UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002
Commission file number 0-30723
OSCA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-0868136
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
156 COMMISSION BLVD.
LAFAYETTE, LA 70508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 337-837-6047
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class A - 6,965,744 Shares as of May 1, 2002
Class B - 7,900,000 Shares as of May 1, 2002
OSCA, INC.
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 (Unaudited) 2
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 3
(Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 4
(Unaudited)
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
1
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OSCA, INC.
CONSOLIDATED BALANCE SHEETS
(thousands)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 1,221 $ 8,487
Restricted cash 7,228 --
Accounts and notes receivable, less allowance for doubtful
accounts of $693 at March 31 and $543 at December 31 32,856 37,497
Inventories 28,564 28,490
Prepaid expenses and other current assets 3,944 1,748
Deferred income taxes 8,670 2,311
--------- ---------
Total current assets 82,483 78,533
Property and equipment, net 57,113 51,256
Goodwill 6,572 6,572
Covenants not to compete, less accumulated amortization of $1,027
at March 31 and $882 at December 31 2,098 143
Other assets 1,322 1,282
--------- ---------
Total Assets $ 149,588 $ 137,786
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,678 $ 15,511
Litigation reserve 13,408 --
Accrued liabilities 5,527 5,242
Income taxes payable 85 2,117
Current portion of notes payable 118 118
Due to Great Lakes 2,217 4,406
--------- ---------
Total current liabilities 37,033 27,394
Notes payable 36,039 27,118
Other long-term liabilities 1,893 970
Deferred income taxes 5,025 3,714
--------- ---------
Total liabilities 79,990 59,196
--------- ---------
Stockholders' equity:
Class A common stock, $.01 par value, 25,000,000 shares authorized, 6,957,692
shares issued and outstanding at March 31, 2002, 6,945,019 shares issued
and outstanding at December 31, 2001 69 69
Class B common stock, $.01 par value, 40,000,000 shares authorized, 7,900,000
shares issued and outstanding at March 31, 2002 and December 31, 2001 79 79
Additional paid-in capital 91,134 90,876
Retained earnings (deficit) (19,994) (10,565)
Accumulated other comprehensive (loss) (1,690) (1,869)
--------- ---------
Total stockholders' equity 69,598 78,590
--------- ---------
Total Liabilities and Stockholders' Equity $ 149,588 $ 137,786
========= =========
See notes to condensed consolidated financial statements.
2
OSCA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
-------- --------
(UNAUDITED)
Net revenue $ 35,570 $ 43,757
Operating Expenses:
Cost of goods sold and services 29,473 32,464
Selling, general and administrative 6,219 5,394
Litigation verdict 13,541 --
Amortization of intangibles 147 99
-------- --------
Total operating expenses 49,380 37,957
-------- --------
Operating income (loss) (13,810) 5,800
Interest expense (324) (461)
Interest income 23 64
Foreign currency losses (214) (277)
Other expense, net (121) (578)
-------- --------
Income (loss) before income taxes (14,446) 4,548
Income tax expense (benefit) (5,017) 1,728
-------- --------
Net income (loss) $ (9,429) $ 2,820
======== ========
Earnings (loss) per share:
Basic ($ 0.63) $ 0.19
Diluted ($ 0.63) $ 0.19
Weighted average shares outstanding 14,851 14,840
Weighted average shares outstanding
assuming dilution 14,851 14,911
See notes to condensed consolidated financial statements.
