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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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, LA 70058
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (504) 362-4321
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $.001 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No | |
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 28, 2002 based on the closing price on the New York Stock
Exchange on that date was $560,225,000.
The number of shares of the Registrant's common stock outstanding on March 14,
2003 was 73,833,359.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Items 10, 11, 12 and 13 of Part III will
be included in an amendment to this Form 10-K or incorporated by reference from
the Registrant's definitive proxy statement to be filed pursuant to Regulation
14A.
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SUPERIOR ENERGY SERVICES, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
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PART I
Items 1. & 2. Business and Properties 1
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 4A. Executive Officers of Registrant 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 42
Matters 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
(i)
PART I
ITEMS 1. & 2. BUSINESS AND PROPERTIES
GENERAL
We are a leading provider of specialized oilfield services and equipment focused
on serving the production-related needs of oil and gas companies in the Gulf of
Mexico. We believe that we are one of the few companies in the Gulf of Mexico
capable of providing most of the post wellhead products and services necessary
to maintain offshore producing wells, as well as plug and abandonment services
at the end of their life cycle. We believe that our ability to provide our
customers with multiple services and to coordinate and integrate their delivery
allows us to maximize efficiency, reduce lead time and provide cost-effective
solutions for our customers.
Over the past several years, we have significantly expanded the geographic scope
of our operations and the range of production-related services we provide
through both internal growth and strategic acquisitions. We have expanded our
geographic focus to select international market areas and added complementary
product and service offerings. Currently, we provide a full range of products
and services for our customers, including well intervention services, marine
services, rental tools and other oilfield services.
OPERATIONS
Well Intervention Services. We provide well intervention services that stimulate
oil and gas production using platforms or liftboats rather than through the use
of a drilling rig, which we believe provides a cost advantage to our customers.
These services include coiled tubing, electric wireline, mechanical wireline,
pumping and stimulation, artificial lift, well control, snubbing, recompletion,
engineering and well evaluation services. We are the leading provider of
mechanical wireline services in the Gulf of Mexico with approximately 180
offshore wireline units, 20 land wireline units and 13 dedicated liftboats
configured specifically for wireline services. We also perform both permanent
and temporary plug and abandonment services.
In 2003, in order to provide additional opportunities for our well intervention
and platform management businesses, we announced that we were evaluating the
acquisition of mature, shallow water oil and gas properties in the Gulf of
Mexico primarily in exchange for assuming plugging and abandonment obligations.
We intend to seek to acquire properties from our customers with several years of
estimated remaining productive life and to provide all of our services to the
properties to produce any remaining proven oil and gas reserves. Our focus will
be on production so we will not participate in any exploratory drilling on any
properties we may acquire except in a way that does not expose us to risking
capital on exploratory drilling. We have not yet acquired any properties.
Marine Services. We own and operate the largest and most diverse liftboat fleet
in the world. A liftboat is a self-propelled, self-elevating work platform with
legs, cranes and living accommodations. We believe that our liftboat fleet is
highly complementary to our well intervention services. Our fleet consists of 57
liftboats, including 13 liftboats configured specifically for wireline services
and 44 in our rental fleet with leg-lengths from 65 feet through 250 feet. In
2002, we constructed and placed into service two 245-foot class liftboats and
one 250-foot class liftboat. All but one of our liftboats are currently
operating in the Gulf of Mexico and represent approximately 27% of the liftboats
operating in the Gulf of Mexico. We currently have a 200-foot class liftboat on
contract in Venezuela. We intend to reposition some of our larger liftboats to
international market areas under long-term contracts as opportunities arise.
Rental Tools. We are a leading provider of rental tools in the Gulf of Mexico.
We manufacture, sell and rent specialized equipment for use with offshore and
onshore oil and gas well drilling, completion, production and workover
activities. Through internal growth and acquisitions, we have increased the size
and breadth of our rental tool inventory and now have 35 locations in all major
staging points for offshore oil and gas activities in the Gulf of Mexico. We
also have rental tool operations in Venezuela, Trinidad, Canada and the United
Kingdom with a limited inventory of rental tools for these market areas. Our
rental tools include pressure control equipment, specialty tubular goods,
connecting iron, handling tools, drill pipe, bolting equipment, tongs, power
swivels and stabilizers. We also provide both land and offshore on-site
accommodations through our rental tools segment.
Other Oilfield Services. We provide a broad range of platform and field
management services to the offshore and onshore oil and gas industry, including
property management, engineering services, operating labor, transportation,
tools and supplies, technical supervision, maintenance, supplemental personnel,
and logistics services. We currently
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provide property management services to approximately 150 offshore facilities in
the Gulf of Mexico. We also provide non-hazardous oilfield waste management and
environmental cleaning services, including tank and vessel cleaning and safe
vessel entry. We also sell oil spill containment inflatable boom and ancillary
storage, deployment and retrieval equipment. We also provide other services,
including the manufacture and sale of specialized drilling rig instrumentation,
electronic torque and pressure control equipment.
For additional industry segment financial information, see note 14 to our
consolidated financial statements.
CUSTOMERS
Our customers have primarily been the major and independent oil and gas
companies operating on the U.S. outer continental shelf. In 2002, 2001 and 2000,
sales to ChevronTexaco accounted for approximately 12%, 12% and 10% of our
total revenue, respectively, primarily in the well intervention and other
oilfield services segments. We do not believe that the loss of any one customer
would have a material adverse effect on our revenues. However, 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.
COMPETITION
We operate in highly competitive areas of the oilfield services industry. The
products and services of each of our principal operating segments are sold in
highly competitive markets, and our revenues and earnings can be affected by the
following factors:
- changes in competitive prices,
- oil and gas prices and industry perceptions of future prices,
- fluctuations in the level of activity by oil and gas producers,
- changes in the number of liftboats operating in the Gulf of Mexico,
- the ability of oil and gas producers to generate capital,
- general economic conditions and
- governmental regulation.
We compete with the oil and gas industry's largest integrated oilfield service
providers in the production-related services segments in which we operate,
including well intervention and other oilfield services. The rental tools
divisions of such companies, as well as several smaller companies that are
single source providers of rental tools, are our competitors in the rental tools
market. In the marine services segment, we compete with smaller companies that
provide liftboat services. We believe that the principal competitive factors in
the market areas that we serve are price, product and service quality, safety
record, equipment availability and technical proficiency.
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.
Further, if additional liftboats are constructed for the Gulf of Mexico market
area by our competitors, it will increase the competition for that service.
Competitive pressures or other factors also may result in significant price
competition that could reduce our operating cash flow and earnings. In addition,
competition among oilfield service and equipment providers is affected by each
provider's reputation for safety and quality. Although we believe that our
reputation for safety and quality service is a key advantage, we cannot assure
that we will be able to maintain our competitive position.
POTENTIAL LIABILITIES AND INSURANCE
Our operations involve a high degree of operational risk, particularly of
personal injury and damage or loss of equipment. Failure or loss of our
equipment could result in property damages, personal injury, environmental
pollution and other damage for which we could be liable. Litigation arising from
the sinking of a liftboat or a catastrophic occurrence at a location where our
equipment and services are used may result in large claims for damages in the
future. We maintain insurance against risks that we believe is consistent with
industry standards and required by our customers. In addition, changes in the
insurance industry have generally led to higher insurance costs and decreased
availability of coverage. The availability of insurance covering risks we and
our competitors typically insure against may decrease, and the insurance that we
are able to obtain may have higher deductibles, higher premiums and more
restrictive policy terms.
2
GOVERNMENTAL REGULATION
Our business is significantly affected by the following:
- state and federal laws and other regulations relating to the oil and
gas industry,
- changes in such laws and regulations and
- the level of enforcement thereof.
We 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 in the future. We also cannot predict whether additional laws and
regulations will be adopted, or the effect such changes may have on us, our
businesses or our 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 plug and abandonment services for wells
situated on the U.S. outer continental shelf are regulated by the Minerals
Management Service (United States Department of the Interior). State regulatory
agencies similarly regulate plug and abandonment services within state coastal
waters.
A decrease in the level of industry compliance with or enforcement of these laws
and regulations in the future may adversely affect the demand for our services.
In addition, the demand for our services from the oil and gas industry is
affected by changes in applicable laws and regulations. The adoption of new laws
and regulations curtailing drilling for oil and gas in our operating areas for
economic, environmental or other policy reasons could also adversely affect our
operations by limiting demand for our services.
Certain of our employees who perform services on offshore platforms and
liftboats 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. Instead, these employees or their representatives are permitted to
pursue actions against us for damages for job related injuries, with generally
no limitations on our potential liability.
Our operations also subject us to compliance with certain federal and state
pollution control and environmental protection laws and regulations. The
technical requirements of these laws and regulations are becoming increasingly
complex and stringent, and compliance is becoming increasingly difficult and
expensive. We believe that our present operations substantially comply with
these laws and regulations and that such compliance has had no material adverse
effect upon our operations. Sanctions for noncompliance may include the
following:
- 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 other 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. Finally, some
environmental statutes impose strict liability, which could render us liable for
environmental damage without regard to our negligence or fault. It is possible
that changes in environmental laws and enforcement policies, or claims for
damages to persons, property, natural resources or the environment could result
in substantial costs and liabilities to us. Our insurance policies provide
liability coverage for sudden and accidental occurrences of pollution or
clean-up and containment in amounts that we believe are comparable to policy
limits carried by others in our industry.
3
EMPLOYEES
As of February 28, 2003, we had approximately 3,500 employees. None of our
employees is represented by a union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is good.
FACILITIES
Our corporate headquarters are located on a 17-acre tract in Harvey, Louisiana.
Our other principal operating facility is located on a 32-acre tract in
Broussard, Louisiana, which we use to support our rental tools and well
intervention group operations. We support the operations conducted by our
liftboats from a 3.5-acre maintenance and office facility in New Iberia,
Louisiana located on the intracoastal waterway that provides access to the Gulf
of Mexico. We also own certain facilities and lease other office, service and
assembly facilities under various operating leases. We have a total of 72
facilities located in Louisiana, Texas, Alabama, Oklahoma, Venezuela, Australia,
Trinidad, the United Kingdom and Canada to support our operations. We believe
that all of our leases are at competitive or market rates and do not anticipate
any difficulty in leasing suitable additional space as may be needed or
extending terms when our current leases expire.
INTELLECTUAL PROPERTY
We use several patented items in our operations that we believe are important
but are not indispensable to our operations. Although we anticipate seeking
patent protection when possible, we rely to a greater extent on the technical
expertise and know-how of our personnel to maintain our competitive position.
OTHER INFORMATION
We have our principal executive offices at 1105 Peters Road, Harvey, Louisiana.
Our telephone number is (504) 362-4321. We also have a world wide web site at
http://www.superiorenergy.com. Copies of the annual, quarterly and current
reports we file with the SEC, and any amendments to those reports, are available
on our web site. The information posted on our web site is not incorporated into
this Annual Report.
CAUTIONARY STATEMENTS
Certain statements made in this Annual Report that are not historical facts are
"forward-looking statements." Such forward-looking statements may include,
without limitation, statements that relate to:
- our business strategy, plans and objectives,
- 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
- our future expansion plans, including our anticipated level of
capital expenditures for, and the nature and scheduling of,
purchases or manufacture of rental tools, equipment and liftboats.
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.
RISK FACTORS
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 ARE SUBJECT TO THE CYCLICAL NATURE OF THE OIL AND GAS INDUSTRY.
Our business depends primarily on the level of activity by the oil and gas
companies in the Gulf of Mexico and along the Gulf Coast. This level of activity
has traditionally been volatile as a result of fluctuations in oil and gas
prices and their uncertainty in the future. The purchases of the products and
services we provide are, to a substantial
4
extent, deferrable in the event oil and gas companies reduce capital
expenditures. Therefore, the willingness of our customers to make expenditures
is critical to our operations. The levels of such capital expenditures are
influenced by:
- oil and gas prices and industry perceptions of future prices,
- the cost of exploring for, producing and delivering oil and gas,
- the ability of oil and gas companies to generate capital,
- the sale and expiration dates of offshore leases,
- the discovery rate of new oil and gas reserves and
- local and international political and economic conditions.
Although activity levels in production and development sectors of the oil and
gas industry are less immediately affected by changing prices and as a result,
less volatile than the exploration sector, producers generally react to
declining oil and gas prices by reducing expenditures. This has in the past and
may in the future, adversely affect our business. We are unable to predict
future oil and gas prices or the level of oil and gas industry activity. 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.
WE ARE VULNERABLE TO THE POTENTIAL DIFFICULTIES ASSOCIATED WITH RAPID EXPANSION.
We have grown rapidly over the last several years through internal growth and
acquisitions of other companies. We believe that our future success depends on
our ability to manage the rapid growth that we have experienced and the demands
from increased responsibility on our management personnel. The following factors
could present difficulties to us:
- lack of sufficient executive-level personnel,
- increased administrative burden and
- increased logistical problems common to large, expansive operations.
