SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.01 PAR VALUE
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, and (2) has been subject to the filing requirements for
the past 90 days. [X] Yes [ ] 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. [X]
Aggregate market value of the voting stock held by non-affiliates of OSCA.
$127,626,635 AT FEBRUARY 15, 2002
Number of shares outstanding of each class of OSCA's Common Stock, as of the
latest practicable date.
6,946,353 SHARES OF CLASS A COMMON STOCK AT FEBRUARY 15, 2002
7,900,000 SHARES OF CLASS B COMMON STOCK AT FEBRUARY 15, 2002
Documents incorporated by reference.
DEFINITIVE PROXY STATEMENT TO BE FILED PURSUANT TO REGULATION 14A WHICH INVOLVES
THE ELECTION OF DIRECTORS (PART III)
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PART I
ITEM 1. BUSINESS
GENERAL
OSCA, Inc., a Delaware corporation, was founded in 1979. OSCA provides
specialized oil and natural gas well completion fluids, completion services and
downhole completion tools to major oil companies and independent exploration and
production companies, primarily in the Gulf of Mexico and in select
international markets. OSCA's products and services help prepare the well for
production and enhance the recovery of oil and natural gas.
OSCA's products and services provide the following benefits to its
customers:
o lengthening well life by controlling the migration of indigenous sand
into the well, which damages downhole and surface production equipment
and causes the reservoir to degrade prematurely;
o increasing well productivity by minimizing reservoir damage during the
completion phase of the well installation process and by repairing
reservoir damage incurred during the drilling phase;
o increasing well flow rates by creating fractures in the reservoir and
packing the fractures with gravel to prevent the migration of sand into
the well, a process which the industry refers to as frac packing; and
o enhancing well productivity by chemically stimulating the reservoir,
allowing faster production and, potentially, increasing the total
recovery of oil and natural gas.
OSCA pioneered the use of high density clear brines for non-damaging
completion and workover fluids applications, adding related fluid maintenance
services to its product offerings in 1980. Throughout the 1980s and early 1990s,
OSCA continued to expand its product and service offerings by entering the sand
control and pressure pumping segments. OSCA entered the downhole gravel pack
tool market by acquiring the assets of Completion Services, Inc. in July 1993
for cash. In 1997, OSCA expanded its pressure pumping capability by entering
marine well services in order to provide its customers with the most advanced
completion technology. At the same time OSCA added coil tubing services, an
essential service for preparing and maintaining well production. Also in 1997,
OSCA expanded the geographical markets in which it operates by engaging in
marine well stimulation services and coiled tubing in the Gulf of Mexico. In
March 1998, OSCA augmented its line of downhole completion tools through the
acquisition of Cain Oil Tools, Inc. for cash. This acquisition provided OSCA
with manufacturing capabilities to support its rapidly growing sand control tool
line as well as expanding its tool products offering to include production tools
for conventional well completions. OSCA completed construction of its downhole
tools test facility in 1999. This facility accelerated OSCA's cycle of
technology development, thus bringing new products to market and stimulating the
growth rate for this business. Also in 1999, OSCA began operations from C-Port
1, in Port Fourchon, Louisiana, a world class completion fluid distribution
facility. In January 2002, OSCA increased its presence in the East Texas and
North Louisiana well stimulation market with the acquisition of substantially
all of the assets of Ancor Services, Inc.
On February 20, 2002, OSCA announced that it entered into a definitive
merger agreement with BJ Services Company. BJ Services Company is a leading
provider of pressure pumping and other oilfield services serving the petroleum
industry worldwide. 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 shareholders 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.
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Great Lakes Chemical Corporation, which owns approximately 53% of
OSCA's Common Stock, 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, including those
under the Hart-Scott-Rodino Antitrust Improvements Act. OSCA will file with the
Securities and Exchange Commission and mail to OSCA shareholders an information
statement describing the transaction. There can be no assurance that the merger
will be consummated in accordance with the terms of the merger agreement, if at
all.
OSCA'S STRATEGY
OSCA focuses its products and services on well completion activities
that assist its customers in optimizing the recovery of oil and natural gas.
OSCA's strategy for future growth is to improve its market position by:
o Focusing on Optimizing Reservoir Productivity. OSCA focuses
its technology, products, services and resources on optimizing
reservoir productivity, primarily through the completion of
oil and natural gas wells. OSCA has developed products and
services that can be readily modified to meet the needs of a
well's particular characteristics. OSCA believes that focusing
on well completions with adaptable products and services
enables it to be more responsive to its customers' needs, thus
allowing OSCA to compete effectively against larger and more
diversified companies.
o Targeting Deepwater Well Completion Opportunities. OSCA
believes that strong demand exists for its specialized
completion technology, products and services in numerous
deepwater well completion markets. The deepwater Gulf of
Mexico is currently one of the world's most attractive
exploration and development areas due to its large reserve
potential. OSCA believes that the number of deepwater
development wells in the Gulf of Mexico will grow at a rate
greater than that of shallow water wells. OSCA generates
significantly more revenue per well on deepwater development
wells due to their high completion fluid volume requirements
and technically demanding nature. OSCA believes its deepwater
completions experience and expertise will enable it to
increase its market share and capitalize on growth
opportunities in the deepwater Gulf of Mexico and to expand
into international deepwater markets such as Brazil and West
Africa.
o Developing Advanced Completion Technologies. OSCA is committed
to developing advanced completion technologies, products and
services. OSCA has strengthened its competitive position in
each of its businesses by working closely with customers to
deliver solutions for specific operating environments. For
example, OSCA uses its completion tools testing facility to
simulate harsh downhole conditions similar to those
experienced in the field. OSCA believes this facility is one
of the newest and most advanced in the world and that it gives
OSCA a competitive advantage in designing new downhole
products and testing prototypes to prevent failures in the
field.
o Capitalizing on Cross-Selling Opportunities. OSCA has the
opportunity to cross sell its products and services because
each is often used in the well completion process and each is
designed to enhance the other's performance. Developing
solutions to challenging well conditions in one product line
helps OSCA establish strong relationships with its clients,
thereby creating a natural opportunity to cross sell its other
products and services.
o Pursuing Strategic Acquisitions. OSCA has made several
strategic acquisitions that complement its product and service
offerings and expand its geographic presence. OSCA's current
strategy is to acquire advanced completion technologies and
related products and services that will enhance OSCA's
competitive position in markets it already serves and to
provide access to new markets that require complex well
completions. While OSCA continually evaluates strategic
acquisition opportunities, OSCA currently has no agreements in
place regarding future acquisitions.
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INDUSTRY OVERVIEW
Demand for well completion services is driven primarily by:
o the levels of exploration and development activity for oil and
natural gas in response to worldwide demand;
o the rate of discovery of new oil and natural gas fields;
o the changing production profiles of existing fields, including
deterioration of production rates due to reservoir degradation
and depletion;
o the characteristics of the reservoir which dictate the type of
completion that is required.
Generally, oil and natural gas companies reduce exploration and
development activity during periods of weak oil prices and increase this
activity during periods of strong prices. The extent to which the revenue of
OSCA's industry increases also depends upon the success of the exploration and
production efforts. In general, these revenue increases lag expansion of
exploration and development capital budgets in times of recovery in the oil and
natural gas industry. These lag times can be up to several quarters for offshore
operations but are generally shorter for onshore operations.
Well completion activity has historically been closely correlated with
the count of active drilling rigs. However, in certain periods when drilling rig
day rates are low, such as the second half of 1999, oil and natural gas
companies may utilize relatively inexpensive drilling rigs to drill wells which
they leave uncompleted until periods of higher commodity prices. As these wells
are brought into production, demand for OSCA's services could exceed the
historical correlation between drilling rig count and completions activity.
Drilling activity is largely dependent on the prices of oil and natural
gas. Oil service activity, in turn, is primarily driven by the number of oil and
natural gas wells being drilled, the depth and drilling conditions of such
wells, the number of well completions and the level of workover activity
worldwide. This relationship was particularly evident during 1998 when oil
prices fell below $11 per barrel. The price decline resulted in the lowest
worldwide oilfield drilling activity levels in recent history. However, the
recovery of oil prices to well above $20 per barrel during 1999 and the
stability of these prices within this relative range throughout 2000 coupled
with extremely strong prices for natural gas were the primary drivers in the
increased drilling activity during 2000 and for most of 2001. Energy prices have
declined in the second half of 2001 in response to a drop in demand related to
the recent economic slowdown in the United States.
Natural gas related drilling and remedial activity in the Gulf of
Mexico was very active during 2000 and early 2001 as operators strived to meet
growing demand in the United States. As a result of the economic slowdown
described above, natural gas related drilling has also slowed in the second half
of 2001.
International drilling activity which reached record low levels during
1999 began to strengthen during the second half of 2000 and increased during
2001.
The demand for products and services in OSCA's industry is impacted by
changing production profiles in existing fields. Additionally, many new oil and
natural gas fields exhibit reservoir characteristics that require more complex
completion and stimulation services. Natural gas wells are generally higher
pressured and require higher weight, higher cost completion fluids which result
in natural gas wells being more profitable to OSCA than oil wells.
