US: company folds on receipt of class actions

Superior Offshore International, Inc. (the "Company") has announced that it filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), in the United States Bankruptcy Court for the Southern District of Texas (the "Court") (Case No. 08-32590-H2-11).

The Company will continue to operate its business as "debtor in possession" under the jurisdiction of the Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court.

But the recent history of the company shows a catastrophe that developed extremely quickly.

On 6th March, Schiffrin Barroway Topaz & Kessler, LLP, a law firm that specialises in class action law suits, announced an action against the company. It alleges "Superior Offshore and certain of its officers and directors with violations of the Securities Act of 1933. Superior Offshore is a provider of subsea construction and commercial diving services to the offshore oil and gas industry, serving operators internationally and domestically in the outer continental shelf of the U.S. Gulf of Mexico. More specifically, the Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that at the time of the issuance of the Registration Statement, the Company knew that its Gulf of Mexico operations were not able to meet goals and projections, which would adversely affect the Company for the foreseeable future; (2) that at the time of the Registration Statement that it would have to move into untested markets due to the decline in its Gulf of Mexico operations; (3) that it would have significant liquidity and debt issues even after the completion of the IPO; (4) that the Company lacked adequate internal and financial controls; and (5) that, as a result of the foregoing, the Company's Registration Statement was false and misleading at all relevant times.

"Beginning in August 2007, the Company began what would become a trend of shocking investors with press releases and revelations. The Company slowly released news indicating that it was not operating according to plan, was changing its core business to untested markets (such as deep water and international), and was having liquidity problems despite the large cash influx from the IPO. The Company released the news little by little over the ensuing months, shocking and angering investors who had relied upon the Company's statements at the time of the IPO. In response to these reports, shares of the Company's stock steadily declined, finally falling to $3.02 on January 22, 2008. This closing price represented a cumulative loss of $11.98, or over 79 percent, of the value of the Company's shares at the time of its IPO just months prior."

On 26th March, there was another announcement:

"Coughlin Stoia Geller Rudman & Robbins LLP (“Coughlin Stoia”) today announced that a class action has been commenced in the United States District Court for the Western District of Louisiana on behalf of purchasers of Superior Offshore International, Inc. (“Superior Offshore”) common stock pursuant or traceable to the Company’s April 20, 2007 Initial Public Offering (the “IPO” or “Offering”).

"The complaint charges Superior Offshore and certain of its officers and directors with violations of the Securities Act of 1933. Superior Offshore provides subsea construction and commercial diving services to the crude oil and natural gas exploration and production and gathering and transmission industries on the outer continental shelf of the Gulf of Mexico.

"The complaint alleges that on April 20, 2007, defendants conducted the IPO pursuant to a false and misleading Registration Statement and Prospectus filed with the Securities and Exchange Commission. Specifically, defendants failed to conduct an adequate due diligence investigation into the Company prior to the Offering. They also failed to reveal, at the time of the Offering, that the Company’s core business was not performing according to plan, that its core market in the Gulf of Mexico was in decline, and that defendants would be forced to immediately transform and reorganize the Company and enter into new, untested markets. As a result, at the time of the Offering, the Company’s business had already been and would continue to be adversely affected. On August 14, 2007, defendants revealed that the Company’s problems, which existed at the time of the Offering, would result in extremely disappointing results for the foreseeable near term and would force defendants to reorganize the Company. As a result, Superior Offshore’s stock price dropped from $13.46 to as low as $10.79 in two days. Then on November 14, 2007, Superior Offshore’s stock price again declined precipitously when defendants revealed that the Company was operating below its recently revised forecasts and that its core business was operating even worse than previously disclosed. On this news, Superior Offshore’s stock price dropped from $9.74 to as low as $6.56 per share in two days.

"Plaintiff seeks to recover damages on behalf of all purchasers of Superior Offshore common stock pursuant or traceable to the Company’s April 20, 2007 IPO. The plaintiff is represented by Coughlin Stoia, which has expertise in prosecuting investor class actions and extensive experience in actions involving financial fraud."

