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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
X OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 75-2379388
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1105 Peters Road
HARVEY, LOUISIANA 70058
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (504) 362-4321
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
__
The number of shares of the Registrant's common stock outstanding on
November 4, 1999 was 59,800,091.
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EXPLANATORY NOTE
This Form 10Q/A hereby amends Item 1 (Financial Statements), Item 2
(Management's Discussion and Analysis of Financial Condition and Results
of Operations) and Exhibit 27 of the Quarterly Report on Form 10-Q of
Superior Energy Services, Inc. (the "Company") for the quarter ended
September 30, 1999, each to read in its entirety as follows:
SUPERIOR ENERGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q/A FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
ACQUISITION OF CARDINAL HOLDING CORP.
On July 15, 1999, Superior Energy Services, Inc. (the "Company") acquired
Cardinal Holding Corp. ("Cardinal") through a merger of Cardinal with and
into a wholly-owned subsidiary of the Company. The merger was treated for
accounting purposes as an acquisition of Superior by Cardinal in a purchase
business transaction. Consistent with the purchase method of accounting,
the Company has carried forward the net assets of Cardinal at their
historical book value and has reflected the net assets of Superior at their
estimated fair value at the date of the merger. Accordingly, all historical
financial results presented in the Company's consolidated financial
statements for periods prior to July 15, 1999 reflect the results of
Cardinal on a stand alone basis. The results of the three and nine months
ended September 30, 1999 reflect three and nine months, respectively,
of Cardinal's operations and two and one-half months of Superior's
operations. The results for the three and nine months ended September 30,
1998 are Cardinal alone. Consequently, analyzing prior period results
to determine or estimate the combined operating potential of the Company
will be difficult at best and perhaps meaningless given the fact Cardinal,
prior to the merger, incurred substantial non-cash and extraordinary
charges during the last few years associated with a recapitalization
and refinancing.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets September 30, 1999
and December 31,1998
(in thousands, except share data)
9/30/99 12/31/98
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 933 $ 421
Accounts receivable- net 34,873 21,591
Income tax receivable 3,169 151
Other 4,058 3,864
--------- ---------
Total current assets 43,033 26,027
--------- ---------
Property, plant and equipment - net 132,329 60,328
Goodwill - net 70,531 17,163
Note receivable 8,898 -
Other assets - net 3,739 4,443
--------- ---------
Total assets $ 258,530 $ 107,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 7,349 6,069
Accrued expenses 10,469 5,090
Current maturities of long-term debt 2,000 7,096
Notes payable - 4,439
--------- ---------
Total current liabilities 19,818 22,694
Deferred income taxes 12,276 4,997
Long-term debt 110,260 102,280
Subordinated debt - 17,930
Stockholders' equity (deficit):
Preferred stock of $.01 par value.
Authorized, 5,000,000 shares; none issued - -
Preferred stock, Class C, of $.10 par value.
Authorized, 25,000 shares; issued none and
20,252 at September 30, 1999 and December
31, 1998, respectively - 2
Common stock of $.001 par value. Authorized,
125,000,000 shares; issued and outstanding
59,186,091 at September 30, 1999 59 5
Additional paid-in capital 245,426 79,682
Accumulated deficit (129,309) (119,629)
--------- ---------
Total stockholders' equity (deficit) 116,176 (39,940)
--------- ---------
Total liabilities and stockholders'
equity (deficit) $ 258,530 $ 107,961
========= =========
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues $ 33,729 $ 17,765 $ 68,974 $ 57,656
Costs and expenses:
Cost of services 18,692 11,569 42,627 31,941
Depreciation and amortization 4,099 1,780 8,639 4,671
General and administrative 6,579 2,239 13,927 11,966
--------- --------- --------- ---------
Total costs and expenses 29,370 15,588 65,193 48,578
--------- --------- --------- ---------
Income from operations 4,359 2,177 3,781 9,078
Other income (expense):
Interest expense (3,061) (3,317) (9,562) (9,172)
Interest income 140 - 140 -
--------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary losses 1,438 (1,140) (5,641) (94)
Income taxes 460 (379) (1,805) 67
--------- --------- --------- ---------
Income (loss) before extraordinary losses 978 (761) (3,836) (161)
Extraordinary losses, net of income tax
benefit of $2,124 in 1999 and $214 in 1998 (4,514) - (4,514) (10,885)
--------- --------- --------- ---------
Net loss $ (3,536) $ (761) $ (8,350) $ (11,046)
========= ========= ========= =========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary losses $ 0.02 $ (0.13) $ (0.24) $ (0.10)