PRODUCTS AND SERVICES
OSCA's products and services, which are available separately or as
integrated systems, are offered through three business segments:
o Completion Fluids
o Completion Services
o Downhole Completion Tools
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COMPLETION FLUIDS
OSCA sells and recycles clear completion fluids and performs related
fluid maintenance activities, such as filtration and reclamation. Completion
fluids are used to control well pressure and facilitate other completion
activities, while minimizing reservoir damage. OSCA provides standardized
completion fluids as well as a broad line of specially formulated and customized
completion fluids for high demand wells. Completion fluids represented $71.6
million, or 40.6%, of OSCA's net revenue and 34.8% of OSCA's operating income in
2001. For more financial information about OSCA's completion fluids business
segment, see note 14 to OSCA's audited consolidated financial statements
included elsewhere in this document.
Completion fluids are clear brines of metallic salts, such as sodium,
potassium and calcium chloride; sodium, calcium and zinc bromide; and sodium and
potassium formate. All are available either as pure salt solutions or as
combinations of these solutions for increased flexibility and greater
cost-effectiveness. These fluids are solids-free, and therefore will not
physically plug oil and natural gas reservoirs. In contrast, drilling mud, the
fluid typically used during drilling and for some well completions, contains
solids to achieve densities greater than water. These solids plug the reservoir,
causing reservoir damage and restricting the flow of oil and natural gas into
the well. When completion fluids are placed into a well, they typically become
contaminated with solids that are left in the well after drilling mud is
displaced. To remove these contaminants, OSCA deploys filtering equipment and
technicians that work in conjunction with OSCA's on-site fluid engineers to
maintain the solids-free condition of the completion fluids throughout the
project. OSCA provides an entire range of completion fluids, as well as all
support services needed to properly apply completion fluids in the field,
including filtration, on-site engineering, additives and rental equipment.
OSCA was one of the first companies to use high density clear fluids as
non-damaging alternatives to solids-laden drilling mud for completion
activities. OSCA supplies a full line of clear brine completion fluids and
additives, with densities ranging from 8.4 to over 22.5 pounds per gallon. This
range is important because each reservoir exhibits unique pressure
characteristics and therefore requires completion fluids of appropriate density
to control wellbore pressure.
THE C-PORT LOADING FACILITY
OSCA is the exclusive on-site supplier of completion fluids at the
C-Port 1 loading facility at Port Fourchon, Louisiana. This facility primarily
services customers in the deepwater Gulf of Mexico. This nine-slip loading
facility, which allows for simultaneous loading of fuel, completion fluids,
supplies and water, saves exploration and production companies substantial time
as compared to other loading facilities where each item must be loaded
individually. This time savings is critical when drilling costs to these
companies can be as much as $200,000 per day.
OSCA owns and operates a fluids distribution plant on property leased
at C-Port 1. OSCA's distribution plant represents an innovation in the
preparation and delivery of completion fluids to our customers. OSCA is able to
blend multiple fluids simultaneously, which enables it to service multiple
customers. OSCA's integrated fluid reclamation equipment allows OSCA to recycle
used fluids and prepare those fluids for reuse. OSCA's on-site technical
services lab optimizes fluid formulations consisting of new and recycled fluids
in order to minimize costs and provide the most beneficial fluid blends to its
customers. OSCA's presence at the C-Port 1 facility has positioned it to supply
completion fluids to many of the high profile projects in the Gulf of Mexico.
COMPLETION SERVICES
OSCA provides marine well services, pressure pumping and coiled tubing
services to perform frac packing, gravel packing and well stimulation. These
services, which are offered in conjunction with OSCA's downhole completion tools
and completion fluids, are either delivered directly by one of OSCA's marine
well service vessels or provided using portable skid-mounted equipment that is
placed at the well location, on the rig or platform. Completion services
represented $51.5 million, or 29.3%, of OSCA's net revenue and 23.7% of OSCA's
operating income in 2001. For more financial information about OSCA's completion
services business segment, see note 14 to OSCA's audited consolidated financial
statements included elsewhere in this document.
5
MARINE WELL SERVICES
OSCA has three marine well service vessels:
o The OSCA Challenger,
o The OSCA Discovery and
o The Elkhorn River
These vessels are capable of operating in harsh deepwater environments
to provide sand control and well stimulation pressure pumping and completion
fluid delivery services. OSCA's vessels are specifically designed for enhanced
safety and operating efficiency and feature dynamic positioning. Dynamic
positioning allows the vessel to maintain position without anchors through the
use of onboard propulsion and satellite navigation systems. OSCA can provide
well services either in shallow or deep water.
These vessels are fitted with specifically designed equipment to
improve operational efficiency and reduce logistical complexity and have the
following features:
o computer controlled satellite navigation system;
o up to 10,500 pumping hydraulic horsepower/50 barrels per
minute capability;
o on-board quality assessment and quality control lab;
o the ability to service 5 to 10 wells per trip offshore; and
o the ability to work in up to 15 foot seas and 40 knot winds.
OSCA's marine well service vessels are ideally suited for providing
frac pack services. During frac packing, fluids are pumped into a well at
pressures and flow rates high enough to create two opposing cracks from either
side of the borehole in order to produce wide, conductive flow paths that
penetrate deep into the oil and gas reservoir. Growing customer acceptance of
frac packing technology has increased the market size for marine well services
significantly since 1994.
SKID-MOUNTED PRESSURE PUMPING SERVICES
OSCA's portable, skid-mounted pressure pumping equipment performs sand
control and well stimulation services for both land-based and offshore
customers. Soft or sandy reservoirs create production problems that restrict
hydrocarbon flow and could eventually lead to a complete loss of production.
Sand control pressure pumping forces gravel and its carrier fluid into the soft
or sandy reservoir to act as a filter, in conjunction with downhole completion
tools, to control the migration of sand into the well. Oil and natural gas are
then free to move through the gravel and into the well to be recovered. Well
stimulation treatment consists of pumping chemicals into the reservoir to
stimulate productivity. OSCA's pressure pumping equipment is designed to be
compact and versatile in order to meet customer requirements for a wide variety
of well conditions.
COILED TUBING SERVICES
Coiled tubing services involve the deployment of a continuous length of
small diameter flexible steel pipe into wells to perform various applications
and functions for in-well servicing operations. Coiled tubing is used to convey
tools that manipulate downhole equipment during the initial completion of the
well, to apply chemicals during the production phase that stimulate a well to
higher production rates and to convey fluids through the wellbore at a rate
sufficient to remove sand and debris from the well. Recent improvements in
coiled tubing reliability have led to expanded use of coiled tubing in
completion and stimulation operations.
The principal advantages of employing coiled tubing include:
o avoiding well shut-down during workover operations, reducing
the risk of reservoir damage;
o the ability to deploy and remove coiled tubing significantly
faster than conventional drill pipe, which must be jointed and
unjointed;
o the ability to direct fluids into a well with more precision,
allowing for localized stimulation treatments, well cleanout,
scale removal and paraffin removal;
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o providing a conduit for the source of energy to power a
downhole motor;
o faster manipulation of downhole completion tools; and
o the smaller size and mobility of a coiled tubing unit enhances
access to remote or offshore fields.
DOWNHOLE COMPLETION TOOLS
OSCA focuses on designing, building and installing downhole completion
tools that deploy gravel to control the migration of reservoir sand into the
well and direct the flow of oil and natural gas into the production tubing.
Downhole completion tools represented $53.0 million, or 30.1%, of OSCA's net
revenue and 64.2% of OSCA's operating income in 2001. For more financial
information about OSCA's downhole completion tools business segment, see note 14
to OSCA's audited consolidated financial statements included elsewhere in this
document.
OSCA's downhole sand control tools are sold as complete systems. OSCA
customizes these systems based on each well's particular mechanical and
reservoir characteristics. These may include downhole pressure, wellbore size
and formation type. Many wells produce from more than one reservoir
simultaneously. Depending on the customer's preference, OSCA has the ability to
install tools that can either isolate one producing zone from another or
integrate the production from multiple zones. Once the tools systems are
designed and customized, each is inspected for quality assurance before it is
delivered to the well location. OSCA's field specialists, working with the rig
crews, deploy OSCA's tools in the well during the completion process.
To further enhance reservoir optimization, OSCA has also developed the
tools necessary to provide the operator with "intelligent completion"
capabilities. This includes the ability to selectively control flow from
multiple reservoirs in the same wellbore from a remote activation site on
surface. In addition, through joint agreements with operators OSCA may also
provide the equipment necessary to monitor downhole parameters such as
temperature, pressure and reservoir flow to allow optimization of well
productivity. These features are important in today's deepwater subsea
completion environments.
In addition to tools that are designed to control sand migration, OSCA
also provides downhole completion tools that are generally used in conventional
completions in reservoirs that do not require sand control. These tools include
production packers and other service tools that OSCA can deliver through its
distribution networks located in key domestic markets and select international
markets. This product line is primarily targeted toward the U.S. onshore market,
although markets outside the U.S., such as Latin America, are now providing
opportunities for market expansion.
INTERNATIONAL OPERATIONS
OSCA operates in many of the major international oil and natural gas
producing sectors of Central and South America and Europe. OSCA generally
provides products and services to its international customers through wholly
owned foreign subsidiaries located in Venezuela, Brazil, Mexico, Scotland, Italy
and Norway. OSCA seeks to operate in those areas where it can achieve and
maintain a significant market share position and earn attractive returns on our
investment. For example, in the first quarter of 2000, OSCA was able to leverage
its experience in the Gulf of Mexico to commence activities off the coast of
Brazil. In the future, OSCA anticipates expanding its international operations
to include West Africa. OSCA's international operations represented $28.2
million, or 16.0%, of OSCA's net revenue in 2001. For more financial information
on OSCA's international operations, see note 14 to OSCA's audited consolidated
financial statements included elsewhere in this document.