Then on the 1 April, another firm, Johnson & Perkinson, issued another action. They say "rhe complaint charges the defendants with making a series of materially false and misleading statements in the Registration Statement and Prospectus issued in connection with the IPO, in violation of the Securities Act of 1933."

On that day, the company filed a report making it plain that it was in serious trouble:

[The Company] announced it was unable to file its Annual Report on Form 10-K for the year ended December 31, 2007 (the "Form 10-K") within the prescribed time period because the Company's management needs additional time to complete the financial statement review and approval process and needs to provide additional documentation to its independent registered public accounting firm, KPMG LLP, in order to resolve certain pending items. In addition, management's negotiations to obtain additional financing in order to address the Company's liquidity position, as further described below, has contributed to this delay. If the Company is unable to obtain adequate additional or alternate financing, the Company expects that KPMG LLP would be required to include an explanatory paragraph in their opinion with respect to the Company's financial statements for the year ended December 31, 2007 expressing doubt about the ability of the Company to continue as a going concern. Even if the Company obtains additional financing, KPMG LLP may still conclude that it is necessary to include such a paragraph in its opinion.

Liquidity and Capital Resources

The Company presently has extremely limited liquidity and requires substantial additional financing to fund its operations and pay its obligations. As of March 31, 2008, the Company estimates on a preliminary basis that its total current liabilities exceeded its total current assets, before considering current deferred tax assets, by approximately $7.0 million. As of March 31, 2008, the Company had less than approximately $1.8 million outstanding under its senior secured credit facility with JPMorgan Chase Bank, N.A. The Company is currently in default under such credit facility. The Company's borrowing base capacity under such credit facility, which is affected by the composition of the Company's eligible domestic accounts receivable, was not sufficient to enable the Company to borrow significant additional funds under the facility as of March 31, 2008.

Additional Financing

On February 1, 2008, the Company retained Tudor, Pickering, Holt & Co. Securities, Inc. as the Company's financial advisor to assist the Company's Board of Directors in exploring a range of financial and strategic alternatives. These alternatives include, among others, obtaining additional or alternate sources of debt or equity financing, a sale or merger of the Company or other strategic transaction, a sale of certain company assets and execution of the Company's business plan.

In the event that the Company is unable to obtain additional financing in early April 2008, the Company will need to sell additional assets or obtain capital from other sources to fund its operations and pay its obligations.

Additional indebtedness or equity financing may not be available to the Company or, if available, such additional indebtedness or equity financing may not be available on a timely basis or on terms acceptable to the Company. In addition, the Company can provide no assurance as to the timing of any asset sales or the proceeds that could be realized by the Company from any such asset sales. Failure to obtain adequate financing or to raise funds from asset sales, should the need develop, could impair the Company's ability to meet its working capital requirements, to fund vessel charter obligations as they become due, to make necessary capital expenditures, to repay the Company's debts as they come due and otherwise to operate its business, and ultimately could require the Company to liquidate or initiate bankruptcy proceedings.

Senior Management Changes

As previously announced, on January 27, 2008 James J. Mermis resigned as Chief Executive Officer and Director effective on such date, and on February 8, 2008 Roger D. Burks resigned as Chief Financial Officer and Director, effective March 31, 2008. On January 27, 2008, the Board of Directors of the Company appointed E. Donald Terry, previously an independent director of the Company, to serve as Interim President and Chief Executive Officer of the Company until a successor is named. On February 11, 2008, the Board of Directors of the Company appointed Thomas E. Daman to serve as the Company's Executive Vice President and Chief Financial Officer effective as of April 1, 2008.

Cost Savings Initiatives

Since the appointment of Mr. Terry as Interim President and Chief Executive Officer, the Company has undertaken a number of initiatives to reduce costs and improve its efficiency and results of operations. In January 2008, the Company terminated the charter for the Adams Surveyor. In February 2008, the Company restructured its ROV division and terminated approximately 43 persons in that division. In March 2008, the Company closed its fabrication operation and approximately 80 individuals employed at that facility were terminated or resigned. In addition, in March 2008 the Company terminated approximately 11 persons on its corporate staff. Because of the timing of these initiatives, the benefit of the cost savings will not be fully reflected in the Company's results of operations until the second quarter of 2008. The Company is continuing to evaluate its operations and cost structure in an effort to identify additional cost savings.