Extraordinary losses (0.09) - (0.21) (1.23)
--------- --------- --------- ---------
Loss per share $ (0.07) $ (0.13) $ (0.45) $ (1.33)
========= ========= ========= =========
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary losses $ 0.02 $ (0.13) $ (0.24) $ (0.10)
Extraordinary losses (0.09) - (0.21) (1.23)
--------- --------- --------- ---------
Loss per share $ (0.07) $ (0.13) $ (0.45) $ (1.33)
========= ========= ========= =========
Weighted average common shares used in
computing earnings (loss) per share:
Basic 51,302 6,009 21,538 8,851
========= ========= ========= =========
Diluted 51,302 6,009 21,538 8,851
========= ========= ========= =========
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(in thousands)
(unaudited)
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (8,350) $ (11,046)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Extraordinary losses 4,514 10,885
Gain on disposal of asset - (732)
Stock compensation awards - 800
Deferred income taxes (102) 52
Depreciation and amortization 8,639 4,671
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable 1,012 (2,717)
Other - net 1,243 1,163
Accounts payable (2,426) 1,019
Accrued expenses (735) (2,796)
Income taxes (2,029) (2,360)
--------- ---------
Net cash provided by (used in) operating
activities 1,766 (1,061)
--------- ---------
Cash flows from investing activities:
Payments for purchases of property and equipment (5,437) (16,359)
Proceeds from sales of assets - 2,700
Businesses acquired, net of cash acquired (1,742) (22,373)
--------- ---------
Net cash used in investing activities (7,179) (36,032)
--------- ---------
Cash flows from financing activities:
Net (payments) borrowings on notes payable (4,439) 1,342
Net decrease in bank overdraft - (416)
Proceeds from long-term debt 115,000 133,500
Principal payments on long-term debt (156,479) (39,240)
Debt acquisition costs (2,615) (4,371)
Payment of premium on subordinated debt (835) -
Redemption of stock warrants - (13,320)
Proceeds from issuance of common and preferred stock 55,000 74,353
Proceeds from exercise of stock options 293 -
Payments to redeem stock - (114,755)
--------- ---------
Net cash provided by financing activities 5,925 37,093
--------- ---------
Net increase in cash and cash equivalents 512 -
Cash and cash equivalents at beginning of period 421 -
--------- ---------
Cash and cash equivalents at end of period $ 933 $ -
========= =========
See accompanying notes to consolidated financial statements
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 1999 and 1998
(1) MERGER
On July 15, 1999, the Company consummated a subsidiary merger (the
"Merger") whereby it acquired all of the outstanding capital stock of
Cardinal Holding Corp. ("Cardinal") from the stockholders of Cardinal in
exchange for an aggregate of 30,239,568 shares of the Company's common
stock (or 51% of the then outstanding common stock). The acquisition was
effected through the merger of a wholly-owned subsidiary of the Company,
formed for this purpose, with and into Cardinal, with the effect that
Cardinal became a wholly-owned subsidiary of the Company.
As used in the consolidated financial statements for Superior Energy
Services, Inc., the term "Superior" refers to the Company as of dates and
periods prior to the Merger and the term "Company" refers to the combined
operations of Superior and Cardinal after the consummation of the Merger.
Due to the fact that the former Cardinal shareholders received 51% of the
outstanding common stock at the date of the Merger, among other factors,
the Merger has been accounted for as a reverse acquisition (i.e., a
purchase of Superior by Cardinal) under the purchase method of accounting.
As such, the Company's consolidated financial statements and other
financial information reflect the historical operations of Cardinal for
periods and dates prior to the Merger. The net assets of Superior, at the
time of the Merger, have been reflected at their estimated fair value
pursuant to the purchase method of accounting at the date of the Merger.
The net assets of Cardinal have been reflected at their historical book
values.
(2) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission; however, management
believes the disclosures which are made are adequate to make the
information presented not misleading. These financial statements and
footnotes should be read in conjunction with the financial statements and
notes thereto included in Superior Energy Services, Inc.'s Proxy
Statement dated June 18, 1999 and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The financial information for the nine months ended September 30, 1999 and
1998, has not been audited. However, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods presented have
been included therein. The results of operations for the first nine months
of the year are not necessarily indicative of the results of operations
that might be expected for the entire year. Certain previously reported
amounts have been reclassified to conform to the 1999 presentation.