3
OSCA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (9,429) $ 2,820
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization of intangibles 2,785 2,144
Deferred income taxes (5,048) 1
Loss on sale of property and equipment 78 --
Tax benefit on exercised stock options 49 --
Changes in operating assets and liabilities, net of effect of business acquired:
Accounts and notes receivable, net 4,641 (3,765)
Inventories (38) 660
Income taxes (2,032) --
Other current assets (2,196) 150
Accounts payable 167 5,905
Litigation reserve 13,408 --
Due to Great Lakes (2,189) 260
Accrued liabilities (15) 652
Other (911) (331)
-------- --------
Net Cash (Used in) Provided by Operating Activities (730) 8,496
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (6,994) (3,301)
Acquisition of business (1,879) --
Cash deposited in restricted cash account related to BJ Merger (7,228) --
Proceeds from the sales of property and equipment 256 21
-------- --------
Net Cash Used in Investing Activities (15,845) (3,280)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 209 --
Net borrowings (repayments) of notes payable 8,921 (3,842)
-------- --------
Net Cash Provided by (Used in) Financing Activities 9,130 (3,842)
-------- --------
Net (decrease) increase in Cash and Cash Equivalents (7,445) 1,374
Cash and Cash Equivalents at Beginning of Year 8,487 3,551
Effect of exchange rate changes on cash and cash equivalents 179 60
-------- --------
Cash and Cash Equivalents at End of Period $ 1,221 $ 4,985
======== ========
See notes to condensed consolidated financial statements.
4
OSCA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of OSCA, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes necessary for
a comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are necessary
for a fair financial statement presentation. The results for the interim period
are not necessarily indicative of the results to be expected for the year.
2. PENDING MERGER AND ACQUISITIONS
Pending Merger
On February 20, 2002, OSCA announced that it entered into a definitive
merger agreement with BJ Services Company. Under the terms of the agreement, BJ
Services will acquire all of the outstanding shares of OSCA for $28.00 per share
in cash. A special committee of independent members of OSCA's Board reviewed the
transaction on behalf of the public stockholders and recommended the transaction
to the complete OSCA Board, which then unanimously approved the merger
agreement. The transaction has a total equity value of approximately $420.0
million.
Great Lakes Chemical Corporation, which owns approximately 53% of
OSCA's outstanding Common Stock and holds approximately 92% of the voting power,
has delivered its written stockholder consent approving the transaction with BJ
Services. The Great Lakes consent constitutes sufficient action by OSCA
stockholders to approve the transaction.
The transaction is subject to regulatory approvals and OSCA has
received those approvals including those under the Hart-Scott-Rodino Antitrust
Improvements Act. OSCA has filed an information statement describing the
transaction with the Securities and Exchange Commission and mailed such
statement to OSCA stockholders on May 2, 2002. OSCA anticipates the merger to
close on May 31, 2002. There can be no assurance that the merger will be
consummated in accordance with the terms of the merger agreement, if at all.
Ancor Services, Inc.
On January 3, 2002, OSCA completed the acquisition of substantially all
of the assets of Ancor Services, Inc. Ancor provided land based well stimulation
products and services to oil and natural gas production companies in East Texas
and North Louisiana. The assets acquired included a cement plant, specialized
vehicles, shop trucks and office furniture. The acquisition has been accounted
for using the purchase method of accounting pursuant to Statement of Financial
Accounting Standards No. 141,
5
Business Combinations. Ancor's operating results since January 3, 2002 have been
consolidated with the operating results of OSCA. The acquired assets were
recorded at fair value with no goodwill being recorded. The purchase price for
the assets of approximately $1.9 million was paid utilizing available cash. As
part of the acquisition, OSCA also compensated the owners of Ancor for entering
into noncompete agreements and for performing consulting services. OSCA paid
$0.9 million toward the noncompete agreements at closing and has an obligation
to pay another $1.2 million over the next four years. The obligation due within
the next year of $0.3 million is included in accrued expenses and the long-term
obligation of $0.9 million is recorded in other long-term liabilities. The
consulting services of $0.8 million were paid at closing.
3. RESTRICTED CASH
OSCA has deposited funds into a Rabbi Trust to cover some, but not all
of its obligations to senior management of OSCA should a change of control and
related termination of employment occur as a result of the merger with BJ
Services. The manager of the Rabbi Trust has invested the funds into a money
market account. If the merger is not completed, the funds will be returned to
OSCA's unrestricted cash account.