Asset Sales and Contract Terminations

As previously announced, in January 2008, the Company sold the Superior Achiever, which was under construction, to Hornbeck Offshore Services LLC, or "Hornbeck," for approximately $70.0 million, the proceeds of which the Company used, among other things, to repay in full its term loan obligation to Fortis Capital Corp. and to repay a portion of its borrowings under its senior secured credit facility with JPMorgan Chase Bank. Following the sale, the Company has no further obligations to the shipbuilder with respect to the construction of the vessel; however, if certain construction costs for the Superior Achiever exceed $120.0 million, the Company will reimburse Hornbeck for the amount of such excess, up to $8.0 million. In addition, in connection with the sale of the Superior Achiever, the Company and Hornbeck entered into a five-year time charter for the Superior Achiever, or under certain circumstances, the HOS Iron Horse. The Company has the option to terminate the charter by giving 90 days' advance notice and paying a termination fee prior to the end of each six-month period within the term. The Company has provided Hornbeck with an $8.0 million cash secured letter of credit to secure its obligations to Hornbeck.

On February 29, 2008, the Company sold its subsidiary, Superior Offshore South Africa (Pty) Ltd., which owns the subsea construction, commercial diving, offshore crude oil and natural gas logistical support and marine salvage businesses that were acquired in December 2006 from Subtech Diving and Marine, in exchange for the settlement of a remaining liability of approximately $2.5 million under the related purchase agreement.

The Company has received a refundable deposit of $1.8 million for the sale or charter of the Gulf Diver V, one of the Company's four-point vessels, from a related party. The Company expects to consummate the sale, which is subject to lender approval and definitive documentation, in early April 2008. The Company may be required to recognize an impairment of up to $2.0 million in connection with the sale of the vessel. The Company may sell certain additional assets to generate cash to fund its operations and to pay its obligations. The assets that may be sold include, among others, two work class ROVs, and certain equipment previously used in the Company's fabrication operations.

Operations Update

The Company has entered into a contract for the Superior Endeavor to work in Saudi Arabia for approximately one year. The vessel is currently in transit and is expected to arrive in approximately two weeks.

The Company has entered into a subcharter for the Gulmar Condor, which the Company has chartered until April 2009, to work in the U.S. Gulf of Mexico for approximately six months, beginning March 10, 2008.

On March 24, 2008, the charter for the Gulmar Falcon was terminated by the vessel owner due to the Company's inability to pay its obligations thereunder when due. Although the vessel owner has terminated the charter for Gulmar Falcon, the Company is continuing to use the vessel on a short term basis until it completes its current project.

The Seamec III, which the Company has chartered until July 2008, is currently in Trinidad. The Company currently expects the vessel to return to the U.S. Gulf of Mexico, upon settlement of certain vendor invoices in the amount of approximately $1.0 million.

During the first quarter of 2008, the Company experienced very low utilization and day rates for its four point vessels, which are used in the U.S. Gulf of Mexico.

First Quarter of 2008 Update

The Company has not yet finalized its financial statements for the three months ended March 31, 2008. Based on preliminary unaudited financial information that is not yet complete and may materially change, the Company currently expects that its revenues for the first quarter of 2008 will not exceed $21.0 million and that its net loss for the first quarter of 2008 will be more than $32.0 million. As described above under "Cost Savings Initiatives", the Company has undertaken a number of cost savings initiatives the benefit of which will not be fully reflected in the Company's results of operations until the second quarter of 2008. If the Company incurs any pre-tax loss for the remainder of 2008 in excess of the amount recognized in the first quarter of 2008, management does not expect the Company to recognize any additional tax benefits associated with that loss.