If we do not manage these potential difficulties successfully, our operating
results could be adversely affected. The historical financial information herein
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.
OUR INABILITY TO CONTROL THE INHERENT RISKS OF ACQUIRING BUSINESSES COULD
ADVERSELY AFFECT OUR OPERATIONS.
Acquisitions have been and we believe will 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. Acquisitions may not perform as expected when the acquisition was made
and may be dilutive to our overall operating results. In addition, our
management may not be able to effectively manage our increased size or operate a
new line of business.
WE ARE SUSCEPTIBLE TO ADVERSE WEATHER CONDITIONS IN THE GULF OF MEXICO.
Our operations are directly affected by the seasonal differences in weather
patterns in the Gulf of Mexico. These differences may result in increased
operations in the spring, summer and fall periods and a decrease in the winter
months. The seasonality of oil and gas industry activity as a whole in the Gulf
Coast region also affects our operations and sales of equipment. Weather
conditions generally result in 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.
5
WE DEPEND ON KEY PERSONNEL.
Our success depends to a great degree on the abilities of our key management
personnel, particularly our Chief Executive Officer and other high-ranking
executives. The loss of the services of one or more of these key employees could
adversely affect us.
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. 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.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
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 in major markets,
- an increased number of liftboats in the Gulf of Mexico,
- general economic conditions and
- governmental regulation.
We compete with the oil and gas industry's largest integrated and independent
oilfield service providers. We believe that the principal competitive factors in
the market areas that we serve are price, product and service quality,
availability and technical proficiency.
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.
Further, additional liftboat capacity in the Gulf of Mexico would increase
competition for that service. 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. Finally,
competition among oilfield service and equipment providers is also affected by
each provider's reputation for safety and quality. Although we believe that our
reputation for safety and quality service is good, we cannot guarantee that we
will be able to maintain our competitive position.
THE DANGERS INHERENT IN OUR OPERATIONS AND THE LIMITS ON INSURANCE COVERAGE
COULD EXPOSE US TO POTENTIALLY SIGNIFICANT LIABILITY COSTS.
Our operations involve the use of liftboats, heavy equipment and exposure to
inherent risks, including equipment failure, blowouts, explosions and fire. In
addition, our liftboats are subject to operating risks such as catastrophic
marine disaster, adverse weather conditions, mechanical failure, collisions, oil
and hazardous substance spills and navigation errors. The occurrence of any of
these events could result in our liability for personal injury and property
damage, pollution or other environmental hazards, loss of production or loss of
equipment. 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 for job-related injuries. In such actions, there
is generally no limitation on our potential liability.
Any litigation arising from a catastrophic occurrence involving our services or
equipment 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. We maintain what we believe is prudent insurance
protection. However,
6
we cannot guarantee 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. Successful claims for which we
are not fully insured may adversely affect our working capital and
profitability. In addition, changes in the insurance industry have generally led
to higher insurance costs and decreased availability of coverage. The
availability of insurance covering risks we and our competitors typically insure
against may decrease, and the insurance that we are able to obtain may have
higher deductibles, higher premiums and more restrictive policy terms.
A TERRORIST ATTACK COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESSES.
The terrorist attacks that took place on September 11, 2001 in the U.S. were
unprecedented events that have created many economic and political
uncertainties, some of which may materially impact our business. The long-term
effects of those attacks on our business are unknown. The potential for future
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business for the short
or long-term in ways that cannot presently be predicted.
THE NATURE OF OUR INDUSTRY SUBJECTS US TO COMPLIANCE WITH REGULATORY AND
ENVIRONMENTAL LAWS.
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 plug and abandonment 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. In
addition, demand for our services 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 could also adversely affect our operations by limiting
demand for our services.
We also have potential environmental liabilities with respect to our offshore
and onshore operations, including our environmental cleaning services. 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. 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 materially adversely affect our future operations and
financial results.
AS WE EXPAND OUR INTERNATIONAL OPERATIONS, WE WILL BE SUBJECT TO ADDITIONAL
POLITICAL, ECONOMIC AND OTHER UNCERTAINTIES.
A key element of our business strategy is to expand our operations into
international oil and gas producing areas. These international operations are
subject to a number of risks inherent in any business operating in foreign
countries including, but not limited to:
- political, social and economic instability,
- potential seizure or nationalization of assets,
- increased operating costs,
- modification or renegotiating of contracts,
- import-export quotas,
7
- currency fluctuations and
- other forms of government regulation which are beyond our control.
Our operations have not yet been affected materially by such conditions or
events, but as our international operations expand, the exposure to these risks
will increase. We could, at any one time, have a significant amount of our
revenues generated by operating activity in a particular country. Therefore, our
results of operations could be susceptible to adverse events beyond our control
that could occur in the particular country in which we are conducting such
operations. We anticipate that our contracts to provide services internationally
will generally provide for payment in U.S. dollars and that we will not make
significant investments in foreign assets. To the extent we make investments in
foreign assets or receive revenues in currencies other than U.S. dollars, the
value of our assets and our income could be adversely affected by fluctuations
in the value of local currencies.
Additionally, our competitiveness in international market areas may be adversely
affected by regulations, including, but not limited to, regulations requiring:
- the awarding of contracts to local contractors,
- the employment of local citizens and
- the establishment of foreign subsidiaries with significant ownership
positions reserved by the foreign government for local citizens.
We cannot predict what types of the above events may occur.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL.
Certain investment funds managed by First Reserve Corporation beneficially own
approximately 24% of our outstanding common stock. As a result, they exercise
substantial influence over the outcome of most matters requiring a stockholder
vote. In addition, in connection with our acquisition of Cardinal Holding Corp.
on July 15, 1999, we entered into a stockholders' agreement that provides that
our board of directors will consist of six members, consisting in part of two
designees of the First Reserve funds and two independent directors designated by
First Reserve and approved by the board. The First Reserve funds will continue
to be entitled to designate these directors until the stockholders' agreement
terminates on July 15, 2009 or in the event of certain substantial reductions of
their ownership interest.
WE MIGHT BE UNABLE TO EMPLOY A SUFFICIENT NUMBER OF SKILLED WORKERS.
The delivery of our products and services require personnel with specialized
skills and experience. As a result, our ability to remain productive and
profitable will depend upon our ability to employ and retain skilled workers. In
addition, our ability to expand our operations depends in part on our ability to
increase the size of our skilled 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 of our
skilled labor force, increases in the wage rates that we must pay or both. If
either of these events were to occur, our capacity and profitability could be
diminished and our growth potential could be impaired.
8
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal and other proceedings that are incidental to
the conduct of our business. We do not believe that any of these proceedings, if
adversely determined, would have a material adverse affect on our financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information about our executive officers.
Name and Age Position
------------ --------
Terence E. Hall, 57 ........... Chairman of the Board, Chief Executive
Officer and President
Kenneth L. Blanchard, 53 ...... Chief Operating Officer and Executive
Vice President
Robert S. Taylor, 48 .......... Chief Financial Officer, Vice President
and Treasurer
Terence E. Hall has served as our Chairman of the Board, Chief Executive
Officer, President and Director since December 1995. Since 1989, he also served
as the President and Chief Executive Officer of Superior Energy Services,
L.L.C., and Connection Technology, L.L.C., two of our wholly-owned subsidiaries,
and their predecessor companies.
Kenneth L. Blanchard has served as our Chief Operating Officer since June 2002
and as one of our Vice Presidents since December 1995. Prior to this, he served
as Vice President of the predecessor to Connection Technology, L.L.C.
Robert S. Taylor has served as our Chief Financial Officer since January 1996
and as one of our Vice Presidents since July 1999. From May 1994 to January
1996, he served as Chief Financial Officer of Kenneth Gordon (New Orleans),
Ltd., an apparel manufacturer.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the New York Stock Exchange, on May 15, 2001,
under the symbol "SPN." Prior to May 15, 2001, our stock was traded on the
NASDAQ National Market under the symbol "SESI." The following table sets forth
the high and low sales prices per share of common stock as reported by the
respective securities market for each fiscal quarter during the periods
indicated.
HIGH LOW
---- ---
2001
First Quarter $ 12.75 $ 9.50
Second Quarter 14.10 7.75
Third Quarter 8.96 5.44
Fourth Quarter 9.40 5.70
2002
First Quarter $ 10.88 $ 7.88
Second Quarter 11.65 9.07
Third Quarter 10.10 5.95
Fourth Quarter 9.03 5.97
2003
First Quarter (through March 14, 2003) $ 9.15 $ 6.80
As of March 14, 2003, there were 73,833,359 shares of Common Stock outstanding,
which were held by 111 record holders.
We do not plan to pay cash dividends on our common stock. We intend to retain
all of the cash our business generates to meet our working capital requirements
and fund future growth. In addition, our bank credit facility prevents us from
paying dividends or making other distributions to our stockholders.
We have four stock incentive plans to provide long-term incentives to our key
employees, including officers and directors, consultants and advisers. The
following table provides information about these incentive plans as of December
31, 2002:
Equity Compensation Plan Information
Weighted- Number of Securities
Number of Securities Average Remaining Available
to be issued upon Exercise Price for Future Issuance
Exercise of of Outstanding under Equity
Plan Category Outstanding Options Options Compensation Plans
- ------------- ------------------- -------------- --------------------
Equity compensation Plans
Approved by Stockholders 5,518,516 $ 7.33 1,782,498(1)
Equity Compensation Plans Not
Approved by Stockholders -- $ -- 13,712(2)
(1) Of the shares remaining available for issuance under the Company's 1999
Stock Incentive Plan and 2002 Stock Incentive Plan, no more than 250,000
shares may be issued as restricted stock or "other stock-based awards"
(which awards are valued in whole or in part on the value of the shares of
Common Stock) under each plan. Of the shares remaining for issuance under
the Company's 1995 Stock Incentive Plan, there is no limit to how many of
the shares may be issued as restricted stock or "other stock-based awards."
10
(2) Under our Director's Stock Plan, our non-employee directors may
elect to receive up to 100%, in 25% increments, of any fees paid by
the Company in common stock. The fees are converted into shares of
common stock in an amount equal to the director's compensation
divided by the average price of the stock for the calendar quarter
in which the election is made.
ITEM 6. SELECTED FINANCIAL DATA
We present below our selected consolidated financial data for the periods
indicated. We derived the historical data from our audited consolidated
financial statements.
When we acquired Cardinal Holding Corp. (Cardinal) on July 15, 1999, the
transaction was treated for accounting purposes as if Cardinal acquired us.
Because we were the company being "acquired" for accounting purposes, financial
information for periods prior to the merger represents the results of Cardinal's
operations, and financial information for periods following the merger
represents the results of the combined companies. Cardinal's historical
operating results were substantially different than ours for the same periods
and reflected substantial non-cash and extraordinary charges associated with a
recapitalization and refinancing. Consequently, analyzing prior period results
to determine or estimate our future operating potential would not provide
meaningful information.
The data presented below should be read together with, and are qualified in
their entirety by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and our consolidated financial
statements included elsewhere in this Annual Report. The financial data is in
thousands, except per share amounts.
Years Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $ 443,147(1) $ 449,042(2) $ 257,502(3) $ 113,076(4) $ 82,223(5)
Income from operations 57,021 104,953 43,359 10,016 15,558
Income (loss) before extraordinary
losses and cumulative effect of
change in accounting principle 21,886 51,187 19,881 (2,034) 1,203
Extraordinary losses, net -- -- (1,557)(6) (4,514)(7) (10,885)(8)
Cumulative effect of change in
accounting principle, net -- 2,589(9) -- -- --
Net income (loss) 21,886 53,776 18,324 (6,548) (9,682)
Net income (loss) before
extraordinary losses and cumulative
effect of change in accounting
principle per share:
Basic 0.30 0.74 0.30 (0.11) 0.06
Diluted 0.30 0.73 0.30 (0.11) 0.06
Net income (loss) per share:
Basic 0.30 0.78 0.28 (0.25) (1.27)
Diluted 0.30 0.77 0.28 (0.25) (1.27)
Total assets 727,620 665,520 430,676 282,255 107,961
Long-term debt, less current portion 256,334 269,633 146,393 117,459 120,210
Stockholders' equity (deficit) 335,342(10) 269,576 206,247(11) 121,487 (39,940)(8)
(1) In the year ended December 31, 2002, we made two acquisitions. We acquired
Environmental Treatment Team Holding, L.L.C. (ETT) in January 2002 by
converting $18.6 million of notes and other receivables into ownership of
the company. Additional consideration, if any, will be based upon a
multiple of four times ETT's average annual earnings before interest,
income taxes, depreciation and amortization expense (EBITDA), less $9
million. We currently estimate that the total additional consideration, if
any, will not exceed $6.5 million.