4. INVENTORIES
The major components of OSCA's inventories are as follows:
MARCH 31, DEC 31,
2002 2001
-------- --------
Downhole Completion Tools
Finished products $ 18,342 $ 16,544
Raw materials 600 609
Reserves for obsolescence (900) (800)
Completion Fluids
Finished products 9,373 10,597
Supplies 744 763
Reserves for obsolescence (450) (450)
Completion Services
Finished products 607 973
Supplies 248 254
-------- --------
$ 28,564 $ 28,490
======== ========
5. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001 with early adoption permitted for companies
with fiscal years beginning after March 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
statements. Other intangible assets will continue to be amortized over their
useful lives.
6
OSCA adopted the new rules on accounting for goodwill and other
intangible assets effective January 1, 2002. OSCA has not yet performed its
transitional impairment test in conjunction with the adoption of SFAS 142.
The following information relates to intangible assets still subject to
amortization under SFAS 142:
Estimated amortization expense: (in thousands)
For the year ended 12/31/02 $578
For the year ended 12/31/03 485
For the year ended 12/31/04 460
For the year ended 12/31/05 360
For the year ended 12/31/06 360
The following table provides the comparable effects excluding the prior
amortization expense of goodwill:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
--------- ---------
(in thousands, except per share data)
Reported net income (loss) before change in
accounting principle $ (9,429) $ 2,820
Add back: goodwill amortization (net of tax) -- 43
--------- ---------
Adjusted net income (loss) (9,429) 2,863
========= =========
Reported basic earnings (loss) per share before
change in accounting principle ($ 0.63) $ 0.19
Add back: goodwill amortization (net of tax) -- --
--------- ---------
Adjusted basic earnings (loss) per share ($ 0.63) $ 0.19
========= =========
Reported diluted earnings (loss) per share before
change in accounting principle ($ 0.63) $ 0.19
Add back: goodwill amortization (net of tax) -- --
--------- ---------
Adjusted diluted earnings (loss) per share ($ 0.63) $ 0.19
========= =========
6. LITIGATION
On September 18, 2000, OSCA was served with notice that a lawsuit was
filed against it and other named defendants on September 1, 2000 in the District
Court of Harris County, Texas. The action is brought by certain underwriting
syndicates of Lloyd's of London who claim to be subrogated to the claim of their
insureds, Newfield Exploration Company, Apache Oil Corporation, Continental Land
& Fur, and Fidelity Oil ("Plaintiffs"). The other defendants include High
Pressure Integrity, Inc. and Chalmers, Collins & Alwell, Inc. On September 8,
2000, OSCA filed a lawsuit against the Plaintiffs and the other defendants in
the United States District Court, Western District of Louisiana,
Lafayette-Opelousas Division. Other actions have also been filed in connection
with the same circumstances. All actions have now been consolidated into one
proceeding in the United States District Court, Southern District of Texas.
7
The lawsuits relate to a blowout of a well situated in the Gulf of
Mexico, offshore Louisiana, for which OSCA and others were engaged to perform
specific workover operations. In the Texas case, Plaintiffs seek damages,
interest and other costs in the approximate amount of $21.5 million, alleging
that OSCA and the other defendants breached their contracts to perform workover
operations, and were negligent in performing those operations. OSCA alleges
negligence against the Plaintiffs and other defendants and seeks damages,
interest, costs and general and equitable relief. OSCA filed a third party
demand against its underwriters and insurance broker in support of coverage of
claims asserted against OSCA in the Newfield matter.
On April 4, 2002, a Federal Court jury in Houston, Texas reached a
verdict in the lawsuit against OSCA and other defendants. The jury found OSCA
and the other defendants responsible for those claims and found OSCA's share of
the damages to be approximately $13.3 million. A charge of $13.5 million has
been recorded in the first quarter of 2002, which includes $0.2 million of legal
fees incurred during the quarter.