The Company expects to record the following charges in the first quarter of 2008, which are reflected in the calculation of the Company's estimated net loss for the quarter disclosed above:

The foregoing estimates include forward-looking statements and are subject to significant risks and uncertainties. Accordingly, the Company's final results for the first quarter of 2008 may be materially different than the foregoing estimates.

Pending Litigation

As previously announced, several putative class-action lawsuits have been filed against the Company alleging violations of the federal securities laws. In addition, two shareholder derivative lawsuits have been filed alleging violations of various laws. The Company believes that each of these lawsuits is without merit and the Company will defend itself vigorously.

Preliminary Unaudited Results of Operations -- Year Ended December 31, 2007

The following results of operations are preliminary and have not been audited or otherwise reviewed by the Company's independent auditors or the Company's Audit Committee. In addition, the following preliminary unaudited results of operations have not been reviewed by all members of the Company's management that are expected to review such information before the filing of the Form 10-K. The following preliminary unaudited results of operations constitute forward-looking statements and are subject to significant risks and uncertainties. Accordingly, the Company's final, audited results of operations could be materially different from the preliminary unaudited results set forth below.

Revenues. The Company anticipates reporting revenues for the year ended December 31, 2007 of $260.8 million compared with $243.4 million for the year ended December 31, 2006, an increase of $17.4 million. The Company anticipates reporting that total vessel revenue days were 2,205 in 2007 compared with 2,686 in 2006, a decrease of 17.9%; that owned and long-term charter vessel revenue days were 1,164 in 2007 compared with 1,309 in 2006, a decrease of 11.1%, and that short-term charter vessel revenue days were 1,041 in 2007 compared with 1,377 in 2006, a decrease of 24.4%. Vessel utilization was 54% in 2007 compared to 89% in 2006. The increase in the Company's revenues from the year ended December 31, 2006 to the year December 31, 2007 was mainly due to the Company's British Petroleum Trinidad & Tobago project, which commenced early in the third quarter of 2007. In addition, the Company's revenues in 2007 were favorably affected by continued provision of diving personnel and technical expertise on vessels and platforms owned and operated by third parties. Revenues were negatively affected by the drydocking of the Superior Endeavour for scheduled upgrades beginning in early February 2007 and the drydocking of the Gulmar Falcon for scheduled upgrades beginning in July 2007. The Company placed the Superior Endeavour and the Gulmar Falcon back in service in September 2007 and October 2007, respectively. The Superior Endeavour, despite re-entering service in the third quarter of 2007, did not generate revenues until early October, while the Gulmar Falcon did not generate revenues until early November. The Company anticipates reporting that revenues relating to the Company's fabrication facility for the year ended December 31, 2007 were $7.8 million compared with $13.3 million for the year ended December 31, 2006, a decrease of $5.5 million, due to a decrease in the number of Gulf of Mexico projects requiring fabrication.

Costs of Revenues (excluding depreciation and amortization). Costs of revenues consist mainly of vessel charter costs, labor costs and related employee benefits, consumables and third-party equipment rentals. The Company anticipates reporting that costs of revenues for the year ended December 31, 2007 were $215.8 million compared with $141.8 million for the year ended December 31, 2006, an increase of $74.0 million. This increase was substantially due to increased third party equipment and vessel rentals and related mobilization of $123.1 million in 2007 compared with $76.0 million for 2006, and a $7.2 million charge with respect to the charter for the Toisa Puma and its subsequent termination. In addition, labor costs and related employee benefits costs were $59.7 million for the year December 31, 2007 compared with $33.1 million for the year ended December 31, 2006, due to the addition of the Company's foreign subsidiaries. Increased downtime for certain of the Company's vessels due to equipment upgrades or low utilization also contributed to higher costs, as these vessels were unable to generate sufficient revenues to offset labor and other operating costs associated with the vessels.