CUSTOMERS AND MARKETING
OSCA's customers include major oil companies and international and
domestic independent exploration and production companies, including foreign
state-owned oil and gas enterprises. In 2001, Chevron USA, Inc. accounted for
approximately 10% of OSCA's net revenue. In 2000, Houston Exploration accounted
for approximately 7% of OSCA's net revenue. In addition, OSCA's top fifteen
customers accounted for approximately 59% of its net revenue in 2001 and 52% of
its net revenue in 2000.
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OSCA devotes a considerable portion of its marketing time and effort to
develop and maintain key customers. In some cases, OSCA provides one or more of
its engineers to work with customers at their locations. This cooperative effort
promotes long-term relationships with customers who look to OSCA for assistance
with their demanding projects and schedules.
OSCA markets its oilfield products and services primarily through its
direct sales force located in 10 sales offices throughout the world. OSCA also
uses designated agents and distributors in nearly every major oil and natural
gas producing region in the world. International markets OSCA serves include the
U.K. and Norwegian sectors of the North Sea, Mexico, Venezuela, Brazil, Italy,
the Asia Pacific, the Middle East, North Africa and West Africa.
TECHNOLOGY AND NEW PRODUCT DEVELOPMENT
OSCA has historically been a leader in the development of completion
technology. OSCA's recent inventions and innovations in fluids technology
include:
o InsulGel(TM) insulating packer fluids, which maintain heat in
wells to reduce paraffin and hydrate problems;
o NoCal HTLC(TM), a non-corrosive packer fluid for severe
environments;
o PAC-Valve, a pressure actuated downhole control valve that can
be activated from the surface as opposed to requiring
mechanical activation using downhole well intervention
equipment;
o OSCA's SMART Technology, an intelligent completion system that
allows the customer to selectively flow, via hydraulic
activation, producing reservoirs of choice; and
o Wellclean system, a suite of mechanical wellbore tools that
enhances and completes the cleanup.
OSCA's technologically advanced products enable it to promote the sale
of other related products and services.
OSCA's research and development facilities are staffed with experts in
completion and workover fluids and include a complete fluid technical service
lab. In April 1999, OSCA completed construction of a downhole tool research
facility in Houston, Texas. This facility provides for critical interaction with
customers in the engineering, manufacturing and testing of tools. OSCA measures
the impact of different raw materials, operating conditions and design
specifications in determining optimal tool configuration. Since OSCA's tools are
often installed miles below the earth's surface, it is critical that potential
design flaws be diagnosed and prevented prior to installation. In order to move
technology from OSCA's research and development facilities to the field, OSCA's
applications engineering group works with sales, R&D, operations and customers
to integrate OSCA's products and services into comprehensive well completion
programs.
OSCA's product development strategy is driven by a structured
evaluation and screening process. OSCA's selection process focuses on practical
solutions to current and near-term customer problems. OSCA involves its
customers early in each development project to promote, maintain and assess
their interest in the project. OSCA screens projects for commercial viability
and fund only those which it believes to be likely candidates for commercial
success.
OSCA has a policy of seeking patents on new products, processes or
improvements when patent protection has a significant commercial benefit. OSCA
does not believe any individual patent is of material importance to its business
as a whole or that the success of its business is dependent upon its patent
portfolio.
COMPETITION
OSCA's principal competitors in completion fluids are Baroid
Corporation, a subsidiary of Halliburton Company; M-I LLC, a joint venture of
Smith International, Inc. and Schlumberger Limited; and Tetra Technologies, Inc.
OSCA's principal competitors in pressure pumping services and sand control tools
are Halliburton Energy Services, a division of Halliburton Company; Schlumberger
Limited; Baker Hughes Incorporated; and BJ Services Company.
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OSCA believes that the three principal bases of competition in our
industry are service record, reputation and pricing.
SUPPLIERS
In the past, OSCA purchased nearly all of the brominated chemicals it
required to support its completion fluids business from Great Lakes. At the time
of the IPO, OSCA entered into a brominated products supply agreement with Great
Lakes. Under this agreement, Great Lakes has committed to provide OSCA with all
or substantially all of OSCA's requirements for brominated products, subject to
a cap. OSCA has committed to purchase at least 80% of its requirements for these
products from Great Lakes, subject to a minimum. The price will be determined
based on Great Lakes' cost plus a margin; however, during contract years three,
four and five and beyond, if OSCA is able to negotiate a lower price from a
third party supplier, Great Lakes must either meet that price or release OSCA
from 40%, 60% and 100%, respectively, of its annual requirements. For more
financial information on OSCA's related party transactions, see note 3 to OSCA's
audit consolidated financial statements included elsewhere in the document.
Principal materials utilized in the sand control pressure pumping
business include frac pack gravel and various acids and chemical additives.
Generally, these items are available from several suppliers, and OSCA utilizes
more than one supplier for each item.
EMPLOYEES
At February 15, 2002, OSCA had approximately 570 employees, 450 of
which were based in the United States. None of OSCA's employees are covered by
collective bargaining agreements. OSCA believes that its employee relations are
good.
OPERATING HAZARDS AND INSURANCE
OSCA's operations are subject to the risks inherent in manufacturing
products, providing services in the oil and natural gas industry, storing,
handling and transporting hazardous substances in bulk and operating in the
marine environment. These risks include:
o personal injury and loss of life,
o business interruptions,
o loss of production,
o property and equipment damage and
o contamination of and damage to the environment.
Damages arising from an occurrence at locations where OSCA presently
operates or has in the past operated may result in the assertion of potentially
large claims against OSCA or the imposition of other obligations of significant
cost.
OSCA maintains a comprehensive insurance package covering its assets
and operations, including product liability and workers' compensation insurance,
at levels that OSCA believes to be appropriate. This insurance is subject to
deductibles, amounts of self-insurance retention per occurrence and some
exclusions to coverage.
ENVIRONMENTAL MATTERS
OSCA is subject to federal, state and local environmental and
occupational safety and health laws and regulations in the United States and
other countries in which it does business. These regulations govern, among other
things, the storage, handling and transportation of hazardous materials in
connection with OSCA's vessels and manufacturing operations and its well
completion services. These laws include the U.S. Comprehensive Environmental
Response, Compensation and Liability Act, also known as the "Superfund" law, and
the U.S. Oil Pollution Act, both of which impose liability without regard to
fault on anyone who has contributed to the release of hazardous substances or
oil into the environment.
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Through the routine course of providing its services, OSCA handles,
stores and transports bulk quantities of hazardous materials. Accordingly, if
leaks or spills of hazardous materials occur from OSCA's facilities, vessels or
otherwise in connection with its operations, OSCA may be responsible under
applicable environmental laws for the costs of investigating and remediating any
resulting contamination of, or damage to, the environment. OSCA has implemented
and continues to implement various procedures to assure compliance with
environmental regulations, including procedures for the handling and disposal of
hazardous materials, which are designed to minimize the occurrence of spills or
leaks of these materials. Under the direction of the State of Louisiana
Department of Environmental Quality, OSCA is investigating a July 1998 release
of zinc bromide solution from one of OSCA's facilities. Because the matter is
still under review by the State of Louisiana, OSCA cannot yet determine what
corrective action, if any, may be required.
ITEM 2. PROPERTIES
OSCA has operations worldwide including its corporate headquarters
facilities in Lafayette, Louisiana. OSCA has 10 sales offices, including 3 in
the United States and 7 in the international regions that OSCA serves.
Distribution and logistics are provided through 21 distribution sites, with 11
in the United States and 10 in key international locations. The facility in
Geismar, Louisiana is a combined manufacturing and distribution site.
DISTRIBUTION FACILITIES
OSCA's U.S. distribution facilities are located in the Gulf Coast
region, in close proximity to both product supplies and customer concentrations.
OSCA's fluids distribution facilities are staffed with experienced personnel and
offer storage, blending and reclamation services for all completion fluid
systems. Each plant is either owned or leased under agreements that expire
between 2002 and 2008.
OSCA operates distribution facilities in the following locations:
<Table>
DOMESTIC INTERNATIONAL
Cameron, Louisiana Anaco, Venezuela*
Port Fourchon, Louisiana Lagonelas, Venezuela
Geismar, Louisiana* Cabimas, Venezuela
Intracoastal City, Louisiana Punta de Mata, Venezuela
Lafayette, Louisiana* Aberdeen, Scotland
Venice, Louisiana Peterhead, Scotland
Aransas Pass, Texas Macae, Brazil
Galveston, Texas* Ravenna, Italy
Corpus Christi, Texas Paraiso, Mexico
Edinburgh, Texas Villahermosa, Mexico
Rio Hondo, Texas
* facilities owned by OSCA
</Table>
MANUFACTURING PLANT--GEISMAR, LOUISIANA
OSCA operates a calcium chloride manufacturing plant in Geismar,
Louisiana. This facility neutralizes hydrochloric acid with calcium carbonate,
generating industrial strength, technical grade and food grade calcium chloride.
The plant's capacity is 720,000 barrels per year, supplying 100% of OSCA's
domestic oilfield needs and part of its international requirements.
Additionally, the Geismar facility distributes calcium chloride to industrial
and food industry customers throughout the United States.
