== ==========
</TABLE>
H) To adjust the Company's provision for income taxes to give effect to the
acquisitions of Nautilus, F&F Wireline and Tong
I) To adjust the Company's provision for income taxes to give effect to the
acquisitions of Fastorq, Stabil Drill and Sub-Surface.
J) To adjust the Company's provision for income taxes to give effect to the
acquisitions of Baytron and Dimensional.
K) To adjust compensation for employees to amounts per employment agreements
entered in connection with the acquisition of Fastorq.
L) To record interest expense at a current interest rate of 7.75% for
acquisition of companies. If the maximum rate (prime) of 8.5% (maximum
price in 1997) would have been used, the annual interest expense would have
increased by $315,000 to $3.4 million and the nine month interest expense
would have increased by $200,000 to $2.5 million.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Superior Energy Services, Inc.:
We have audited the consolidated balance sheets of Superior Energy Services,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Superior
Energy Services, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for each of the years
then ended in conformity with generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, in 1995 the
Company adopted the methods of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of prescribed by Statement of
Financial Accounting Standards No. 121.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
March 14, 1997
F-8
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 5,068 $ 433
Accounts receivable--net of allowance for doubtful accounts
of $204,000 in 1995 and $149,000 in 1996................... 3,759 6,966
Inventories................................................. 968 1,197
Deferred income taxes....................................... 256 137
Other....................................................... 227 345
------- -------
Total current assets...................................... 10,278 9,078
Property, plant and equipment--net............................ 6,904 9,894
Goodwill--net................................................. 4,576 8,239
Patent--net................................................... 1,226 1,126
------- -------
$22,984 $28,337
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable--bank......................................... $ 1,249 $ 351
Accounts payable............................................ 2,345 1,800
Notes payable--other........................................ 3,422 1,171
Unearned income............................................. 1,085 392
Accrued expenses............................................ 456 1,362
Income taxes payable........................................ 545 1,208
Other....................................................... 200 200
------- -------
Total current liabilities................................. 9,302 6,484
------- -------
Deferred income taxes......................................... 408 1,254
Long-term debt................................................ -- 250
Other......................................................... 180 --
Stockholders' equity:
Preferred stock of $.01 par value. Authorized--5,000,000
shares; none issued........................................ -- --
Common stock of $.001 par value. Authorized--40,000,000
shares; issued--18,597,045................................. 17 19
Additional paid-in capital.................................. 16,230 19,551
Retained earnings (deficit)................................. (3,153) 779
------- -------
Total stockholders' equity................................ 13,094 20,349
------- -------
$22,984 $28,337
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Revenues................................................ $ 12,338 $ 23,638
--------- ----------
Costs and expenses:
Costs of services..................................... 7,487 11,040
Depreciation and amortization......................... 259 1,323
Impairment of long-lived assets....................... 4,042 --
General and administrative............................ 3,258 5,737
--------- ----------
Total costs and expenses............................ 15,046 18,100
--------- ----------
Income (loss) from operations........................... (2,708) 5,538
Other income (expense):
Interest expense...................................... (86) (127)
Other................................................. 79 206
--------- ----------
Income (loss) before income taxes................... (2,715) 5,617
Income taxes............................................ 131 1,685
--------- ----------
Net income (loss)................................... $ (2,846) $ 3,932
========= ==========
Net loss as adjusted for pro forma income taxes
(unaudited):
Loss before income taxes as per above................. $ (2,715)
Pro forma income taxes................................ 640
---------
Net loss as adjusted for pro forma income taxes..... $ (3,355)
=========
Net income (loss) per common share and common share
equivalent............................................. $ (.38) $ 0.22
========= ==========
Weighted average shares outstanding..................... 8,847,946 17,618,711
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK COMMON PAID-IN EARNINGS
SHARES STOCK CAPITAL (DEFICIT) TOTAL
---------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994..... 3,550 $ 248 $ -- $ 2,025 $ 2,273
Net loss....................... -- -- -- (2,846) (2,846)
Shareholder distributions...... -- -- -- (2,465) (2,465)
Acquisition of Oil Stop, Inc... 1,800,000 2 3,598 -- 3,600
Share exchange for the Superior
Companies..................... 10,037,700 (238) 3,350 133 3,245
Sale of common stock........... 5,175,000 5 9,265 -- 9,270
Exercise of private warrants... 16,666 -- 17 -- 17
---------- ----- ------- ------- -------
Balance, December 31, 1995..... 17,032,916 17 16,230 (3,153) 13,094
Net income..................... -- -- -- 3,932 3,932
Acquisition of remaining minor-
ity interest in Ace Rental
Tools, Inc.................... 14,129 -- 35 -- 35
Acquisition of Baytron, Inc.... 550,000 1 1,099 -- 1,100
Acquisition of Dimensional Oil
Field Services, Inc........... 1,000,000 1 2,187 -- 2,188
---------- ----- ------- ------- -------
Balance, December 31, 1996..... 18,597,045 $ 19 $19,551 $ 779 $20,349
========== ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(2,846) $ 3,932
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................. 259 1,323
Unearned income............................................ 1,085 (692)
Impairment of long-lived assets............................ 4,042 --
Deferred income taxes...................................... (444) 258
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (384) (1,490)
Notes receivable.......................................... 120 --
Inventories............................................... 61 (229)
Other--net................................................ 141 (56)
Accounts payable.......................................... (332) (1,482)
Due from (to) shareholders................................ 1,243 (302)
Accrued expenses.......................................... 58 751
Income taxes payable...................................... 613 663
------- -------
Net cash provided by operating activities................ 3,616 2,676
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment................ -- 354
Payments for purchases of property and equipment............ (610) (1,965)
Deferred payment for acquisition of Oil Stop, Inc........... -- (2,000)
Acquisition of businesses, net of cash acquired............. -- (2,321)
------- -------
Net cash used in investing activities.................... (610) (5,932)
------- -------
Cash flows from financing activities:
Notes payable............................................... (5,264) (1,379)
Shareholder distributions................................... (2,465) --
Due to shareholders......................................... 297 --
Proceeds from sale of common stock.......................... 9,287 --
------- -------
Net cash (used in) provided by financing activities...... 1,855 (1,379)
------- -------
Net (decrease) increase in cash.......................... 4,861 (4,635)
Cash and cash equivalents at beginning of year............... 207 5,068
------- -------
Cash and cash equivalents at end of year..................... $ 5,068 $ 433
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of Superior
Energy Services, Inc. and its subsidiaries (the Company). All significant
intercompany accounts and transactions are eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to the
1996 presentation.
(b) Business
The Company is in the business of providing an integrated range of
specialized oilfield products and services in the Gulf of Mexico. These
products and services include oil and gas well plug and abandonment, wireline
and workover services, the manufacture, sale and rental of specialized oil
well equipment and fishing tools, the development, manufacture, sale and
rental of oil and gas drilling instrumentation and computerized rig data
acquisition systems, and the development, manufacture and sale of oil spill
containment booms and ancillary equipment. A majority of the Company's
business is conducted with major oil and gas exploration companies. The
Company continually evaluates the financial strength of their customers but
does not require collateral to support the customer receivables. The Company
operated as one segment in 1995 and 1996.
