================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
_ X _ OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
_____ OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM.........TO........
COMMISSION FILE NO. 0-20310
SUPERIOR ENERGY SERVICES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 75-2379388
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1105 PETERS ROAD
HARVEY, LA 70058
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (504) 362-4321
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Revenues for the year ended December 31, 1998 were $91,334,000
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 15, 1999 based on the closing price on Nasdaq National
Market on that date was $74,136,000
The number of shares of the Registrant's common stock outstanding on March 15,
1999 was 28,792,523.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ___ No _ X_
===============================================================================
SUPERIOR ENERGY SERVICES, INC.
ANNUAL REPORT ON FORM 10-KSB FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Description of Business and Properties 1
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 31
Item 10. Executive Compensation 31
Item 11. Security Ownership of Certain Beneficial Owners
and Management 31
Item 12. Certain Relationships and Related Transactions 31
Item 13. Exhibits and Reports on Form 8-K 31
(i)
PART I
Items 1 and 2. Description of Business and Properties
- - -----------------------------------------------------
General
Superior Energy Services, Inc. (together with its subsidiaries, 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 plug and
abandonment ("P&A") services, electric and mechanical wireline services, tank
cleaning services, the manufacture and sale of computereized electronic torque
and pressure control equipment and the manufacture and sale of oil spill
containment equipment. Over the last several 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.
Since the second quarter of 1998, there has been a downturn in demand for the
Company's services, resulting in a significant decline in demand for the
Company's well services operations. The Company's rental tool operations have
not been as adversely affected because its present inventory of rental tools is
used significantly in workover activity and deep water drilling projects which
have not been affected as much as other areas of the industry. For additional
industry segment information for the year ended December 31, 1998, see Note 10
of the notes to consolidated financial statements.
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.
Through its internal growth and through acquisitions, the Company has increased
the size and breadth of its rental tool inventory and now has 20 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 a rental tool operation in Venezuela and
currently has a limited inventory of rental tools located in Venezuela. The
Company's broad range of rental tools includes, but is not limited to the
following:
<TABLE>
<CAPTION>
<C> <S>
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>
Well Services. The Company is the leading provider of P&A services in the
Gulf of Mexico and also provides electric and mechanical wireline services as
well as tank cleaning services.
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 below 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 rather than using 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 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 1998, the Company expanded its well services to include vessel pressure
cleaning and safe vessel entry. In addition to conventional tank and vessel
pressure cleaning, the Company uses its patented technology for
on-line/remote cleaning to pressure clean vessels while under normal operation
and flow. This patented technology offers numerous benefits, including no
confined space entry, eliminates production shut-in, and reduces waste disposal
costs.
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.
The Company designs, manufactures and sells computerized electronic torque
and pressure control equipment. 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 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, wireline and tank cleaning 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 on a day rate basis. The Company
derives a significant amount of its revenue from a small number of major
and independent oil and gas companies. In 1998 and 1997, one customer
accounted for 12% and 27%, respectively, of the Company's consolidated
revenue primarily in the rental and well services segments and another
customer accounted for 12% and 5%, respectively, of the Company's
consolidated revenue primarily in the rental segment. No other customer
accounted for 10 percent or more of revenue in 1998 or 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.
Marketing for the Company's rental tools operations is conducted by the
Company's sales force which operates out of Harvey, Lafayette, Morgan City and
Houma, Louisiana, and 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 Harvey, Louisiana.
Competition
The Company competes in highly competitive areas of the oilfield services
industry. The products and services of each of the Company's principal industry
segments are sold in highly competitive markets, and its revenues and earnings
can be affected by changes in competitive prices, fluctuations in the level of
activity and major markets, general economic conditions and governmental
regulation. The Company competes with the oil and gas industry's largest
integrated oilfield service providers. The Company believes that the principal
competitive factors in the market areas that it serves are product and service
quality and availability, technical proficiency and price.
There can be no assurance that the Company's operations will not be
adversely affected 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.
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 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 for damages. 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.
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 Minerals Management
Service (United States Department of the Interior) ("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 changes in laws and regulations relating to the
oil and gas industry. 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.
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 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 statutes impose strict liability,
rendering a person liable for environmental damage without regard to negligence
or fault on the part of such person.
International Operations
The Company's operations in Venezuela are subject to risks inherent in doing
business in foreign countries. These risks include political changes,
expropriation, currency restrictions, taxes, changes in currency exchange
rates, boycotts and other civil disturbances. Although it is impossible to
predict the likelihood of such occurrences or their effect on the Company,
management believes that these risks are acceptable. However, there can be no
assurance that the occurrence of any one of these events would not have a
material adverse effect on the Company's operations.
Employees
As of March 15, 1999, the Company had approximately 560 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.
Facilities
The Company owns certain facilities and leases other office, service and
assembly facilities under various operating leases, including 20 rental tool
facilities located throughout the Gulf Coast from Corpus Christi, Texas to
Venice, Louisiana. In April 1998, the Company consolidated all of its New
Orleans area sales and administrative functions in a building with
approximately 26,000 square feet in Harvey, Louisiana which it purchased in
1997. 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.
Intellectual Property
The Company uses several patented items in its operations, which management
believes are important but are not indispensable to the Company's operations.
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.
Cautionary Statement Concerning Forward-Looking Information
Certain statements made in this Report that are not historical facts are
"forward-looking statements" as defined in Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-
looking statements may include, without limitation, statements that relate to:
* statements regarding our business strategy, plans and objectives;
* statements expressing our beliefs and expectations regarding
future demand for our products and services and other events and
conditions that may influence the oilfield services market and our
performance in the future; and
* statements concerning our future expansion plans, including our
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.
Also, you can generally identify forward-looking statements by such
terminology as "may," "will," "expect," "believe," "anticipate," "project,"
"estimate" or similar expressions. Such statements are based on certain
assumptions and analyses made by our management in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. We caution you
that such statements are only predictions and not guarantees of future
performance and that actual results, developments and business decisions may
differ from those envisioned by the forward-looking statements.
All phases of our operations are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control. Any one of such
influences, or a combination, could materially affect the accuracy of the
forward-looking statements and the projections on which the statements are
based. Some important factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements include the following:
We depend on oil and gas industry; Industry volatility.
Our business depends in large part on the conditions of the oil and gas
industry, and specifically on the capital expenditures of our customers.
Purchases of products and services such as those provided by us are, to a
substantial extent, deferrable in the event oil and gas companies reduce
capital expenditures. As a result, the cyclical nature of the oil and gas
industry and general economic conditions have a significant effect on the
demand for our oilfield services and our revenues and profitability.
Since the second quarter of 1998, there has been a downturn in demand for
our well services operations. The demand for our P&A services primarily
depends on:
* the number of offshore producing wells that have ceased to be
commercially productive;
* the level of expenditures by oil and gas companies;
* the level of environmental awareness; and
* the desire of oil and gas companies to minimize future P&A liabilities.