OIL TOOLS FACILITY--MANSFIELD, TEXAS
This 37,000 square foot facility houses manufacturing for OSCA's
downhole completion tools and a significant portion its sand control tools. The
facility employs machinists, quality control personnel and sales and support
staff. In addition, this facility supports and distributes a full line of
mechanical and hydraulic set
10
packer equipment to supply the non-sand control completion and workover markets.
OSCA leases this facility under an agreement that expires on January 1, 2003.
OTHER FACILITIES
OSCA also conducts land completion services from leased locations in
Kilgore and Corpus Christi, Texas.
ITEM 3. 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, Plaintiffs seek damages,
interest and other costs in the approximate amount of $21.4 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 has amended its complaint
to include Cardinal Wireline Service, who was performing wireline operations
aboard the platform immediately before the blowout. OSCA has also filed a third
party demand against its underwriters and insurance broker in support of
coverage of claims asserted against OSCA in the Newfield matter.
OSCA has denied that it breached its contract or was negligent and
intends to vigorously defend itself and to prosecute the merits of its claims.
Mediation has been set in the combined lawsuits for March 5, 2002, and a trial
date of March 14, 2002 has been set. On February 22, 2002, the court issued
preliminary rulings in the case, one of which was partial summary judgment in
favor of Newfield and against OSCA on the issue of breach of contract, and one
of which was a dismissal of OSCA's claims against Cardinal Wireline Service. The
court specifically stated, and OSCA believes, that this ruling is not
dispositive as to whether OSCA's actions caused the blowout and whether OSCA is
therefore liable for damages to Newfield. OSCA intends to defend the case
vigorously. While it is not possible to predict the outcome of legal actions
brought by or against OSCA, management is unable to determine whether the
outcome of the legal actions will have a material adverse effect on the results
of operations in any particular period. However, management does not believe
that the outcome will have a material adverse effect on OSCA's consolidated
financial position or liquidity.
OSCA is also a party to various routine legal proceedings. These
primarily involve commercial claims, products liability claims, personal injury
claims and workers' compensation claims. OSCA cannot predict the outcome of
these lawsuits, legal proceedings and claims with certainty. Nevertheless, OSCA
believes that the outcome of all of these proceedings, even if determined
adversely, would not have a material adverse effect on its business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of OSCA during
the fourth quarter of the year ended December 31, 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock of OSCA has traded on the National Association
of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") under the
symbol "OSCA" since its initial public offering on June 15, 2000. As of February
15, 2002, there were approximately 7 holders of record of OSCA's Class A Common
Stock.
The following table sets forth for the periods indicated the high and
low closing prices per share of the OSCA's Class A Common Stock.
<Table>
<Caption>
HIGH LOW
------ ------
2000:
Second Quarter, commencing June 15, 2000 $18.63 $16.25
Third Quarter 18.00 11.00
Fourth Quarter 17.00 10.88
2001:
First Quarter $25.56 $14.56
Second Quarter 29.76 16.75
Third Quarter 21.05 12.56
Fourth Quarter 22.65 14.05
</Table>
OSCA has not paid cash dividends on its Class A Common Stock. OSCA
currently intends to retain earnings to finance the development of its business
and does not expect to pay cash dividends in the foreseeable future.
To date, there has been no public market for the Class B Common Stock
of OSCA. OSCA paid a cash dividend of approximately $8.2 million to its sole
Class B shareholder in 2000 as a result of the IPO. All of the Class B Common
Stock is held by Great Lakes, see note 9 to OSCA's audited consolidated
financial statements included elsewhere in this document.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected historical financial data
for the periods and as of the dates presented. The statement of operations data
for each of the years in the five-year period ended December 31, 2001 and the
balance sheet data at December 31, 1997, 1998, 1999, 2000 and 2001 have been
derived from the consolidated financial statements and notes thereto, some of
which are included elsewhere in this Form 10-K, and have been audited by Ernst &
Young LLP, independent auditors. The historical consolidated statement of
operations data set forth below has been adjusted to reflect many significant
changes that occurred in the operations and funding of OSCA as a result of its
separation from Great Lakes in June 2000. The selected financial data should be
read in conjunction with, and are qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this Form 10-K. The financial information presented below may not be indicative
of future performance and does not necessarily reflect what the financial
position and results of operations would have been had OSCA operated as a
separate, stand-alone entity during the periods presented.
12
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenue $ 112,739 $ 113,369 $ 91,938 $ 131,961 $ 176,021
Operating expenses:
Cost of goods sold and services 78,026 88,800 74,635 98,224 134,620
Selling, general and admin. 16,515 19,271 18,153 21,391 23,203
Amortization of intangibles 251 370 432 397 453
Special charges (credit)(1) -- 13,350 (2,550) (688) --
--------- --------- --------- --------- ---------
Operating income (loss) 17,947 (8,422) 1,268 12,637 17,745
Interest expense (income), net (191) (137) (114) 985 1,227
Other expense (income), net (16) 538 (724) 2 786
--------- --------- --------- --------- ---------
Income (loss) before income taxes 18,154 (8,823) 2,106 11,650 15,732
Income tax provision (benefit) 6,727 (1,943) 1,284 4,434 6,012
--------- --------- --------- --------- ---------
Net income (loss) $ 11,427 $ (6,880) $ 822 $ 7,216 $ 9,720
========= ========= ========= ========= =========
Diluted earnings (loss) per share(2) $ 1.36 $ (.82) $ .10 $ .61 $ .65
========= ========= ========= ========= =========
Weighted-average shares outstanding(2) 8,400 8,400 8,400 11,827 14,909
OTHER DATA:
Depreciation and amortization $ 4,355 $ 6,053 $ 7,312 $ 8,257 $ 9,152
Capital expenditures 18,913 24,140 5,873 4,407 19,765
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------------------------------------------
BALANCE SHEET DATA: 1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(in thousands)
Working capital (deficit) $ 48,937 $ 44,411 $ (29,480) $ 53,843 $ 51,139
Property and equipment, net 34,085 46,054 46,928 41,759 51,256
Total assets 100,179 120,044 101,687 124,306 137,786
Total debt(3) 34,178 53,310 109,113 31,214 27,236
Total stockholders' equity
(deficit)/Great Lakes Investment 54,928 47,724 (19,930) 68,721 78,590
</Table>
(1) In 1998, OSCA incurred special charges of $13.4 million related to
asset impairments, write-down of the carrying value of an asset to be
disposed of for fair value, severance costs, lease costs and other
related charges. In 1999, OSCA recognized a credit to special charges
of $2.5 million for an upward adjustment of the carrying value of an
asset held for disposal which was impaired in 1998. In 2000, OSCA
recognized a credit to special charges of $0.7 million for an
adjustment to lease costs. See note 4 and Schedule II to OSCA's audited
consolidated financial statements included elsewhere in this document.
(2) Diluted earnings per share and the weighted average shares outstanding
prior to 2000 include only the Class B Common Stock and have been
restated to the number of shares that were converted at the
recapitalization in December 1999.
(3) Total debt for 1997 through 1999 includes all notes payable and
outstanding payables to Great Lakes. Total debt since 2000 includes all
notes payable.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
The discussion and analysis of OSCA's financial condition and results
of operations should be read in conjunction with the audited consolidated
financial statements and related notes, which appear elsewhere in this Form
10-K.
Since 1982, OSCA's business operations have been conducted by various
entities owned directly or indirectly by Great Lakes. In order to accomplish
OSCA's IPO and to appropriately reflect the businesses to be included in the
IPO, Great Lakes transferred certain foreign subsidiaries previously owned by
Great Lakes to OSCA. This transfer was completed in December 1999 and resulted
in OSCA's direct ownership of those subsidiaries. Accordingly, financial
information for 1999 is presented on a consolidated basis. The financial
information for the periods prior to the transfer are presented on a combined
basis.
The accompanying financial statements prior to the IPO reflect the
historical financial position, results of operations, changes in stockholder's
equity (deficit) and cash flows directly related to OSCA, adjusted to include
only those parts of the business which remained part of OSCA after the IPO.
These adjustments, which were made to the historical accounting records of OSCA,
consist primarily of the "carve-out" or elimination of the assets, liabilities
and results of operations of two businesses owned by OSCA. These two businesses
consisted of an environmental remediation services business owned by OSCA and
OSCA's 50% ownership interest in a joint venture formed to provide pipeline
commissioning and infrastructure support services primarily in the Gulf of
Mexico.
This "carve-out" was supported by the terms of a Separation Agreement
entered into with Great Lakes. The Separation Agreement specifies that as of the
closing date of the offering, Great Lakes assumed and indemnified OSCA for all
claims, charges, assessments and liabilities, known and unknown, directly or
indirectly relating to these businesses. Additionally, Great Lakes is entitled
to all rights and beneficial interest in all tangible and intangible assets
relating to these businesses. Therefore, the future results of operations and
financial position of OSCA will not be impacted by these businesses.
These financial statements have been prepared from OSCA's and Great
Lakes' historical accounting records and include the historical operations of
entities directly owned by OSCA and operations transferred to OSCA by Great
Lakes in December 1999. Accordingly, Great Lakes' net investment is shown in
lieu of stockholders' equity (deficit) in the financial statements prior to the
transfer.
The statements of operations prior to the IPO include all material
costs of doing business including costs related to services provided to OSCA by
Great Lakes. Charges for such services are based on a number of factors
including actual and allocated charges. These charges are not necessarily
indicative of the costs and expenses that would have resulted if OSCA had been
operated as a separate entity prior to the IPO.