11
We also acquired a business in December 2002 for $5.6 million in cash
consideration (including transaction costs), with an additional $925,000
of consideration due upon receipt of the title to a facility owned by the
acquired business. These acquisitions have been accounted for as
purchases, and the results of operations have been included from the
respective company's acquisition date.
(2) In the year ended December 31, 2001, we made five acquisitions for $108
million in initial aggregate consideration, of which $2 million was paid
with common stock. For two of the acquisitions, additional consideration,
if any, will be based upon the respective company's average EBITDA less
certain adjustments, and for one acquisition, additional consideration, if
any, will be based upon the performance of a marine vessel. The total
additional consideration, if any, will not exceed $19.7 million. These
acquisitions have been accounted for as purchases, and the results of
operations have been included from the respective company's acquisition
date.
(3) In the year ended December 31, 2000, we made six acquisitions for $42.5
million in initial aggregate cash consideration. These acquisitions have
been accounted for as purchases, and the results of operations have been
included from the respective company's acquisition date.
(4) On July 15, 1999, we acquired Cardinal through a stock for stock merger.
The merger was accounted for as a reverse acquisition which resulted in
the adjustment of our net assets existing at the time of the merger to
their estimated fair value as required by the rules of purchase
accounting. Our operating results have been included from July 15, 1999.
We made another acquisition in November 1999 for approximately $2.9
million in cash and 597,000 shares of our common stock that was accounted
for as a purchase, and the results of operations have been included from
the acquisition date.
(5) In 1998, Cardinal acquired three companies for an aggregate purchase price
of $24.1 million in cash and stock. Each of these acquisitions was
accounted for using the purchase method and the operating results of the
acquired companies were included from their respective acquisition dates.
(6) We refinanced our indebtedness in October 2000 resulting in an
extraordinary loss of $1.6 million, net of a $1.0 million income tax
benefit, which included the write-off of unamortized debt acquisition
costs.
(7) In July 1999, in connection with the Cardinal acquisition, we refinanced
our combined debt resulting in an extraordinary loss of $4.5 million, net
of a $2.1 million income tax benefit.
(8) In 1998, Cardinal completed a recapitalization and refinancing which was
funded through debt and equity investments resulting in an extraordinary
loss of $10.9 million, net of a $214,000 income tax benefit.
(9) In 2001, we changed depreciation methods from the straight-line method to
the units of production method on our liftboat fleet. The cumulative
effect of this change in accounting principle on prior years resulted in
an increase in net income of $2.6 million, net of income taxes of $1.7
million.
(10) In March 2002, we sold 4.2 million shares of common stock that generated
net proceeds of approximately $38.8 million.
(11) In May 2000, we sold 7.3 million shares of common stock that generated net
proceeds of approximately $63.2 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements included elsewhere in this Annual Report. The
following information contains forward-looking statements, which are subject to
risks and uncertainties. Should one or more of these risks or uncertainties
materialize, our actual results may differ from those expressed or implied by
the forward-looking statements. See "Cautionary Statements."
12
OVERVIEW
We are a leading provider of specialized oilfield services and equipment focused
on serving the production-related needs of oil and gas companies in the Gulf of
Mexico. We believe that we are one of the few companies in the Gulf of Mexico
capable of providing most of the post wellhead products and services necessary
to maintain offshore producing wells, as well as plug and abandonment services
at the end of their life cycle. We believe that our ability to provide our
customers with multiple services and to coordinate and integrate their delivery
allows us to maximize efficiency, reduce lead time and provide cost-effective
solutions for our customers.
Over the past several years, we have significantly expanded the geographic scope
of our operations and the range of production-related services we provide
through both internal growth and strategic acquisitions. We have expanded our
geographic focus to select international market areas and added complementary
product and service offerings. Currently, we provide a full range of products
and services for our customers, including well intervention services, marine
services, rental tools and other oilfield services. For additional industry
segment financial information, see note 14 to our consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. We evaluate our estimates on an ongoing
basis, including those related to long-lived assets and goodwill, income taxes,
allowance for doubtful accounts and self-insurance. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable under the circumstances. Actual amounts could differ significantly
from these estimates under different assumptions and conditions.
We believe the following critical accounting policies are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments.
Long-Lived Assets. We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. We record impairment losses on long-lived assets used in
operations when the cash flows estimated to be generated by those assets are
less than the carrying amount of those items. Our cash flow estimates are based
upon, among other things, historical results adjusted to reflect our best
estimate of future market rates, utilization levels, operating performance and
other factors. Our estimates of cash flows may differ from actual cash flows due
to, among other things, changes in economic conditions or changes in an asset's
operating performance. If the sum of the cash flows is less than the carrying
value, we recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. The net carrying value of
assets not fully recoverable is reduced to fair value. Our estimate of fair
value represents our best estimate based on industry trends and reference to
market transactions and is subject to variability. During the year ended
December 31, 2002, we did not record any impairment losses related to long-lived
assets.
Goodwill. In assessing the recoverability of goodwill, we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates or their related assumptions
adversely change in the future, we may be required to record material impairment
charges for these assets not previously recorded. We adopted Statement of
Financial Accounting Standards No. 142 (FAS No. 142), "Goodwill and Other
Intangible Assets," effective January 1, 2002. FAS No. 142 requires that
goodwill as well as other intangible assets with indefinite lives no longer be
amortized, but instead tested annually for impairment. In connection with FAS
No. 142, the transitional goodwill impairment evaluation required us to perform
an assessment of whether there was an indication that goodwill was impaired as
of the date of adoption. To accomplish this, we identified our reporting units
(which are consistent with our reportable segments) and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. We then estimated the fair value of each reporting unit and
compared it to the reporting unit's carrying value. Based on this test, the fair
value of the reporting units exceeded
13
the carrying amount, and the second step of the impairment test was not
required. No impairment loss has been recognized as the result of the adoption
of FAS No. 142.
Income Taxes. We provide for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (FAS No. 109), "Accounting for Income
Taxes." This standard takes into account the differences between financial
statement treatment and tax treatment of certain transactions. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Our deferred tax calculation requires us to make
certain estimates about our future operations. Changes in state, federal and
foreign tax laws, as well as changes in our financial condition or the carrying
value of existing assets and liabilities, could affect these estimates. The
effect of a change in tax rates is recognized as income or expense in the period
that includes the enactment date.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. These estimated allowances are periodically reviewed, on a
case by case basis, analyzing the customer's payment history and information
regarding customer's creditworthiness known to us. In addition, we record a
reserve based on the size and age of all receivable balances against which we do
not have specific reserves. If the financial condition of our customers was to
deteriorate, resulting in their inability to make payments, additional
allowances may be required.
Self-Insurance. We self-insure up to certain levels for losses related to
workers' compensation, protection and indemnity, general liability, property
damage, and group medical. With the recent tightening in the insurance markets,
we have elected to retain more risk by increasing our self-insurance. We accrue
for these liabilities based on estimates of the ultimate cost of claims incurred
as of the balance sheet date. We regularly review our estimates of reported and
unreported claims and provide for losses through reserves. While we believe
these estimates are reasonable based on the information available, our financial
results could be impacted if litigation trends, claims settlement patterns,
health care costs and future inflation rates are different from our estimates.
Although we believe adequate reserves have been provided for expected
liabilities arising from our self-insured obligations, and we believe that we
maintain adequate excess insurance coverage, we cannot assure that such coverage
will adequately protect us against liability from all potential consequences.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002
AND 2001
For the year ended December 31, 2002, our revenues were $443.1 million resulting
in net income of $21.9 million or $0.30 diluted earnings per share, as compared
to revenue of $449.0 million and income before cumulative effect of change in
accounting principle of $51.2 million or $0.73 diluted earnings per share for
2001. The decrease in revenue and operating income is a result of reduced
activity by our customers, resulting in lower utilization of the Company's
expanded asset base. In 2002, we significantly expanded our capacity to serve
our customers by adding three large liftboats, expanding our rental tool
inventory, and expanding and enhancing several of our operating facilities. The
following discussion analyzes our operating results on a segment basis.
WELL INTERVENTION GROUP SEGMENT
Revenue for our well intervention group was $148.7 million for the year ended
December 31, 2002, 13% lower than the same period in 2001. This segment's gross
margin decreased to 37% in the year ended December 31, 2002 from 44% in the year
ended December 31, 2001. Demand and pricing decreased for almost all of our
services as production-related activity decreased significantly.
14
MARINE SEGMENT
Our marine revenue for the year ended December 31, 2002 decreased 5% over the
same period in 2001 to $67.9 million. The gross margin percentage decreased to
34% from 52% as utilization for most liftboat classes declined in 2002 to 69%
from 78% in 2001. We added two 245-foot class liftboats and one 250-foot class
liftboat to our fleet during 2002. Although these larger liftboats earn higher
average dayrates, the fleet's average dayrate remained relatively unchanged from
2001.
RENTAL TOOLS SEGMENT
Revenue for our rental tools segment for the year ended December 31, 2002 was
$124.1 million, a 2% increase over the same period in 2001, and the rental tools
gross margin percentage increased to 69% from 66% in 2001. These increases
resulted from our acquisition of a drill pipe and handling tool rental company
near the end of the third quarter of 2001 and our larger asset base as a result
of our acquisitions and capital expenditures during 2001 and 2002.
OTHER OILFIELD SERVICES SEGMENT
Other oilfield services revenue for the year ended December 31, 2002 was $102.5
million, a 21% increase over the same period in 2001. The gross margin increased
slightly to $20.7 million in the year ended December 31, 2002 from $18.3 million
in the same period in 2001. This segment generated higher revenue and gross
margin primarily from the acquisition of an environmental services company in
January 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $41.6 million in the year ended
December 31, 2002 from $33.4 million in 2001. The increase mostly resulted from
our larger asset base as a result of our acquisitions and capital expenditures
during 2001 and 2002. As of January 1, 2002, we ceased amortizing our goodwill,
while approximately $4.4 million of goodwill amortization expense was recorded
in the year ended December 31, 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $86.2 million in the year ended
December 31, 2002 from $73.3 million in 2001. The increase is primarily the
result of our 2001 and 2002 acquisitions.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000
For the year ended December 31, 2001, our revenues were $449.0 million resulting
in income before cumulative effect of change in accounting principle of $51.2
million or $0.73 diluted earnings per share, as compared to revenue of $257.5
million and net income before extraordinary loss of $19.9 million or $0.30
diluted earnings per share for 2000. This increase is the result of an increased
demand for our services and our acquisitions. The following discussion analyzes
our operating results on a segment basis.
WELL INTERVENTION GROUP SEGMENT
Revenue for our well intervention group for 2001 was $171.2 million, a 90%
increase over 2000. The segment's gross margin percentage increased to 44% in
2001 from 36% in 2000. Demand and pricing increased for almost all of our
services as production-related activity was significantly higher throughout most
of 2001. In addition to internal growth, our revenue and margin increases can be
attributed to acquisitions made in 2000 and 2001, which expanded our service
offering to include hydraulic drilling and workover services and well control
services, as well as a significant expansion of our coiled tubing services.
15
MARINE SEGMENT
Revenue for our marine segment for 2001 was $71.4 million, an increase of 108%
over 2000. The gross margin percentage increased to 52% from 45% as dayrates and
utilization for all liftboat classes increased. The fleet's average dayrate
increased 67% over 2000 and utilization increased from 77% to 78%. Marine
revenue, average day rate and margins benefited from the increased size of our
liftboat fleet as a result of our acquisitions and from higher demand for
production-related services and offshore construction support services.
RENTAL TOOLS SEGMENT
Revenue for our rental tools segment for 2001 was $121.7 million, increasing 61%
over 2000. The gross margin percentage remained unchanged at 66% in 2001 and
2000. The increase in revenue is attributable to higher demand for
drilling-related tools, such as drill pipe and accessories, gravel packs,
high-pressure connecting iron, and on-site accommodations, and increased
exposure to deepwater drilling activity. Also, the segment benefited from
additional rentals related to acquisitions made in 2000 and 2001.
OTHER OILFIELD SERVICES SEGMENT
Revenue from the other oilfield services segment increased to $84.7 million in
2001 from $57.3 million in 2000. The gross margin percentage increased to 22% in
2001 from 21% in 2000. These increases were driven mainly by higher demand for
our environmental maintenance services, as well as our offshore and dockside
tank and vessel services related to increases in Gulf of Mexico drilling
activity. The segment also experienced increased activity for its contract
operations, supplemental labor and offshore construction and fabrication
services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $33.4 million in 2001 from $22.3
million in 2000. The increase primarily resulted from our larger asset base as a
result of our acquisitions and capital expenditures during 2000 and 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses as a percentage of revenue decreased to 16%
in 2001 from 17% for 2000. The percentage decrease is due to increased activity
levels and higher pricing for many of our services. General and administrative
expenses increased to $73.3 million for 2001 from $44.3 million in 2000. The
increase is primarily the result of our acquisitions and our increased activity
levels.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, capital expenditures, debt
service and acquisitions. Our primary sources of liquidity are cash flows from
operations and borrowings under our revolving credit facility. We had cash and
cash equivalents of $3.5 million at December 31, 2002 compared to $3.8 million
at December 31, 2001. In the year ended December 31, 2002, we generated net cash
from operating activities of $87.3 million. We supplemented our cash flow with
the sale of 4.2 million shares of common stock during the first quarter of 2002,
which generated net proceeds of approximately $38.8 million.