Customers which accounted for 10 percent or more of revenue for the years
ended December 31, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Chevron USA................................................... 23.7% 34.5%
Conoco Inc.................................................... 16.4% 8.9%
</TABLE>
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
lives as follows:
<TABLE>
<S> <C>
Buildings................................................... 30 years
Machinery and equipment..................................... 5 to 15 years
Automobiles, trucks, tractors and trailers.................. 2 to 5 years
Furniture and equipment..................................... 5 to 7 years
</TABLE>
The Company assesses the potential impairment of capitalized costs of long-
lived assets in accordance with Statement of Financial Accounting Standards
(FAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Under this method, the Company assesses
its capitalized costs utilizing its current estimate of future revenues and
operating expenses. In the event net undiscounted cash flow is less than
capitalized costs, an impairment loss is recorded based on estimated fair
value, which would consider discounted future net cash flows.
F-13
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(e) Goodwill
The Company amortizes costs in excess of fair value of net assets of
businesses acquired using the straight-line method over a period of 20 years.
Recoverability will be reviewed periodically by comparing the undiscounted
fair value of cash flows of the assets to which the goodwill applies to the
net book value, including goodwill, of assets.
(f) Inventories
Inventories are stated at the lower of average cost or market. The cost of
booms and parts are determined principally on the first-in, first-out method.
(g) Cash Equivalents
The Company considers all short-term deposits with a maturity of ninety days
or less to be cash equivalents.
(h) Revenue Recognition
The Company recognizes revenues when services are provided and upon the
completion of job orders from its customers. Rental income is recognized on a
straight-line basis. Unearned income is recorded for lease payments in excess
of rental income recognized.
(i) Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes. FAS
No. 109 requires an asset and liability approach for financial accounting and
reporting for income taxes. Deferred income taxes reflect the impact of
temporary differences between amounts of assets for financial reporting
purposes and such amounts as measured by tax laws.
(j) Patents
Patents are amortized using the straight-line method over the life of each
patent.
(k) Pro Forma Income Taxes and Earnings per Share
Pro forma income tax expense and net income (loss) as adjusted for income
taxes is presented on the Statement of Operations in order to reflect the
impact on income taxes as if the entire consolidated company had been a
taxable entity for all of 1995. In computing weighted average shares
outstanding, 8,400,000 shares issued in the Reorganization (see Note 2) is
assumed to be outstanding as of January 1, 1995. All other common shares
issued or sold are included in the weighted average shares outstanding
calculation from the date of issuance or sale.
(l) Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying amount
of these financial instruments approximates their fair value.
F-14
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(2) BUSINESS COMBINATIONS
In July 1996, the Company, pursuant to a statutory merger, acquired Baytron,
Inc. (Baytron) for $1,100,000 in cash and 550,000 shares of the Company's
common stock at the current approximate $2.00 market price at the date of
purchase for a total purchase price of $2,200,000. The property, plant and
equipment of Baytron were valued at their estimated fair value of
approximately $791,000. Deferred taxes have been provided for the difference
between the book and tax basis of the property. The remaining assets and
liabilities approximated their fair values. The excess purchase price over the
fair value of the net assets of Baytron at July 31, 1996 of $1,309,000 was
allocated to goodwill to be amortized over 20 years.
In September 1996, the Company, pursuant to a statutory merger, acquired all
the capital stock of Dimensional Oil Field Services, Inc. (Dimensional) for
$1,500,000 in cash, a promissory note of $1,000,000 and 1,000,000 restricted
shares of the Company's common stock at the current approximate $2 3/16 market
price at the date of purchase. Promissory notes having an aggregate value of
$750,000 are subject to certain minimum earnings requirements and are not
reflected in the purchase price which approximates $3,984,000. The property,
plant and equipment of Dimensional were valued at their estimated fair value
of approximately $1,517,000. Deferred taxes have been provided for the
difference between the book and tax basis of the property. The remaining
assets and liabilities approximated their fair values. The excess purchase
price over the fair value of the net assets of Dimensional at September 15,
1996 of approximately $2,649,000 was allocated to goodwill to be amortized
over 20 years.
On December 13, 1995, the Company consummated a share exchange (the Share
Exchange) whereby it (i) acquired all of the outstanding common stock of
Superior Well Service, Inc., Connection Technology, Ltd. and Superior Tubular
Services, Inc. (collectively, Superior ) and (ii) acquired all of the
outstanding common stock of Oil Stop, Inc. (Oil Stop). As used in the
consolidated statements of the Company, the term Small's (Small's Oilfield
Services Corp.) refers to the Company as of dates and periods prior to the
consummation of the Share Exchange.
Small's acquired all of the capital stock of Superior for 8,400,000 Common
Shares. Because of the controlling interest that Superior shareholders had in
the combined entity, among other factors, the transaction was accounted for as
a reverse acquisition which resulted in the adjustment of the net assets of
Small's to its estimated fair value as required by the rules of purchase
accounting. The net assets of Superior were reflected at their respective
historical book values. The valuation of Small's net assets was based upon the
1,641,250 shares of common stock outstanding prior to the Share Exchange at
the approximate market price of $2.00 at the time of the renegotiation of the
Share Exchange on August 25, 1995. The purchase price allocated to net assets
was $3,283,000. The revaluation resulted in a substantial reduction in the
carrying value of Small's property and equipment. The revaluation reflected an
excess purchase price of $3,520,000 over the fair value of tangible assets
which was recorded as goodwill. At December 31, 1995, in applying the rules of
FAS No. 121 (see Note 9), this goodwill was written off and the property and
equipment was written down an additional $522,000.
Small's also acquired Oil Stop for the sum of $2,000,000 in cash and
1,800,000 million shares of common stock at the approximate trading price of
$2.00 at the time of the renegotiation of the Share Exchange on August 25,
1995 for a total purchase price of $5,600,000. The book values of Oil Stop's
assets and liabilities approximated their fair values under the rules of
purchase accounting. The excess purchase price over the fair value of the net
assets of Oil Stop at December 13, 1995 of $4,585,000 was allocated to
goodwill to be amortized over 20 years.
Each of the above transactions have been accounted for as a purchase and the
results of operations of the acquired company have been included from the
acquisition date.
F-15
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions and the Share
Exchange had occurred on January 1, 1995 with pro forma adjustments to give
effects to amortization of goodwill, depreciation and certain other
adjustments together with related income tax effects (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net sales............................................... $25,870 $28,968
======= =======
Net earnings (loss)..................................... $(4,151) $ 4,253
======= =======
Earnings (loss) per share............................... $ (0.40) $ 0.23
======= =======
</TABLE>
The above pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the acquisitions and the
Share Exchange been effected on the assumed date.
Subsequent to year end, the Company, pursuant to a stock purchase agreement
dated February 28, 1997, acquired all of the outstanding common stock of
Nautilus Pipe & Tool Rental, Inc. and Superior Bearing & Machine Works, Inc.
(collectively doing business as "Concentric Pipe & Tool Rentals") for
$4,000,000 cash, 420,000 restricted shares of the Company's common stock and a
promissory note in the principal amount of $2,150,000. The promissory note of
$2,150,000 is subject to certain contingencies and is not reflected in the
purchase price which approximates $5,838,000. Concentric Pipe & Tool Rentals
is engaged in the business of renting specialized equipment used in the
exploration, development and production of oil and gas and has operating
facilities in Houma and Lafayette, Louisiana.
(3) LEASED EQUIPMENT
In April 1993, the Company entered into an agreement to lease equipment
(boom) to National Response Corporation for the period June 1993 through
December 31, 1997. The lease is an operating lease. The lessee has the option
to purchase the equipment at the end of the lease term for $450,000. Rental
income is recognized on a straight-line basis. Unearned income is recorded for
lease payments in excess of rental income recognized.