OSCA is organized into three global business segments: Completion
Fluids, Completion Services and Downhole Completion Tools. The units are
organized to offer a distinct group of products, technology and services.
FACTORS AFFECTING RESULTS OF OPERATIONS
Demand for OSCA's services depends primarily on activity in the oil and
natural gas exploration and production industry in the Gulf of Mexico and in
select international markets. This activity is driven mostly by current and
expected market prices for oil and natural gas and by the exploration and
production budgets of OSCA's principal customers. These factors are largely
dependent on global and regional levels of energy supply and demand. Generally,
increasing energy demand and commodity prices generate increased exploration and
production activity, which translates to greater demand for OSCA's services.
Conversely, in periods of falling energy demand and commodity prices, demand for
OSCA's services generally declines. Historically, changes in the budgets and
activity levels of exploration and production companies have lagged significant
movements in oil and natural gas prices.
14
The effect of lower oil prices was evident during the second half of
1998 and first half of 1999 when the oil and natural gas industry experienced a
significant downturn. Oil prices declined to their lowest level in over 12
years. This decline resulted in oil and natural gas companies canceling or
deferring a significant portion of their exploration and development activities,
which led to reduced demand for OSCA's products and services and increased
pricing pressure.
Oil and natural gas prices substantially recovered in the second half
of 1999. In the second half of 1999, exploration and production activity began
to recover and gradually increased throughout 2000 in the Gulf of Mexico. Oil
and natural gas prices remained at high levels through early 2001 and drove
increases in drilling activity in the Gulf of Mexico and other oil and natural
gas producing regions of the world. Due primarily to cutbacks in demand related
to recent U.S. economic slowdown, energy prices declined in the second half of
2001 and drilling activity has slowed.
Merger activity among both major and independent oil and natural gas
companies also affects exploration, development and production activity, as
these organizations attempt to increase efficiency and reduce costs. Generally,
only the more promising exploration and development projects from each merged
entity are likely to be pursued, which may result in overall lower post merger
exploration and development budgets.
The main drivers of OSCA's revenue are the number of wells completed in
the Gulf of Mexico and, to a lesser degree, activity in select international
markets such as Brazil, Venezuela and the North Sea. These drivers are dependent
on the factors and dynamics described above.
The main components of OSCA's operating expenses are cost of goods sold
and services and selling, general and administrative expenses. Each of these
expense items includes expenses that, at least in the short term, are relatively
fixed. Therefore, as OSCA's revenues fluctuate in response to the factors and
dynamics described above, its expenses as a percentage of revenues fluctuate
accordingly. During the last industry downturn, in 1998 and 1999, OSCA elected
to maintain, and in some instances expand, its productive and sales capacity to
prepare it for the next industry expansion, and as a result its expenses
increased significantly as a percentage of revenues. This effect reversed itself
in 2000 as OSCA's revenues increased as a result of increased industry activity.
SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. See Note 2 to OSCA's audited consolidated financial
statements included elsewhere in this document for a summary of the significant
accounting policies and methods used in the preparation of the financial
statements. The following is a brief discussion of the more significant
accounting policies and methods used by OSCA.
GENERAL
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The most significant estimates and
assumptions relate to inventories, deferred income taxes, and allowances for
doubtful accounts. Actual amounts could differ significantly from these
estimates. Other significant accounting issues relate to foreign currency and
related parties.
INVENTORIES
OSCA values its inventory at the lower of cost or market. OSCA also
provides a reserve for slow moving and obsolete items. The reserve is based on a
review of items which have not moved for a certain length of time and
management's estimate of what may be obsolete. The reserve was $1.3 million at
December 31, 2001. If market value decreases or usage decreases, OSCA's estimate
of the carrying value of inventory could be reduced by a material amount.
15
DEFERRED INCOME TAXES
OSCA has deferred tax assets related to net operating losses generated
in foreign countries. OSCA's accounting policy is to record valuation allowances
when it is more likely than not that a tax benefit will not be realized. At
December 31, 2001, OSCA had deferred tax assets related to foreign net operating
losses of $1.2 million and a valuation allowance of $0.8 million to offset those
assets. The valuation allowance offsets a portion of the net operating losses
generated in Mexico and Venezuela. If OSCA's estimate of recoverability is
incorrect an additional $0.3 million of a valuation allowance would be required.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
OSCA evaluates the collectibility of its accounts receivable based on a
combination of factors. In circumstances where OSCA is aware of a specific
customer's inability to meet its financial obligations to OSCA (e.g., bankruptcy
filings, substantial downgrading of credit scores), OSCA will record a specific
reserve for bad debts to reduce the receivable to the amount OSCA reasonably
believes will be collected. For all other customers, OSCA records reserves for
bad debts based on .5% of accounts receivables. If circumstances change (i.e.,
higher than expected defaults or an unexpected material adverse change in a
major customer's ability to meet its financial obligations), OSCA's estimate of
the recoverability of amounts due could be reduced by a material amount.
FOREIGN CURRENCY
OSCA generates a significant portion of its revenues and corresponding
accounts receivable through sales denominated in currencies other than the U.S.
dollar. Historically, the foreign currency gains and losses on these
transactions have not been significant, and OSCA has determined that foreign
currency derivative products are generally not required to hedge its exposure.
If there were a significant decline in exchange rates, the U.S. dollar
equivalents OSCA would receive from its customers could be materially less than
the reported amount.
RELATED PARTIES
OSCA has had significant transactions in the past with Great Lakes and
Great Lakes remains a major supplier of some of the products used in OSCA's
operations. Great Lakes also guarantees OSCA's obligations under its $40.0
million credit facility. See notes 3 and 9 to OSCA's audited consolidated
financial statements included elsewhere in this document for a more complete
description of the relationship.
RESULTS OF OPERATIONS
The following table summarizes our historical results of operations as
a percentage of net revenue for the periods indicated. The historical financial
data for 1999, 2000 and 2001 were derived from our audited consolidated
financial statements included elsewhere in this Form 10-K. The information
contained in this table should be read in conjunction with "Selected Financial
Data" and the consolidated financial statements and related notes included
elsewhere in this Form 10-K.
16
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
------ ------ ------
STATEMENT OF INCOME DATA:
Net revenue 100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold and services 81.2 74.4 76.5
Selling, general & administrative 19.7 16.2 13.2
Amortization of intangibles 0.5 0.3 0.2
Special charges (credit) (2.8) (0.5) --
------ ------ ------
Total operating expenses 98.6 90.4 89.9
Operating income 1.4 9.6 10.1
Interest expense (income), net (0.1) 0.8 0.7
Other expense (income), net (0.8) 0.0 0.5
------ ------ ------
Income before income taxes 2.3 8.8 8.9
Income tax provision 1.4 3.3 3.4
------ ------ ------
Net income 0.9% 5.5% 5.5%
====== ====== ======
</Table>
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
Net Revenue. Revenues by business segment are as follows:
<Table>
<Caption>
YEARS ENDED %
DECEMBER 31, INCREASE
--------------------- --------
2000 2001
-------- --------
(in thousands)
Completion Fluids $ 55,168 $ 71,551 29.7
Completion Services 43,511 51,500 18.4
Downhole Completion Tools 33,282 52,970 59.2
-------- --------
$131,961 $176,021 33.4
======== ========
</Table>
Revenues in all segments increased due to favorable market conditions
for most of 2001. Worldwide drilling activities continued to improve early in
2001, particularly in the Gulf of Mexico, as a result of stable oil prices for
most of 2001. Prices for oil fell off in the fourth quarter of 2001 and
consequently, so did drilling activity.
The Completion Services segment had a lower percentage increase than
the other two segments as the completion services were more affected by the
fourth quarter industry decline. The Downhole Completion Tool segment had a
higher percentage increase due to market penetration primarily attributable to
the successful introduction of several products.
17
Cost of goods sold and services. Cost of goods sold and services by
business segment are as follows:
<Table>
<Caption>
YEARS ENDED %
DECEMBER 31, INCREASE
---------------------- --------
2000 2001
-------- --------
(in thousands)
Completion Fluids $ 42,369 $ 58,295 37.6
Completion Services 33,427 42,331 26.6
Downhole Completion Tools 22,428 33,994 51.6
-------- --------
$ 98,224 $134,620 37.1
======== ========
</Table>
The increase in cost of goods sold and services correlates with the
increase in revenue.
Selling, General and Administrative. Selling, general and
administrative expense increased $1.8 million, or 8.5%, to $23.2 million for the
year ended 2001 compared to $21.4 million for the year ended December 31, 2000.
The increase was mainly due to the growth of OSCA's workforce in response to
greater industry activity. Selling, general and administrative expense decreased
as a percentage of net revenue primarily due to higher net revenue that was able
to be leveraged on the fixed portion of these expenses.
Operating Income. As a result of the foregoing, operating income
increased $5.1 million to $17.7 million for the year ended December 31, 2001
compared to $12.6 million for the prior year. Operating income by segment is as
follows:
<Table>
<Caption>
%
YEARS ENDED INCREASE
DECEMBER 31, (DECREASE)
---------------------- ----------
2000 2001
-------- --------
(in thousands)
Completion Fluids $ 5,606 $ 6,176 10.2
Completion Services 6,262 4,210 (32.8)
Downhole Completion Tools 4,125 11,397 176.3
Corporate and Other (3,356) (4,038) (20.3)
-------- --------
$ 12,637 $ 17,745 40.4
======== ========
</Table>
Interest Expense (Income), Net. Net interest expense increased $0.2
million for the year ended December 31, 2001 compared to the prior year
primarily due to an increase in average outstanding debt offset by a decrease in
the interest rate. Average debt outstanding for the year ended December 31, 2000
was $17.4 million compared to $27.3 million for the year ended December 31,
2001.