We made $104.5 million of capital expenditures during the year ended December
31, 2002, of which approximately $38.4 million was for liftboats (including the
purchase of a 250-foot class liftboat), approximately $39.8 million was used to
expand and maintain our rental tool equipment inventory and approximately $14
million was used on facilities construction (including our facility in
Broussard, Louisiana). We also made $12.3 million of capital expenditures to
expand and maintain the asset base of our well intervention group and other
oilfield services group.
In January 2002, we acquired ETT by converting $18.6 million of notes and other
receivables into 100% ownership of ETT to further expand our environmental
services. Additional consideration, if any, will be based upon a multiple of
four times ETT's annual average EBITDA less $9 million, to be determined in the
second quarter of 2003. While the amount of additional consideration payable
depends upon ETT's operating performance and is
16
difficult to predict accurately, we currently estimate that the total additional
consideration, if any, will not exceed $6.5 million.
In June 2002, we made an approximate $11.5 million investment in a rental tool
company, Lamb Energy Services, L.L.C. (Lamb Energy), through the contribution of
an $8.9 million note receivable and $2.6 million of rental tool assets. The
equity in loss from our investment in this affiliate was approximately $80,000
from June to December 31, 2002.
Lamb Energy established a $15 million credit facility with a syndicate of banks
that matures in 2004. We have fully guaranteed amounts outstanding under the
credit facility and we do not expect to incur any losses as a result of this
guarantee. As of December 31, 2002, Lamb Energy had $12 million outstanding
under its credit facility.
We have outstanding $200 million of 8 7/8% senior notes due 2011. The indenture
governing the senior notes requires semi-annual interest payments, which
commenced November 15, 2001, and continue through the maturity date of May 15,
2011. The indenture governing the senior notes contains certain covenants that,
among other things, prevent us from incurring additional debt, paying dividends
or making other distributions, unless our ratio of cash flow to interest expense
is at least 2.25 to 1, except that we may incur additional debt in an amount
equal to 30% of our net tangible assets as defined, which was approximately $139
million at December 31, 2002. The indenture also contains covenants that
restrict our ability to create certain liens, sell assets, or enter into certain
mergers or acquisitions.
We also have a bank credit facility with term loans in an aggregate amount of
$40.8 million at December 31, 2002 and a revolving credit facility of $75
million. On September 30, 2002, we amended one of the financial covenants in our
credit facility to increase the maximum ratio of our debt to EBITDA since our
EBITDA for the trailing twelve months has declined due to decreased activity
levels in 2002. We also amended our capital expenditures covenant to increase
our permitted capital expenditures in 2002 to $110 million from $85 million to
allow us to continue to expand our fixed asset base. The credit facility bears
interest at a LIBOR rate plus margins that depend on our leverage ratio. As of
March 14, 2003, the amounts outstanding under the term loans were $40.8 million,
$8.2 million was outstanding under our revolving credit facility, and the
weighted average interest rate on amounts outstanding under the credit facility
was 4.1% per annum. Indebtedness under the credit facility is secured by
substantially all of our assets, including the pledge of the stock of our
principal subsidiaries. The credit facility contains customary events of default
and requires that we satisfy various financial covenants. It also limits our
capital expenditures, our ability to pay dividends or make other distributions,
make acquisitions, make changes to our capital structure, create liens or incur
additional indebtedness.
In April 2002, we closed a $20.2 million U.S. Government guaranteed long-term
financing under Title XI of the Merchant Marine Act of 1936 which is
administered by the Maritime Administration (MARAD) for the construction of two
245-foot class liftboats. This debt bears an interest rate of 6.45% per annum
and is payable in equal semi-annual installments of $405,000, which began
December 3, 2002, and mature June 3, 2027. Our obligations are secured by the
two liftboats. In accordance with the agreement, we are required to comply with
certain covenants and restrictions, including the maintenance of minimum net
worth and debt-to-equity requirements.
The following table summarizes our contractual cash obligations and commercial
commitments at December 31, 2002 (amounts in thousands) for our long-term debt
and operating leases. We do not have any other material obligations or
commitments of this kind.
Description 2003 2004 2005 2006 2007 Thereafter
----------- ---- ---- ---- ---- ---- ----------
Long-term debt $ 13,730 $ 22,880 $ 16,031 $ 827 $ 810 $215,786
Operating leases 3,165 2,270 1,463 757 547 724
-------- -------- -------- -------- -------- --------
Total $ 16,895 $ 25,150 $ 17,494 $ 1,584 $ 1,357 $216,510
======== ======== ======== ======== ======== ========
The table does not include the guarantee of the Lamb Energy Services $15 million
credit facility under which $12 million was outstanding as of December 31, 2002,
or any potential additional consideration that may be payable as a result of our
acquisitions. Additional consideration is generally based on the acquired
company's operating
17
performance after the acquisition as measured by EBITDA and other adjustments
intended to exclude extraordinary items. While the amounts payable depend upon
the acquired company's operating performance and are difficult to predict
accurately, we currently estimate that the maximum additional consideration
payable for all of our acquisitions was $42.1 million, with $13.9 million
potentially payable in 2003 and $28.2 million in 2004. These amounts are not
classified as liabilities under generally accepted accounting principles and not
reflected in our financial statements until the amounts are fixed and
determinable. When amounts are determined, they are capitalized as part of the
purchase price of the related acquisition. We do not have any other financing
arrangements that are not required under generally accepted accounting
principles to be reflected in our financial statements.
We have identified capital expenditure projects that will require up to $50
million in 2003, exclusive of any acquisitions. We believe that our current
working capital, cash generated from our operations and availability under our
revolving credit facility will provide sufficient funds for our identified
capital projects.
We intend to continue implementing our growth strategy of increasing our scope
of services through both internal growth and strategic acquisitions. In 2003, we
expect to continue to make the capital expenditures required to implement our
growth strategy in amounts consistent with the amount of cash generated from
operating activities, the availability of additional financing and our credit
facility. Depending on the size of any future acquisitions, we may require
additional equity or debt financing in excess of our current working capital and
amounts available under our revolving credit facility.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 (FAS No. 143), "Accounting for Asset
Retirement Obligations." This standard requires us to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. FAS No. 143 is effective for fiscal years beginning after June
15, 2002. The transition adjustment resulting from the adoption of this
statement will be reported as a cumulative effect of change in accounting
principle. We do not believe the implementation of FAS No. 143 will have a
significant impact on our financial condition and results of operations.
In May 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 (FAS No. 145), "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." This Statement rescinds Statement of Financial Accounting
Standards No. 4 (FAS No. 4), "Reporting Gains and Losses from Extinguishments of
Debt," and requires that all gains and losses from extinguishments of debt
should be classified as extraordinary items only if they meet the criteria in
APB No. 30. Applying APB No. 30 will distinguish transactions that are part of
an entity's recurring operations from those that are unusual or infrequent or
that meet the criteria for classification as to an extraordinary item. Any gain
or loss on extinguishments of debt that was classified as an extraordinary item
in prior periods presented that does not meet the criteria in APB No. 30 for
classification as an extraordinary item must be reclassified. We will adopt the
provisions related to the rescission of FAS No. 4 as of January 1, 2003.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 (FAS No. 146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that the liabilities associated with these costs be recorded at
their fair value in the period in which the liability is incurred. FAS No. 146
will be effective for us for disposal activities initiated after December 31,
2002.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation Number 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34." FIN 45 clarifies the requirements of Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002. However, the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a
18
guarantor's year-end. With respect to initial recognition and measurement, we
have not assessed the impact, if any, of the adoption of FIN 45.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148 (FAS No. 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB
Statement of Financial Accounting Standards No. 123," to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (FAS No. 123), to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This statement also requires that those effects be disclosed more prominently by
specifying the form, content and location of those disclosures. FAS No. 148
improves the prominence and clarity of the pro forma disclosures required by FAS
No. 123 by prescribing a specific tabular format and by requiring disclosure in
the "Summary of Significant Accounting Policies" or its equivalent. In addition,
this statement improves the timeliness of those disclosures by requiring their
inclusion in financial reports for interim periods. This statement is effective
for financial statements for fiscal years ending after December 15, 2002 and is
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002 with earlier application
permitted. We have adopted the disclosure provisions of FAS No. 148 and
presented the pro forma effects of FAS No. 123 for the years ended December 31,
2002, 2001 and 2000 in note 1 of our consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin
Number 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 applies immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable entities in which an enterprise holds
a variable interest that it acquired before February 1, 2003. FIN 46 applies to
public enterprises as of the beginning of the applicable interim or annual
period. We are in the process of determining what impact, if any, the adoption
of the provisions of FIN 46 will have upon our financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with foreign currency fluctuations and
changes in interest rates. A discussion of our market risk exposure in financial
instruments follows.
Foreign Currency Exchange Rates
Because we operate in a number of countries throughout the world, we conduct a
portion of our business in currencies other than the U.S. dollar. The functional
currency for most of our international operations is the U.S. dollar, but a
portion of the revenues from our foreign operations are paid in foreign
currencies. The effects of foreign currency fluctuations are partly mitigated
because local expenses of such foreign operations are also generally are
denominated in the same currency. The Company continually monitors the currency
exchange risks associated with all contracts not denominated in the U.S. dollar.
Any gains or losses associated with such fluctuations have not been material.
We do not hold any foreign currency exchange forward contracts and/or currency
options. We make limited use of derivative financial instruments to manage risks
associated with existing or anticipated transactions. We do not hold derivatives
for trading purposes or use derivatives with leveraged or complex features.
Derivative instruments are traded with creditworthy major financial
institutions. Assets and liabilities of our foreign subsidiaries are translated
at current exchange rates, while income and expense are translated at average
rates for the period. Translation gains and losses are reported as the foreign
currency translation component of accumulated other comprehensive income in
stockholders' equity.
Interest Rates
On occasion, we use interest rate swap agreements to manage our interest rate
exposure. Under interest rate swap agreements, we agree with other parties to
exchange, at specific intervals, the difference between fixed-rate and
variable-rate interest amounts calculated by reference to an agreed-upon
notional principal amount. As of December 31, 2001, we were party to an interest
rate swap with an approximate notional amount of $1.8 million designed to
convert a similar amount of variable-rate debt to fixed rates. The swap matured
in October 2002, and the interest rate was 5.675%.
19
The effect on our earnings and other comprehensive income vary from period to
period and will be dependent upon prevailing interest rates. During 2002 and
2001, losses of approximately $39,000 and $25,000, respectively, were
transferred from accumulated other comprehensive income. At December 31, 2001,
we recorded a payable of approximately $30,000 and a corresponding charge to
accumulated other comprehensive loss of approximately $18,000, net of income
tax. No such agreements were outstanding at December 31, 2002.
At December 31, 2002, $50.1 million of our long-term debt had variable interest
rates. Based on debt outstanding at December 31, 2002, a 10% increase in
variable interest rates would increase our interest expense in the year 2002 by
approximately $222,000, while a 10% decrease would decrease our interest expense
by approximately $222,000.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Stockholders
Superior Energy Services, Inc.:
We have audited the consolidated balance sheets of Superior Energy Services,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended December 31,
2002. In connection with our audit of the consolidated financial statements, we
also have audited the accompanying financial statement schedule, "Valuation and
Qualifying Accounts," for the years ended December 31, 2002, 2001 and 2000.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion the related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of depreciation on its liftboat fleet in 2001.
As discussed in Note 11 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
As discussed in Note 1 to the consolidated financial statements, effective July
1, 2001, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations", and certain provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets" as required for goodwill
and intangible assets resulting from business combinations initiated after June
30, 2001. On January 1, 2002, the Company adopted the remaining provisions of
SFAS No. 142.