In connection with the lawsuit, OSCA asserted claims against its
insurers and insurance brokers in support of insurance coverage for this
incident. OSCA's insurers have denied coverage for this incident and a related
trial on these insurance coverage claims is scheduled to begin on May 20, 2002.
The court has not yet entered a final judgment on the liability claim and OSCA
does not expect final judgment to be entered until completion of the related
insurance trial. Any recoveries as a result of the insurance trial will be
recognized in the period in which recovery occurs.
7. LONG-TERM DEBT
During the quarter ended March 31, 2002, OSCA borrowed approximately
$8.9 million under its $40.0 million credit facility with a bank. These
borrowings resulted in $35.9 million being outstanding as of March 31, 2002. The
borrowings were used to fund the restricted cash (note 3) and the Ancor
acquisition (note 2). As a result of the litigation verdict (note 6), OSCA was
in violation of covenants related to funded indebtedness and fixed charge
coverage ratios. On April 30, 2002, the lenders granted OSCA a modification in
the calculation of those two covenants which brought OSCA into compliance.
8. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
------- -------
Net income (loss) $(9,429) $ 2,820
Foreign currency translation 179 (110)
------- -------
Comprehensive income (loss) $(9,250) $ 2,710
======= =======
8
9. EARNINGS (LOSS) PER SHARE
The computation of basic and diluted earnings (loss) per share is
determined by dividing net income (loss) by the number of shares as follows (in
thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
-------- --------
Numerator:
Net income (loss) $ (9,429) $ 2,820
======== ========
Denominator:
Weighted - average shares- basic 14,851 14,840
Effect of dilutive securities- stock options -- 71
-------- --------
Weighted-average shares- diluted 14,851 14,911
======== ========
Basic earnings (loss) per share $ (0.63) $ 0.19
======== ========
Diluted earnings (loss) per share $ (0.63) $ 0.19
======== ========
Restricted stock and options to purchase 101,548 shares of OSCA's
common stock were not included in the computation of diluted earnings (loss) per
share for the three months ended March 31, 2002 as the effect would have been
antidilutive due to the net loss for the period.
10. SEGMENT INFORMATION
OSCA is organized into three global business segments:
- Completion Fluids,
- Completion Services and
- Downhole Completion Tools.
The segments are organized to offer a distinct but synergistic group of
products, technology and services.
OSCA evaluates performance and allocates resources based on operating
income which represents net revenue less cost of sales and allocated selling,
general and administrative expenses. Intersegment net revenue and transfers are
recorded at OSCA's cost, and therefore there is no intercompany income or loss
recorded.
9
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
-------- --------
Net revenues by segment to external customers:
Completion Fluids $ 10,347 $ 17,346
Completion Services 13,027 12,608
Downhole Completion Tools 12,196 13,803
-------- --------
$ 35,570 $ 43,757
======== ========
Segment operating income (loss):
Completion Fluids $ (449) $ 1,479
Completion Services (722) 1,860
Downhole Completion Tools 1,544 3,249
-------- --------
Total operating income of reportable segment 373 6,588
Corporate and Other (14,183) (788)
-------- --------
Operating income (loss) (13,810) 5,800
Interest expense, net (301) (397)
Other expense, net (335) (855)
-------- --------
Income (loss) before income taxes $(14,446) $ 4,548
======== ========
11. CONTINGENCIES
OSCA is partially self-insured for employee health insurance claims and
generally incurs a maximum of $80,000 per employee under medical claims. While
OSCA has workers compensation and automobile liability insurance coverage, both
policies have a deductible of $250,000 per incident. Although OSCA believes that
adequate reserves have been provided for expected liabilities arising from its
insurance obligations, management's estimates of these liabilities may change in
the future as circumstances warrant.
OSCA may be subject to various legal proceedings, claims and litigation
arising from a variety of matters including governmental regulations,
environmental matters, commercial matters, product liability, personal injury,
workers' compensation claims and other matters arising out of the ordinary
course of its business. In general, while the effect on future financial results
is not subject to reasonable estimation because considerable uncertainty exists,
in the opinion of management, the resolution of these legal proceedings and
claims will not have a material adverse effect on OSCA's financial position,
liquidity or results of operations.