Operating Expenses. Operating expenses consist of selling, general and administrative costs not directly related to a specific project or job, depreciation and amortization, disposal of assets, insurance and bad debt expense. The Company anticipates reporting that operating expenses for the year ended December 31, 2007 were $73.5 million compared with $27.4 million for the year ended December 31, 2006, an increase of $46.1 million. The Company anticipates reporting that this increase was attributable to several factors: salaries, labor costs and related employee benefits increased $4.9 million due to increases in salaries and the size of the Company's staff; stock based compensation increased $12.6 million due to awards made under the 2007 stock incentive plan; professional fees increased $8.5 million due to reporting and other obligations under the Securities Exchange Act of 1934, compliance with the Sarbanes-Oxley Act, as well as several financing transactions; an impairment charge of $4.3 million on the Gulf Diver IV, which in December 2007 management decided to sell; and bad debt expense of $12.2 million due to write offs associated with four customers due to contract disputes and operational considerations. The Company also recorded a cash severance charge of $1.0 million and stock based compensation charge of $4.9 million in connection with the resignations of R. Joshua Koch, Jr. and Patrice Chemin from the Company in the fourth quarter of 2007. In addition, the Company is attempting to receive final documentation from two foreign-owned companies that operated on its behalf in U.S. waters in 2005, 2006 and 2007. This documentation, which the Company currently anticipates receiving, is to mitigate the income taxes due on these foreign companies' U.S. operations. If the Company is unable to receive such documentation, payments of approximately $3.2 million will be made to the U.S. Internal Revenue Service on behalf of the foreign companies and rebilled to one of the two companies and the Company anticipates a charge of $1.5 million will be taken with respect to the other company.

Non-Operating Expenses. The Company anticipates reporting that interest income (expense), net for the year ended December 31, 2007 was $(1.0) million compared with $0.1 million for the year ended December 31, 2006, an increase of $(0.9) million. Loss on extinguishment of debt was $4.6 million for the year ended December 31, 2007, compared with $0 for the year ended December 31, 2006, due to the write off of debt issuance costs of $3.9 million upon early payment of the Company's senior secured term loan and a commitment fee of $0.7 million with respect to a potential new term loan.

Provision (Benefit) for Income Taxes. The Company anticipates reporting that benefit for income taxes for the year ended December 31, 2007 was $(13.8) million compared with a provision of $25.8 million for the year ended December 31, 2006, a decrease of $39.6 million. This decrease was due to lower profitability. The Company anticipates reporting that its effective tax rate was 40.4% for the year ended December 31, 2007 and 34.8% for the year ended December 31, 2006.

On 2nd April a website called "benchmarkjournal.com" announced that it was "tracking DEEP." That website claims to undertake detailed and in depth analysis of its "targets" - but it appears to be a tip sheet. Our own interest in the site was heightened when we were unable to find any contact information including an indication of which country it operates in or from. There are email addresses and an on-site form. The site has a registration process but no fees, again raising our interest in its credibility.

By then there must have been blood in the water because on 11 April, yet another law firm, using language that may be regarded as somewhat sly, announced another class action: "The Law Office of David R. Chase, P.A. (the "Firm") announces that it is investigating alleged securities violations by Superior Offshore International, Inc. ("Superior Offshore"), and certain of its officers, directors and the underwriters of its IPO. The Firm currently represents a Superior Offshore shareholder who has suffered substantial monetary loss.

"Several class action lawsuits naming Superior Offshore, among others, have been filed in the United States District Courts in Texas and Louisiana. The complaints charge the defendants with making a series of materially false and misleading statements in the Registration Statement and Prospectus issued in connection with the IPO in violation of the Securities Act of 1933.

"Individuals, families, trusts and other entities that purchased Superior Offshore common stock between April 20, 2007 and January 9, 2008, inclusive, have the opportunity to participate as Lead Plaintiffs in the lawsuit. To do so, you must apply to serve in that capacity by April 28, 2008."

Things were going from bad to worse and on 23 April, the company received a de-listing notice from NASDAQ. Announcing the notice, the company said " that it received a delisting notice from the Nasdaq's Listing Qualifications Department citing the Company's failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2007 (the "Form 10-K") in accordance with the filing requirements for continued listing set forth in Marketplace Rule 4310(c)(14). The notice indicates that the Company's common stock is subject to delisting from The Nasdaq Stock Market at the opening of business on April 28, 2008, unless the Company requests a hearing in accordance with the Nasdaq Marketplace Rules. The Company does not intend to request such a hearing."