(3) BUSINESS COMBINATIONS
On July 15, 1999, the Company acquired all of the outstanding capital stock
of Cardinal for 30,239,568 shares of the Company's common stock. Because
the Cardinal shareholders received 51% of the outstanding common stock at
the date of the Merger, among other factors, the transaction has been
accounted for as a reverse acquisition which has resulted in the adjustment
of the net assets of Superior to its estimated fair value as required by
the rules of purchase accounting. The net assets of Cardinal are reflected
at its historical book values. The valuation of Superior's net assets
is based upon the 28,849,523 common shares outstanding prior to the
Merger at the approximate trading price of $3.78 at the time of the
negotiation of the Merger on April 21, 1999. The purchase price allocated
to net assets was $56.3 million. The revaluation reflected excess purchase
price of $52.8 million over the fair value of tangible assets which was
recorded as goodwill.
In 1998, Superior acquired all of the outstanding stock of a company for an
aggregate $1,000,000 cash. The acquisition was accounted for as a purchase
and the results of operations of the acquired company has been included
from its acquisition date. In the first quarter of 1998, Superior sold
Baytron, Inc. for a gain of approximately $1.2 million. Effective July 1,
1999, Superior sold Lamb Services, Inc. and Tong Specialty, Inc. for a
promissory note having an aggregate principal amount of $8.9 million which
bears interest of 7.5% per annum. These two subsidiaries were originally
acquired in the second quarter of 1998. No gain or loss was recorded on
this sale.
In 1998, Cardinal acquired all of the outstanding stock of three companies
for an aggregate purchase price of $24,084,000 with a combination of cash
and stock as consideration for the acquisitions. Each of these
acquisitions was accounted for using the purchase method and the results of
operations of the acquired companies have been included from their
respective acquisition dates.
The following unaudited pro forma information for the three and nine months
ended September 30, 1998, and for the nine months ended September 30, 1999,
presents a summary of consolidated results of operations of Superior and
Cardinal as if the Merger, the acquisitions, and the sales of subsidiaries,
had occurred on January 1, 1998, with pro forma adjustments to give effect
to amortization of goodwill, depreciation and certain other adjustments,
together with related income tax effects (in thousands, except per share
amounts). Reference should be made to the Condensed Consolidated
Statements of Operations on page 3 for comparative information for the
three months ended September 30, 1999.
NINE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
Revenues $102,887 $133,924 $39,721
======== ======== =======
Income before extraordinary loss $ 340 $ 11,082 $ 1,122
======== ======== =======
Basic earnings per share $ 0.01 $ 0.19 $ 0.02
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Diluted earnings per share $ 0.01 $ 0.19 $ 0.02
======== ======== =======
The above pro forma information is not necessarily indicative of the
results of operations as they would have been had the acquisitions and
sales of subsidiaries been effected on January 1, 1998.
Most of Superior's prior acquisitions have involved additional contingent
consideration based upon a multiple of the acquired companies' respective
average EBITDA (earnings before interest, income taxes, depreciation and
amortization expense) over a three year period from the respective date of
acquisition. In no event will the maximum aggregate consideration exceed
$41.4 million. If the overall current industry activity levels continue,
the additional consideration actually paid will be materially less than the
maximum consideration. The additional consideration is not currently
reflected in the respective companies' purchase price. The additional
consideration, if paid, will be capitalized as additional purchase price.
Subsequent to September 30, 1999, the Company acquired Production
Management Companies, Inc. ("PMI") for aggregate consideration consisting
of $3,000,000 in cash and 610,000 shares of the Company's common stock.
Additional consideration, if any, will be based upon a multiple of four
times PMI's average earnings before interest, taxes, depreciation and
amortization less certain adjustments. The additional consideration will
be paid on the first and third anniversary of the acquisition, and in no
event will the total additional payments exceed $11 million.
PMI provides contract operating and supplemental labor services on offshore
oil and gas producing properties, offshore construction and maintenance
services, onshore and offshore sandblasting and platform coating services
as well as offshore and dockside environmental cleaning services. PMI
operates primarily in the Gulf Coast region and is headquartered in Harvey,
Louisiana.
(4) LONG-TERM DEBT
On July 15, 1999, the Company entered into a $152 million term loan and
revolving credit facility. The credit facility was implemented to
refinance the combined debt of Superior and Cardinal, provide a $20 million
working capital facility and $22 million of borrowings that may be used to
fund the additional consideration that may be payable as a result of
Superior's prior acquisitions. The Company executed an amendment to the
credit facility on November 3, 1999 to increase the maximum borrowings
under the credit facility by $10 million, to refinance PMI's existing
indebtedness and to pay the cash portion of the acquisition price for PMI.