KPMG LLP
New Orleans, Louisiana
March 1, 2003
21
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(in thousands, except share data)
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,480 $ 3,769
Accounts receivable - net of allowance for doubtful
accounts of $4,617 in 2002 and $4,057 in 2001 108,352 109,835
Income taxes receivable 6,087 11,694
Prepaid insurance and other 11,663 10,181
--------- ---------
Total current assets 129,582 135,479
--------- ---------
Property, plant and equipment - net 418,047 345,878
Goodwill - net of accumulated amortization of $9,151 160,366 148,729
Notes receivable -- 23,062
Investments in affiliates 12,343 --
Other assets - net of accumulated amortization of
$2,756 in 2002 and $1,440 in 2001 7,282 12,372
--------- ---------
Total assets $ 727,620 $ 665,520
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,010 $ 21,591
Accrued expenses 33,871 40,093
Deferred income taxes -- 510
Current maturities of long-term debt 13,730 16,727
--------- ---------
Total current liabilities 68,611 78,921
--------- ---------
Deferred income taxes 67,333 47,390
Long-term debt 256,334 269,633
Stockholders' equity:
Preferred stock of $.01 par value. Authorized,
5,000,000 shares; none issued -- --
Common stock of $.001 par value. Authorized, 125,000,000
shares; issued and outstanding 73,819,341 and 69,322,886
at December 31, 2002 and 2001, respectively 74 69
Additional paid-in capital 368,746 324,898
Accumulated other comprehensive income 43 16
Accumulated deficit (33,521) (55,407)
--------- ---------
Total stockholders' equity 335,342 269,576
--------- ---------
Total liabilities and stockholders' equity $ 727,620 $ 665,520
========= =========
See accompanying notes to consolidated financial statements.
22
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2002 2001 2000
---- ---- ----
Revenues $ 443,147 $ 449,042 $ 257,502
--------- --------- ---------
Costs and expenses:
Cost of services 258,334 237,355 147,601
Depreciation and amortization 41,595 33,446 22,255
General and administrative 86,197 73,288 44,287
--------- --------- ---------
Total costs and expenses 386,126 344,089 214,143
--------- --------- ---------
Income from operations 57,021 104,953 43,359
Other income (expense):
Interest expense, net of amounts capitalized (21,884) (20,087) (12,078)
Interest income 530 1,892 1,898
Earnings (loss) in unconsolidated entities, net (80) -- --
--------- --------- ---------
Income before income taxes, extraordinary loss and
cumulative effect of change in accounting principle 35,587 86,758 33,179
Income taxes (13,701) (35,571) (13,298)
--------- --------- ---------
Income before extraordinary loss and cumulative effect
of change in accounting principle 21,886 51,187 19,881
Extraordinary loss, net of income tax benefit of $996 -- -- (1,557)
Cumulative effect of change in accounting principle,
net of income tax expense of $1,655 -- 2,589 --
--------- --------- ---------
Net income $ 21,886 $ 53,776 $ 18,324
========= ========= =========
Basic earnings per share:
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $ 0.30 $ 0.74 $ 0.30
Extraordinary loss -- -- (0.02)
Cumulative effect of change in accounting principle -- 0.04 --
--------- --------- ---------
Earnings per share $ 0.30 $ 0.78 $ 0.28
========= ========= =========
Diluted earnings per share:
Earnings before extraordinary loss and cumulative
effect of change in accounting principle $ 0.30 $ 0.73 $ 0.30
Extraordinary loss -- -- (0.02)
Cumulative effect of change in accounting principle -- 0.04 --
--------- --------- ---------
Earnings per share $ 0.30 $ 0.77 $ 0.28
========= ========= =========
Weighted average common shares used in computing
earnings per share:
Basic 72,912 68,545 64,991
Incremental common shares from stock options 960 1,047 930
--------- --------- ---------
Diluted 73,872 69,592 65,921
========= ========= =========
See accompanying notes to consolidated financial statements.
23
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31 2002, 2001 and 2000
(in thousands, except share data)
Accumulated
Preferred Common Additional other
stock Preferred stock Common paid-in comprehensive Accumulated
shares stock shares stock capital income (loss) deficit Total
--------- --------- ------ ------ ---------- -------------- ----------- -----
Balances, December 31, 1999 -- $ -- 59,810,789 $ 60 $ 248,934 $ -- $ (127,507) $ 121,487
Comprehensive income:
Net income -- -- -- -- -- -- 18,324 18,324
Other comprehensive income -
Foreign currency translation
adjustment -- -- -- -- -- 58 -- 58
------ ------ ---------- ------ --------- -------- ----------- ---------
Total comprehensive income -- -- -- -- -- 58 18,324 18,382
Stock issued for cash -- -- 7,300,000 7 63,240 -- -- 63,247
Exercise of stock options and
related tax benefit, net -- -- 705,476 1 3,203 -- -- 3,204
Acquisition of common stock -- -- (12,961) -- (73) -- -- (73)
------ ------ ---------- ------ --------- -------- ----------- ---------
Balances, December 31, 2000 -- -- 67,803,304 68 315,304 58 (109,183) 206,247
Comprehensive income:
Net income -- -- -- -- -- -- 53,776 53,776
Other comprehensive loss -
Foreign currency translation
adjustment -- -- -- -- -- (24) -- (24)
Unrealized loss on derivatives -- -- -- -- -- (18) -- (18)
------ ------ ---------- ------ --------- -------- ----------- ---------
Total comprehensive income (loss) -- -- -- -- -- (42) 53,776 53,734
Stock issued for acquisitions -- -- 825,612 1 6,217 -- -- 6,218
Exercise of stock options and
related tax benefit, net -- -- 693,970 -- 3,377 -- -- 3,377
------ ------ ---------- ------ --------- -------- ----------- ---------
Balances, December 31, 2001 -- -- 69,322,886 69 324,898 16 (55,407) 269,576
Comprehensive income:
Net income -- -- -- -- -- -- 21,886 21,886
Other comprehensive income -
Foreign currency translation
adjustment -- -- -- -- -- 9 -- 9
Unrealized gain on derivatives -- -- -- -- -- 18 -- 18
------ ------ ---------- ------ --------- -------- ----------- ---------
Total comprehensive income -- -- -- -- -- 27 21,886 21,913
Stock issued for cash -- -- 4,197,500 4 38,832 -- -- 38,836
Exercise of stock options and
related tax benefit, net -- -- 298,955 1 5,016 -- -- 5,017
------ ------ ---------- ------ --------- -------- ----------- ---------
Balances, December 31, 2002 -- $ -- 73,819,341 $ 74 $ 368,746 $ 43 $ (33,521) $ 335,342
====== ====== ========== ====== ========= ======== =========== =========
See accompanying notes to consolidated financial statements.
24
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
(in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 21,886 $ 53,776 $ 18,324
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary loss -- -- 1,557
Cumulative effect of change in accounting principle -- (2,589) --
Depreciation and amortization 41,595 33,446 22,255
Deferred income taxes 17,669 25,865 8,348
Earnings (loss) in unconsolidated entities, net 80 -- --
Amortization of debt acquisition costs 1,031 1,269 377
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable 4,629 (22,248) (22,938)
Other - net 2,467 (462) (1,172)
Accounts payable (1,660) (6,816) 7,463
Accrued expenses (7,466) 18,764 (4,151)
Income taxes 7,052 (11,656) 504
--------- --------- ---------
Net cash provided by operating activities 87,283 89,349 30,567
--------- --------- ---------
Cash flows from investing activities:
Payments for purchases of property and equipment (104,452) (83,863) (57,257)
Businesses acquired, net of cash acquired (7,653) (104,999) (40,827)
Increase in notes receivable -- (3,849) (10,315)
Other -- 1,415 (2,315)
--------- --------- ---------
Net cash used in investing activities (112,105) (191,296) (110,714)
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable -- -- (3,713)
Net borrowings (payments) on revolving credit facility 1,550 (8,800) 34,000
Proceeds from long-term debt 20,241 232,000 110,000
Principal payments on long-term debt (39,582) (118,345) (129,231)
Debt acquisition costs (1,529) (6,770) (1,124)
Proceeds from issuance of stock 38,836 -- 63,247
Proceeds from exercise of stock options 5,017 3,377 3,204
--------- --------- ---------
Net cash provided by financing activities 24,533 101,462 76,383
--------- --------- ---------
Net decrease in cash and cash equivalents (289) (485) (3,764)
Cash and cash equivalents at beginning of year 3,769 4,254 8,018
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,480 $ 3,769 $ 4,254
========= ========= =========
See accompanying notes to consolidated financial statements.
25
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions are
eliminated in consolidation. Certain previously reported amounts
have been reclassified to conform to the 2002 presentation.
(b) Business
The Company is a leading provider of specialized oilfield services
and equipment focusing on serving the production-related needs of
oil and gas companies in the Gulf of Mexico. A majority of the
Company's business is conducted with major and independent oil and
gas exploration companies. The Company continually evaluates the
financial strength of its customers but does not require collateral
to support the customer receivables.
The Company's well intervention and marine services segments 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 2002, 2001 and 2000, one customer accounted for
approximately 12%, 12% and 10% of the Company's total revenue,
respectively, primarily in the well intervention and other oilfield
services segments. 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
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(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 assets as follows:
Buildings and improvements 15 to 30 years
Marine vessels and equipment 5 to 25 years
Machinery and equipment 5 to 15 years
Automobiles, trucks, tractors and trailers 2 to 5 years
Furniture and fixtures 3 to 7 years
The company capitalizes interest on borrowings used to finance the
cost of major capital projects during the active construction
period. Capitalized interest is added to the cost of the underlying
assets and is amortized over the useful lives of the assets. For
2002, 2001 and 2000, the Company capitalized approximately
$1,066,000, $839,000 and $242,000, respectively, of interest for
various capital expansion projects.
26
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds its fair value. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(e) Goodwill
The Company adopted Statement of Financial Accounting Standards No.
142 (FAS No. 142), "Goodwill and Other Intangible Assets," effective
January 1, 2002. FAS No. 142 requires that goodwill as well as other
intangible assets with indefinite lives no longer be amortized, but
instead tested annually for impairment. In conjunction with the
adoption of Financial Accounting Standards No. 141 (FAS No. 141),
"Business Combinations," goodwill has no longer amortized for any
business combinations initiated or completed after June 30, 2001. In
connection with FAS No. 142, the transitional goodwill impairment
evaluation required the Company to perform an assessment of whether
there was an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company identified its reporting
units (which are consistent with the Company's reportable segments)
and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company then estimated the fair value of each
reporting unit and compared it to the reporting unit's carrying
value. Based on this test, the fair value of the reporting units
exceeded the carrying amount, and the second step of the impairment
test was not required. No impairment loss has been recognized as the
result of the adoption of FAS No. 142.
Prior to the adoption of FAS No. 142, the Company amortized goodwill
using the straight-line method over a period not to exceed 30 years,
and evaluated the recoverability of goodwill based on undiscounted
estimates for cash flows in accordance with Statement of Financial
Accounting Standards No. 121 (FAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
27
The following table presents net income for each period exclusive of
amortization expense recognized in such periods related to goodwill,
which is no longer amortized as a result of the adoption of FAS No.
142. Amounts are in thousands except per share information:
Year Ended
December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Income before cumulative effect of change
in accounting principle, as reported $ 21,886 $ 51,187 $ 19,881
Extraordinary loss net of income tax expense, as reported -- -- (1,557)
Cumulative effect of change in accounting
principle, net of income tax expense, as reported -- 2,589 --
Goodwill amortization, net of income tax expense -- 4,172 2,999
-------- -------- --------
Net income as adjusted $ 21,886 $ 57,948 $ 21,323
======== ======== ========
Basic earnings per share:
Earnings before cumulative effect
of change in accounting principle, as reported $ 0.30 $ 0.74 $ 0.30
Extraordinary loss -- -- (0.02)
Cumulative effect of change in accounting principle -- 0.04 --
Goodwill amortization, net of income tax expense -- 0.06 0.05
-------- -------- --------
Earnings per share $ 0.30 $ 0.84 $ 0.33
======== ======== ========
Diluted earnings per share:
Earnings before cumulative effect
of change in accounting principle, as reported $ 0.30 $ 0.73 $ 0.30
Extraordinary loss -- -- (0.02)
Cumulative effect of change in accounting principle -- 0.04 --
Goodwill amortization, net of income tax expense -- 0.06 0.04
-------- -------- --------
Earnings per share $ 0.30 $ 0.83 $ 0.32
======== ======== ========
Weighted average common shares used
in computing earnings per share:
Basic 72,912 68,545 64,991
======== ======== ========
Diluted 73,872 69,592 65,921
======== ======== ========
(f) Other Assets
Other assets consist primarily of debt acquisition costs and
covenants not to compete. Debt acquisition costs are being amortized
over the term of the related debt, which is in each instance
approximately four to ten years. The amortization of debt
acquisition costs, which is classified as interest expense, was
$1,031,000, $1,269,000, and $377,000 for the years ended December
31, 2002, 2001 and 2000, respectively. The covenants not to compete
are being amortized over the terms of the agreements, which is four
years. Amortization expense recorded on the covenants not to compete
for the years ended December 31, 2002, 2001 and 2000 was $272,000,
$328,000 and $386,000, respectively.
(g) Cash Equivalents
The Company considers all short-term deposits with a maturity of
ninety days or less to be cash equivalents.
28
(h) Revenue Recognition
For all of the Company's segments, revenue is recognized when
services or equipment are provided. The Company contracts for
marine, well intervention and environmental 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. Reimbursements from customers for the
cost of rental tools that are damaged or lost downhole are reflected
as revenue at the time of the incident.