Income Tax Provision. The income tax provision for the year ended
December 31, 2001 was $6.0 million, resulting in an effective tax rate of 38.2%,
while in 2000 it was $4.4 million, resulting in an effective tax rate of 38.1%.
Net Income. Net income for the year ended December 31, 2001 increased
$2.5 million to $9.7 million from $7.2 million for the year ended December 31,
2000 reflecting the factors discussed above.
18
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Revenues. Revenues by business segment are as follows:
<Table>
<Caption>
YEARS ENDED %
DECEMBER 31, INCREASE
--------------------- --------
1999 2000
-------- --------
(in thousands)
Completion Fluids $ 50,621 $ 55,168 9.0
Completion Services 25,666 43,511 69.5
Downhole Completion Tools 15,651 33,282 112.7
-------- --------
$ 91,938 $131,961 43.5
======== ========
</Table>
All segments experienced an increase in revenue which was primarily
attributable to an increase in oil and natural gas prices that resulted in an
increase in worldwide drilling activities, particularly in the Gulf of Mexico.
In addition, the Downhole Completion Tool segment benefited from increased
market penetration which was primarily attributable to the successful
introduction of several new products.
Cost of Goods Sold and Services. Cost of goods sold and services for
the year ended December 31, 2000 increased $23.6 million, or 31.6%, to $98.2
million from $74.6 million for the year ended December 31, 1999. However, as a
percentage of revenue, cost of goods sold and services decreased mainly due to
price increases for products and services and a more favorable product mix.
Selling, General and Administrative. Selling, general and
administrative expense increased $3.2 million, or 17.6%, to $21.4 million for
2000 compared to $18.2 million for 1999. The increase was mainly due to the
growth of OSCA's workforce in response to greater industry activity. Selling,
general and administrative expense decreased as a percentage of net revenue
primarily due to higher net revenue that was able to be leveraged on the fixed
portion of these expenses.
Special Charges (Credit). Of the lease costs included in the special
charges originally recorded in the year ended December 31, 1998, approximately
$0.7 million was reversed in 2000. This reversal relates to a time period during
the year when the vessel being leased was in operation and those lease costs
were charged to OSCA's operating expenses rather than against the reserve.
Additional information regarding the special charges (credit) is provided in
Note 4 to OSCA's audited consolidated financial statements included elsewhere in
this document.
Operating Income. As a result of the foregoing, operating income
increased $11.3 million to $12.6 million for the year ended December 31, 2000
compared to $1.3 million for the year ended December 31, 1999. Operating income
by segment is as follows:
<Table>
<Caption>
YEARS ENDED %
DECEMBER 31, INCREASE
---------------------- --------
1999 2000
-------- --------
(in thousands)
Completion Fluids $ 5,046 $ 5,606 11.1
Completion Services (696) 6,262 999.7
Downhole Completion Tools 621 4,125 564.3
Corporate and Other (3,703) (3,356) 9.4
-------- --------
$ 1,268 $ 12,637 896.6
======== ========
</Table>
19
Interest Expense (Income), Net. Net interest expense increased $1.1
million for the year ended December 31, 2000 compared to the prior year
primarily as a result of interest expense on OSCA's revolving credit facility
incurred in conjunction with the IPO.
Income Tax Provision (Benefit). The income tax provision for 2000 was
$4.4 million, resulting in an effective tax rate of 38.1%, while in 1999 it was
$1.3 million, resulting in an effective tax rate of 61.0%. The differences
between the effective tax rates for these periods and the statutory U.S. federal
income tax rate (35%) relate primarily to non-reciprocal tax benefits on foreign
losses in 1999.
Net Income. Net income for the year ended December 31, 2000 increased
$6.4 million to $7.2 million from $0.8 million for the year ended December 31,
1999 reflecting the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
OSCA's primary uses for cash are working capital, capital expenditures
and acquisitions. Historically, OSCA's cash sources have been provided by
operations and prior to the IPO, provided by intercompany borrowings from Great
Lakes. 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 December 31, 2001 was $51.1 million compared
to $53.8 million at December 31, 2000. The decrease is attributable to OSCA's
investment of current assets into property and equipment and to reduce long-term
debt.
OSCA's operations for the year ended December 31, 2001 provided net
cash of $27.1 million which was primarily utilized for capital expenditures.
Capital expenditures for the year ended December 31, 2001 were $19.8 million. In
addition to capital expenditures, OSCA used the cash provided from operations to
reduce long-term debt approximately $4.0 million in 2001. OSCA's cash at
December 31, 2001 was $8.5 million compared to $3.6 million at December 31,
2000.
In 2000, OSCA's primary use of funds was for the payment of dividends
and amounts due to Great Lakes. OSCA's primary source of cash in 2000 was the
proceeds of the IPO and the revolving credit facility.
The revolving credit facility bears interest at a floating rate (LIBOR
plus an applicable margin) and provides for up to $40.0 million of borrowings in
the United States, subject to borrowing base limitations. In conjunction with
the IPO, OSCA borrowed $31.0 million under the revolving credit facility. The
proceeds from those borrowings were used to repay indebtedness owed to Great
Lakes. Borrowings under the revolving credit facility mature in 2003. The
revolving credit facility is guaranteed by Great Lakes, so long as Great Lakes
maintains a controlling interest in OSCA. OSCA pays Great Lakes an annual fee
equal to 0.15% of the committed amount under the revolving credit facility for
this guarantee. At February 18, 2002, $32.0 million was outstanding under this
facility.
As of December 31, 2001, OSCA had the following contractual cash
obligations:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
------- --------- ------- ------- -------
Long Term Debt $27,236 $ 118 $27,118 $ -- $ --
Operating Leases 7,594 5,212 1,964 418 --
Capital Expenditure Commitments 10,860 10,860 -- -- --
------- ------- ------- ------- ----
Total Contractual Cash Obligations $45,690 $16,190 $29,082 $ 418 $ --
======= ======= ======= ======= ====
</Table>
OSCA estimates that cash generated from operations in 2002 and
borrowings from the revolving credit facility will be sufficient to meet its
cash operating requirements. OSCA expects total capital expenditures in 2002 to
be approximately $19.1 million.
20
If OSCA should decide to pursue additional acquisition opportunities
during 2002 besides the Ancor Services acquisition, OSCA's ability to finance
any such acquisitions will be a critical element of its analysis. Pursuant to
OSCA's revolving credit facility, OSCA has agreed to limit the amount of equity
it may issue, or debt it may incur, which may make it more difficult to pursue
strategic acquisitions. OSCA may require additional equity or debt financing to
meet its working capital requirements or to fund its research and development
activities. There can be no assurance that additional financing will be
available when required or, if available, that it will be on terms satisfactory
to OSCA.
INFLATION
The impact of inflation on OSCA's business has not been material during
the periods presented.
RECENTLY ISSUED 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
will apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net income
of $0.2 million ($.01 per basic share) per year. During 2002, OSCA will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of OSCA.
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 (FAS 144), which 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. FAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. OSCA expects to adopt FAS 144 as of
January 1, 2002 and it has not determined the effect, if any, the adoption of
FAS 144 will have on its financial position and results of operations.
FORWARD-LOOKING STATEMENTS
This document includes certain statements that contain
"forward-looking" information. Forward-looking statements speak to the future.
The following words and similar expressions are intended to identify such
forward-looking statements:
o anticipate,
o believe,
o estimate,
o expect,
o intend and
o will.
OSCA believes that the expectations reflected in these forward-looking
statements are reasonable. However, OSCA cannot give any assurance that such
expectations will materialize. These forward-looking statements are subject to:
o risks,
o uncertainties and
o assumptions.
21
If any of these risks, uncertainties or assumptions materialize, actual
results of current and future operations may not be as expected. Therefore,
readers should not place undue certainty on these forward-looking statements.
Among the factors that will directly affect OSCA's results of
operations and the industry it operates are:
o changes in the price of oil and natural gas,
o OSCA's ability to successfully integrate recent acquisitions,
o presence of competitors with greater financial resources,
o operating risks inherent in the oilfield service industry,
such as blowouts, explosions, and vessels sinking,
o domestic and worldwide politically stability and economic
growth,
o risks associated with OSCA's successful execution of internal
operating plans,
o legal proceedings,
o exposure to environmental liabilities and
o currency risk factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OSCA is subject to certain market risks arising from transactions
entered into in the normal course of business. These risks relate to changes in
interest rates and fluctuations in foreign currency exchange rates. OSCA does
not believe that it has any material exposure to these market risks.
Interest Rates
OSCA's long-term debt under its revolving credit agreement incurs
interest at a variable rate based on LIBOR plus an applicable margin. OSCA's
exposure to interest rate risk due to changes in LIBOR is not expected to be
material. At December 31, 2001, the fair value of the obligation approximates
its related carrying value because the obligation bears interest at the current
market rate.
Foreign Currency Risk
A portion of OSCA's revenue and operating expenses are denominated in
foreign currencies. As a result, OSCA is subject to foreign exchange risks that
could adversely affect its operations. To the extent that OSCA incurs expenses
in U.S. dollars but earns revenue in foreign currencies, any decrease in the
values of those foreign currencies relative to the U.S. dollar could cause
OSCA's profit margins to decline or could cause OSCA's products to be less
competitive against those of foreign competitors.