Under the amended credit facility, the term loans require quarterly
principal installments commencing December 31, 1999 in the amount of
$519,000 and then increasing up to an aggregate of approximately $1.6
million a year until 2006 when $92 million will be due and payable. As
amended, the term loan and revolving credit facility bears interest at
a LIBOR rate plus margins that depend on the Company's leverage ratio. At
September 30, 1999, the weighted average interest rate on the credit
facility was 9.62%, and the amount outstanding under the credit facility
was $112,160,000. Indebtedness under the credit facility is secured 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 credit facility, the Company has also agreed to maintain
certain debt coverage and leverage ratios. The credit facility also
imposes certain limitations on the ability of the Company and its
subsidiaries to make capital expenditures, pay dividends or other
distributions, make acquisitions, make changes to the capital structure,
create liens or incur indebtedness.
The early extinguishment of the Cardinal and Superior indebtedness in July
1999 resulted in an extraordinary loss, net of a $2.1 million income tax
benefit, of $4.5 million which included the premium on the subordinated
debt and the write-off of unamortized financing costs.
In 1998, Cardinal completed a recapitalization and refinancing which
resulted in an extraordinary loss, net of a $214,000 income tax benefit, of
$10.9 million which included the unamortized estimated value of stock
warrants which were redeemed for $10.5 million and unamortized financing
costs of approximately $379,000.
(5) 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, marine and other. Each
segment offers products and services within the oilfield services industry.
The rental tools segment sells and rents specialized equipment for use with
onshore and offshore oil and gas well drilling, completion, production and
workover activities. The well services segment provides mechanical wireline
services, plug and abandonment services, data acquisition services, gas
lift services, pumping and stimulation services, electric line services and
tank cleaning. The marine segment operates offshore service vessels,
primarily liftboats, for oil and gas production facility maintenance and
construction operations as well as production service activities. The
other segment manufactures and sells computerized electronic and pressure
control equipment and manufactures, sells and rents oil spill containment
equipment. All the segments operate primarily in the Gulf Coast region.
Summarized financial information concerning the Company's segments for the
three and nine months ended September 30, 1999 and 1998 is shown in the
following tables (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 1999
Rental Well Unallocated Consolidated
Tools Services Marine Other Total Amount Total
-------------------------------------------------------------------------------
Revenues $ 9,036 $ 17,482 $ 6,663 $ 548 $ 33,729 $ - $ 33,729
Cost of services 2,868 11,599 4,017 208 18,692 - 18,692
Depreciation
and amortization 1,563 1,436 1,062 38 4,099 - 4,099
General and
administrative 2,169 3,048 1,095 267 6,579 - 6,579
Operating income 2,436 1,399 489 35 4,359 - 4,359
Interest expense - - - - - (3,061) (3,061)
Interest income - - - - - 140 140
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Income (loss) before
income taxes and
extraordinary loss $ 2,436 $ 1,399 $ 489 $ 35 $ 4,359 $ (2,921) $ 1,438
===============================================================================
THREE MONTHS ENDED SEPTEMBER 30, 1998
Well Unallocated Consolidated
Services Marine Total Amount Total
---------------------------------------------------------
Revenues $ 10,373 $ 7,392 $ 17,765 $ - $ 17,765
Cost of services 7,455 4,114 11,569 - 11,569
Depreciation and amortization 1,026 754 1,780 - 1,780
General and administrative 1,211 1,028 2,239 - 2,239
Operating income 681 1,496 2,177 - 2,177
Interest expense - - - (3,317) (3,317)
---------------------------------------------------------
Income (loss) before
income taxes $ 681 $ 1,496 $ 2,177 $(3,317) $ (1,140)
=========================================================
NINE MONTHS ENDED SEPTEMBER 30, 1999
Rental Well Unallocated Consolidated
Tools Services Marine Other Total Amount Total
-------------------------------------------------------------------------------
Revenues $ 9,036 $ 41,805 $ 17,585 $ 548 $ 68,974 $ - $ 68,974
Cost of services 2,868 28,060 11,491 208 42,627 - 42,627
Depreciation
and amortization 1,563 4,163 2,875 38 8,639 - 8,639
General and
administrative 2,169 8,188 3,303 267 13,927 - 13,927
Operating income (loss) 2,436 1,394 (84) 35 3,781 - 3,781
Interest expense - - - - - (9,562) (9,562)
Interest income - - - - - 140 140
-------------------------------------------------------------------------------
Income (loss) before
income taxes and
extraordinary loss $ 2,436 $ 1,394 $ (84) $ 35 $ 3,781 $ (9,422) $ (5,641)
===============================================================================
NINE MONTHS ENDED SEPTEMBER 30, 1998
Well Unallocated Consolidated
Services Marine Total Amount Total
---------------------------------------------------------
Revenues $ 31,542 $ 26,114 $ 57,656 $ - $ 57,656
Cost of services 21,270 10,671 31,941 - 31,941
Depreciation and amortization 2,563 2,108 4,671 - 4,671
General and administrative 6,048 5,918 11,966 - 11,966
Operating income 1,661 7,417 9,078 - 9,078
Interest expense - - - (9,172) (9,172)
---------------------------------------------------------
Income (loss) before income
taxes and extraordinary loss $ 1,661 $ 7,417 $ 9,078 $ (9,172) $ (94)
=========================================================
IDENTIFIABLE ASSETS
Rental Well Unallocated Consolidated
Tools Services Marine Other Total Amount Total
-------- -------- ------- ------ -------- ----------- -----------
September 30, 1999 $121,089 $77,322 $50,399 $4,385 $253,195 $5,335 $258,530
======== ======= ======= ====== ======== ====== ========
December 31, 1998 $ - $50,095 $53,844 $ - $103,939 $4,022 $107,961
======== ======= ======= ====== ======== ====== ========
(6) COMMITMENTS AND CONTINGENCIES
At the end of the quarter ended September 30, 1999, one of the Company's
two hundred foot class liftboats sank in the Gulf of Mexico. The vessel is
fully insured and management does not believe it or any related unasserted
claims will have a material effect on the financial position, results of
operations or liquidity of the Company.