The demand for our rental tool and wireline services primarily depends on
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, as a result, less volatile than
the exploration sector, producers have reacted to declining oil and gas prices
by reducing expenditures. This has adversely affected our business. We are
unable to predict future oil and gas prices, 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. A prolonged low level of activity in the
oil and gas industry will adversely affect the demand for our products and
services and our financial condition and results of operations.
Rapid growth involves risks.
We have grown rapidly over the last several years through internal growth
and acquisitions of other companies. It will be important for our future
success to manage the rapid growth that we have experienced, and this will
demand increased responsibility for management personnel. The following
factors could present difficulties to us:
* the lack of sufficient executive-level personnel;
* increased administrative burdens; and
* the increased logistical problems of large, expansive operations.
If we do not manage these potential difficulties successfully, they could
have a material adverse effect on our financial condition and results of
operations. The historical financial information included in this Report is
not necessarily indicative of the results that would have been achieved had we
been operated on a fully integrated basis or the results that may be realized
in the future.
Acquisition strategy involves risks.
Acquisitions have been and may continue to be a key element of our business
strategy. We cannot assure you that we will be able to identify and acquire
acceptable acquisition candidates on terms favorable to us in the future. We
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 impose a
significant burden on our results of operations and financial condition. The
issuance of additional equity securities could result in significant dilution
to our stockholders. We cannot assure you that we will be able to successfully
consolidate the operations and assets of any acquired business with our own
business. In addition, our management may not be able to effectively manage
our increased size or operate a new line of business. Any inability on our
part to consolidate and manage acquired businesses could have a material
adverse effect on our results of operations and financial condition.
Seasonality and adverse weather conditions may adversely affect our operations.
Our P&A operations are directly affected by the weather conditions in the
Gulf of Mexico. Due to seasonal differences in weather patterns, our P&A crews
may operate more days in the spring, summer and fall periods and less in the
winter months. The seasonality of oil and gas drilling activity in the Gulf
Coast region affects our rental tool operations and sales of equipment. Due to
exposure to weather, we generally experience higher drilling activity in the
spring, summer and fall months with the lowest activity in winter months. The
rainy weather, hurricanes and other storms prevalent in the Gulf of Mexico and
along the Gulf Coast throughout the year may also affect our operations.
Accordingly, our operating results may vary from quarter to quarter, depending
on factors outside of our control. As a result, full year results are not
likely to be a direct multiple of any particular quarter or combination of
quarters.
Shortage of skilled workers may impair growth potential and profitability.
Our ability to remain productive and profitable will depend substantially
on our ability to attract and retain skilled workers. Our ability to expand
our operations is in part impacted by our ability to increase our 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 our skilled labor force, increases in the wage
rates paid by us, or both. If either of these events occurred, our capacity
and profitability could be diminished and our growth potential could be
impaired.
We depend on significant customers.
We derive a significant amount of our revenue from a small number of
major and independent oil and gas companies. In 1998 and 1997, one customer
accounted for approximately 12% and 27%, respectively, of the Company's
consolidated revenue primarily in the rental and well services segments and
another customer accounted for approximately 12% and 5%, respectively, of
the Company's consolidated revenue primarily in the rental segment. Our
inability to continue to perform services for a number of our large existing
customers, if not offset by sales to new or other existing customers, could
have a material adverse effect on our business and operations.
We operate in a highly competitive industry.
We compete in highly competitive areas of the oilfield services industry.
The products and services of each of our principal industry segments are sold
in highly competitive markets, and our revenues and earnings may be affected by
the following factors:
* changes in competitive prices;
* fluctuations in the level of activity and major markets;
* general economic conditions; and
* governmental regulation.
We compete with the oil and gas industry's largest integrated oil field
service providers. We believe that the principal competitive factors in the
market areas that we serve are product and service quality and availability,
technical proficiency and price.
Our operations may be adversely affected if our current competitors or
new market entrants introduce new products or services with better features,
performance, prices or other characteristics than our products and services.
Competitive pressures or other factors also may result in significant price
competition that could have a material adverse effect on our 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 we believe that our reputation for safety and
quality service is good, we cannot assure you that we will be able to maintain
our competitive position.
Operating hazards may result in liability; limited insurance coverage.
Our operations involve the use of heavy equipment and exposure to inherent
risks, including blowouts, explosions and fire. If any of these events were to
occur, this could result in liability for personal injury and property damage,
pollution or other environmental hazards or loss of production. In addition,
certain of our 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 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 us for damages on job-
related injuries. In such actions, there is generally no limitation on our
potential liability.
If our equipment were to fail, this could result in property damage,
personal injury, environmental pollution and resulting damage for which we
could be liable. Litigation may arise from a catastrophic occurrence at a
location where our equipment and services are used. This could result in large
claims for damages. The frequency and severity of such incidents affect our
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 to such incidents, could
affect our ability to obtain projects from oil and gas companies or insurance.
This could have a material adverse effect on us. We maintain what we believe
is prudent insurance protection. We cannot assure you that we will be able to
maintain adequate insurance in the future at rates we consider reasonable or
that our insurance coverage will be adequate to cover future claims that may
arise.
Compliance with regulatory and environmental laws may affect our operations.
Our business is significantly affected by state and federal laws and other
regulations relating to the oil and gas industry and by changes in such laws
and the level of enforcement of such laws. We are unable to predict the level
of enforcement of existing laws and regulations, how such laws and regulations
may be interpreted by enforcement agencies or court rulings, or whether
additional laws and regulations will be adopted. We are also unable to predict
the effect that any such events may have on us, our business, or our financial
condition.
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 significantly affect the demand for our P&A services. A
decrease in the level of enforcement of such laws and regulations in the future
would adversely affect the demand for our services and products. Numerous
state and federal laws and regulations also affect the level of purchasing
activity of oil spill containment equipment and consequently our business. A
decrease in the level of enforcement of state and federal laws and regulations
in the future may adversely affect the demand for our products. In addition,
we depend on the demand for our services from the oil and gas industry. 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 our areas of operations for economic, environmental or other policy
reasons would adversely affect our operations by limiting demand for our
services.
We also have potential environmental liabilities with respect to our
offshore and onshore operations. Certain environmental laws provide for joint
and several liabilities for remediation of spills and releases of hazardous
substances. These environmental statutes may impose liability without regard
to negligence or fault. In addition, we may be subject to claims alleging
personal injury or property damage as a result of alleged exposure to hazardous
substances. We believe that our present operations substantially comply with
applicable federal and state pollution control and environmental protection
laws and regulations. We also believe that compliance with such laws has had
no material adverse effect on our operations to date. However, such
environmental laws are changed frequently. Sanctions for noncompliance may
include revocation of permits, corrective action orders, administrative or
civil penalties and criminal prosecution. We are unable to predict whether
environmental laws will in the future materially adversely affect our
operations and financial condition.
We depend in part on the development of new technology.