(i) Income Taxes
The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (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) 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, convertible preferred stock shares and warrants
and the potential shares that would have a dilutive effect on
earnings per share.
(k) Financial Instruments
On occasion, the Company uses interest rate swap agreements to
manage its interest rate exposure. The Company specifically
designates these agreements as cash flow hedges of debt instruments
and recognizes interest differentials as adjustments to interest
expense in the period the differentials occur. Under interest rate
swap agreements, the Company agrees with other parties to exchange
at specific intervals, the difference between fixed-rate and
variable-rate interest amounts calculated by reference to an
agreed-upon notional principal amount. No such agreements were
outstanding at December 31, 2002.
(l) Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are
translated at current exchange rates, while income and expenses are
translated at average rates for the period. Translation gains and
losses are reported as the foreign currency translation component of
accumulated other comprehensive income in stockholders' equity.
(m) Stock Based Compensation
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 No. 123 (FAS
No. 123), "Accounting for Stock-Based Compensation" permits the
continued use of the intrinsic-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. No stock based compensation costs are reflected in net
income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on
the date of grant. As required by Statement of Financial Accounting
Standards No. 148 (FAS No. 148), "Accounting for Stock Based
Compensation - Transition and Disclosure," which amended FAS No.
123, the following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FAS No. 123 to a stock based employee
compensation. The pro forma data
29
presented below is not representative of the effects on reported
amounts for future years (amounts are in thousands, except per share
amounts).
2002 2001 2000
-------- -------- --------
Net income, as reported $ 21,886 $ 53,776 $ 18,324
Stock-based employee compensation
expense, net of tax (3,262) (2,582) (3,836)
-------- -------- --------
Pro forma net income $ 18,624 $ 51,194 $ 14,488
======== ======== ========
Basic earnings per share:
Earnings, as reported $ 0.30 $ 0.78 $ 0.28
Stock-based employee compensation
expense, net of tax (0.04) (0.03) (0.06)
-------- -------- --------
Pro forma earnings $ 0.26 $ 0.75 $ 0.22
======== ======== ========
Diluted earnings per share:
Earnings, as reported $ 0.30 $ 0.77 $ 0.28
Stock-based employee compensation
expense, net of tax (0.05) (0.03) (0.06)
-------- -------- --------
Pro forma earnings $ 0.25 $ 0.74 $ 0.22
======== ======== ========
Black-Scholes option pricing model assumptions:
Risk free interest rate 2.943% 4.5% 5.2%
Expected life (years) 3 3 3
Volatility 85.48% 79.11% 128.75%
Dividend yield -- -- --
(2) Change in Accounting Principle
On January 1, 2001, the Company changed depreciation methods from the
straight-line method to the units-of-production method on its liftboat fleet to
more accurately reflect the wear and tear of normal use. Management believes
that the units-of-production method is best suited to reflect the actual
depreciation of the liftboat fleet. Depreciation expense calculated under the
units-of-production method may be different than depreciation expense calculated
under the straight-line method in any period. The annual depreciation based on
utilization of each liftboat will not be less than 25% of annual straight-line
depreciation, and the cumulative depreciation based on utilization of each
liftboat will not be less than 50% of cumulative straight-line depreciation. The
cumulative effect of this change in accounting principle on prior years resulted
in an increase in net income for the year ended December 31, 2001 of $2.6
million, net of taxes of $1.7 million, or $0.04 per share.
30
(3) Supplemental Cash Flow Information (in thousands)
2002 2001 2000
---- ---- ----
Cash paid for interest $ 22,006 $ 17,329 $ 12,135
========= ========= =========
Cash paid (received) for income taxes $ (15,224) $ 20,304 $ 4,368
========= ========= =========
Details of acquisitions:
Fair value of assets $ 29,985 $ 141,946 $ 65,373
Fair value of liabilities (22,093) (26,957) (19,658)
Common stock issued -- (6,218) --
--------- --------- ---------
Cash paid 7,892 108,771 45,715
Less cash acquired (239) (3,772) (4,888)
--------- --------- ---------
Net cash paid for acquisitions $ 7,653 $ 104,999 $ 40,827
========= ========= =========
Non-cash investing activity:
Additional consideration
payable on acquisitions $ 660 $ 3,750 $ 18,449
========= ========= =========
Retainage payable on
vessel construction $ -- $ -- $ 1,000
========= ========= =========
(4) Business Combinations
Effective January 1, 2002, the Company acquired Environmental Treatment Team
Holding, L.L.C. (ETT), by converting $18.6 million of notes and other
receivables into 100% ownership of ETT to further expand the environmental
services of the Company. Additional consideration, if any, will be based upon a
multiple of four times ETT's average annual earnings before interest, income
taxes, depreciation and amortization expense (EBITDA) less $9 million, to be
determined in the second quarter of 2003. The Company currently estimates that
the total additional consideration, if any, will not exceed $6.5 million. The
acquisition has been accounted for as a purchase and the acquired assets and
liabilities have been valued at their estimated fair market value. The purchase
price allocated to net assets was approximately $13 million, and the excess
purchase price over the fair value of net assets of approximately $5.6 million
was allocated to goodwill. The results of operations have been included from the
acquisition date.
On December 13, 2002, the Company acquired a business to further expand the
rental tool services of the Company. The Company paid $5.6 million in cash
consideration for this acquisition (including transaction costs) and will pay an
additional $925,000 upon the receipt of the title to a facility for this
business. The acquisition has been accounted for as a purchase and the acquired
assets and liabilities have been valued at their estimated fair market value.
The purchase price has been preliminarily allocated to net assets was
approximately $2.6 million, and the excess purchase price over the fair value of
net assets of approximately $3 million was allocated to goodwill. The remaining
$925,000 will be allocated to the facility upon receipt. The results of
operations have been included from the acquisition date. The results of
operations of this acquired company were not material to the overall results of
operations of the Company.
In the year ended December 31, 2001, the Company made five acquisitions for a
total of $108 million in consideration, of which $2 million was paid with common
stock. For two of the acquisitions, additional consideration, if any, will be
based upon the respective company's average EBITDA less certain adjustments, and
for one acquisition, additional consideration, if any, will be based upon the
performance of a marine vessel. The total additional consideration, if any, will
not exceed $19.7 million. These acquisitions have been accounted for as
purchases and the acquired assets and liabilities have been valued at their
estimated fair market value. The purchase price allocated to net assets was
approximately $80.5 million, and the excess purchase price over the fair value
of net assets of approximately $27.5 million was allocated to goodwill, of which
$17.9 million relates to acquisitions
31
after June 30, 2001 and is not being amortized as the result of new accounting
pronouncements. The results of operations have been included from the respective
acquisition date.
Most of the Company's acquisitions have involved additional contingent
consideration based upon a multiple of the acquired companies' respective
average EBITDA over a three-year period from the respective date of acquisition.
In 2002, the Company capitalized additional consideration of $3 million related
to two of its acquisitions, of which $660,000 was paid subsequent to year end.
While the amounts of additional consideration payable depend upon the acquired
company's operating performance and are difficult to predict accurately, the
Company estimates that the maximum additional consideration payable for all of
the Company's acquisitions will be approximately $42.1 million, with $13.9
million potentially payable in 2003 and $28.2 million in 2004. These amounts are
not classified as liabilities under generally accepted accounting principles and
not reflected in the Company's financial statements until the amounts are fixed
and determinable. When amounts are determined, they are capitalized as part of
the purchase price of the related acquisition. With the exception of the
guarantee of the $15 million credit facility of Lamb Energy Services, L.L.C.
(Lamb Energy) (see note 7 to the consolidated financial statements), the Company
does not have any other financing arrangements that are not required under
generally accepted accounting principles to be reflected in its financial
statements.
(5) Property, Plant and Equipment
A summary of property, plant and equipment at December 31, 2002 and 2001 (in
thousands) is as follows:
2002 2001
---- ----
Buildings and improvements $ 30,135 $ 19,574
Marine vessels and equipment 191,848 142,295
Machinery and equipment 261,521 207,022
Automobiles, trucks, tractors and trailers 11,808 11,836
Furniture and fixtures 7,461 5,811
Construction-in-progress 14,116 24,317
Land 4,778 4,676
--------- ---------
521,667 415,531
Accumulated depreciation (103,620) (69,653)
--------- ---------
Property, plant and equipment, net $ 418,047 $ 345,878
========= =========
The cost of property, plant and equipment leased to third parties was
approximately $4.2 million at December 31, 2001. Amounts leased at December 31,
2002 were not material.
(6) Investments in Affiliates
In June 2002, the Company contributed a note receivable of $8.9 million and
fixed assets with an approximate $2.6 million net book value to obtain a 54.3%
equity ownership interest in Lamb Energy a rental tool company. The Company is
accounting for its investment under the equity method of accounting, as it does
not have voting or operational control of Lamb Energy. Investments in affiliates
also include a 50% ownership interest in Siempre Listo, L.L.C., a company that
owns an airplane. The equity in loss from these investments was approximately
$80,000 for the year ended December 31, 2002. The summarized financial
information of the aggregate of these entities is not material to the financial
position or results of operations of the Company.
32
(7) Debt
Long-Term Debt
The Company's long-term debt as of December 31, 2002 and 2001 consisted of the
following (in thousands):
2002 2001
---- ----
Senior Notes - interest payable semiannually
at 8.875%, due May 2011 $200,000 $200,000
Term Loans - interest payable monthly at floating rate
(4.19% at December 31, 2002), due in quarterly
installments through March 2005 with $12 million due May 2005 40,800 74,500
Revolver - interest payable monthly at floating rate
(5.5% at December 31, 2002), due in May 2004 9,250 7,700
U.S. Government guaranteed long-term financing - interest
payable semianually at 6.45%, due in semiannual installments
through June 2027 19,836 --
Notes payable - paid January 2, 2002 with Revolver -- 3,750
Other installment notes payable (interest rates ranging
from 7% to 9%), due monthly through October 2006 178 410
-------- --------
270,064 286,360
Less current portion 13,730 16,727
-------- --------
Long-term debt $256,334 $269,633
======== ========
The Company has outstanding $200 million of 8 7/8% senior notes due 2011. The
indenture governing the registered notes requires semi-annual interest payments
which commenced November 15, 2001 and continue through the maturity date of May
15, 2011. The indenture governing the senior notes contains certain covenants
that, among other things, prevents the Company from incurring additional debt,
paying dividends or making other distributions, unless its ratio of cash flow to
interest expense is at least 2.25 to 1, except that the Company may incur
additional debt in an amount equal to 30% of its net tangible assets as defined,
which was approximately $139 million at December 31, 2002. The indenture also
contains covenants that restrict the Company's ability to create certain liens,
sell assets, or enter into certain mergers or acquisitions. At December 31,
2002, the Company was in compliance with all such covenants.
The Company has a bank credit facility consisting of term loans in an aggregate
amount of $40.8 million at December 31, 2002 and a revolving credit facility of
$75 million. The term loans require quarterly principal installments in the
amount of $3.2 million through March 31, 2005. A balance of $12 million is due
on the facility maturity date of May 2, 2005. On September 30, 2002, the Company
amended one of the financial covenants in its credit facility to increase the
maximum ratio of its debt to EBITDA since its EBITDA for the trailing twelve
months has declined due to decreased activity levels in 2002. The Company also
amended its capital expenditures covenant to increase its permitted capital
expenditures in 2002 to $110 million from $85 million to allow the Company to
continue to expand its fixed asset base. The credit facility bears interest at a
LIBOR rate plus margins that depend on the Company's leverage ratio.
Indebtedness under the credit facility is secured by substantially all of the
Company's assets, including the pledge of the stock of the Company's principal
subsidiaries. The credit facility contains customary events of default and
requires that the Company satisfy various financial covenants. It also limits
the Company's capital expenditures, its ability to pay dividends or make other
distributions, make acquisitions, make changes to the Company's capital
structure, create liens or incur additional indebtedness. At December 31, 2002,
the Company was in compliance with all such covenants.
In April 2002, the Company closed a $20.2 million U.S. Government guaranteed
long-term financing under Title XI of the Merchant Marine Act of 1936 which is
administered by the Maritime Administration (MARAD) for the construction of two
245-foot class liftboats. The debt bears an interest rate of 6.45% per annum and
is payable in equal semi-annual installments of $405,000, which began December
3, 2002, and mature June 3, 2027. The
33
Company's obligations are secured by the two liftboats. In accordance with the
agreement, the Company is required to comply with certain covenants and
restrictions, including the maintenance of minimum net worth and debt-to-equity
requirements. At December 31, 2002, the Company was in compliance with all such
covenants.
The Company owns a 54.3% interest in Lamb Energy, which has a $15 million credit
facility with a syndicate of banks that matures in 2004. The Company fully
guarantees amounts due under the credit facility. The Company does not expect to
incur any losses as a result of the guarantee. As of December 31, 2002, Lamb
Energy had $12 million outstanding on this credit facility.