10
12. NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS No. 121, Accounting for Impairment of
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. OSCA's adoption of SFAS 144 has not had a material impact on
its financial position and results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with OSCA's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
Annual Report on Form 10-K and the unaudited interim consolidated financial
statements included elsewhere in this report.
The following table sets forth the percentage relationship to net
revenue of certain income statement items for OSCA's operations:
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
------ ------
(%) (%)
Net revenue 100.0 100.0
Operating expenses:
Cost of goods sold and services 82.8 74.2
Selling, general & administrative 17.5 12.3
Litigation verdict 38.1 --
Amortization of intangibles 0.4 0.2
------ ------
Operating income (loss) (38.8) 13.3
Interest expense (0.9) (1.1)
Interest income -- 0.1
Foreign currency losses (0.6) (0.6)
Other expense, net (0.3) (1.3)
------ ------
Income (loss) before income taxes (40.6) 10.4
Income tax expense (benefit) (14.1) 4.0
------ ------
Net income (loss) (26.5) 6.4
====== ======
RESULTS OF OPERATIONS
OSCA is organized into three global business segments:
- Completion Fluids,
- Completion Services and
- Downhole Completion Tools.
The segments are organized to offer a distinct but synergistic group of
products, technology and services.
The Completion Fluids segment sells and recycles clear completion
fluids and performs related fluid maintenance services, such as filtration and
reclamation. OSCA also provides a broad line of specially formulated and
customized completion fluids. Completion fluids are used to control well
12
pressure, clean the well subsequent to drilling activities and facilitate other
completion activities, while minimizing reservoir damage
The Completion Services segment provides:
- sand control pressure pumping,
- marine well services and
- coiled tubing services to perform gravel packing, frac packing
and well stimulation.
The purpose of sand control pressure pumping is to force fluids and
gravel pack sand into the well to act as a downhole filter to inhibit the flow
of sand into the well. Coiled tubing is utilized to convey chemicals that
stimulate the well or deliver downhole equipment during well completion, or
during the production phase in order to stimulate well production rates.
Completion services are provided either by portable equipment placed directly on
a well, rig or platform or delivered via a fleet of advanced marine vessels.
The Downhole Completion Tools segment designs, builds and installs
downhole completion tools for wells that are primarily used to control the
migration of reservoir sand into the well. The downhole completion tools help to
prevent the deterioration of the reservoir.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Net Revenue. Revenues by business segment are as follows:
THREE MONTHS ENDED % INCREASE
MARCH 31, (DECREASE)
------------------------- ----------
2002 2001
-------- --------
(in thousands)
Completion Fluids $ 10,347 $ 17,346 (40.3)
Completion Services 13,027 12,608 3.3
Downhole Completion Tools 12,196 13,803 (11.6)
-------- --------
$ 35,570 $ 43,757 (18.7)
======== ========
Market conditions for the three months ended March 31, 2002 have
deteriorated from the conditions that existed for the three months ended March
31, 2001. The deterioration was a result of a weakened economy and decreased oil
and natural gas prices. Those market conditions resulted in a decrease in
revenue for the Completion Fluids and Downhole Completion Tools segments for the
comparable three-month periods ended March 31, 2002 and 2001. The Completion
Services segment realized a net increase in revenue in spite of the market
conditions for the quarter ended March 31, 2002 compared to the quarter ended
March 31, 2001. The increase is attributable to approximately $1.0 million of
revenue generated in the first quarter of 2002 from OSCA's expansion into the
land market, with no comparable revenue in the first quarter of 2001.