On 24th April, the Company made another announcement: "James Perskey, Leon Codron and E. Donald Terry have resigned from the Company's board of directors. Mr. Terry also resigned as the Company's president and chief executive officer. Thomas E. Damon has resigned as the Company's executive vice president and chief financial officer, and Steven J. Singer has resigned as the Company's executive vice president and general counsel. Wayne M. Rose has resigned as the Company's senior vice president - commercial and David Weinhoffer has been terminated as the Company's executive vice president; however Mr. Rose and Mr. Weinhoffer each have been rehired by the Company to assist in the wind-down process.

"The Company's board of directors has appointed H. Malcolm Lovett, Jr. as a director and as its chief restructuring officer. In that capacity, Mr. Lovett will perform the duties and assume the responsibilities of the president of the Company.

"Strategic Capital Corporation, a company controlled by Mr. Lovett, has been engaged to provide financial advisory and restructuring services to the Company.

"As a result of the resignations of the directors and officers described above and the appointment of Mr. Lovett as a director and chief restructuring officer, the Company's board of directors currently consists of Mr. Lovett and Eric Smith, and Mr. Lovett is the only executive officer of the Company.

"The Company has ceased all ongoing operations other than those deemed necessary to ensure (i) the public safety; (ii) the health and safety of the Company's employees; and (iii) an orderly transition of certain projects to its customers. All of the Company's employees have been terminated except for those necessary to assist in the wind-down of the Company's affairs."

On 25th April, the company filed for protection under Chapter 11 of the US Bankruptcy Code - that is a form of voluntary arrangement and administration under which the company can continue to operate under the supervision of the Court which, in practice, means an administrator.

There are dark forces at work here: the stock was heavily pumped - but not just on the pump and dump side of the industry. If you feel like paying to watch it, you can see the CNBC stock-tip programme Mad Money here - http://www.cnbc.com/id/15840232?video=259297009 - when presenter Jim Cramer said the IPO stock was a definite buy. That led to his comments being embellished and pushed around the web using web sites such as "maddmoney.blogspot.com"

That website said "

Cramer Says IPO Superior Offshore International Inc Is A Buy

Cramer was out telling investors that Superior Offshore International, Inc. (DEEP) a company involved in subsea-construction services, is set to come public under the symbol DEEP and should start trading this Friday. Jim likes the earnings and fundamentals and the IPO price range of $14 to $16 on this company. Jim is also bullish on DEEP because competitors The Halliburton Company (HAL) and Nabors Industries Ltd. (NBR) are doing good right now. Jim told investors to buy 100 shares of DEEP by Wednesday or Thursday and he would pay up to $20. Most of DEEP's business is in the Gulf of Mexico, but it is expanding to deepwater, he said. And the company is not just about new drilling, it also repairs and maintains current drilling activity, Cramer stated. "There are still years of repair work left after Hurricane Katrina, and hurricane season is supposed to pick up this year," he said. "It could be your play for repairing infrastructure after storms hit." Cramer sees a great company here with DEEP in a hot sector."

The IPO was in April 2007. By April 2008, the company had a USD7 million shortfall and was selling assets to try to stay in business. Business Week's stock chart shows a thinly traded stock which never reached USD0.30. On 25th April its stock dipped to its lowest: USD0.18. But that was also the day that its stock was most heavily traded: Morning Star.Com said "This stock has experienced unusually high trading volume of 1,164,572 shares today; its average daily volume over the previous 30 days was 487,130 shares."

It's a long way from the morning of 5 July 2007. That was the date that Louis E. Schaefer Jr., Chairman of Superior Offshore International Inc., presided over the opening bell at Nasdaq - with all the familiar smiles and back-slapping that happens on those occasions. You can see the pictures at http://www.nasdaq.com/reference/200707/market_close_070507.stm but we can't bring them to you for copyright reasons.