OSCA does not intend to comprehensively hedge its exposure to currency
rate changes, although OSCA may choose to selectively hedge certain working
capital balances, firm commitments, cash returns from subsidiaries and
affiliates and/or tax payments. There can be no assurance these efforts will be
successful. At December 31, 2001, OSCA had no open foreign currency hedged
positions. The income statement effect of foreign currency (gains) losses for
1999, 2000 and 2001 were ($0.6) million, $0.1 million and $0.4 million
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be included in this Item 8 is contained in
Pages F-1 through F-22 in this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
PART III
The information required by Part III is incorporated by reference from
a definitive proxy statement that OSCA will file pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
In the event such Proxy Statement is not filed with the SEC in the 120-day
period, the information required by Part III will be filed in an amendment to
this Report not later than the end of the 120-day period.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is hereby incorporated by
reference from OSCA's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by
reference from OSCA's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is hereby incorporated by
reference from OSCA's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is hereby incorporated by
reference from OSCA's Proxy Statement.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 Financial Statements of OSCA, Inc.
<Table>
Page
Report of Independent Auditors F-1
Financial Statements:
Consolidated Balance Sheets --
December 31, 2000 and 2001 F-2
Consolidated Statements of Income --
For the Three Years Ended December 31, 2001 F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) -- For the Three Years Ended
December 31, 2001 F-4
Consolidated Statements of Cash Flows --
For the Three Years Ended December 31, 2001 F-5
Notes to Consolidated Financial Statements F-6
(a) 2 Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-1
</Table>
All other financial statement schedules have been omitted since they are either
not required or not applicable.
(a) 3 Exhibits
Exhibit No. Description
3.1 Form of Restated Certificate of Incorporation of OSCA, Inc.
(incorporated by reference to OSCA's Registration Statement on Form
S-1 No. 333-31956).
3.2 Form of Amended and Restated By-Laws of OSCA, Inc. (incorporated by
reference to OSCA's Registration Statement on Form S-1 No.
333-31956).
4.1 Credit Agreement by and among OSCA, Inc., Bank One, Louisiana,
N.A., Hibernia National Bank, Lasalle Bank N.A., and National City
Bank of Indiana dated June 20, 2000 (incorporated by reference to
OSCA's Annual Report or Form 10K for the year ended December 31,
2000)
10.1 Form of Master Separation Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.2 Form of Services Agreement between OSCA, Inc. and Great Lakes dated
June 20, 2000 (incorporated by reference to OSCA's Registration
Statement on Form S-1 No. 333-31956).
10.3 Form of Tax Disaffiliation Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.4 Form of IPO and Distribution Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.5 Form of Registration Rights Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
24
10.6 Form of Brominated Products Supply Agreement between OSCA, Inc. and
Great Lakes dated June 20, 2000 (incorporated by reference to
OSCA's Registration Statement on Form S-1 No. 333-31956).
10.7 OSCA, Inc. 2000 Incentive Compensation Plan (incorporated by
reference to OSCA's Registration Statement on Form S-1 No.
333-31956).
10.8 OSCA, Inc. 2000 Stock Incentive Plan (incorporated by reference to
OSCA's Registration Statement on Form S-1 No. 333-31956).
10.9 Amended and restated Change in Control Agreement between OSCA, Inc.
and Robert L. Hollier dated October 26, 2000 (incorporated by
reference to OSCA's annual report on Form 10-K for the year ended
December 31, 2000).
10.10 Amended and restated Change in Control Agreement between OSCA, Inc.
and Richard J. Alario, Steven J. Brading, Don H. Michel and Stephen
M. Gray dated October 26, 2000 (incorporated by reference to OSCA's
Annual Report on Form 10K for the year ended December 31, 2000).
10.11 Amendment to the Amended and Restated Change in Control Agreement
between OSCA, Inc. and Robert L. Hollier, Richard J. Alario, Steven
J. Brading, Donald H. Michel and Stephen M. Gray (filed herewith).
10.12 Amendment to the Amended and Restated Change in Control Agreement
between OSCA, Inc. and Robert L. Hollier, Richard J. Alario, Steven
J. Brading, Donald H. Michel and Stephen M. Gray (filed herewith).
21.1 Subsidiaries of OSCA (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
23.1 Consent of Ernst & Young LLP (filed herewith).
24.1 Power of Attorney (included in signature page)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 2001.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OSCA, Inc.
By /s/ Robert L. Hollier Date: February 28, 2002
--------------------------------- -----------------
Robert L. Hollier, President &
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert L. Hollier, Stephen M. Gray and
Steven J. Brading and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him, and in his
name, place and stead, in any and all capacities, to sign any or all amendments
Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of OSCA and in the
capacities and on the dates indicated:
By /s/ Steven J. Brading Date: February 28, 2002
--------------------------------- -----------------
Steven J. Brading, Vice President
and Chief Financial Officer
(Principal Accounting Officer)
By /s/ Mark P. Bulriss Date: February 28, 2002
--------------------------------- -----------------
Mark P. Bulriss, Director,
Chairman of the Board
By /s/ Martin M. Hale Date: February 28, 2002
--------------------------------- -----------------
Martin M. Hale, Director
By /s/ Robert L. Hollier Date: February 28, 2002
--------------------------------- -----------------
Robert L. Hollier, Director
By /s/ Mack G. Nichols Date: February 28, 2002
--------------------------------- -----------------
Mack G. Nichols, Director
By /s/ Richard A. Pattarozzi Date: February 28, 2002
--------------------------------- -----------------
Richard A. Pattarozzi, Director
By /s/ W. Bernard Pieper Date: February 28, 2002
--------------------------------- -----------------
W. Bernard Pieper, Director
By /s/ Richard T. Higgons Date: February 28, 2002
--------------------------------- -----------------
Richard T. Higgons, Director
By /s/ John L. Whitmire Date: February 28, 2002
--------------------------------- -----------------
John L. Whitmire, Director
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
OSCA, Inc.
We have audited the accompanying consolidated balance sheets of OSCA,
Inc. and subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of OSCA,
Inc. and subsidiaries at December 31, 2000 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
January 21, 2002, except for Note 18, as to
which the date is February 20, 2002
Indianapolis, Indiana
F-1
OSCA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
- --------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 2001
--------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 3,551 $ 8,487
Accounts and notes receivable, less allowance for
doubtful accounts of $558 in 2000 and $543 in 2001 40,583 37,497
Inventories 27,214 28,490
Prepaid expenses and other current assets 1,324 1,748
Deferred income taxes 1,883 2,311
--------- ---------
Total current assets 74,555 78,533
Property and equipment, net 41,759 51,256
Goodwill, less accumulated amortization of $4,202 in 2000 and $4,478 in 2001 6,848 6,572
Other assets 1,144 1,425
--------- ---------
Total Assets $ 124,306 $ 137,786
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 11,492 $ 15,511
Accrued liabilities 5,508 5,242
Income taxes payable 301 2,117
Current portion of notes payable 118 118
Due to Great Lakes 3,293 4,406
--------- ---------
Total current liabilities 20,712 27,394
Notes payable 31,096 27,118
Other long-term liabilities 691 970
Deferred income taxes 3,086 3,714
--------- ---------
Total liabilities 55,585 59,196
--------- ---------
Commitments and Contingencies
Stockholders' Equity
Class A common stock, $.01 par value, 25,000,000 shares authorized 6,440,000
shares issued and outstanding at December 31, 2000, 6,945,019 shares issued
and outstanding at December 31, 2001 64 69
Class B common stock, $.01 par value, 40,000,000 shares authorized 8,400,000 issued
and outstanding at December 31, 2000, 7,900,000 shares issued and outstanding at
December 31, 2001 84 79
Additional paid-in capital 90,798 90,876
Retained deficit (20,285) (10,565)
Accumulated other comprehensive loss (1,940) (1,869)
--------- ---------
Total stockholders' equity 68,721 78,590
--------- ---------
Total Liabilities and Stockholders' Equity $ 124,306 $ 137,786
========= =========
</Table>
See accompanying notes to consolidated financial statements.
F-2
OSCA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share )
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
--------- --------- ---------
Net revenue $ 91,938 $ 131,961 $ 176,021
Operating expenses:
Cost of goods sold and services 74,635 98,224 134,620
Selling, general and administrative 18,153 21,391 23,203
Amortization of intangibles 432 397 453
Special charges (credit) (2,550) (688) --
--------- --------- ---------
Total operating expenses 90,670 119,324 158,276
--------- --------- ---------
Operating income 1,268 12,637 17,745
Interest expense 37 1,344 1,512
Interest income (151) (359) (285)
Foreign currency (gains) losses (586) 142 368
Other expense (income) - net (138) (140) 418
--------- --------- ---------
Income before income taxes 2,106 11,650 15,732
Income tax provision 1,284 4,434 6,012
--------- --------- ---------
Net income $ 822 $ 7,216 $ 9,720
========= ========= =========
Earnings per share:
Basic $ 0.10 $ 0.61 $ 0.66
Diluted $ 0.10 $ 0.61 $ 0.65
Weighted-average shares outstanding 8,400 11,826 14,841
Weighted-average shares outstanding
assuming dilution 8,400 11,827 14,909
</Table>
See accompanying notes to consolidated financial statements.