Sales of certain of our products, primarily our oil spill containment
equipment, are based primarily on our proprietary technology. Our success in
the sales of these products depends to a significant extent on the development
and implementation of new product designs and technologies. Whether we can
continue to develop products and technology to meet evolving industry standards
at levels of capability and price acceptable to our customers will
significantly affect our ability to compete in this market area. Many of our
competitors have greater resources devoted to research and development of new
products and technologies than we have. While we have patents on certain of
our technologies and products, patents secured by us may successfully be
challenged by others. In addition, we may not be able to protect our patents
from the development of similar products by others.
International operations involve risks.
Our operations in Venezuela, although presently limited, are subject to
risks inherent in doing business in foreign countries. These risks include,
but are not limited to:
* political changes;
* expropriation;
* currency restrictions and changes in currency exchange rates;
* taxes; and
* boycotts and other civil disturbances.
Although it is impossible to predict the likelihood of such occurrences
or their effect on our operations, our management believes that these risks are
acceptable. However, the occurrence of any one of these events could have a
material adverse effect on our operations.
Item 3. 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. The Company insures against these risks to the extent deemed prudent
by its management, but no assurance can be given that the nature and amount of
such insurance will in every case fully indemnify the Company against
liabilities arising out of pending and future legal proceedings related to its
business activities. 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 adversely, would not have a
material adverse effect on the Company's business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
- - -----------------------------------------------------------
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- - ----------------------------------------------------------------
The Company's 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 two fiscal 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>
1997
First Quarter $ 4.88 $ 2.88
Second Quarter 5.19 4.38
Third Quarter 9.12 5.00
Fourth Quarter 14.31 8.88
1998
First Quarter $ 10.06 $ 7.00
Second Quarter 11.56 5.00
Third Quarter 5.53 3.13
Fourth Quarter 4.38 2.50
First Quarter 1999 (through March 15, 1999) $ 3.13 $ 2.00
</TABLE>
As of March 15, 1999 there were 28,792,573 shares of Common Stock
outstanding, which were held by approximately 163 record holders.
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 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.
Item 6. Management's Discission and Analysis or Plan of Operation
- - -----------------------------------------------------------------
Overview
Demand for the Company's rental tools and well 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. 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 oilfield services industry experienced a significant decline in activity
in the last half of 1998 which has continued into the first quarter of 1999.
The Company's rental tool business has been impacted, but not as much as other
areas of the oilfield service industry because it is primarily concentrated in
workover activity and deep water drilling projects which have not been affected
as much as other areas of the industry. The Company's P&A segment has been
adversely affected as some major and independent oil and gas companies have
elected to defer making these expenditures. However, as a result of these
deferrals and increased depletion rates, the backlog of wells requiring plug
and abandonment continues to increase. Should the decline in overall industry
activity levels continue, it could have a material adverse effect on the
Company's financial condition and results of operation.
Comparison of the Results of Operations for the Years Ended December 31, 1998
and 1997.
The Company's performance in 1998 was impacted in the second half of the
year by the decline in activity in the oilfield services industry as a result
of a decline in oil prices. In addition, work in the Gulf of Mexico, which is
the Company's primary operating area, was virtually shut down during September
1998 by a series of storms and hurricanes.
The Company's revenue increased 68% to $91.3 million for the year ended
December 31, 1998, as compared to $54.3 million for the year ended December 31,
1997. The majority of the increase is primarily the result of a full year of
revenues from acquisitions made in 1997 in the rental segment.
The Company's gross margin decreased to 52.1% for the year ended December
31, 1998 as compared to 57.2% for the year ended December 31, 1997. This
decrease is primarily a result of the general decline in activity in the
oilfield services industry and a $690,000 charge for obsolete inventory as
part of the special charges discussed below. Although all three segments were
impacted, the well services segment had the largest decline as a result of
several factors. The well services segment was in the process of expansion
in the latter part of 1997 and the beginning of 1998 which resulted in
increased expenses at about the time the P&A activity began to decline. During
the year, due to competitive pressures, the Company performed more turnkey
basis projects, which impacted the Company's gross margin negatively.
Throughout the last half of 1998 and into the first quarter of 1999, in
response to the downturn in demand for the Company's services, the Company has
made an extensive effort to bring costs into line with the reduced level of
activity, and is considering further savings measures.
Depreciation and amortization increased 129%, to $7.5 million for the year
ended December 31, 1998 as compared to $3.3 million for the year ended December
31, 1997. Most of the increase is a result of a full year of depreciation from
the 1997 acquisitions. Depreciation also increased as a result of $29.1
million of capital expenditures in the year ended December 31, 1998 primarily
for purposes of expanding the rental tool inventory.
General and administrative expenses increased to $22.9 million for the year
ended December 31, 1998 as compared to $12.5 million for the year ended
December 31, 1997. Most of the increase is a result of a full year of general
and administrative expenses for the acquisitions made in 1997 as well as
acquisitions made in 1998. Interest expense increased to $1.4 million for the
year ended December 31, 1998 from $722,000 for the year ended December 31, 1997
as a result of an increase in borrowings to fund capital expenditures as well
as two acquisitions.
Net income before special charges, merger termination expenses and gain on
sale of subsidiary was $10.2 million or diluted earnings per share of $0.34 for
the year ended December 31, 1998 as compared to net income of $9.5 million or
diluted earnings per share of $0.43 for the year ended December 31, 1997.
During the year ended December 31, 1998, the Company recorded a pre-tax
special charge of $14.4 million. The special charge consisted of $12.1 million
for impairment of goodwill, $930,000 in patents and $690,000 in associated
inventory as a result of obsolescence and $650,000 associated with reduction in
employees as a result of the general decline in the industry. The portion of
the special charge related to inventory obsolescence is included in costs of
services in the consolidated statement of operations.
The non-cash writeoff of goodwill was recorded in accordance with Statement
of Financial Standards (FAS) No. 121, which requires that long-lived
assets and certain identifiable intangibles held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The severity as well as the duration of the downturn in
activity in the oil and gas industry is such an event. 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 assets.
The Company's review of its long-lived assets indicated that the carrying
value of certain of the Company's assets used by the Company in its well
services, rental tools and oil containment boom businesses had been impaired.
The fair value of the assets was determined by discounting the estimated
net cash flows generated by the assets. The result was an impairment charge
of $12.1 million for the year ended December 31, 1998 consisting entirely
of goodwill.
The special charges of $930,000 in patents and $690,000 in associated
inventory are a result of obsolescence in the oil containment boom
business as evidenced by declining cash flows. The Company also authorized
and committed to terminating thirty employees during the fourth quarter
of 1998. As a result, included in the special charge, is $650,000 for
severance, employment contract and benefits costs for the terminated employees.