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.
(7) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS No. 133, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. FAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. Earlier application of the provisions of the Statement
is encouraged and is permitted as of the beginning of any fiscal quarter
that begins after the issuance of the Statement. The Company has not yet
assessed the financial impact of adopting this statement.
(8) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed in the same
manner as basic earnings per share except that the denominator is increased
to include the number of additional common shares that could have been
outstanding assuming the exercise of stock options, warrants and
convertible preferred stock and the potential shares that would have a
dilutive effect on earnings per share.
On July 15, 1999, the Company effected an approximate 364 to 1 stock
issuance as a result of the Merger. All earnings per common share amounts,
references to common stock, and stockholders' equity amounts have been
restated as if the stock issuance had occurred as of the earliest period
presented. The effect of preferred dividends on arriving at the income
available to common stockholders was none for the three months ended
September 30, 1999 and 1998, and was $1.3 million and $738,000 for the nine
months ended September 30, 1999 and 1998, respectively. The dilutive stock
options, warrants and convertible preferred stock shares were anti-dilutive
in the three and nine months ended September 30, 1999 and 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" includes certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements other than statements of historical fact
included in this section regarding the Company's financial position and
liquidity, its strategic alternatives, future capital needs, business
strategies and other plans and objectives of management of the Company for
future operations and activities, are forward-looking statements. These
statements are based on certain assumptions and analyses made by the
Company's management in light of its experience and its perception of
historical trends, current conditions, expected future developments and
other factors it believes are appropriate under the circumstances. Such
forward-looking statements are subject to uncertainties that could cause
the Company's actual results to differ materially from such statements.
Such uncertainties include but are not limited to: the volatility of the
oil and gas industry, including the level of offshore exploration,
production and development activity; risks of the Company's growth
strategy, including the risks of rapid growth and the risks inherent in
acquiring businesses; changes in competitive factors affecting the
Company's operations; operating hazards, including the significant
possibility of accidents resulting in personal injury, property damage or
environmental damage; the effect on the Company's performance of regulatory
programs and environmental matters; seasonality of the offshore industry in
the Gulf of Mexico; the Company's dependence on certain customers; and the
potential shortage of skilled workers. These and other uncertainties
related to the Company's business are described in detail in the Company's
Proxy Statement dated June 18, 1999. Although the Company believes that
the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
be correct. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update any of its forward-looking
statements for any reason.
ACQUISITION OF CARDINAL HOLDING CORP.
On July 15, 1999, the Company acquired Cardinal through a merger of
Cardinal with and into a wholly-owned subsidiary of the Company. The
Merger was treated for accounting purposes as an acquisition of Superior
by Cardinal in a purchase business transaction. Consistent with purchase
method of accounting, the Company has carried forward the net assets of
Cardinal at their historical book value and has reflected the net assets of
Superior at their estimated fair value at the date of the Merger.
Accordingly, all historical financial results presented in the Company's
consolidated financial statements for periods prior to July 15, 1999
reflect the results of Cardinal on a stand alone basis. The results of the
three and nine months ended September 30, 1999 reflect three and nine
months, respectively, of Cardinal's operations and two and one-half months
of Superior's operations. The results for the three and nine months ended
September 30, 1998 are Cardinal alone. Consequently, analyzing prior
period results to determine or estimate the combined operating potential of
the Company will be difficult at best and perhaps meaningless given the
fact Cardinal, prior to the Merger, incurred substantial non-cash and
extraordinary charges during the last few years associated with a
recapitalization and refinancing.