13
Cost of goods sold and services. Cost of goods sold and services by
business segment are as follows:
THREE MONTHS ENDED % INCREASE
MARCH 31, (DECREASE)
------------------------- ----------
2002 2001
-------- --------
(in thousands)
Completion Fluids $ 9,071 $ 14,146 (35.9)
Completion Services 11,967 9,585 24.9
Downhole Completion Tools 8,435 8,733 (3.4)
-------- --------
$ 29,473 $ 32,464 (9.2)
======== ========
The decrease in cost of goods sold and services for the Completion
Fluids and Downhole Completion Tools segments correlates with the decrease in
revenue. The increase in cost of goods sold and services in the Completion
Services segment relates to OSCA's land market expansion. OSCA incurred
approximately $2.2 million in costs of goods sold and services for the land
market during the quarter ended March 31, 2002, with no comparable cost in the
same period of the prior year.
Selling, General and Administrative. Selling, general and
administrative expense increased $0.8 million, or 15.3%, to $6.2 million for the
three months ended March 31, 2002 compared to $5.4 million for the three months
ended March 31, 2001. The increase is primarily attributable to the following
factors:
- - $325,000 in additional wage expense primarily attributed to OSCA's
continued focus on the Downhole Completion Tools segment and OSCA's
expansion into the land market in the Completion Services segment,
- - $316,000 for bonus accruals for OSCA's workforce in response to
anticipated achievement of performance targets as of March 31, 2002,
whereas OSCA did not anticipate a need for bonus accruals at March 31,
2001, and
- - $146,000 increase in bad debt expense as a result of market conditions.
Litigation Verdict. On April 4, 2002, a jury reached a verdict in the
lawsuit against OSCA and other defendants relating to a blowout of a well in the
Gulf of Mexico for which OSCA and others were engaged to perform workover
operations. Plaintiffs claimed that OSCA and the other defendants breached their
contracts to perform workover operations and were negligent in performing those
operations. The jury found OSCA and the other defendants responsible for those
claims and found OSCA's share of the damages to be approximately $13.3 million.
Those damages along with legal fees incurred in the first quarter of 2002 have
been charged to the litigation verdict expense.
In connection with the lawsuit, OSCA asserted claims against its
insurers and insurance brokers in support of insurance coverage for this
incident. OSCA's insurers have denied coverage for this incident and a related
trial on these insurance coverage claims is scheduled to begin on May 20, 2002.
Amortization of Intangibles. Amortization of intangibles for the
quarter ended March 31, 2001, included approximately $69,000 related to the
amortization of goodwill and with the adoption of SFAS 141, OSCA did not record
any amortization related to goodwill for the quarter ended March 31, 2002.
14
The increase in amortization expense between periods relates to the amortization
of covenants not to compete that were incurred with the Ancor acquisition.
Operating Income (Loss). As a result of the foregoing, operating income
(loss) decreased $19.6 million to a loss of $13.8 million for the three months
ended March 31, 2002 compared to operating income of $5.8 million for the same
period of the prior year. Operating income (loss) by segment is as follows:
THREE MONTHS ENDED % INCREASE
MARCH 31, (DECREASE)
------------------------- ----------
2002 2001
-------- --------
(in thousands)
Completion Fluids $ (449) $ 1,479 (130.4)
Completion Services (722) 1,860 (138.8)
Downhole Completion Tools 1,544 3,249 (52.5)
Corporate and Other (14,183) (788) (1,699.9)
-------- --------
$(13,810) $ 5,800 (338.1)
======== ========
Income Tax Provision. The income tax provision for the quarter ended
March 31, 2002 was a tax benefit of $5.0 million, resulting in an effective tax
rate of 34.7%, while in 2001 OSCA recorded a tax expense of $1.7 million,
resulting in an effective tax rate of 38.0%. The decrease in effective rate was
primarily due to the fact that no benefit was recognized on certain losses
generated in international countries for the three months ended March 31, 2002.
Net Income (Loss). Net income (loss) for the three months ended March
31, 2002 decreased $12.2 million to a net loss of $9.4 million from a net profit
of $2.8 million for the three months ended March 31, 2001 reflecting the factors
discussed above.