During the fourth quarter of 1998, the Company entered into a merger
agreement with Parker Drilling Company ("Parker"), which was subsequently
terminated prior to year-end by mutual consent. As part of the termination,
the Company agreed to pay Parker $2.125 million and also incurred approximately
$112,000 in additional costs associated with the merger termination. In the
first quarter of 1998, the Company sold a subsidiary for a gain of
approximately $1.2 million.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
The Company experienced significant growth in revenue and net income in the
year ended December 31, 1997 as compared to the year ended December 31, 1996
due to continued strong demand for its products and services, internal growth
and growth through acquisitions.
The Company's revenue increased 130% to $54.3 million for the year ended
December 31, 1997 as compared to $23.6 million for the year ended December 31,
1996. Of this increase, approximately 26% was the result of internal growth of
the Company's operations and approximately 74% was the result of acquisitions
completed by the Company since July 1996.
The Company's gross margin increased to 57.2% for the year ended December
31, 1997 from 53.3% for the year ended December 31, 1996. 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 147%, to $3.3 million for the year
ended December 31, 1997 from $1.3 million for the year ended December 31, 1996.
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 to 23.1% for the year ended December 31, 1997
from 23.4% for the year ended December 31, 1996. Interest expense increased to
$722,000 for the year ended December 31, 1997 as compared to $127,000 for the
year ended December 31, 1996. This was primarily as a result of the interim
financing of the various acquisitions the Company made during 1997.
Net income increased 140% to $9.5 million for the year ended December 31,
1997 from $3.9 million for the year ended December 31, 1996, while diluted
earnings per share increased 95% to $0.43 from $0.22. The strong earnings
growth experienced by the Company is the 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 income for the period as the
average number of shares outstanding for the year ended December 31, 1997
increased 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 in
September 1997, and as a result of the public offering of approximately 3.9
million shares of Common Stock completed in December 1997.
Liquidity and Capital Resources
For the year ended December 31, 1998, the Company had cash flows from
operations of $18.1 million as compared to $2.3 million for the year ended
December 31, 1997. The Company's EBITDA (earnings before interest, income
taxes, depreciation and amortization expense) was $25.4 million for the year
ended December 31, 1998 as compared to $18.5 million for the year ended
December 31, 1997. The EBITDA for 1998 of $25.4 million is exclusive of the
gain on sale of subsidiary, the merger termination and the special charge,
which was mostly non-cash in nature. These increases are primarily a result of
the operations of the 1997 acquisitions being included for a full fiscal year.
In 1998, the Company acquired all the outstanding common stock of three
companies for an aggregate $3,857,000 cash. Additional cash consideration, if
any, will be based upon a multiple of four times the respective acquired
company's average EBITDA over a three year period from the date of acquisition,
less certain adjustments. In no event, will the aggregate additional
consideration exceed $50,143,000. If the overall current industry activity
levels continue, the additional consideration would be materially less than
the maximum consideration. For additional information, see Note 3 of the notes
to the consolidated financial statements.
The Company made additional capital expenditures in 1998 of $29.1 million
primarily for additional rental equipment. Other capital expenditures included
P&A equipment spreads and renovation of the Company's new operating facility.
The Company, as of the end of the first quarter of 1998, consolidated all of
its New Orleans area sales and administrative functions in this facility.
During the second quarter of 1998, the Board of Directors approved the
purchase of up to 500,000 shares of the Company's outstanding common stock.
Under this program, the Company purchased a total of 474,500 shares of common
stock at an average price of $4.73 per share. This repurchase program has been
discontinued.
The Company, in the first quarter of 1998, made a final payment of $750,000
in connection with the acquisition of Dimensional Oilfield Services, Inc. The
Company, in the first quarter of 1998, received cash proceeds of $4.2 million
from the sale of Baytron, Inc. At the beginning of the fourth quarter of 1998,
the Company entered into a merger agreement with Parker. In December 1998, the
Company and Parker jointly agreed to terminate the merger agreement. As part
of the termination, the Company paid Parker $2.125 million and also incurred
approximately $112,000 in additional costs associated with the merger
termination.
The Company has a revolving credit facility with Whitney National Bank and
other banks (the "Bank Credit Facility"), to provide for a revolving line of
credit of up to $45.0 million which matures on April 30, 2000, and bears
interest at an annual rate of LIBOR plus a margin that depends on the Company's
debt coverage ratio. As of March 15, 1999, there was $27.8 million outstanding
under the Bank Credit Facility at an interest rate of approximately 6.8% per
annum. Borrowings under the Bank Credit Facility are available for
acquisitions, working capital, letters of credit and general corporate
purposes. Indebtedness under the Bank Credit Facility is guaranteed by the
Company's subsidiaries, collateralized by substantially all of the assets of
the Company and its subsidiaries, and a pledge of all the common stock of the
Company's 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.
Management currently believes that the Company will have capital
expenditures, excluding acquisitions, of approximately $8 to $10 million in
1999 primarily to further expand its rental tool inventory. 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 equity or debt financing possibly in excess of the limits of the
current Bank Credit Facility.
Year 2000
The Company is assessing both the cost of addressing and the cost or the
consequence of incomplete or untimely resolution of the Year 2000 issue. This
process includes (i) the development of Year 2000 awareness, (ii) a
review to identify systems that could be affected by the Year 2000 issue,
(iii) an assessment of potential risk factors (including non-compliance by
the Company's suppliers, subcontractors and customers), (iv) the allocation of
required resources, (v) a determination of the extent of remediation work
required, (vi) the development of an implementation plan and time table, and
(vii) the development of contingency plans.
The Company makes use of computers in its processing of accounting,
financial, administrative, and management information. Additionally, the
Company uses computers as a tool for its employees to communicate among
themselves and with other persons outside the organization. The Company will
contact its key vendors and customers to assess their efforts and progress with
Year 2000 issues. The Company anticipates completion of its evaluation of non-
information technology equipment, key vendors and suppliers and any remedial
action and/or a contingency plan, if necessary, by August 31, 1999.
The Company is in the process of analyzing and evaluating the operational
problems and costs that would be reasonably likely to result from the failure
by the Company or certain third parties to complete efforts necessary to
achieve Year 2000 compliance on a timely basis. The Company is in the process
of evaluating all the material information technology ("IT") and non-IT systems
that it uses directly in its operations. The Company presently believes that
the year 2000 issue will not pose significant operational problems for
the Company's computer systems. However, if all significant Year 2000 issues
are not properly identified, or assessment, remediation and testing of its
systems are not effected timely, the Year 2000 issue could have an adverse
impact on the Company's operations and financial condition. Among other
things, the Company could be impacted by the inability of its customers to
accurately and timely pay invoices, the Company's inability to access necessary
capital from lenders or other sources when required, and the inability of the
Company's significant suppliers, subcontractors and others to provide the
necessary materials, services or systems required to operate the Company's
business.
The Company believes that it will be able to implement successfully the
changes necessary to address the Year 2000 issues with reliance on its
third party vendors and does not expect the cost of such changes to have a
material impact on the Company's financial position, results of operations
or cash flows in future periods.