OVERVIEW
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 through the Gulf Coast region.
Management believes that the Company is the leading provider in the Gulf of
Mexico of mechanical wireline services, plug and abandonment services and
liftboat rental services and the second largest provider of oil field
rental tools. The Company's management team has aggressively expanded the
Company's operations through both internal growth and strategic
acquisitions. This expansion, including the Cardinal acquisition, has
enabled Superior 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.
The demand for the Company's services depends largely on oil and gas
exploration and development 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. These
expenditures are influenced by prevailing 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.
Historically, oil and gas prices and the level of exploration and
development activity have fluctuated substantially, impacting the demand
for oilfield services.
RESULTS OF OPERATIONS
The following discussion compares the operating results of the Company for
the three month and the nine month periods ended September 30, 1999 and
1998. As described above, the acquisition of Cardinal was treated for
accounting purposes as an acquisition of Superior by Cardinal and,
accordingly, all historical financial results presented in the Company's
financial statements for periods prior to July 15, 1999 represent the
results of Cardinal on a stand alone basis. As such, the historical
financial results for the prior year periods are those of Cardinal, not
Superior. The Company's results of operations subsequent to the date of
the Cardinal acquisition represent the combined operations of Cardinal and
Superior. Accordingly, management believes that analyzing prior period
results to determine or estimate the combined operating potential of the
Company will be difficult at best and perhaps meaningless given the fact
that Cardinal, prior to the Merger, incurred substantial non-cash and
extraordinary charges during the last few years associated with a
reorganization and recapitalization.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER
30, 1999 AND 1998
The Company's revenues were $33.7 million for the three months ended
September 30, 1999 as compared to $17.8 million for the same period in
1998. The substantial increase in the third quarter of 1999 compared to
the same period in 1998 is a result of the 1999 period representing the
combined operations of Cardinal and Superior for approximately 2.5 months
while the 1998 period reflects Cardinal's operations alone. In the third
quarter of 1999, the Company continued to be affected by the downturn in
industry activity, which began in the second half of 1998. On a combined
basis, demand for the Company's services has decreased considerably during
the three month period ended September 30, 1999 compared to the same period
in 1998, with a decline in revenue apparent in all segments of the
Company's business.
Although demand for the Company's services decreased in the third
quarter of 1999 compared to the same period in 1998, the Company's gross
margin increased to 44.6% for the three months ended September 30, 1999
from 34.9% for the same period in 1998. The increased gross margin is a
result of the marine segment's revenue comprising 19.8% of the Company's
total revenue for the third quarter of 1999 compared to 41.6% in the same
period in 1998. The rental tool segment of the Company's operations
continues to contribute the strongest gross margin of all the segments.
The Company's costs and expenses were $29.4 million in the third quarter of
1999 as compared to $15.6 million for the same period in 1998.
Depreciation and amortization expense increased to $4.1 million for the
three months ended September 30, 1999 from $1.8 million for the three
months ended September 30, 1998. Most of the increase resulted from the
larger asset base that has resulted from the combined operations of
Superior and Cardinal in the third quarter of 1999 and from the Company's
1999 acquisitions and capital expenditures. General and administrative
expenses increased to $6.6 million for the third quarter of 1999 as
compared to $2.2 million for the same period of 1998. The increase is the
result of the third quarter of 1999 reflecting the combined operations of
Cardinal and Superior for 2.5 months.
The Company incurred an extraordinary charge of $4.5 million, net of income
taxes, during the three months ended September 30, 1999. That charge, the
majority of which was non-cash in nature, resulted from the early
extinguishment of debt when, in connection with the acquisition of
Cardinal, the debt of the combined Company was refinanced.
The Company recorded net income before extraordinary charges of $978,000,
or $0.02 diluted earnings per share, for the quarter ended September 30,
1999. After extraordinary charges, the Company recorded a net loss of $3.5
million, or $0.07 loss per diluted share, for the quarter ended September
30, 1999 as compared to a net loss of $761,000, or $0.13 loss per diluted
share, for the comparable period in 1998. In addition to the extraordinary
charge of $4.5 million incurred by the Company during the quarter, the
Company's results for the third quarter of 1999 reflect the impact of the
economic slowdown in the oil and gas industry and customers' decisions to
limit or defer investment in exploration, drilling, production and plug and
abandonment services.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998
The Company's revenues were $69.0 million for the nine months ended
September 30, 1999 as compared to $57.7 million for the same period in
1998. The increase in revenues for the first nine months of 1999 compared
to the same period in 1998 is a result of the 1999 period representing the
combined operations of Cardinal and Superior for approximately 2.5 months
whereas the 1998 period reflects Cardinal's operations alone. During the
first nine months of 1999, the Company continued to be affected by the
downturn in industry activity, which began in the second half of 1998. On
a combined basis, demand for the Company's services has decreased during
the nine month period ended September 30, 1999 compared to the same period
in 1998, with a decline in revenue experienced in all segments of the
Company's business.