Extraordinary Loss
The early extinguishment of the Company's indebtedness in October 2000 resulted
in an extraordinary loss of $1.6 million, net of a $1.0 million income tax
benefit, which resulted from the write-off of unamortized debt acquisition costs
related to the prior credit facility.
Annual maturities of long-term debt for each of the five fiscal years following
December 31, 2002 are as follows (in thousands):
2003 $ 13,730
2004 22,880
2005 16,031
2006 827
2007 810
Thereafter 215,786
---------
Total $ 270,064
=========
(8) Income Taxes
The components of income tax expense, before the income tax effect of the
extraordinary loss and cumulative effect of change in accounting principle, for
the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands):
2002 2001 2000
---- ---- ----
Current
Federal $ (5,042) $ 9,706 $ 3,851
State 199 -- 1,099
Foreign 875 -- --
-------- -------- --------
(3,968) 9,706 4,950
-------- -------- --------
Deferred
Federal 16,801 22,991 8,125
State 868 2,874 223
-------- -------- --------
17,669 25,865 8,348
-------- -------- --------
$ 13,701 $ 35,571 $ 13,298
======== ======== ========
34
Income tax expense differs from the amounts computed by applying the U.S.
Federal income tax rate of 35% to income before income taxes as follows (in
thousands):
2002 2001 2000
---- ---- ----
Computed expected tax expense $12,456 $30,366 $11,613
Increase resulting from:
Goodwill amortization -- 1,306 1,025
State and foreign income taxes 1,068 1,808 481
Other 177 2,091 179
------- ------- -------
Income tax expense $13,701 $35,571 $13,298
======= ======= =======
The significant components of deferred income taxes at December 31, 2002 and
2001 are as follows (in thousands):
2002 2001
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 1,069 $ 805
Alternative minimum tax credit and net
operating loss carryforward 7,696 1,220
Other 1,096 878
-------- --------
9,861 2,903
Valuation allowance -- (279)
-------- --------
Net deferred tax assets 9,861 2,624
-------- --------
Deferred tax liabilities:
Property, plant and equipment 69,322 45,787
Other 7,872 4,737
-------- --------
Deferred tax liabilities 77,194 50,524
-------- --------
Net deferred tax liability $ 67,333 $ 47,900
======== ========
The net change in the valuation allowance was a decrease of $279,000 for the
year ended December 31, 2002, an increase of $24,000 for the year ended December
31, 2001 and a decrease of $900,000 for the year ended December 31, 2000. The
net deferred tax assets reflect management's estimate of the amount that will be
realized from future profitability and the reversal of taxable temporary
differences that can be predicted with reasonable certainty.
As of December 31, 2002, the Company had net operating losses to carryforward of
an estimated $4.9 million, which is available to reduce future Federal taxable
income with expiration dates from 2010 through 2021, and an alternative minimum
tax credit carryforward of an estimated $3.7 million. The Company also had
various state net operating loss carryforwards of an estimated $23.8 million.
(9) Stockholders' Equity
In March 2002, the Company sold 4.2 million shares of common stock. The offering
generated net proceeds to the Company of approximately $38.8 million.
In May 2000, the Company sold 7.3 million shares of common stock. The offering
generated net proceeds to the Company of approximately $63.2 million.
In June 2002, the Company's stockholders approved the 2002 Stock Incentive Plan
("2002 Incentive Plan") to provide long-term incentives to its key employees,
including officers and directors, consultants and advisers to the Company
("Eligible Participants"). Under the 2002 Incentive Plan, the Company may grant
incentive stock options, non-qualified stock options, restricted stock, stock
awards or any combination thereof to Eligible Participants for up to 1,400,000
shares of the Company's common stock. The Compensation Committee of the Board of
Directors
35
establishes the term and the exercise price of any stock options granted under
the 2002 Incentive Plan, provided the exercise price may not be less than the
fair market value of the common share on the date of grant.
In addition to the 2002 Incentive Plan, Superior maintains its 1999 Stock
Incentive Plan ("1999 Incentive Plan") and its 1995 Stock Incentive Plan ("1995
Incentive Plan"), as amended. Under the 1999 Incentive Plan and the 1995
Incentive Plan, the Company may grant incentive stock options, non-qualified
stock options, restricted stock, stock awards or any combination thereof to
Eligible Participants which consists of its key employees, including officers
and directors who are employees of the Company for up to 5,929,327 shares and
1,900,000 shares, respectively, of the Company's common stock. All of the
Company's 1995 Stock Incentive Plan's options which have been granted are
vested.
A summary of stock options granted under the incentive plans for the years ended
December 31, 2002 and 2001 is as follows:
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year 5,308,215 $ 7.05 4,334,363 $ 6.10 4,104,917 $ 5.56
Granted 655,841 $ 9.39 1,917,500 $ 8.48 908,246 $ 7.75
Exercised (290,665) $ 5.96 (690,648) $ 5.38 (658,800) $ 4.96
Forfeited (154,875) $ 8.89 (253,000) $ 6.18 (20,000) $ 7.37
--------- --------- ---------
Outstanding at end of year 5,518,516 $ 7.33 5,308,215 $ 7.05 4,334,363 $ 6.10
========= ======= ========= ======= ========= =======
Exercisable at end of year 3,509,008 $ 6.61 2,968,689 $ 6.15 2,400,559 $ 5.70
========= ======= ========= ======= ========= =======
Available for future grants 1,782,498 883,464 2,547,964
========= ========= =========
Average fair value of grants
during the year $ 5.33 $ 4.44 $ 5.35
======= ======= =======
A summary of information regarding stock options outstanding at December 31,
2002 is as follows:
Options Outstanding Options Exercisable
----------------------------------------- --------------------
Range of Remaining Weighted Weighted
Exercise Contractual Average Average
Prices Shares Life Price Shares Price
- ----------------------------------------------------------------------------------
$2.50 - $3.43 127,500 3-4 years $ 2.91 127,500 $ 2.91
$4.75 - $5.75 1,939,117 1.5-6.5 years $ 5.65 1,939,117 $ 5.65
$7.06 - $9.00 1,926,186 5-10 years $ 7.61 982,518 $ 7.54
$9.25-$12.45 1,525,713 6-9.5 years $ 9.48 459,873 $ 9.68
(10) Profit-Sharing Plan
The Company maintains various defined contribution profit-sharing plans for
employees who have satisfied minimum service and age requirements. Employees may
contribute up to 50% of their earnings to the plans. The Company provides a
discretionary match, not to exceed 5% of an employee's salary. The Company made
contributions of $1,674,000, $1,052,000 and $729,000 in 2002, 2001 and 2000,
respectively.
36
(11) Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133 (FAS
No. 133), "Accounting for Derivative Instruments and Hedging
Activities," effective January 1, 2001. The Company uses interest rate swap
agreements to manage its interest rate exposure. Under interest rate swap
agreements, the Company agrees with other parties to exchange at specific
intervals, the difference between fixed-rate and variable-rate interest amounts
calculated by reference to an agreed-upon notional principal amount. As of
December 31, 2001, the Company was party to an interest rate swap with an
approximate notional amount of $1.8 million designed to convert a similar amount
of variable-rate debt to fixed rates. The swap matured in October 2002, and the
interest rate was 5.675%.
The Company's interest rate swap qualified for cash flow hedge accounting
treatment under FAS No. 133, whereby changes in fair value have been recognized
in accumulated other comprehensive income (a component of stockholders' equity)
until settled, when the resulting gains and losses will be recorded in earnings.
The effect on the Company's earnings and other comprehensive income vary from
period to period and will be dependent upon prevailing interest rates. During
2002 and 2001, losses of approximately $32,000 and $25,000, respectively, were
transferred from accumulated other comprehensive income. At December 31, 2001,
the Company recorded a payable of approximately $30,000 and a corresponding
charge to accumulated other comprehensive loss of approximately $18,000, net of
income tax. No such agreements were outstanding at December 31, 2002.
(12) 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 approximately $3.0 million in 2002, $2.2 million
in 2001, and $1.9 million in 2000. Future minimum lease payments under
non-cancelable leases for the five years ending December 31, 2003 through 2007
and thereafter are as follows: $3,165,000, $2,270,000, $1,463,000, $757,000,
$547,000 and $724,000, respectively. Future minimum lease payments receivable
under non-cancelable sub-leases for the five years ending December 31, 2003
through 2007 and thereafter are as follows: $538,000, $481,000, $472,000,
$472,000, $472,000, and $39,000, 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.
(13) Related Party Transactions
The Company provides field management and other services to an independent oil
and gas exploration and production company, of which a member of the Company's
Board of Directors is Chief Executive Officer. The Company billed this customer
approximately $4 million in each of 2002, 2001 and 2000 on terms that the
Company believes are customary in the industry. The Company expects to continue
providing services to this customer.
The Company leased a plane acquired in November 2001 for business travel from a
company in which the President and Chief Executive Officer then owned a 50%
interest. The lease provided that the Company would make monthly lease payments
of $14,250 and pay all of the plane's operating and maintenance costs. The
Company expensed $16,625 for the use of the plane during the 2001 fiscal year,
and $15,600 in operating and maintenance costs. Effective December 31, 2001, the
Company bought the Chief Executive Officer's interest in the company that owns
the plane for $900,000, the same price that he paid for his interest in November
2001.
(14) Segment Information
Beginning January 1, 2002, the Company modified its segment disclosure by
combining the field management segment with the environmental and other segment
(other oilfield services segment) in order to better reflect how the chief
operating decision maker of the Company evaluates the Company's results of
operations. The Company's reportable segments are as follows: well intervention
group, marine, rental tools, and other oilfield services. Each segment offers
products and services within the oilfield services industry. The well
intervention group segment provides plug and abandonment services, coiled tubing
services, well pumping and stimulation services, data acquisition services, gas
lift services, electric wireline services, hydraulic drilling and workover
services, well control services and mechanical wireline services that perform a
variety of ongoing maintenance and repairs to
37
producing wells, as well as modifications to enhance the production capacity and
life span of the well. The marine segment operates liftboats for oil and gas
production facility maintenance, construction operations and platform removals,
as well as production service activities. The rental tools segment rents and
sells specialized equipment for use with onshore and offshore oil and gas well
drilling, completion, production and workover activities. The other oilfield
services segment provides contract operations and maintenance services,
interconnect piping services, sandblasting and painting maintenance services,
transportation and logistics services, offshore oil and gas cleaning services,
oilfield waste treatment services, dockside cleaning of items, including supply
boats, cutting boxes, and process equipment, and manufactures and sells drilling
instrumentation and oil spill containment equipment. All the segments operate
primarily in the Gulf of Mexico.