<PAGE>
Item 7. Financial Statements
- - ----------------------------
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, 1998 and 1997, 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years then
ended in conformity with generally accepted accounting principles.
KPMG LLP
New Orleans, Louisiana
March 9, 1999
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 737 $ 1,902
Accounts receivable - net of allowance
for doubtful accounts of $798,000 in
1998 and $551,000 in 1997 22,486 24,054
Inventories 2,972 1,778
Income tax receivable 2,568 -
Other 1,892 1,513
------- -------
Total current assets 30,655 29,247
Property, plant and equipment - net 76,187 51,797
Goodwill - net 24,302 35,989
Patent - net - 1,027
------- -------
Total assets $ 131,144 $ 118,060
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,557 $ 5,976
Accrued expenses 6,316 3,872
Income taxes payable - 893
------- -------
Total current liabilities 11,873 10,741
Deferred income taxes 8,612 7,127
Long-term debt 27,955 11,339
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 and outstanding:
1998 - 28,792,523 shares;
1997 - 29,173,390 shares 29 29
Additional paid-in capital 78,794 78,590
Retained earnings 6,126 10,234
Treasury stock, at cost, 474,500 shares (2,245) -
------- -------
Total stockholders' equity 82,704 88,853
------- -------
Total liabilities and stockholders' $ 131,144 $ 118,060
equity ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1998 and 1997
(in thousands, except
per share data)
<TABLE>
<CAPTION> 1998 1997
---- ----
<S> <C> <C>
Revenues $ 91,334 $ 54,256
-------- --------
Costs and expenses:
Costs of services 43,734 23,216
Depreciation and amortization 7,494 3,272
Special charges 13,763 -
General and administrative 22,921 12,530
-------- --------
Total costs and expenses 87,912 39,018
-------- --------
Income from operations 3,422 15,238
Other income (expense):
Interest expense-net (1,490) (722)
Merger termination (2,237) -
Gain on sale of subsidiary 1,176 -
-------- --------
Income before income taxes 871 14,516
Provision for income taxes 4,979 5,061
-------- --------
Net income (loss) $ (4,108) $ 9,455
======== ========
Earnings (loss) per share:
Basic $ (0.14) $ 0.44
======== ========
Diluted $ (0.14) $ 0.43
======== ========
Weighted average common shares used
in computing earnings (loss) per share:
Basic 28,982 21,695
======== ========
Diluted 28,982 21,993
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
December 31, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Additional
stock Common paid-in Retained Treasury
shares stock capital earnings stock Total
------ ------ ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 18,597,045 $ 19 $ 19,551 $ 779 $ - $ 20,349
Net income - - - 9,455 - 9,455
Acquisition of Nautilus Pipe &
Tool Rentals, Inc. 420,000 - 1,837 - - 1,837
Acquisition of Tong Rentals &
Supply Co., Inc. 1,100,000 1 5,499 - - 5,500
Exercise of B warrants 4,466,509 4 14,468 - - 14,472
Sale of common stock 3,900,000 4 36,867 - - 36,871
Exercise of stock options 689,836 1 368 - - 369
---------- --- ------- ------- ------- ------
Balance, December 31, 1997 29,173,390 29 78,590 10,234 - 88,853
Net loss - - - (4,108) - (4,108)
Purchase of common stock for (474,500) - - - (2,245) (2,245)
treasury
Exercise of stock options 93,633 - 204 - - 204
---------- --- ------- ------- ------- ------
Balance, December 31, 1998 28,792,523 $ 29 $ 78,794 $ 6,126 $ (2,245) $ 82,704
========== === ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,108) $ 9,455
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 7,494 3,272
Unearned income - (392)
Gain on sale of subsidiary (1,176) -
Special charges 13,763 -
Deferred income taxes 777 (65)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable 3,863 (7,707)
Inventories 550 (572)
Other - net 955 (249)
Accounts payable 1,725) 403
Due to shareholders - (1,433)
Accrued expenses 1,047 1,083
Income taxes payable (3,314) (1,452)
-------- --------
Net cash provided by operating activities 18,126 2,343
-------- --------
Cash flows from investing activities:
Payments for purchases of property and equipment (29,120) (9,804)
Acquisition of businesses, net of cash acquired (3,583) (47,793)
Deferred payment for acquisition of subsidiary (750) -
Proceeds from sale of subsidiary 4,247 -
-------- --------
Net cash used in investing activities (29,206) (57,597)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable-net 11,956 5,011
Proceeds from exercise of stock options 204 369
Purchase of common stock for treasury (2,245) -
Proceeds from sale of common stock - 36,871
Proceeds from exercise of B warrants - 14,472
-------- --------
Net cash provided by financing activities 9,915 56,723
-------- --------
Net increase(decrease) in cash and cash
equivalents (1,165) 1,469
Cash and cash equivalents at beginning of year 1,902 433
-------- --------
Cash and cash equivalents at end of year $ 737 $ 1,902
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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 1998 presentation.
(b) Business
--------
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 plug and abandonment services,
electric and mechanical wireline services, tank cleaning, the
manufacture and sale of computerized electronic torque and pressure
control equipment and the manufacture and sale of oil spill containment
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's P&A, wireline and tank cleaning 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 on a day rate
basis. The Company derives a significant amount of its revenue from
a small number of major and independent oil and gas companies. In 1998
and 1997, one customer accounted for 12% and 27%, respectively, of
the Company's consolidated revenue primarily in the rental and well
services segments and another customer accounted for 12% and 5%,
respectively, of the Company's consolidated revenue primarily in the
rental segment. No other customer accounted for 10 percent or more
of revenue in 1998 or 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.
(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.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(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>
<CAPTION>
<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.
(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 not to
exceed 30 years. Recoverability is reviewed 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
-------------------
For the Company's plug and abandonment (P&A), wireline and rental tool
operations and tank cleaning services, revenue is recognized when
services or equipment are provided. The Company contracts for P&A,
wireline and tank cleaning projects either on a day rate or turnkey
basis, with a 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.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
(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) Earnings Per Share
------------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards (FAS) No. 128, Earnings Per Share which
requires the presentation of "basic" and "diluted" earnings per share
as defined, on the face of the income statement for all entities with
complex capital structures. The number of dilutive stock options and
warrants used in computing diluted earnings per share were 298,000 in
1997, and these securities were anti-dilutive in 1998.
(l) Financial Instruments
---------------------
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt.
The carrying amount of these financial instruments approximates their
fair values.
(m) Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 130, Reporting
Comprehensive Income. FAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. The Company adopted this standard
in 1998. Such adoption had no effect on the Company's financial
statement presentation as the Company has no items of other
comprehensive income.