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31, 1995 and 1996 (in
thousands) is as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Buildings................................................. $ 462 $ 462
Machinery and equipment................................... 5,669 8,725
Automobiles, trucks, trailers and tractors................ 839 1,036
Furniture and fixtures.................................... 74 184
Construction-in-progress.................................. 360 1,170
Land...................................................... 320 20
------ -------
7,724 11,597
Less accumulated depreciation............................. 820 1,703
------ -------
Property, plant and equipment, net........................ $6,904 $ 9,894
====== =======
</TABLE>
The cost of property, plant and equipment leased to third parties was
$5,231,000 at December 31, 1995 and 1996.
F-16
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(5) NOTES PAYABLE
The Company's notes payable as of December 31, 1995 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ----
<S> <C> <C>
Revolving line of credit in the original amount of $1,000,000
bearing a variable rate of interest which equals the Wall Street
Journal posted prime rate (8.5% at December 31, 1995) plus 2%;
principal due March 31, 1996..................................... $ 918 $ --
Master note loan agreement with bank with a maximum principal
amount of $4,000,000 bearing interest at the bank's prime rate
(8.25% at December 31, 1996)..................................... -- 300
Note payable in connection with purchase of Dimensional Oil Field
Services, Inc., due January, 1998, annual interest of 7.0%....... -- 250
Installment notes payable, annual interest rates of 8.00% to 8.75%
at December 31, 1996............................................. 90 51
Notes payable to insurance company, due July 1996, annual interest
rate of 7.5%..................................................... 96 --
Other installment notes payable with interest rates ranging from
7.35% to 12.0% due in monthly installments through 1996.......... 145 --
------ ----
1,249 601
Less current portion of notes payable............................. 1,249 351
------ ----
Long-term debt.................................................... $ -- $250
====== ====
</TABLE>
At December 31, 1996, the Company had notes payable related to acquisitions
totaling $750,000 which are not recorded as their payment is subject to
certain minimum earnings requirements.
Subsequent to year end, the Company borrowed $4.0 million in connection with
the acquisition of Concentric Pipe & Tool Rentals. Interest is at the lender's
prime rate. The loan requires no principal payments through December 31, 1997
at which time it will convert to a five or seven year term loan (at the
Company's option) with principal and interest payable monthly thereafter at
8.25%.
(6) INCOME TAXES
Prior to December 13, 1995, certain companies in the Share Exchange were
sub-chapter S corporations for income tax reporting purposes. Therefore,
through December 13, 1995, no provision for federal and state income taxes had
been made. In accordance with the terms of the Share Exchange, the sub-chapter
S shareholders received a note to be paid in five equal installments during
the twelve-month period ended November 1, 1997 for undistributed earnings
prior to January 1, 1995 in the amount of $1,374,000. In addition, they
received $1,091,000 primarily to pay taxes on earnings from January 1, 1995
through December 13, 1995. Pro forma income tax expense and net income (loss)
as adjusted for income taxes is presented on the Statements of Operations in
order to reflect the impact of income taxes as if Superior had been a taxable
entity for all of 1995.
F-17
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
The components of income tax expense for the years ended December 31, 1995
and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- ------
<S> <C> <C>
Current:
Federal................................................... $ 497 $1,382
State..................................................... 78 54
----- ------
575 1,436
----- ------
Deferred:
Federal................................................... (384) 242
State..................................................... (60) 7
----- ------
$ 131 $1,685
===== ======
</TABLE>
The significant components of deferred tax assets and liabilities at
December 31, 1995 and 1996 are as follows ( in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Property, plant and equipment........................ $ 527 $ --
Unearned income...................................... 401 137
Allowance for doubtful accounts...................... 75 51
Net operating loss carryforward...................... 1,118 942
------- -------
2,121 1,130
Valuation allowance.................................. (1,900) (992)
------- -------
Net deferred tax assets............................ 221 138
------- -------
Deferred tax liabilities:
Property, plant and equipment........................ -- (946)
Patent............................................... (373) (308)
------- -------
(373) (1,254)
------- -------
$ (152) $(1,116)
======= =======
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred tax
assets reflect management's estimate of the amount which will be realized from
future profitability which can be predicted with reasonable certainty.
As of December 31, 1996, the Company has a net operating loss carryforward
of approximately $2.8 million which is available to reduce future Federal
taxable income through 2010. The utilization of the net operating loss
carryforward is limited to approximately $200,000 a year.
F-18
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
A reconciliation between the statutory federal income rate and the Company's
effective tax rate on pretax income (loss) for the years ended December 31,
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
Federal income tax rate..................................... (34.0)% 34.0%
Impairment of long-lived assets............................. 50.6 --
Sub-chapter S income not subject to corporate tax........... (17.2) --
Valuation allowance adjustment.............................. -- (6.3)
Other....................................................... 5.4 2.3
----- ----
Effective income tax rate................................... 4.8% 30.0%
===== ====
</TABLE>
(8) JOINT VENTURE
On January 15, 1996, the Company entered into a joint venture with the G&L
Tool Company, Inc. ("G&L"), an unrelated party, which extends through January
31, 2001. The Company contributed its West Texas assets that had a book value
of approximately $4.5 million to the joint venture which will be engaged in
the business of renting specialized oil well equipment and fishing tools to
the oil and gas industry in connection with the drilling, development and
production of oil, gas and related hydrocarbons.
The Company receives as its share of distributions from operations $110,000
a month which began February 1996 and runs through January 1998 and $80,000 a
month for the period February 1998 through January 2001. The distributions are
reflected as revenues on the Statements of Operations. The Company's share of
distributions is personally guaranteed by a principal of G&L.
At the end of the joint venture term, G&L will have at its election, the
option to purchase all of the Company's West Texas assets contributed to the
joint venture for $2 million.
(9) IMPAIRMENT OF LONG-LIVED ASSETS
In 1995 the Company elected the early adoption of Statement of Financial
Accounting Standards (FAS) No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. FAS No. 121 requires
that when events or changes in circumstances indicate that carrying amounts of
an asset may not be recoverable, there has been an impairment, and the asset
should be written down to its fair asset value. In such instances where there
is goodwill associated with the asset as a result of a business combination
accounted for using the purchase method, the goodwill is eliminated before
making any reduction of the carrying amounts of the impaired long-lived asset.
The undiscounted net cash flows from the joint venture described in Note 8
were less than the carrying value of the property, plant and equipment and
associated goodwill indicating that an impairment had taken place.
The fair value of the fixed assets was determined by discounting the
estimated net cash flows from the joint venture. The result was an impairment
charge of $4,042,000 for the year ended December 31, 1995 consisting of a
write-off of goodwill of $3,520,000 and a write-off of $522,000 of property,
plant and equipment.
F-19
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(10) STOCKHOLDERS' EQUITY
At a special meeting of stockholders on February 23, 1996, the shareholders
approved increasing the authorized number of shares of common stock to
40,000,000. At December 31, 1996, the following were outstanding:
(a) Class A Warrants issued in connection with the Company's initial
public offering, entitling the holders to purchase an aggregate of
1,121,251 shares of Common Stock until July 6, 1997 at an exercise price of
$6.00 per Common Share;
(b) Class B Warrants issued December 13, 1995 entitling the holder to
purchase an aggregate of 5,175,000 shares of Common Stock until December
13, 2000 at an exercise price of $3.60 per Common Share;
(c) Warrants entitling the holders thereof to purchase an aggregate of
66,666 shares of Common Stock until January 17, 2000 at an exercise price
of $1.00 per share;
(d) Options to purchase an aggregate of 75,000 shares of Common Stock
until December 31, 1997 at an exercise price of $3.60 per share;
(e) Options to purchase an aggregate of 150,000 shares of Common Stock
until May 5, 1998 at an exercise price of $4.75 per share;
(f) Options issued in July 1992 to purchase (a) an aggregate of 210,000
shares of Common Stock until July 6, 1997 at an exercise price of $3.60 per
share and (b) Class A Warrants at an exercise price of $.07 per warrant,
which Class A Warrants entitle the holders thereof to purchase an aggregate
of 210,000 shares of Common Stock at a price of $6.00 per share, and
(g) Underwriters Unit Purchase Options issued December 13, 1995 entitling
the holder to purchase up to 150,000 Units until December 13, 1999 at an
exercise price of $10.40.