FINANCIAL CONDITION & LIQUIDITY
WORKING CAPITAL
OSCA's primary uses for cash are:
- to fund working capital requirements,
- to make capital expenditures and
- for acquisitions.
Historically, OSCA's cash sources have been provided by:
- operations,
- borrowings and
- prior to its IPO, intercompany borrowings from Great Lakes.
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To the extent OSCA's future cash requirements exceed the cash provided
by operations, OSCA will fund those requirements through debt or equity
financing activities.
OSCA's working capital at March 31, 2002 was $45.5 million compared to
$51.1 million at December 31, 2001. The decrease is attributable to the accrual
related to the Newfield litigation which is offset by the tax benefit associated
with the accrual.
OSCA's operations used $0.7 million in cash for the first three months
of 2002 and provided $8.5 million in cash in the first three months of 2001. The
difference in operating cash flow is primarily attributable to OSCA's net income
(loss) for the respective periods. Capital expenditures for the three months
ended March 31, 2002 and 2001 were $7.0 million and $3.3 million, respectively.
During the first quarter of 2002, OSCA continued its planned capital
expenditures related to the expansion of its land based completion services
segment. In connection with that expansion, OSCA used $1.9 million to acquire
the assets of Ancor Services, Inc., a provider of land based well stimulation
products and services to oil and natural gas producers in East Texas and North
Louisiana. OSCA also deposited $7.2 million into a Rabbi Trust to cover some,
but not all of its obligations to senior management of OSCA should a change of
control occur pursuant to the pending merger with BJ Services Company. The
manager of the Rabbi Trust has invested the funds into a money market account.
If the merger does not occur the funds will become an unrestricted asset of
OSCA.
OSCA's primary source of funds for the first quarter of 2002 was
available cash and additional net borrowings of $8.9 million from its $40.0
million credit facility. During the first quarter of 2001, OSCA's primary source
of funds was from operations and OSCA was able to reduce outstanding debt.
Long Term Debt Facilities
At March 31, 2002, OSCA had available borrowings of $3.3 million under
its credit facility compared to $12.3 million at March 31, 2001. OSCA had one
outstanding letter or credit for $750,000 as of March 31, 2002 and 2001 which
reduced availability under its credit facility.
As a result of the litigation verdict, which resulted in a $13.5
million expense, OSCA was in violation of covenants related to funded
indebtedness and fixed coverage ratios. On April 30, 2002, the lenders granted
OSCA a modification in the calculation of those two covenants which brought OSCA
into compliance.
Future Capital Needs
Capital expenditures for the year ended December 31, 2002 are expected
to be approximately $19.1 million with $7.0 million already spent in the first
quarter of 2002. The remaining capital expenditures are expected to be funded
from operations or additional borrowings.
While a verdict of $13.3 million has been awarded against OSCA as a
result of the Newfield litigation, management is under the opinion that a
significant portion of the verdict will be covered by insurance. OSCA's insurers
have denied coverage and a trial to determine the extent of the insurance
companies' liability is scheduled to start May 20, 2002. There can be no
assurance as to the result of that trial.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives. OSCA
adopted the new rules on accounting for goodwill and other intangible assets
effective January 1, 2002. OSCA has not yet performed its transitional
impairment tests in conjunction with the adoption of SFAS 142.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations for a disposal of a segment of a
business. SFAS 144 is effective for fiscal years beginning after December 15,
2001. OSCA's adoption of SFAS 144 has not had a material impact on its financial
position and results of operations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements involving risks and
uncertainties that affect OSCA's operations as discussed in the 2001 Annual
Report on Form 10-K filed with the SEC. Accordingly, there is no assurance that
OSCA's expectations will be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
OSCA's exposure to market risk for changes in interest rate and its
exposure to foreign exchange risk has not changed materially since December 31,
2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 18, 2000, OSCA was served with notice that a lawsuit was
filed against it and other named defendants on September 1, 2000 in the District
Court of Harris County, Texas. The action is brought by certain underwriting
syndicates of Lloyd's of London who claim to be subrogated to the claim of their
insureds, Newfield Exploration Company, Apache Oil Corporation, Continental Land
& Fur, and Fidelity Oil ("Plaintiffs"). The other defendants include High
Pressure Integrity, Inc. and Chalmers, Collins & Alwell, Inc. On September 8,
2000, OSCA filed a lawsuit against the Plaintiffs and the other defendants in
the United States District Court, Western District of Louisiana,
Lafayette-Opelousas Division. Other actions have also been filed in connection
with the same circumstances. All actions have now been consolidated into one
proceeding in the United States District Court, Southern District of Texas.