(2) Supplemental Cash Flows Information (in thousands)
--------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid for:
Interest, net of amounts capitalized $ 1,481 $ 649
======= =======
Income taxes $ 7,050 $ 5,195
======= =======
Details of acquisitions:
Fair value of assets $ 11,822 $ 76,245
------- -------
Fair value of liabilities 7,933 18,202
Common stock issued - 7,338
------- -------
Cash paid 3,889 50,705
Less cash acquired 306 2,912
------- -------
Net cash paid for acquisitions $ 3,583 $ 47,793
</TABLE> ======= =======
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Business Combinations
---------------------
In September 1998, the Company acquired all of the outstanding common
stock of Hydro-dynamics Oilfield Contractors, Inc. (Hydro-dynamics) for
$1,000,000 in cash. Payment of an additional $750,000 will be based on the
attainment of certain objectives. At the third anniversary of the acquisition,
additional cash consideration, if any, will be based upon a multiple of four
times Hydro-dynamics' average earnings before interest, taxes, depreciation
and amortization (EBITDA) over a three year period from the date of
acquisition. The contingent consideration, if paid, will be capitalized
as additional purchase price. In no event will the total consideration paid
exceed $22,000,000. The property plant and equipment of Hydro-dynamics are
valued at their estimated fair market value of approximately $936,000.
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 Hydro-dynamics of approximately $830,000 was allocated to goodwill.
In June, 1998 the Company acquired all of the outstanding common stock of
Lamb Services, Inc. and Tong Specialty, Inc. for $2,857,000 cash. Additional
cash consideration, if any, will be based upon a multiple of four times the
combined companies' average EBITDA less certain adjustments. The contingent
consideration, if paid, will be capitalized as additional purchase price. The
additional consideration will be paid on the second and third anniversary of
the stock purchase agreement, and in no event, will the total additional
payments exceed $28,143,000. The property, plant and equipment of Lamb
Services, Inc. and Tong Specialty, Inc. were valued at their estimated fair
value of approximately $4.1 million. Deferred taxes have been provided for the
difference between the book and tax basis of the property. The remaining
assets and liabilities approximate their fair values. The excess purchase
price over the fair value of the net assets of Lamb Services and Tong Specialty
of approximately $627,000 was allocated to goodwill.
In 1997, the Company acquired all of the outstanding common stock of six
companies for a combined $50,210,000 cash, 1,520,000 shares of the Company's
common stock and promissory notes providing for payments of up to $20,655,000.
The amounts payable under the promissory notes are subject to certain
contingencies and are not reflected in the respective company's purchase price.
The above acquisitions were accounted for as a purchase, and the results
of operations of the acquired companies have been included from their
respective acquisition dates.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had occurred on
January 1, 1998 and January 1, 1997 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>
<S> <C> <C>
1998 1997
---- ----
Revenues $ 99,362 $ 96,869
======== ========
Net income (loss) $ (4,538) $ 12,812
======== ========
Basic earnings (loss) per share $ (0.16) $ 0.58
======== ========
Diluted earnings (loss) per share $ (0.15) $ 0.57
======== ========
</TABLE>
The above pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the acquisitions been
effected on the assumed date.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Property, Plant and Equipment
-----------------------------
A summary of property, plant and equipment at December 31, 1998 and
1997 (in thousands) is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Buildings $ 6,050 $ 4,055
Machinery and equipment 70,657 44,551
Automobiles, trucks, trailers and tractors 4,247 3,028
Furniture and fixtures 950 604
Construction-in-progress 1,447 2,356
Land 1,596 1,268
--------- ---------
84,947 55,862
Less accumulated depreciation 8,760 4,065
--------- ---------
Property, plant and equipment, net $ 76,187 $ 51,797
========= =========
</TABLE>
The cost of property, plant and equipment leased to third parties was
$5,266,000 at December 31, 1998 and 1997. Interest cost incurred during the
period of construction of plant and equipment is capitalized. The interest
cost capitalized on plant and equipment was none in 1998 and $167,000 in 1997.
(5) Notes Payable
-------------
The Company's notes payable as of December 31, 1998 and 1997 consist
of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Revolving line of credit in the original amount
of $45,000,000 bearing interest based on
LIBOR plus 1.5% to 2.5% set quarterly
(7.31% at December 31, 1998) principal
due April 30, 2000 $ 27,400 $ 10,350
Other installment notes payable with interest
rates ranging from 7% to 10% due in monthly
installments through April, 2011 555 989
---------- ----------
27,955 11,339
Less current portion of notes payable - -
---------- ----------
Long-term debt $ 27,955 $ 11,339
========== ==========
</TABLE>
The Company maintains a revolving credit facility which provides for
borrowing of up to $45.0 million which matures on April 30, 2000, and bears
interest at an annual rate of LIBOR plus a margin that depends on the Company's
debt coverage ratio. A commitment fee ranging from .25% to .325% per annum is
payable on the unused portion of the credit. Borrowings under the Bank Credit
Facility are available for acquisitions, working capital, letters of credit and
general corporate purposes. Indebtedness under the Bank Credit Facility is
guaranteed by the Company's subsidiaries, collateralized by substantially all
of the assets of the Company and its subsidiaries, and a pledge of all the
common stock of the Company's 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. The Company is not required to maintain compensating
balances in connection with these agreements.
(6) Income Taxes
------------
The components of income tax expense for the year ended December 31, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Current
Federal $ 3,346 $ 3,973
State 349 621
---------- ----------
3,695 4,594
---------- ----------
Deferred:
Federal 1,223 404
State 61 63
---------- ----------
1,284 467
---------- ----------
$ 4,979 $ 5,061
========== ==========
</TABLE>
The significant components of deferred income taxes at December 31, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 295 $ 199
Net operating loss carryforward 898 979
Other 496 -
---------- ----------
1,689 1,178
Valuation allowance (957) (1,034)
---------- ----------
Net deferred tax asset 732 144
---------- ----------
Deferred tax liabilities:
Property, plant and equipment (8,675) (6,408)
Patent - (280)
Other (669) (583)
---------- ----------
(9,344) (7,271)
---------- ----------
$ (8,612) $ (7,127)
</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 change in the
valuation allowance for the year ended December 31, 1998 was a decrease of
$77,000 and an increase of $42,000 for the year ended December 31, 1997. 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.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Income Taxes (continued)
------------------------
As of December 31, 1998, the Company had a net operating loss carryforward
of approximately $2.6 million which is available to reduce future Federal
taxable income through 2010. The utilization of the net operating loss
carryforward is limited to approximately $238,000 a year.
Income tax expense differs from the amounts computed by applying the US.