Under a Stock Option Plan (1991 Option Plan), approved by the Company's
stockholders and Board of Directors, the Company may grant to officers,
directors, employees, consultants and agents stock options for up to 75,000
shares of the Company's common stock. Stock options are exercisable at the
greater of the fair market value of the common shares on the date of grant or
$5.00 and options may not be granted to persons who hold 10% or more of the
Company outstanding common shares on the date of a proposed grant. All options
expire ten years from the date of grant. None of the stock options under the
1991 Option Plan has been granted.
In October 1995, the stockholders approved the 1995 Stock Incentive Plan
(Incentive Plan) to provide long-term incentives to its key employees,
including officers and directors who are employees of the Company (Eligible
Employees). Under the Incentive Plan, the Company may grant incentive stock
options, non-qualified stock options, restricted stock, stock awards or any
combination thereof to Eligible Employees for up to 600,000 shares of the
Company's Common Stock. The Compensation Committee of the Board of Directors
establishes the exercise price of any stock options granted under the
Incentive Plan, provided the exercise price may not be less than the fair
market value of a common share on the date of grant.
F-20
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
A summary of stock options granted under the Incentive Plan for the years
ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------------- -----------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. -- 150,000 $2.53
Granted...................................... 150,000 $2.53 421,500 $2.56
Exercised.................................... -- -- --
Forfeited.................................... -- -- (40,000) $2.56
Canceled..................................... -- -- -- --
------- ----- ------- -----
Outstanding at the end of year............... 150,000 $2.53 531,500 $2.55
======= ===== ======= =====
Exercisable at end of year................... -- -- 357,000 $2.55
======= ===== ======= =====
Available for future grants.................. 450,000 68,500
======= =======
</TABLE>
The Company accounts for its stock based compensation under the principles
prescribed by the Accounting Principles Board's Opinion No. 25, Accounting for
Stock Issued to Employees (Opinion No. 25). Accordingly, stock options awarded
under the Incentive Plan are considered to be "non-compensatory" and do not
result in the recognition of compensation expense.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No.123 Accounting for Stock-Based
Compensation, which encouraged the use of fair value based method of
accounting for compensation expense associated with stock option and similar
plans. However, FAS No. 123 permits the continued use of the value based
method prescribed by Opinion No. 25 but required additional disclosures,
including pro forma calculations of earnings and net earnings per share as if
the fair value method of accounting prescribed by FAS No. 123 had been applied
in 1995 and 1996. The pro forma data presented below is not representative of
the effects on reported amounts for future years because FAS No. 123 does not
apply to awards prior to 1995 and additional awards are expected in the future
(in thousands, except per share amounts).
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
--------------------- ---------------------
1995 1996 1995 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss)................ $ (3,355) $ 3,932 $ (3,355) $ 3,798
========= ========== ========= ==========
Earnings per share............... $ (0.38) $ 0.22 $ (0.38) $ 0.22
========= ========== ========= ==========
Average shares outstanding....... 8,847,946 17,618,711 8,847,946 17,618,711
========= ========== ========= ==========
Average fair value of grants dur-
ing the year.................... -- -- $ 0.57 $ 0.58
========= ========== ========= ==========
Black-Scholes option pricing
model assumptions:
Risk free interest rate........ 5.9% 6.1%
Expected life (years).......... 3 3
Volatility..................... 20.6% 20.6%
Dividend yield................. -- --
========= ==========
</TABLE>
F-21
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(11) COMMITMENTS AND CONTINGENCIES
The Company leases certain office, service and assembly facilities under
operating leases. The leases expire at various dates over the next several
years. Total rent expense was $85,000 in 1995 and $169,000 in 1996. Future
minimum lease payments under non-cancelable leases for the five years ending
December 31, 1996 through 2000 are as follows: $243,000, $198,000, $93,000,
$54,000 and none, respectively.
From time to time, the Company is involved in litigation arising out of
operations in the normal course of business. In management's opinion, the
Company is not involved in any litigation, the outcome of which would have a
material effect on its business or operations.
(12) RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions which have given rise to
amounts payable to the shareholders. The balances at December 31, 1995 and
1996 were $3,422,000 and $1,171,000, respectively.
Due to shareholders, included in notes payable--other on the consolidated
balance sheet, at December 31, 1995 consisted of $2,000,000 paid January 2,
1996 to the former sole shareholder of Oil Stop in the acquisition of that
company and approximately $1,374,000 due to the former shareholders of
Superior for undistributed earnings in sub-chapter S corporations prior to
December 31, 1994. Due to shareholders at December 31, 1996 is primarily for
the undistributed earnings in sub-chapter S corporations prior to December 31,
1994.
The Company paid consulting fees to a director, who is not an employee, of
$25,000 in 1995 and $23,000 in 1996. The employment contract of a director,
who is a former officer, was converted to a consulting agreement, in May 1996.
He was paid $70,000 in 1996 under this agreement and will be paid $60,000 in
1997 and 1998. The Company also paid a director, who is also an employee and a
shareholder rent of approximately $2,400 in 1995 and $46,200 in 1996. The
Company is obligated to make such rent payments in the future as follows:
$46,200 in 1997 and $46,200 in 1998. The Company also paid an employee $36,000
in 1995 for the rent of two facilities. As of December 31, 1995, the Company
negotiated the cancellation of lease with an officer and director in the
amount of $125,000.