The Company's costs and expenses were $65.2 million in the nine months
ended September 30, 1999 as compared to $48.6 million for the same period
in 1998. Depreciation and amortization expense increased to $8.6 million
for the nine months ended September 30, 1999 from $4.7 million for the nine
months ended September 30, 1998. Most of the increase resulted from the
larger asset base that has resulted from the combined operations of
Superior and Cardinal in the third quarter of 1999 and from the Company's
1999 acquisitions and capital expenditures. General and administrative
expenses increased to $13.9 million for the nine months ended September 30,
1999 as compared to $12.0 million for the same period of 1998. The
increase reflects the increased expenses resulting from the combined
operations of Cardinal and Superior for 2.5 months of the period.
During the nine months ended September 30, 1999, the debt of the combined
Company was refinanced in connection with the Merger which resulted in an
extraordinary charge of $4.5 million, net of income taxes, from the early
extinguishment of debt. The majority of the charges were non-cash in
nature. During the nine months ended September 30, 1998, the Company
incurred extraordinary charges of $10.9 million, net of income taxes, in
connection with a recapitalization and refinancing. These charges were
also mostly of a non-cash nature.
The Company recorded a net loss before extraordinary charges of $3.8
million, or $0.24 loss per diluted share, for the nine months ended
September 30, 1999. After extraordinary charges, the Company recorded a
net loss of $8.4 million, or $0.45 loss per diluted share, for the nine
months ended September 30, 1999 as compared to a net loss of $11.0
million, or $1.33 loss per diluted share, for the comparable period in
1998. The Company's results for the nine months ended September 30, 1999
reflect the extraordinary charge of $4.5 million incurred by the Company
during the third quarter and the impact of the economic slowdown in the
oil and gas industry and customers' decisions to limit or defer investment
in exploration, drilling, production and plug and abandonment services. The
Company's results for the nine months ended September 30, 1998 reflect
extraordinary charges of $10.9 million incurred by Cardinal during that
period in connection with its reorganization and recapitalization.
CAPITAL RESOURCES AND LIQUIDITY
The Company had cash and cash equivalents of $933,000 at September 30, 1999
compared to $421,000 at December 31, 1998. Net cash provided by operating
activities was $1.8 million for the nine month period ended September 30,
1999 as compared to $1.0 million net cash used in operating activities for
the same period in 1998.
In early November 1999, the Company acquired PMI for aggregate
consideration consisting of $3.0 million in cash and 610,000 shares of the
Company's common stock. Additional consideration, if any, will be based
upon a multiple of four times PMI's average earnings before interest,
taxes, depreciation and amortization less certain adjustments. The
additional consideration will be paid on the first and third anniversary of
the acquisition, and in no event will the total additional payments exceed
$11 million.
On July 15, 1999, the Company entered into a $152 million term loan and
revolving credit facility. The credit facility was implemented to
refinance the combined debt of Superior and Cardinal, provide a $20 million
working capital facility and $22 million of borrowings that may be used to
fund the additional consideration that may be payable as a result of the
Superior's prior acquisitions. The Company executed an amendment to
the credit facility on November 3, 1999 to increase the maximum borrowings
under the credit facility by $10 million to refinance PMI's existing
indebtedness and to pay the cash portion of the acquisition price for PMI.
Under the amended credit facility, the term loans require quarterly
principal installments commencing December 31, 1999 in the amount of
$519,000 and then increasing up to an aggregate of approximately $1.6
million a year until 2006 when $92 million will be due and payable. As
amended, the term loan and revolving credit facility bears interest at
a LIBOR rate plus margins that depend on the Company's leverage ratio. As
of November 4, 1999, the amount outstanding under the amended credit
facility was $125.0 million. Indebtedness under the credit facility is
secured by substantially all of the assets of the Company and its
subsidiaries and a pledge of all of the common stock of the Company's
subsidiaries. Pursuant to the credit facility, the Company has also
agreed to maintain certain debt coverage and leverage ratios. The credit
facility also imposes certain limitations on the ability of the Company
and its subsidiaries to make capital expenditures, pay dividends or make
other distributions, make acquisitions, make changes to the capital
structure, create liens or incur indebtedness.