Federal income tax rate of 34% to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Computed expected tax expense $ 296 $ 4,935
Increase (decrease) in income taxes resulting from:
Impairment charge 4,143 -
State income taxes 480 432
Other 60 (306)
-------- ---------
Provision for income taxes $ 4,979 $ 5,061
======== =========
</TABLE>
(7) Stockholders' Equity
--------------------
In October 1995, the Company's 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, as amended, 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
1,900,000 shares of the Company's Common Stock. In connection with the signing
of the merger agreement with Parker Drilling Company, which was subsequently
terminated, all of the Company's outstanding options vested. 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.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Stockholders' Equity (continued)
-------------------------------
A summary of stock options granted under the Incentive Plan for the
years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Number Weighted Number Weighted
of Average of Average
Shares Price Shares Price
----------------------- ------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,337,800 $3.84 531,500 $2.55
Granted 496,000 $7.96 860,500 $4.56
Exercised (80,300) $2.60 (54,200) $2.60
Forfeited (57,000) $5.07 - -
--------- ----- --------- -----
Outstanding at the end of year 1,696,500 $4.49 1,337,800 $3.84
========= ===== ========= =====
Exercisable at end of year 1,696,500 $4.49 443,300 $2.58
========= ===== ========= =====
Available for future grants 64,000 8,000
====== =====
</TABLE>
A summary of information regarding stock options outstanding at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------
<C> <C> <C> <C> <C> <C>
Range of Remaining Weighted Weighted
Exercise Contractural Average Average
Prices Shares Live Price Shares Price
- - --------------------------------------------------------------------------
$2.5 - $3.43 733,500 6-8 yrs $2.95 733,500 $2.95
$4.75 - $9.25 963,000 8.5-9.5 yrs $5.67 963,000 $5.67
</TABLE>
Additionally, at December 31, 1998, options relating to the 1995 Share
Exchange to purchase an aggregate of 65,000 shares of Common Stock at an
exercise price of $3.60 per share were outstanding until December 31, 2000.
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). However, Statement of Financial
Accounting Standards (FAS) No. 123 Accounting for Stock-Based Compensation
permits the continued use of the value based method prescribed by Opinion No.
25 but requires 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. The pro forma data presented below
is not representative of the effects on reported amounts for future years (in
thousands, except per share amounts).
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Stockholders Equity (continued)
-------------------------------
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Net income (loss) $ (4,108) $ 9,455 $ (5,337) $ 9,117
Basic earnings (loss) per share $ (0.14) $ 0.44 $ (0.18) $ 0.42
Diluted earnings (loss) per share $ (0.14) $ 0.43 $ (0.18) $ 0.41
Average fair value of grants during the year $ - $ - $ 4.71 $ 1.48
======== ======= ======= =======
Black-Scholes option pricing model assumptions
Risk free interest rate 6.1% 6.1%
Expected life (years) 2 2
Volatility 119.6% 73.0%
Dividend yield -0- -0-
======== =======
</TABLE>
(8) 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 $530,000 in 1998 and $331,000 in 1997. Future
minimum lease payments under non-cancelable leases for the five years ending
December 31, 1999 through 2003 are as follows: $586,000, $458,000, $238,000,
$178,000 and $51,000 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 the financial position, results of operations or liquidity
of the Company.
(9) Related Party Transactions
--------------------------
The Company paid consulting fees to a director, who is not an employee, of
$10,000 in 1998 and $13,000 in 1997. The employment contract of a director,
who is a former officer, was converted into a consulting agreement in 1996. He
was paid $60,000 in 1997. In 1998, this directors contract was terminated by
paying $60,000 and a note receivable the Company had fully reserved in prior
years. The Company also paid a director, who is also an employee and a
shareholder rent of approximately $69,000 in 1998 and $70,000 in 1997. The
Company is obligated to make such rent payments in the future as follows:
$69,000 in 1999 and $24,000 in 2000.
(10) Segment Information
-------------------
In 1998, the Company adopted Statement of Financial Accounting Standard
(FAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. The Company's reportable segments are grouped by products and
services as follows: rental tools, well services and other. Each segment
offers unique products and services within the oilfield services industry.
Rental tools sells and rents specialized equipment for use with onshore and
offshore oil and gas well drilling, completion, production and workover
activities. Well services provide plug and abandonment services, electric and
mechanical wireline services and tank cleaning to its customer base. Other
segment manufactures and sells computerized electronic and pressure control
equipment for the oil and gas industry and provides the manufacturing, sale and
rental of oil spill containment equipment. All the segments operate primarily
in the Gulf Coast Region.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on operating
profits or losses before special charges. Segment revenues reflect direct
sales of products and services for that segment, and each segment records
direct expenses related to its employees and its operations. Identifiable
assets are primarily those assets directly used in the operations of each
segment.
Summarized financial information concerning the Company's reportable
segments as of December 31, 1998 and 1997 is shown in the following tables (in
thousands):
<TABLE>
<CAPTION>
Rental Well Unallocated Consolidated
1998 Tools Services Other Total Amount Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Identifiable assets $ 101,581 $ 24,266 $ 4,206 $ 130,053 $ 1,091 $ 131,144
Capital expenditures 25,405 3,450 265 29,120 - 29,120
Revenues $ 56,289 $ 30,599 $ 4,446 $ 91,334 $ - 91,334
Costs of services 20,949 20,191 2,594 43,734 - 43,734
Depreciation and
amortization 6,070 982 442 7,494 - 7,494
General and administrative 16,273 4,881 1,767 22,921 - 22,921
Special charges 6,902 3,820 3,041 13,763 - 13,763
Operating income 6,095 725 (3,398) 3,422 - 3,422
Merger termination - - - - 2,237 2,237
Gain on sale of subsidiary - - 1,176 1,176 - 1,176
Interest - - - - 1,490 1,490
-----------------------------------------------------------------------------------------------
Income before income taxes $ 6,095 $ 725 (2,222) $ 4,598 $ (3,727) $ 871
===============================================================================================
</TABLE>
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Segment Information (continued)
------------------------------
<TABLE>
<CAPTION>
Rental Well Unallocated Consolidated
1997 Tools Services Other Total Amount Total
- - ---- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Identifiable assets $ 85,149 $ 20,635 $ 11,705 $ 117,489 $ 571 $ 118,060
Capital expenditures 4,850 3,983 971 9,804 - 9,804
Revenues $ 19,697 $ 27,018 $ 7,541 $ 54,256 $ - $ 54,256
Costs of services 5,889 14,689 2,638 23,216 - 23,216
Depreciation and
amortization 1,960 592 720 3,272 - 3,272
General and administrative 5,245 4,372 2,913 12,530 - 12,530
Operating income 6,603 7,365 1,270 15,238 - 15,238
Interest - - - - 722 722
-----------------------------------------------------------------------------------------------
Income before income taxes $ 6,603 $ 7,365 $ 1,270 $ 15,238 $ (722) $ 14,516
===============================================================================================
</TABLE>
(11) Special Charges and Merger Termination
--------------------------------------
During the year ended December 31, 1998 the Company recorded a pre-tax
special charge of $14.4 million. The special charge consisted of $12.1 million
of impairment of goodwill assets, $930,000 in patents and $690,000 associated
inventory as a result of obsolescence and $650,000 of costs associated with
reduction in employees as a result of the general decline in the industry. The
portion of the special charge related to inventory obsolescence is included in
costs of services in the consolidated statement of operations.
The non-cash writeoff of goodwill was recorded in accordance with
FAS No. 121, which requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever,
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The severity as well as the duration of the
current oil and gas industry is such an event. 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 assets.