F-22
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1997
------ -------------
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 1,103
Accounts receivable--net....................................... 13,183
Inventories.................................................... 1,474
Deferred income taxes.......................................... 137
Other.......................................................... 885
-------
Total current assets......................................... 16,782
-------
Property, plant and equipment--net............................... 23,193
Goodwill--net.................................................... 17,347
Patent--net...................................................... 1,052
-------
Total assets................................................. $58,374
=======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Accounts payable............................................... $ 2,244
Notes payable--other........................................... 296
Unearned income................................................ 173
Accrued expenses............................................... 2,166
Income taxes payable........................................... 352
-------
Total current liabilities.................................... 5,231
-------
Deferred income taxes............................................ 3,570
Long-term debt................................................... 1,412
Stockholders' equity:
Preferred stock of $.01 par value. Authorized, 5,000,000
shares; none issued........................................... --
Common stock of $.001 par value. Authorized, 40,000,000 shares;
issued, 25,143,985............................................ 25
Additional paid-in capital..................................... 41,620
Retained earnings.............................................. 6,516
-------
Total stockholders' equity................................... 48,161
-------
Total liabilities and stockholders' equity................... $58,374
=======
</TABLE>
F-23
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30,
---------------- ----------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue.................................... $ 5,910 $13,220 $15,240 $33,309
------- ------- ------- -------
Costs and expenses:
Costs of services........................ 2,716 5,442 7,129 14,735
Depreciation and amortization............ 346 829 936 1,992
General and administrative............... 1,359 3,063 3,548 7,556
------- ------- ------- -------
Total costs and expenses............... 4,421 9,434 11,613 24,283
------- ------- ------- -------
Income from operations..................... 1,489 3,886 3,627 9,026
Other income (expense):
Interest expense......................... (11) (226) (59) (463)
Other.................................... (7) -- 173 --
------- ------- ------- -------
Income before income taxes............. 1,471 3,660 3,741 8,563
Provision for income taxes................. 441 1,208 1,122 2,826
------- ------- ------- -------
Net income................................. $ 1,030 $ 2,452 $ 2,619 $ 5,737
======= ======= ======= =======
Net income per common share and common
share equivalent.......................... $ 0.06 $ 0.11 $ 0.15 $ 0.28
======= ======= ======= =======
Weighted average shares outstanding........ 17,614 22,126 17,259 20,259
======= ======= ======= =======
</TABLE>
F-24
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
-----------------
1996 1997
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 2,619 $ 5,737
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 936 1,992
Unearned income........................................... (519) (219)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable...................................... (1,044) (4,387)
Inventories.............................................. 14 (269)
Other-net................................................ (70) (395)
Accounts payable......................................... (1,186) (63)
Due to shareholders...................................... (26) (1,136)
Accrued expenses......................................... 135 670
Income taxes payable..................................... 1,111 (1,234)
------- --------
Net cash provided by operating activities................... 1,970 696
------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired........... (2,349) (9,256)
Payments for purchases of property and equipment........... (1,164) (4,985)
Proceeds from sale of property and equipment............... 357 --
------- --------
Net cash used in investment activities.................. (3,156) (14,241)
------- --------
Cash flows from financing activities:
Notes payable--bank........................................ (308) (524)
Deferred payment for acquisition of Oil Stop, Inc.......... (2,000) --
Proceeds from exercise of warrants and stock options....... -- 14,739
------- --------
Net cash provided by (used in) financing activities..... (2,308) 14,215
------- --------
Net increase (decrease) in cash......................... (3,494) 670
Cash and cash equivalents at beginning of period............ 5,068 433
------- --------
Cash and cash equivalents at end of period.................. $ 1,574 $ 1,103
======= ========
</TABLE>
F-25
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission; however, management believes the
disclosures which are made are adequate to make the information presented not
misleading. These financial statements and footnotes should be read in
conjunction with the financial statements and notes thereto included in the
Company's consolidated financial statements for the year ended December 31,
1996.
The financial information for the nine months ended September 30, 1996 and
1997, has not been audited. However, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods presented have been
included therein. The results of operations for the first nine months of the
year are not necessarily indicative of the results of operations which might
be expected for the entire year. Certain previously reported amounts have been
reclassified to conform to the 1997 presentation.
(2) BUSINESS COMBINATIONS
The Company, pursuant to a stock purchase agreement dated February 28, 1997,
acquired all of the outstanding common stock of Nautilus Pipe & Tool Rental,
Inc. and Superior Bearing & Machine Works, Inc. (collectively doing business
as "Concentric Pipe & Tool Rentals") for $4,000,000 cash 420,000 restricted
shares of the Company's common stock and a promissory note in the principal
amount of $2,150,000. The amounts payable under the promissory note is subject
to certain contingencies and is not reflected in the purchase price which
approximated $5,838,000. Concentric Pipe & Tool Rentals is engaged in the
business of renting specialized equipment used in the exploration, development
and production of oil and gas and has operating facilities in Houma and
Lafayette, Louisiana.
The Company, pursuant to a stock purchase agreement dated April 30, 1997,
acquired all of the outstanding common stock of F. & F. Wireline Service, Inc.
for $900,000 cash and a promissory note in the principal amount of $600,000.
The amount payable under the promissory note is subject to certain
contingencies and is not reflected in the purchase price of $900,000. F & F
Wireline Service, Inc. is located in Lake Charles, Louisiana and provides
production wireline services on land and throughout the western Gulf of
Mexico.
The Company, pursuant to an agreement and plan of merger dated May 31, 1997,
acquired Tong Rentals and Supply Company, Inc. for $5,500,000 cash and
1,100,000 shares of the Company's common stock. Tong Rentals and Supply
Company, Inc. rents power swivels, power tongs and related equipment. It
operates offices in Lafayette, Louisiana and Houston and Alice, Texas.
Subsequent to September 30, 1997, the Company, pursuant to a stock purchase
agreement dated October 3, 1997, acquired all of the outstanding common stock
of Fastorq, Inc. for $4,810,000 cash and a promissory note in the principal
amount of $2,590,000. The amount payable under the promissory note is subject
to certain contingencies and is not reflected in the purchase price of
$4,810,000. Fastorq, Inc. provides wrench bolting, nut splitting, bolt removal
and mechanical pipe cutting services and has operating facilities in Belle
Chasse and Gonzales, Louisiana.
Subsequent to September 30, 1997, the Company agreed in principle to
purchase all of the outstanding stock of Stabil Drill Specialties, Inc. for
$17,500,000 cash and a promissory note in the principal amount of $7,500,000.
The amount payable under the promissory note will be subject to certain
contingencies. Stabil Drill
F-26
<PAGE>
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Specialties, Inc. manufactures for sale and rental a full range of tools used
in the bottom hole assembly including stabilizers, mills, hole openers and
non-magnetic drill collars with operating facilities in Lafayette, Houma,
Louisiana and Houston and Corpus Christi, Texas.
Subsequent to September 30, 1997, the Company agreed in principle to
purchase all of the outstanding stock of Sub-Surface Tools, Inc. for
$17,500,000 cash and a promissory note of $7,500,000. The amount payable under
the promissory note will be subject to certain contingencies. Sub-Surface
Tools, Inc. provides specialized rental equipment including tubulars, tubular
handling tools and pressure equipment used for drilling completion and
workover of oil and gas wells with operating facilities in Morgan city, Venice
and New Iberia, Louisiana and Alvin, Texas.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Statement No. 128, (FAS) No. 128, Earnings
Per Share. FAS No. 128 which supersedes Opinion No. 15, will be effective for
the Company's year ended December 31, 1997, and cannot be adopted earlier.