The lawsuits relate to a blowout of a well situated in the Gulf of
Mexico, offshore Louisiana, for which OSCA and others were engaged to perform
specific workover operations. In the Texas case,
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Plaintiffs seek damages, interest and other costs in the approximate amount of
$21.5 million, alleging that OSCA and the other defendants breached their
contracts to perform workover operations, and were negligent in performing those
operations. OSCA alleges negligence against the Plaintiffs and other defendants
and seeks damages, interest, costs and general and equitable relief. OSCA filed
a third party demand against its underwriters and insurance broker in support of
coverage of claims asserted against OSCA in the Newfield matter.
On April 4, 2002, a Federal Court jury in Houston, Texas reached a
verdict in the lawsuit against OSCA and other defendants. The jury found OSCA
and the other defendants responsible for those claims and found OSCA's share of
the damages to be approximately $13.3 million. A charge of $13.5 million has
been recorded in the first quarter of 2002, which includes $0.2 million of legal
fees incurred during the quarter.
In connection with the lawsuit, OSCA asserted claims against its
insurers and insurance brokers in support of insurance coverage for this
incident. OSCA's insurers have denied coverage for this incident and a related
trial on these insurance coverage claims is scheduled to begin on May 20, 2002.
The court has not yet entered a final judgment on the liability claim and OSCA
does not expect final judgment to be entered until completion of the related
insurance trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 20, 2002, OSCA announced that it entered into a definitive
merger agreement with BJ Services Company. Under the terms of the agreement, BJ
Services will acquire all of the outstanding shares of OSCA for $28.00 per share
in cash. A special committee of independent members of OSCA's Board reviewed the
transaction on behalf of the public stockholders and recommended the transaction
to the complete OSCA Board, which then unanimously approved the merger
agreement. The transaction has a total equity value of approximately $420.0
million.
Great Lakes Chemical Corporation, which owns approximately 53% of
OSCA's outstanding Common Stock and holds approximately 92% of the voting power,
has delivered its written stockholder consent approving the transaction with BJ
Services. The Great Lakes consent constitutes sufficient action by OSCA
stockholders to approve the transaction.
The transaction is subject to regulatory approvals and OSCA has
received those approvals including those under the Hart-Scott-Rodino Antitrust
Improvements Act. OSCA has filed an information statement describing the
transaction with the Securities and Exchange Commission mailed such statement to
OSCA stockholders on May 2, 2002. OSCA anticipates the merger closing on May 31,
2002. There can be no assurance that the merger will be consummated in
accordance with the terms of the merger agreement, if at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of the report are listed below:
2.1 Agreement and Plan of Merger Dated as of February 20, 2002, by and
among, BJ Services Company, BJTX, Co. and OSCA, Inc. (incorporated by
reference to OSCA's Information Statement on Schedule 14C filed April
29, 2002).
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(b) Reports on Form 8-K
On April 11, 2002, OSCA filed a current report on Form 8-K (pursuant to
Item 5 thereunder) to report a litigation verdict.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
OSCA has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 13, 2002 By: /s/ Steven J. Brading
------------------------------------------
Steven J. Brading
Vice President & Chief Financial and
Accounting Officer
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