The Company's review of its long-lived assets indicated that the carrying
value of certain of the Company's assets in the well services, rental tools and
the oil containment boom businesses had been impaired. The fair value of the
assets was determined by discounting the estimated net cash flows from
the assets. The result was impairment charge of $12.1 million for the year
ended December 31, 1998 consisting entirely of goodwill.
The special charges of $930,000 in patents and $690,000 in associated
inventory are a result of obsolescence in the oil containment boom
business as evidenced by declining cash flows. The Company also authorized and
committed to terminating thirty employees during the fourth quarter of 1998. As
a result, included in the special charge, is $650,000 for severance,
unemployment contract and benefits costs for the terminated employees.
SUPERIOR ENERGY SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11)Special Charges and Merger Termination (continued)
--------------------------------------------------
At the beginning of the fourth quarter of 1998, the Company entered into
an agreement to merge with the Parker Drilling Company (Parker). The Company
and Parker subsequently jointly agreed to terminate the merger agreement. As
part of the termination, the Company agreed to pay Parker $2.125 million and
also incurred approximately $112,000 in costs associated with the merger
termination.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- - -----------------------------------------------------------------------
Financial Disclosure
--------------------
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- - -------------------------------------------------------------------------------
Compliance with Section 16(A) of the Exchange Act
--------------------------------------------------
Information required by this item will be included in the Company's
definitive proxy statement in connection with its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 10. Executive Compensation
- - -------------------------------
Information required by this item will be included in the Company's
definitive proxy statement in connection with its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- - ------------------------------------------------------------------------
Information required by this item will be included in the Company's
definitive proxy statement in connection with its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
- - --------------------------------------------------------
Information required by this item will be included in the Company's
definitive proxy statement in connection with its 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
- - ------------------------------------------
(a) Exhibits. Reference is made to the Exhibit Index beginning on page
E-1 hereof.
(b) Reports on Form 8-K. The Company filed a current report on Form 8-K
dated October 28, 1998 under Item 5 on November 3, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUPERIOR ENERGY SERVICES, INC.
By:/s/ TERENCE E.HALL
------------------------
Terence E. Hall
Chairman of the Board,
Chief Executive Officer
and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/S/TERENCE E. HALL Chairman of the Board, March 30, 1999
- - ---------------------------- Chief Executive Officer and President
TERENCE E. HALL (Principal Executive Officer)
/S/ROBERT S. TAYLOR Chief Financial Officer (Principal March 30, 1999
- - ---------------------------- Financial and Accounting Officer)
ROBERT S. TAYLOR
/S/JAMES E. RAVANNACK Director March 30, 1999
- - ----------------------------
JAMES E. RAVANNACK
/S/RICHARD J. LAZES Director March 30, 1999
- - ----------------------------
RICHARD J. LAZES
/S/BRADFORD SMALL Director March 30, 1999
- - ----------------------------
BRADFORD SMALL
/S/JUSTIN L. SULLIVAN Director March 30, 1999
- - ----------------------------
JUSTIN L. SULLIVAN
</TABLE>
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
- - -------- ----------- --------------
<S> <C>
3.1 Composite of the Company's Certificate of Incorporation.(1)
3.2 Composite of the Company's By-laws.(2)
4.1 Specimen Stock Certificate. (9)
10.1 Revolving Credit by and between Whitney National
Bank, the banks named therein and the Company dated as of
February 17, 1998.(11)
10.2 Stock Purchase Agreement dated February 28, 1997, by and
between the Company and John C. Gordon.(4)
10.5 Agreement and Plan of Merger dated as of May 31, 1997, by and
among the Company, Tong Rentals and Supply Acquisition, Inc.
Tong Rentals and Supply Company, Inc. and Rufus L. Patin (5)
10.6 Stock Purchase Agreement dated as of September 30, 1997, by and
among the Company, Phillip D. Jaudon and Al J. Shiyou (6)
10.7 Stock Purchase Agreement dated October 31, 1997, by and between
the Company and the stockholders of Stabil Drill Specialties, Inc.(7)
10.8 Stock Purchase Agreement dated November 5, 1997, by and between
the Company and the stockholders of Sub-Surface Tools, Inc. (7)
10.9 1995 Stock Incentive Plan, as amended (8)
10.10 Form of Consultant Option, as amended (10)
10.12 Lease of Commercial Property dated January 1, 1997 between Oil
Stop, Inc. and Richard Lazes (11)
</TABLE>
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
- - -------- ----------- --------------
<S> <C>
10.13 Lease of Commercial Property dated March 1, 1994
between Oil Stop, Inc. and Richard Lazes.(10)
10.15 Employment Agreement between the Company and Richard J.
Lazes.(3)
21.1 Subsidiaries of the Company.(11)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
_________________
(1) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended March 31, 1996.
(2) Incorporated by reference to the Company's Form SB-2 (Registration
Statement No. 333-15987).
(3) Incorporated by reference to Amendment No. 2 to the Company's Form
S-4 on Form SB-2 (Registration Statement No. 33-94454)
(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 28, 1997
(5) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 31, 1997
(6) Incorporated by reference to the Company's Current Report on
Form 8-K dated October 3, 1997
(7) Incorporated by reference to the Company's Current Report on
Form 8-K dated October 31, 1997
(8) Incorporated by reference to Exhibit A to the Company's
Definitive Proxy Statement dated June 25, 1997
(9) Incorporated by reference to Amendment No. 1 to the Company's
Form S-4 on Form SB-2 (Registration Statement No. 33-94454)
(10) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(11) Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997.
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Superior Energy Services, Inc.
We consent to incorporation by reference in registration statements NO. 333-
22603 on Form S-3, No. 333-12175 and No. 333-43421 on Form S-8 of Superior
Energy Services, Inc. of our report dated March 9, 1999, relating to the
consolidated balance sheets of Superior Energy Services, Inc., and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended, which report appears in the December 31, 1998, annual report on Form 10-
KSB of Superior Energy Services, Inc.
KPMG LLP
New Orleans, Louisiana
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 737,000
<SECURITIES> 0
<RECEIVABLES> 23,284,000
<ALLOWANCES> (798,000)
<INVENTORY> 2,972,000
<CURRENT-ASSETS> 30,655,000
<PP&E> 84,947,000
<DEPRECIATION> (8,760,000)
<TOTAL-ASSETS> 131,144,000
<CURRENT-LIABILITIES> 11,873,000
<BONDS> 0
<COMMON> 29,000
0
0
<OTHER-SE> 82,675,000
<TOTAL-LIABILITY-AND-EQUITY> 131,144,000
<SALES> 91,334,000
<TOTAL-REVENUES> 91,334,000
<CGS> 43,734,000
<TOTAL-COSTS> 87,912,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,490,000
<INCOME-PRETAX> 871,000
<INCOME-TAX> 4,979,000
<INCOME-CONTINUING> (4,108,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,108,000)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