After adoption, all prior period earnings per share must be restated to
conform with FAS No. 128. FAS No. 128 will not have a material impact on the
Company's earnings per share.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Stabil Drill Specialties, Inc.:
We have audited the accompanying balance sheets of Stabil Drill Specialties,
Inc. as of August 31, 1996 and 1997, and the related statements of income and
retained earnings and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stabil Drill Specialties,
Inc. as of August 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
October 20, 1997
F-28
<PAGE>
STABIL DRILL SPECIALTIES, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ---------- ---------
<S> <C> <C>
Current assets:
Cash......................................................... $ 25,983 748,801
Accounts receivable, net of allowance of $20,303 and $36,106
in 1996 and 1997, respectively:
Billed..................................................... 2,010,028 3,574,511
Unbilled................................................... 351,984 671,170
Other receivables............................................ 25,453 4,370
Other current assets......................................... 134,122 13,010
---------- ---------
Total current assets..................................... 2,547,570 5,011,862
---------- ---------
Property, plant and equipment, net............................. 2,831,089 4,225,331
Goodwill, net.................................................. -- 473,500
Other assets................................................... 37,501 39,318
---------- ---------
$5,416,160 9,750,011
========== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable................................................ 777,116 20,735
Current portion of long-term debt............................ 246,811 314,799
Accounts payable............................................. 243,098 1,004,605
Accrued expenses............................................. 117,622 250,890
Income taxes payable......................................... 40,081 752,596
Deferred income taxes........................................ 185,450 174,118
---------- ---------
Total current liabilities................................ 1,610,178 2,517,743
---------- ---------
Long-term debt................................................. 409,439 1,244,036
Deferred income taxes.......................................... 1,011,926 1,249,814
Stockholders' equity:
Common stock, $1 par value, 10,000 shares authorized, 100
shares issued and outstanding............................... 100 100
Additional paid in capital................................... 39,106 39,106
Retained earnings............................................ 2,345,411 4,699,212
---------- ---------
Total stockholders' equity............................... 2,384,617 4,738,418
---------- ---------
$5,416,160 9,750,011
========== =========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
STABIL DRILL SPECIALTIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED AUGUST 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenues................................................. $8,601,983 14,372,077
---------- ----------
Costs and expenses:
Operating expenses..................................... 4,374,170 6,144,914
General and administrative............................. 2,440,645 3,367,107
Depreciation........................................... 668,871 807,600
Interest expense....................................... 132,314 82,107
Loss (gain) on sale of other assets.................... 19,717 (19,926)
Deferred compensation.................................. 230,000 --
---------- ----------
7,865,717 10,381,802
---------- ----------
Income before income taxes........................... 736,266 3,990,275
Income taxes............................................. 322,814 1,636,474
---------- ----------
Net income............................................... 413,452 2,353,801
Retained earnings, beginning of year..................... 1,931,959 2,345,411
---------- ----------
Retained earnings, end of year........................... $2,345,411 4,699,212
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
STABIL DRILL SPECIALTIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 413,452 2,353,801
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 670,868 808,818
Gain on sale of equipment............................ (314,995) (621,285)
Deferred income taxes................................ 219,470 112,891
Changes in working capital, net of the effect of the
acquisition of Terrebonne Machine Shop, Inc.:
Accounts receivable................................. (286,720) (1,599,853)
Other assets........................................ (113,100) 45,146
Accounts payable and accrued expenses............... (267,834) 673,086
Other liabilities................................... 6,568 707,149
--------- -----------
Net cash provided by operating activities.......... 327,709 2,479,753
--------- -----------
Cash flows from investing activities:
Capital expenditures.................................. (950,583) (1,964,488)
Proceeds from the sale of equipment................... 534,273 1,021,821
Acquisition of Terrebonne Machine Shop, Inc........... -- (605,070)
--------- -----------
Net cash used in investing activities.............. (416,310) (1,547,737)
--------- -----------
Cash flows from financing activities:
Repayments on loan obligations........................ (750,532) (1,273,302)
Proceeds from issuance of debt........................ 838,262 1,064,104
--------- -----------
Net cash (used in) provided by financing
activities........................................ 87,730 (209,198)
--------- -----------
Net (decrease) increase in cash........................ (871) 722,818
Cash, beginning of year................................ 26,854 25,983
--------- -----------
Cash, end of year...................................... $ 25,983 748,801
========= ===========
Supplemental schedules of noncash investing and
financing activities:
Long-term debt was incurred when the Company purchased
the following assets:
Terrebonne Machine Shop, Inc......................... $ -- 255,402
Equipment............................................ 40,000 --
--------- -----------
$ 40,000 255,402
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 132,423 82,849
========= ===========
Income taxes.......................................... $ 114,314 896,798
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
Stabil Drill Specialties, Inc. (the Company) rents, repairs and sells
drilling tools used in the exploration of oil and gas primarily in Louisiana
and Texas. The Company's customers consist primarily of oil and gas drilling
companies.
(b) Revenue Recognition
The Company recognizes revenues when rentals are provided. Rentals are not
invoiced until the tool is returned from the job. Unbilled accounts receivable
consist of receivables which have not been invoiced as of the end of the
period. In the ordinary course of business, the Company grants credit to
customers, generally without collateral.
(c) Income Taxes
Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, (FAS) No. 109, Accounting
for Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(d) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Manufacturing overhead
is capitalized and included in the cost of rental tools fabricated by the
Company. Depreciation is computed using the straight line method based on the
estimated useful lives of the individual assets as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Autos and trucks.................................................... 5
Machinery and equipment............................................. 5-18
Leasehold improvements.............................................. 8-15
Building............................................................ 30
</TABLE>
Expenditures for property, plant and equipment and items which substantially
increase the useful lives of existing assets are capitalized at cost while
routine expenditures for repairs and maintenance are expensed as incurred.
(e) Cash Flow Statement
For purposes of the statements of cash flows, the Company considers all
highly-liquid instruments purchased with a maturity date of three months or
less to be cash equivalents.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Accordingly, actual results could differ from those
estimates.
F-32
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1997
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at August 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Rental tools.................................... $ 2,623,126 3,486,731
Shop equipment.................................. 745,556 1,307,138
Land and buildings.............................. 346,222 643,013
Truck and auto.................................. 597,180 639,303
Furniture and fixtures.......................... 114,457 149,863
Leasehold improvements.......................... 7,274 7,274
----------- -----------
4,433,815 6,233,322
Less accumulated depreciation................... (1,676,893) (2,156,880)
----------- -----------
2,756,922 4,076,442
Construction in progress........................ 74,167 148,889
----------- -----------
$ 2,831,089 4,225,331
=========== ===========
</TABLE>
(3) NOTES PAYABLE
Notes payable at August 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ------
<S> <C> <C>
Note payable to a bank, due September 1996, bearing interest
at 9.75%, secured by equipment and accounts receivable...... $ 72,175 --
Note payable to a bank, $450,000 revolving line of credit
($300,000, prior to January 1996) under which the Company
may borrow amounts not to exceed 70% of eligible accounts
receivable, bearing interest at 2% over Chase Manhattan
Bank's prime rate, due monthly, secured by assignments of
accounts receivable and personal guarantee of an officer.... 450,000 --
Note payable to a vendor, non-interest bearing, payable in
monthly payments of $6,667 through November 1996............ 20,000 --
Note payable to a credit corporation, due in monthly
installments through May 1997, bearing interest at 10.95%,
unsecured.................................................... 95,927 --
Note payable to an individual, as further described in note
6............................................................ 139,014 20,735
-------- ------
$777,116 20,735
======== ======
</TABLE>
F-33
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1997
(4) LONG-TERM DEBT
Long-term debt at August 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Notes payable to a bank, bearing interest at 1% above Chase
Manhattan Bank's prime rate (9.57% at August 31, 1997),
due in monthly installments of $2,175 through February
2002 and one final payment of $104,525, secured by
personal guarantee of an officer and mortgages on land and
building.................................................. $ -- 162,854
Notes payable to a bank, bearing interest at 8.5%, due in