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. 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 segments as of
December 31, 2002, 2001 and 2000 and for the years then ended is shown in the
following tables (in thousands):
Other
Well Rental Oilfield Unallocated Consolidated
2002 Intervention Marine Tools Services Amount Total
- ---- --------------------------------------------------------------------------------
Identifiable assets $ 199,084 $ 195,832 $ 261,341 $ 63,491 $ 7,872 $ 727,620
Capital expenditures 18,058 38,833 41,931 5,630 -- 104,452
Revenues $ 148,670 $ 67,884 $ 124,085 $ 102,508 $ -- $ 443,147
Costs of services 93,474 44,648 38,375 81,837 -- 258,334
Depreciation and amortization 10,625 6,764 19,822 4,384 -- 41,595
General and administrative 34,520 7,463 29,846 14,368 -- 86,197
Operating income 10,051 9,009 36,042 1,919 -- 57,021
Interest expense -- -- -- -- (21,884) (21,884)
Interest income 530 530
Earnings in unconsolidated
entities, net -- -- (80) -- -- (80)
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes $ 10,051 $ 9,009 $ 35,962 $ 1,919 $ (21,354) $ 35,587
========= ========= ========= ========= ========= =========
Other
Well Rental Oilfield Unallocated Consolidated
2001 Intervention Marine Tools Services Amount Total
- ---- --------------------------------------------------------------------------------
Identifiable assets $ 200,512 $ 165,057 $ 233,733 $ 58,775 $ 7,443 $ 665,520
Capital expenditures 22,300 22,091 36,274 3,198 -- 83,863
Revenues $ 171,223 $ 71,406 $ 121,742 $ 84,671 $ -- $ 449,042
Costs of services 95,549 34,473 40,929 66,404 -- 237,355
Depreciation and amortization 9,449 4,729 16,382 2,886 -- 33,446
General and administrative 29,521 6,134 26,883 10,750 -- 73,288
Operating income 36,704 26,070 37,548 4,631 -- 104,953
Interest expense -- -- -- -- (20,087) (20,087)
Interest income -- -- -- -- 1,892 1,892
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes and cumulative effect
of change in accounting
change in accounting principle $ 36,704 $ 26,070 $ 37,548 $ 4,631 $ (18,195) $ 86,758
========= ========= ========= ========= ========= =========
38
Other
Well Rental Oilfield Unallocated Consolidated
2001 Intervention Marine Tools Services Amount Total
- ---- -------------------------------------------------------------------------------
Identifiable assets $ 136,439 $ 74,720 $ 180,204 $ 38,239 $ 1,074 $ 430,676
Capital expenditures 10,244 23,676 22,641 1,696 -- 58,257
Revenues $ 90,031 $ 34,390 $ 75,814 $ 57,267 $ -- $ 257,502
Costs of services 57,460 18,929 25,840 45,372 -- 147,601
Depreciation and amortization 6,450 3,428 10,472 1,905 -- 22,255
General and administrative 15,394 3,554 16,337 9,002 -- 44,287
Operating income (loss) 10,727 8,479 23,165 988 -- 43,359
Interest expense -- -- -- -- (12,078) (12,078)
Interest income -- -- -- -- 1,898 1,898
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary loss $ 10,727 $ 8,479 $ 23,165 $ 988 $ (10,180) $ 33,179
========= ========= ========= ========= ========= =========
(15) Interim Financial Information (Unaudited)
The following is a summary of consolidated interim financial information for the
years ended December 31, 2002 and 2001 (amounts in thousands, except per share
data):
Three Months Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
2002
Revenues $104,826 $112,730 $107,213 $118,378
Gross profit 45,588 50,590 40,077 48,558
Net income 5,825 8,505 1,946 5,610
Earnings per share:
Basic $ 0.08 $ 0.12 $ 0.03 $ 0.08
Diluted 0.08 0.11 0.03 0.08
Three Months Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
2001
Revenues $ 91,256 $109,639 $128,606 $119,541
Gross profit 42,938 53,920 60,730 54,099
Income before cumulative effect of change in
accounting principle 10,880 14,336 15,279 10,692
Net income 13,469 14,336 15,279 10,692
Earnings before cumulative effect of change in
accounting principle per share:
Basic $ 0.16 $ 0.21 $ 0.22 $ 0.15
Diluted 0.16 0.21 0.22 0.15
Earnings per share:
Basic $ 0.20 $ 0.21 $ 0.22 $ 0.15
Diluted 0.20 0.21 0.22 0.15
(16) Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 (FAS No. 143), "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding
39
increase in the carrying amount of the related long-lived asset. FAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The transition
adjustment resulting from the adoption of this statement will be reported as a
cumulative effect of change in accounting principle. The Company does not
believe that the adoption of FAS No. 143 will have a significant impact on its
financial condition and results of operations.
In May 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 145 (FAS No. 145), "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." This Statement rescinds Statement of Financial Accounting
Standards No 4 (FAS No. 4), "Reporting Gains and Losses from Extinguishments of
Debt," and requires that all gains and losses from extinguishments of debt
should be classified as extraordinary items only if they meet the criteria in
APB No. 30. Applying APB No. 30 will distinguish transactions that are part of
an entity's recurring operations from those that are unusual or infrequent or
that meet the criteria for classification as to an extraordinary item. Any gain
or loss on extinguishments of debt that was classified as an extraordinary item
in prior periods presented that does not meet the criteria in APB No. 30 for
classification as an extraordinary item must be reclassified. The Company will
adopt the provisions related to the rescission of FAS No. 4 as of January 1,
2003.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 146 (FAS No.146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS No 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that the liabilities associated with these costs be recorded at
their fair value in the period in which the liability is incurred. FAS No. 146
will be effective for the Company for disposal activities initiated after
December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation Number 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements of Financial Accounting Standards
No 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002. However, the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. With respect to
initial recognition and measurement, the Company has not assessed the impact, if
any, of the adoption of FIN 45.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 148 (FAS No. 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123,"
to provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of FAS No 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement also requires that
those effects be disclosed more prominently by specifying the form, content and
location of those disclosures. FAS No 148 improves the prominence and clarity of
the pro forma disclosures required by FAS No. 123 by prescribing a specific
tabular format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent. In addition, this statement improves the
timeliness of those disclosures by requiring their inclusion in financial
reports for interim periods. This statement is effective for financial
statements for fiscal years ending after December 15, 2002 and is effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002 with earlier application permitted. The
Company adopted the disclosure provisions of FAS No. 148 and presented the pro
forma effects of FAS No. 123 for the years ended December 31, 2002, 2001 and
2000 in Note 1.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin
Number 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 applies immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to
40
variable entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of the
beginning of the applicable interim or annual period. The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 will have upon its financial condition or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item will be included in an amendment to this Form
10-K or incorporated by reference from the registrant's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be included in an amendment to this Form
10-K or incorporated by reference from the registrant's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item will be included in an amendment to this Form
10-K or incorporated by reference from the registrant's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be included in an amendment to this Form
10-K or incorporated by reference from the registrant's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation conducted within 90 days of filing this report on Form
10-K, our Chief Financial Officer and Chief Executive Officer have concluded
that our disclosure controls and procedures (as defined in rules 13a-14c
promulgated under the Securities Exchange Act of 1934, as amended) are effective
and designed to alert them to material information relating to the Company.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
our most recent evaluation.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements are Included in Part II of this Report:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying accounts for the years ended
December 31, 2002, 2001 and 2000
(3) Exhibits
The exhibits filed as part of this Form 10-K are listed on the Index to
Exhibits immediately preceding such exhibits, which index is incorporated
herein by reference.
(b) Reports on Form 8-K
On November 6, 2002, the Company filed a current report on Form 8-K
reporting, under Item 5, the results for the third quarter ended September
30, 2002.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Terence E. Hall
-------------------------------
Terence E. Hall
Chairman of the Board,
Chief Executive Officer and
President
Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Terence E. Hall Chairman of the Board, March 26, 2003
- --------------------------
TERENCE E. HALL Chief Executive Officer
and President
(Principal Executive Officer)
/s/ Robert S. Taylor Vice President and March 26, 2003
- -------------------------- Chief Financial Officer
ROBERT S. TAYLOR (Principal Financial and
Accounting Officer)
/s/ Justin L. Sullivan Director March 26, 2003
- --------------------------
JUSTIN L. SULLIVAN
/s/ Richard Pattarozzi Director March 26, 2003
- --------------------------
RICHARD PATTAROZZI
/s/ Joseph R. Edwards Director March 26, 2003
- --------------------------
JOSEPH R. EDWARDS
/s/ Ben Guill Director March 26, 2003
- --------------------------
BEN GUILL
/s/ Richard Bachmann Director March 26, 2003
- --------------------------
RICHARD BACHMANN
44
CERTIFICATION
I, Terence E. Hall, certify that:
1. I have reviewed this annual report on Form 10-K of Superior Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
SUPERIOR ENERGY SERVICES, INC.
Date: March 26, 2003 by: /s/ Terence E. Hall
--------------------------------------
Terence E. Hall
Chairman of the Board,
Chief Executive Officer and President
45
CERTIFICATION
I, Robert S. Taylor, certify that:
1. I have reviewed this annual report on Form 10-K of Superior Energy
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant's, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
SUPERIOR ENERGY SERVICES, INC.
Date: March 26, 2003 by: /s/ Robert S. Taylor
--------------------------------------
Robert S. Taylor
Chief Financial Officer
(Principal Financial and Accounting Officer)
46
SUPERIOR ENERGY SERVICES, INC. AND SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
Additions
--------------------------
Balance at the Charged to Balance
beginning of costs and Balances from at the end
Description the year expenses acquisitions Deductions of the year
- ---------------------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Allowance for doubtful accounts $ 4,057 $ 2,073 $ 133 $ 1,646 $ 4,617
Year ended December 31, 2001:
Allowance for doubtful accounts $ 2,292 $ 2,854 $ 3 $ 1,092 $ 4,057
Year ended December 31, 2000:
Allowance for doubtful accounts $ 2,892 $ 724 $ 81 $ 1,405 $ 2,292
47
INDEX TO EXHIBITS
Exhibit No. Seq. No.
- ----------- --------
DESCRIPTION
3.1 Certificate of Incorporation of the Company
(incorporated herein by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996).
3.2 Certificate of Amendment to the Company's
Certificate of Incorporation (incorporated herein
by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
3.3 Amended and Restated Bylaws (incorporated herein by
reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
4.1 Specimen Stock Certificate (incorporated herein by
reference to Amendment No. 1 to the Company's Form
S-4 on Form SB-2 (Registration Statement No.
33-94454)).
4.2 Registration Rights Agreement dated as of July 15,
1999 by and among the Company, First Reserve Fund
VII, Limited Partnership and First Reserve Fund
VIII, Limited Partnership (incorporated herein by
reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
4.3 Stockholders' Agreement dated as of July 15, 1999
by and among the Company, First Reserve Fund VII,
Limited Partnership and First Reserve Fund VIII,
Limited Partnership (incorporated herein by
reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
4.4 Indenture dated May 2, 2001, by and among SESI,
L.L.C., the Company, the Subsidiary Guarantors
named therein and the Bank of New York as trustee
(incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001), as amended by First Supplemental
Indenture, dated as of July 9, 2001, by and among
SESI, L.L.C., Wild Well Control, Inc., Blowout
Tools, Inc. and the Bank of New York, as trustee
(incorporated herein by reference to the Company's
Registration Statement on Form S-4 (Registration
No. 333-64946)) as amended by Second Supplemental
Indenture, dated as of September 1, 2001 by and
among SESI, L.L.C., Workstrings, L.L.C., Technical
Limit Drillstrings, Inc. and the Bank of New York,
as trustee (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
10.1 Superior Energy Services, Inc. 1995 Stock Incentive
Plan (incorporated herein by reference to Exhibit A
to the Company's Definitive Proxy Statement dated
June 25, 1997).
10.2 Superior Energy Services, Inc. 1999 Stock Incentive
Plan as amended (incorporated herein by reference
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999).
48
Exhibit No. Seq. No.
- ----------- --------
DESCRIPTION
10.3 Amended and Restated Credit Agreement dated as of
December 31, 2000 by and among SESI, L.L.C., the
Company, Bank One, Louisiana, National Association,
as agent, and other lenders specified therein
(incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 2000)
10.4 Employment Agreement between the Company and
Terence Hall (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1999).
10.5 Amended and Restated Employment and Non-Competition
Agreement between the Company and Robert Taylor
dated July 15, 2001 (incorporated herein by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).
10.6 Amended and Restated Employment and Non-Competition
Agreement between the Company and Kenneth Blanchard
dated July 15, 2001 (incorporated herein by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).
10.7 First Amendment to Amended and Restated Credit
Agreement dated as of May 2, 2001, among the
Company, SESI, L.L.C., Bank One, NA, as agent,
Wells Fargo Bank Texas, N.A., Whitney National
bank, and the other lenders specified therein
(incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 30, 2001).
10.8 Second Amendment to Amended and Restated Credit
Agreement dated as of November 14, 2001, among the
Company, SESI, L.L.C., Bank One, NA, as agent,
Wells Fargo Bank Texas, N.A., Whitney National
bank, and the other lenders specified therein
(incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 2001).
10.9 Third Amendment to Amended and Restated Credit
Agreement dated as of November 16, 2001 among SESI,
L.L.C., as Borrower, Superior Energy Services,
Inc., as Parent, Bank One, NA, as Agent, Wells
Fargo Bank Texas, N.A., as Syndication Agent,
Whitney National Bank, as Documentation Agent, and
the lenders party thereto (incorporated herein by
reference to the Company's Current Report on Form
8-K dated March 6, 2002).
10.10 Purchase Agreement, dated December 31, 2001 between
SESI, L.L.C. and Terence E. Hall (incorporated
herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001).
10.11 Superior Energy Services, Inc. 2002 Stock Incentive
Plan (incorporated herein by reference to the
Company's Definitive Proxy Statement in connection
with its 2002 Annual Meeting of Stockholders).
10.12 Fourth Amendment to Amended and Restated Credit
Agreement dated as of June 11, 2002 among SESI,
L.L.C., as borrower, Superior Energy Services,
Inc., as parent, Bank One N.A. as agent, Wells
Fargo Bank Texas, N.A. as syndication agent,
Whitney National Bank as documentation agent, and
the lenders party thereto (incorporated herein by
reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
49
Exhibit No. Seq. No.
- ----------- --------
DESCRIPTION
10.13 Fifth Amendment to Amended and Restated Credit
Agreement dated as of September 30, 2002 among
SESI, L.L.C., as borrower, Superior Energy
Services, Inc., as parent, Bank One N.A. as agent,
Wells Fargo Bank Texas, N.A. as syndication agent,
Whitney National Bank as documentation agent, and
the lenders party thereto (incorporated herein by
reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002).
10.14* Superior Energy Services, Inc. Directors' Stock Plan dated
April 30, 2000.
21.1* Subsidiaries of the Company.
23.1* Consent of KPMG LLP.
99.1* Certificate pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2* Certificate pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Filed herein
- ----------
50