In the first nine months of 1999, the Company made capital expenditures of
$5.4 million. Management currently believes that the Company will make
additional capital expenditures, excluding acquisitions, of approximately
$2 to $3 million during the remainder of 1999 primarily to further expand
its rental tool inventory.
In 1999, prior to the Merger, Cardinal declared stock dividends on its
Class C preferred stock for stockholders of record as of December 31, 1998
and June 30, 1999. The declaration of these dividends resulted in an
increase in additional paid in capital and an increase in the accumulated
deficit of $1.3 million.
At the end of the quarter ended September 30, 1999, one of the Company's
two hundred foot class liftboats sank in the Gulf of Mexico. The vessel is
fully insured and management does not believe it or any related unasserted
claims will have a material effect on the financial position, results of
operations or liquidity of the Company.
The Company's expansion has occurred through internal growth and strategic
acquisitions. In connection with refinancing the existing debt of its
newly acquired companies and with financing the cash portion of the
purchase price paid for those acquisitions, the Company has significantly
increased its leverage. The Company believes that cash generated from
operations and availability under the Company's credit facility will
provide sufficient funds for the Company's identified capital projects and
working capital requirements. However, the Company's strategy involves the
acquisition of companies that 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 and debt
financing in excess of the Company's credit facility.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. FAS No. 133, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. FAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. Earlier application of the provisions of the Statement
is encouraged and is permitted as of the beginning of any fiscal quarter
that begins after the issuance of the Statement. The Company has not yet
assessed the financial impact of adopting this statement.
YEAR 2000
The Year 2000 problem results from the use of two digits rather than four
digits to define the applicable year in computer hardware and software.
When computer systems must process dates both before and after January 1,
2000, two digit year "fields" may create processing ambiguities that can
cause errors and system failures, because computer programs that have date-
sensitive features may recognize a date represented by "00" as the year
1900, instead of 2000. These errors or failures may have limited effects,
or the effects may be widespread, depending on the computer chip, system,
or software, and its location and function.
The Company's plan to address the Year 2000 issue has included (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 plan has been developed with an aim
towards taking reasonable steps to prevent the Company's mission critical
functions from being impaired due to the Year 2000 issue.
The Company has considered both its information technology ("IT") and its
non-IT systems. The term "computer equipment and software" includes
systems that are commonly thought of as IT systems, including accounting,
data processing and telephone systems. Non-IT systems include alarm
systems, fax machines, monitors for field operations and other
miscellaneous items. Both IT and non-IT systems may contain embedded
technology that without proper identification or assessment, remediation
and testing of its systems, are not effectively timely or performed
properly, the Year 2000 issue could potentially have an adverse impact on
the Company's operations and financial condition. Through the Company's
assessment and remediation phases, the Company has replaced or has ordered
a replacement or upgrade for the identified equipment and software that is
not Year 2000 ready. The Company presently believes that the Year 2000
issue will not pose significant operational problems for the Company's
computer systems. Furthermore, throughout 1999, as new equipment and
software are purchased in the ordinary course of business, the Company has
ensured that such purchases are Year 2000 ready.
The Company has assessed the costs of addressing and the cost or the
consequence of incomplete or untimely resolution of the Year 2000 issue for
its IT systems which are used directly in the Company's operations. The
Company utilized its resources to test or replace many of its IT systems,
with the focus on its financial systems. As of the date of this filing,
the Company's Year 2000 plan related to IT systems is substantially
complete and anticipates that the remainder of the plan will be completed
before year end. The Company believes that the most reasonably likely
worst-case scenario would be that the Company would divert to the use of
manual accounting records for billings, payments and collections. In
addition, the inability of principal suppliers and major customers to be
Year 2000 compliant could result in delays in delivery from those suppliers
and collections of accounts receivable from those customers.
The Company continues its assessment of the costs of addressing and the
cost or the consequence of incomplete or untimely resolution of the Year
2000 issue for its non-IT systems which are used directly in the Company's
operations. The continuation of the assessment and remediation of non-IT
systems is due to the Merger, and the Company anticipates the completion of
the assessment and remediation, if any, by November 30, 1999.
PART II. OTHER INFORMATION
Item 6. EXHIBITS
(a) The following exhibits are filed with this Form 10-Q/A:
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERIOR ENERGY SERVICES, INC.
Date: MARCH 31, 2000 BY: /S/ ROBERT S. TAYLOR
Robert S. Taylor
Chief Financial Officer
(Principal Financial and Accounting
Officer)