monthly installments of $14,405, secured by personal
guarantee of an officer and chattel mortgage on equipment. -- 690,719
Notes payable to certain individuals, dated July 31, 1997,
non-interest bearing, with a face amount of $400,000 and
imputed interest at 8.5%, due in annual installments of
$100,000 through July 31, 2000, unsecured................. -- 255,402
Note payable to an individual, dated December 21, 1994,
bearing interest at 8.5% per annum, due in monthly
installments of $2,368 through December 1997, unsecured... 35,511 --
Notes payable to officers, subordinated to certain bank
debts, bearing interest at 9% per annum, due on demand
with interest payable monthly, unsecured.................. 186,697 154,255
Note payable to the Small Business Administration, bearing
interest at 8.78% per annum, due in monthly installments
of $770 through April 2011, secured by mortgages on land
and building.............................................. 71,639 68,945
Note payable to a bank, bearing interest at 8%, due in
monthly installments of $1,092 through April 2005, secured
by mortgages on land and building......................... 81,175 72,708
Note payable to a bank, bearing interest at 1 1/2% above
Chase Manhattan Bank's prime rate (10% at August 31,
1997), due in monthly installments of $1,130 through
December 2003, secured by personal guarantee of an officer
and mortgages on land and building........................ 72,134 65,473
Notes payable to banks, bearing interest at 7.9% to 8.75%,
due in monthly installments through October 1997, secured
by chattel mortgage on vehicles........................... 106,119 88,479
Notes payable to banks, bearing interest at 10.25% to
12.5%, due in monthly installments through July 1997,
secured by chattel mortgage on equipment and accounts
receivable assignment..................................... 102,975 --
-------- ---------
656,250 1,558,835
Less current portion of long-term debt..................... 246,811 314,799
-------- ---------
Total long-term debt..................................... $409,439 1,244,036
======== =========
</TABLE>
Maturities of long-term debt for each of the next five years are as follows:
<TABLE>
<S> <C>
1998............................................................. $314,799
1999............................................................. 246,271
2000............................................................. 267,968
2001............................................................. 191,580
2001............................................................. 286,530
Thereafter....................................................... 251,687
========
</TABLE>
F-34
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1997
(5) INCOME TAXES
Income tax expense for the years ended August 31, 1996 and 1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- ---------
<S> <C> <C> <C>
1996:
U.S. Federal............................. $ 102,001 251,564 353,565
State and local.......................... 1,343 (32,094) (30,751)
---------- ------- ---------
$ 103,344 219,470 322,814
========== ======= =========
1997:
U.S. Federal............................. 1,377,552 61,360 1,438,912
State and local.......................... 146,031 51,531 197,562
---------- ------- ---------
$1,523,583 112,891 1,636,474
========== ======= =========
</TABLE>
The actual income tax expense attributable to pretax income for the years
ended August 31, 1996 and 1997, differs from amounts computed by applying the
U.S. Federal tax rate of 34% to pretax income as a result of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Computed expected tax expense........................ $250,330 1,356,694
State income tax net of the Federal benefit.......... (20,296) 130,391
Expenses not deductible for tax...................... 76,072 80,637
Other................................................ 16,708 68,752
-------- ---------
$322,814 1,636,474
======== =========
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and liabilities at August 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Deferred tax assets--accounts payable accrued for
financial reporting purposes............................. $ 139,843 --
---------- ---------
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation............................ 455,577 693,939
Accounts receivable accrued for financial reporting
purposes............................................... 881,642 557,907
Other................................................... -- 172,086
---------- ---------
Total deferred tax liabilities........................ 1,337,219 1,423,932
---------- ---------
Net deferred tax liability............................ $1,197,376 1,423,932
========== =========
</TABLE>
No valuation allowance has been provided for the deferred tax asset, as
management believes it is more likely than not it will be realized through
future operating results and the reversal of taxable temporary differences.
F-35
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1997
(6) DEFERRED COMPENSATION AGREEMENT
On November 8, 1995, the Company entered into a deferred compensation
agreement with a former employee. The agreement bears interest at 8.75% and
obligates the Company to pay the individual monthly payments of $10,481 from
December 1995 through November 1997. The present value has been recorded as
expense in the statement of income in 1996.
(7) OPERATING LEASES
The Company has, in its normal course of business, entered into several
operating lease agreements expiring in various years through 2001. Future
minimum lease payments, scheduled by years ending August 31, are as follows:
<TABLE>
<S> <C>
1998.............................................................. $28,216
1999.............................................................. 28,210
2000.............................................................. 21,000
2001.............................................................. 12,250
=======
</TABLE>
Rent expense totaled $104,495 and $94,689 for the years ended August 31,
1996 and 1997, respectively.
(8) PROFIT SHARING PLAN
The Company maintains a profit sharing plan with a 401(k) provision that
covers all full-time employees over the age of twenty-one with more than one
year of service. Each participant may contribute up to 15% of their
compensation. Employer contributions to the plan are at the discretion of the
board of directors. Employer matching contributions to the plan amounted to
$37,046 and $57,308 during 1996 and 1997, respectively. The board of directors
elected to make a profit sharing contribution of $35,000 and $100,000 for the
fiscal years ended August 31, 1996 and 1997, respectively.
(9) RELATED PARTY TRANSACTIONS
Loans from officers at August 31, 1996 and 1997 amount to $186,697 and
$154,255, respectively. Interest paid by the Company on these loans for the
years ended August 31, 1996 and 1997 amounted to $18,393 and $18,226,
respectively. These obligations are more fully described in note 4.
The Company purchases equipment from an entity that is owned by the
Company's management. Purchases during 1996 and 1997 amounted to $115,160 and
$122,572, respectively.
(10) BUSINESS ACQUISITION
In July 1997, the Company acquired 100% of the outstanding common stock of
Terrebonne Machine Shop, Inc. The acquisition was recorded as a purchase and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their fair value at the purchase date. The
remainder of the purchase price was recorded as goodwill and is being
amortized over 20 years. The Company paid cash of $600,000 and issued a note
payable for the remaining balance of $400,000 ($355,402 at present value). In
connection with the acquisition, immediately following the transaction, the
Company merged the assets and liabilities of Terrebonne Machine Shop, Inc.
into the Company. Results of operations of the acquired entity have been
included in the accompanying statement of income and retained earnings from
the date of acquisition forward.
F-36
<PAGE>
STABIL DRILL SPECIALTIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1997
The purchase price allocation is as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash........................................................ $ 235,416
Accounts receivable......................................... 262,733
Fixed assets................................................ 563,170
Other assets................................................ 572
Cost in excess of net assets acquired....................... 474,717
----------
Total assets acquired..................................... 1,536,608
----------
Liabilities assumed:
Accounts payable............................................ 88,421
Notes payable............................................... 240,486
Income taxes payable........................................ 85,731
Accrued expenses............................................ 52,903
Deferred income taxes....................................... 113,665
----------
Total liabilities assumed................................. 581,206
----------
Net assets acquired....................................... $ 955,402
==========
</TABLE>
The following unaudited pro forma information presents a summary of results
of operations as if the acquisition had occurred on September 1, 1995 with pro
forma adjustments to give effect to amortization of goodwill, depreciation and
certain other adjustments together with related income tax effects:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue............................................. $9,522,400 15,888,396
========== ==========
Net income.......................................... $ 488,666 2,473,933
========== ==========
</TABLE>
The above pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the acquisition been
effected on the assumed date.
(11) COMMITMENTS AND CONTINGENCIES
From time to time the Company is involved in litigation arising out of
operations in the norman course of business. In management's opinion, the
Company is not involved in any litigation, the outcome of which would have a
material effect on its financial position or results of operations.
(12) SUBSEQUENT EVENT
Subsequent to year end, the Company's shareholders entered into an agreement
to sell all of the common stock of the Company for cash of $17,500,000 and
contingent notes payable of $7,500,000, which are dependent upon the financial
performance of the Company over the next three years, to Superior Energy
Services, Inc.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Sub-Surface Tools, Inc.:
We have audited the accompanying balance sheet of Sub-Surface Tools, Inc. as
of July 31, 1997, and the related statements of income and retained earnings
and cash flows for the year then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Sub-Surface Tools, Inc. as
of July 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
October 15, 1997
F-38
<PAGE>
SUB-SURFACE TOOLS, INC.
BALANCE SHEET
JULY 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash............................................................. $ 626,228
Accounts receivable.............................................. 2,143,159
Other............................................................ 34,127
-----------
Total current assets........................................... 2,803,514
Net property and equipment......................................... 13,700,428
Other assets....................................................... 9,200
-----------
$16,513,142
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Accounts payable and accrued expenses............................ 1,225,023
Current portion of notes payable................................. 1,383,852
-----------
Total current liabilities...................................... 2,608,875
-----------
Deferred income taxes.............................................. 1,079,249
Stockholders' equity:
Common stock, no par value; 5,000 shares authorized and issued... 5,000
Treasury stock................................................... (8,500)
Retained earnings................................................ 12,828,518
-----------
Total stockholders' equity..................................... 12,825,018
-----------
$16,513,142
===========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
SUB-SURFACE TOOLS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED JULY 31, 1997
<TABLE>
<S> <C>
Revenues........................................................... $10,696,294
-----------
Expenses:
Costs of services................................................ 3,886,370
Selling, general and administrative.............................. 2,411,973
Interest......................................................... 147,748
Depreciation..................................................... 1,784,661
-----------
8,230,752
-----------
Income before income taxes..................................... 2,465,542
Income taxes....................................................... 909,303
-----------
Net income..................................................... 1,556,239
Retained earnings at beginning of year............................. 11,272,279
-----------
Retained earnings at end of year................................... $12,828,518
===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
SUB-SURFACE TOOLS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income....................................................... $ 1,556,239
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 1,784,661
Gain on sale of property and equipment.......................... (205,804)
Deferred income taxes........................................... 140,049
Changes in operating assets and liabilities:
Accounts receivable............................................ 114,478
Other assets................................................... (2,268)
Accounts payable and accrued expenses.......................... (166,065)
-----------
Net cash provided by operating activities..................... 3,221,290
-----------
Cash flows from investing activities:
Proceeds from sale of property and equipment..................... 713,175
Payments for purchases of property and equipment................. (4,532,734)
-----------
Net cash used in investing activities......................... (3,819,559)
-----------
Cash flows from financing activities:
Repayment of loan to shareholder................................. (42,000)
Proceeds from notes payable...................................... 1,924,086
Repayments of notes payable...................................... (1,455,859)
-----------
Net cash provided by financing activities..................... 426,227
-----------
Net decrease in cash.......................................... (172,042)
Cash at beginning of year......................................... 798,270
-----------
Cash at end of year............................................... $ 626,228
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest........................... $ 145,757
===========
Cash paid during the year for taxes.............................. $ 787,000
===========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
SUB-SURFACE TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Sub-Surface Tools, Inc. (the Company) rents specialized equipment, including
tubulars, tubular handling tools and pressure control equipment, used in oil
and gas well drilling, workover, completion and production activities.
(b) Use of Estimates
The preparation of financial statements 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 these estimates.
(c) Revenue Recognition
Revenues are recognized when rentals are provided.
(d) Property and Equipment
Property and equipment is carried at cost. Depreciation is computed using
the straight-line method based on the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
DESCRIPTION USEFUL LIVES
----------- ------------
<S> <C>
Buildings and improvements................................... 30 years
Machinery and equipment...................................... 5-15 years
Transportation equipment..................................... 3-5 years
Oilfield tools............................................... 10-12 years
Furniture and fixtures....................................... 5-7 years
</TABLE>
(e) Income Taxes
Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standard No. 109, (FAS) No. 109, Accounting
for Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
(2) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMER
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The
Company places cash with high quality financial institutions.
A majority of the Company's business is conducted with major oil and gas
exploration companies with operations in the Gulf of Mexico. The Company
continually evaluates the financial strength of their customers but does not
require collateral to support the customer receivables.
F-42
<PAGE>
SUB-SURFACE TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
One customer, Shell Oil Corporation, accounted for 86 percent of operating
revenues for the year ended July 31, 1997.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at July 31, 1997 follows:
<TABLE>
<S> <C>
Land......................................................... $ 348,061
Buildings and improvements................................... 812,410
Machinery and equipment...................................... 528,520
Automobiles, trucks, trailers and tractors................... 211,175
Furniture and fixtures....................................... 7,567
Oilfield tools............................................... 19,195,592
-----------
21,103,325
Less accumulated depreciation................................ 7,402,897
-----------
Net property and equipment................................. $13,700,428
===========
</TABLE>
(4) NOTES PAYABLE
A summary of notes payable at July 31, 1997 follows:
<TABLE>
<S> <C>
Revolving master note payable to bank......................... $ 781,352
Installment note payable, principal and interest (8.25%)
payable monthly, maturing July 20, 1998...................... 530,500
Note payable shareholder...................................... 72,000
----------
1,383,852
Less current portion.......................................... 1,383,852
----------
$ --
==========
</TABLE>
The Company entered into a revolving master note loan agreement with a bank
with a maximum aggregate principal amount of $1,000,000. The master note
payable bears interest at variable rates as determined by the bank (effective
rate of 8.25% at July 31, 1997). Amounts currently outstanding under the
agreement are due December 15, 1997.
Additionally, on September 30, 1997, the Company entered into a master note
with a bank for aggregate borrowings not to exceed $3,000,000. Total
borrowings under the master note were $1,653,424 at October 10, 1997.
Principal and interest, which accrue at 8.5%, are due November 30, 1997.
(5) INCOME TAXES
Components of income tax expense for the year ended July 31, 1997 are as
follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
-------- ------ -------
<S> <C> <C> <C>
Current........................................... $719,837 49,417 769,254
Deferred.......................................... 131,618 8,431 140,049
-------- ------ -------
$851,455 57,848 909,303
======== ====== =======
</TABLE>
F-43
<PAGE>
SUB-SURFACE TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
The effective rate of income tax expense is 37% for the year ended July 31,
1997. The reasons for the differences between the effective tax rate and the
"expected" corporate federal income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF PRETAX
EARNINGS
----------
<S> <C>
Expected tax rate.................................................... 34%
Increases (decreases) in tax rate resulting from:
State income taxes................................................. 1
Non-deductible meals and entertainment expense..................... 1
Other.............................................................. 1
---
37%
===
</TABLE>
The deferred tax liability of $1,079,249 at July 31, 1997 is a result of the
difference in the tax and book basis of property, plant and equipment,
principally due to differences in depreciation.
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease. The operating
lease is for a five-year period from March 1, 1997 to February 28, 2002 and
provides for annual rental payments of $32,000.
From time to time the Company is involved in litigation arising out of
operations in the normal course of business. In management's opinion, the
Company is not involved in any litigation, the outcome of which would have a
material effect on its financial position or results of operations.
(7) SUBSEQUENT EVENT
Subsequent to year end, the Company's shareholder entered into an agreement
to sell all of the common stock of the Company for cash of $17,500,000 and
contingent notes payable of $7,500,000, which are dependent upon the financial
performance of the Company over the next three years, to Superior Energy
Services, Inc.
F-44
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Forward-Looking Statements................................................ 14
Use of Proceeds........................................................... 15
Dividends and Price Range of
Common Stock ............................................................ 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 24
Management................................................................ 30
Principal and Selling Stockholders........................................ 32
Description of Capital Stock.............................................. 33
Underwriting.............................................................. 35
Legal Matters............................................................. 36
Experts................................................................... 36
Available Information..................................................... 37
Incorporation of Certain Documents by Reference........................... 37
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
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6,000,000 SHARES
[LOGO OF SUPERIOR ENERGY SERVICES APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
NOVEMBER 20, 1997
JOHNSON RICE & COMPANY L.L.C.
JEFFERIES & COMPANY, INC.
GAINES, BERLAND INC.
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