F-3
OSCA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
GREAT ADDITIONAL RETAINED OTHER
LAKES COMMON PAID-IN EARNINGS COMPREHENSIVE COMPREHENSIVE
INVESTMENT STOCK CAPITAL (DEFICIT) INCOME (LOSS) INCOME (LOSS)
---------- -------- ---------- --------- ------------- -------------
Balance at Jan. 1, 1999 $ 47,724 $ -- $ -- $ -- $ -- $ --
Net income -- -- -- 822 -- 822
For. currency trans. adj. (1,324) -- -- -- -- (1,324)
Dividends -- -- -- (67,152) -- --
Capitalization of
consolidated entity (46,400) 84 690 47,048 (1,422) --
-------- -------- -------- -------- -------- --------
Balance at Dec. 31, 1999 -- 84 690 (19,282) (1,422) $ (502)
========
Net income -- -- -- 7,216 -- $ 7,216
Sale of stock -- 64 90,108 -- -- --
Dividends -- -- -- (8,219) -- --
For. currency trans. adj. -- -- -- -- (518) (518)
-------- -------- -------- -------- -------- --------
Balance at Dec. 31, 2000 -- 148 90,798 (20,285) (1,940) $ 6,698
========
Net income -- -- -- 9,720 -- $ 9,720
Exercise of stock options -- -- 78 -- -- --
For. currency trans. adj. -- -- -- -- 71 71
-------- -------- -------- -------- -------- --------
Balance at Dec. 31, 2001 $ -- $ 148 $ 90,876 $(10,565) $ (1,869) $ 9,791
======== ======== ======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-4
OSCA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 822 $ 7,216 $ 9,720
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of intangibles 7,312 8,257 9,152
Deferred income taxes 2,999 1,711 200
Special charges (credits) (2,550) (688) --
Loss (gain) on sale of property and equipment 619 (95) 61
Changes in operating assets and liabilities:
Accounts and notes receivable, net 9,882 (19,783) 3,086
Inventories 5,202 (7,893) (1,276)
Prepaid expenses and other current assets 92 377 (424)
Accounts payable (4,986) 4,996 4,019
Due to Great Lakes (8,876) (40,348) 1,113
Accrued and other liabilities (2,427) 1,446 1,550
Other -- (119) (135)
-------- -------- --------
Net cash provided by (used in) operating activities 8,089 (44,923) 27,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,873) (4,407) (19,765)
Purchase of other assets (89) -- --
Proceeds from sale of property and equipment -- 1,674 1,059
-------- -------- --------
Net cash used in investing activities (5,962) (2,733) (18,706)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings and (repayments) from notes payable, net (321) 30,742 (3,978)
Proceeds from sale of stock, net -- 90,172 --
Proceeds from exercise of stock options -- -- 78
Cash dividends to Great Lakes (2,152) (73,219) --
-------- -------- --------
Net cash provided by (used in) financing activities (2,473) 47,695 (3,900)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (346) 39 4,460
Cash and cash equivalents at beginning of year 5,568 3,898 3,551
Effect of exchange rate changes on cash and cash equivalents (1,324) (386) 476
-------- -------- --------
Cash and cash equivalents at end of year $ 3,898 $ 3,551 $ 8,487
======== ======== ========
Supplemental schedule of non-cash financing activities:
Issuance of dividend note payable to Great Lakes $ 65,000
========
</Table>
See accompanying notes to consolidated financial statements.
F-5
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
OSCA, Inc., including its consolidated subsidiaries, headquartered in
Lafayette, Louisiana, is a partially-owned subsidiary of Great Lakes Chemical
Corporation. OSCA provides specialized oil and natural gas well completion
fluids, completion services and downhole completion tools to major oil companies
and independent exploration and production companies, primarily in the Gulf of
Mexico and in select international markets. OSCA has operations in the United
States, United Kingdom, Norway, Italy and Central and South America.
Prior to June 15, 2000, OSCA was a wholly-owned subsidiary of Great
Lakes. In June 2000, Great Lakes sold 40% of its ownership interest in OSCA as
part of an initial public offering. The transaction was effected through a
recapitalization of OSCA whereby two classes of common stock were created (Class
A and Class B). The Class A common stock was offered to the public as part of
the IPO and Great Lakes retained 100% ownership of the Class B common stock. In
July 2000, the over-allotment option granted to the underwriters was exercised
and resulted in an additional distribution of stock that reduced Great Lakes'
ownership by 3.4% to 56.6%. During 2001, Great Lakes sold 500,000 shares of OSCA
stock reducing its Common Stock ownership to 53.2% as of December 31, 2001. Upon
sale, these shares were automatically converted from Class B shares to Class A
shares of OSCA's Common Stock.
Since 1982, OSCA's business operations have been conducted by various
entities owned directly or indirectly by Great Lakes. In order to accomplish
OSCA's IPO and to appropriately reflect the businesses to be included in the
IPO, Great Lakes transferred certain subsidiaries previously owned by Great
Lakes to OSCA. This transfer was completed in December 1999 and resulted in
OSCA's direct ownership of those subsidiaries. Accordingly, financial
information for 1999 is presented on a consolidated basis.
The accompanying financial statements that are prior to the IPO reflect
the historical financial position, results of operations, changes in
stockholders' equity (deficit) and cash flows directly related to OSCA ,
adjusted to include only those parts of the OSCA business which remained part of
OSCA after the IPO. These adjustments, which were made to the historical
accounting records of OSCA, consisted primarily of the "carve-out" or
elimination of assets, liabilities and results of operations of two businesses
owned by OSCA. These two businesses consisted of i) the former environmental
remediation services business owned by OSCA through its wholly-owned subsidiary,
OSCA de Mexico, and ii) OSCA's 50% ownership interest in a joint venture formed
to provide pipeline commissioning and infrastructure support services primarily
in the Gulf of Mexico.
This "carve-out" is supported by the terms of a Separation Agreement
entered into with Great Lakes. The Separation Agreement specifies that as of the
closing date of the offering, Great Lakes assumed and indemnified OSCA for all
claims, charges, assessments and liabilities, known and unknown, directly or
indirectly relating to these businesses. Additionally, Great Lakes is entitled
to all rights and beneficial interest in all tangible and intangible assets
relating to these businesses. Therefore, the future results of operations and
financial position of OSCA will not be impacted by these businesses.
These financial statements have been prepared from the historical
accounting records of OSCA and Great Lakes, and include the historical
operations of entities directly owned by OSCA and operations transferred to OSCA
by Great Lakes in December 1999. Accordingly, Great Lakes' investment in OSCA
("Great Lakes Investment") is shown in lieu of stockholders' equity in the
financial statements prior to the transfer.
The statements of income prior to the IPO include all material costs of
doing business including costs related to services provided by Great Lakes to
OSCA. Charges for such services are based on a number of factors including
actual and allocated charges which management believes to be reasonable. These
charges
F-6
are not necessarily indicative of the costs and expenses that would have
resulted if OSCA had been operated as a separate entity prior to the IPO. OSCA's
management estimates the incremental recurring corporate administrative expenses
that would have been incurred by OSCA on a stand alone basis to be approximately
$750,000 annually for all periods prior to the IPO.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include all the accounts of OSCA
and its subsidiaries as described above. All of OSCA's subsidiaries are wholly
owned. All significant intercompany accounts and transactions are eliminated in
consolidation. Significant accounts and transactions with Great Lakes are
disclosed as related party transactions.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition
Revenue from sales of products is recognized at the time title passes
to the customer. Title passes upon delivery to the customer. Revenue from
services is recognized as the services are provided to the customer.
OSCA provides sales allowances for sales credits issued to customers in
the normal course of business. The allowances are recorded as reductions of
sales and are included in net revenue in the accompanying consolidated
statements of income. The reductions included in net revenue were $0.2 million,
$2.0 million and $4.7 million for the years ended December 31, 1999, 2000 and
2001, respectively.
Cash Equivalents
OSCA considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. OSCA provides a reserve for
slow moving and obsolete items. The reserve is based on a review of items which
have not moved for a certain length of time.
Property and Equipment
Property and equipment is stated at cost. Improvements are capitalized
and depreciated over the period of benefit. Maintenance and repairs are charged
to operating expenses as incurred.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets which are as follows:
o buildings and improvements -- 20-39 years
o machinery and equipment -- 3-15 years
F-7
Upon retirement or other disposal of property and equipment, the cost
and related accumulated depreciation are removed from the respective accounts.
Any gains or losses are included in results of operations.
Goodwill
Goodwill, which represents the excess of cost over fair value of net
assets acquired, is amortized using the straight-line method over 40 years
Impairment of Long-Lived Assets
When events or circumstances indicate that the carrying amount of
long-lived assets to be held and used or intangible assets might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amounts. Fair value
is determined based on discounted cash flow or appraised values, as appropriate.
Foreign Currency Translation
The results of operations for foreign subsidiaries, other than those
located in highly inflationary countries, are translated into U.S. dollars using
the average exchange rates during the year, while assets and liabilities are
translated using end-of-period exchange rates. Resulting translation adjustments
are recorded as foreign currency translation adjustments in stockholders'
equity/Great Lakes investment. Foreign currency gains and losses, resulting from
transactions and resulting from translation of subsidiaries in highly
inflationary countries (Venezuela), are determined using a combination of
current and historical rates and are reported in the consolidated statement of
income. Effective January 1, 2002, Venezuela was determined to no longer be
hyperinflationary and therefore translation adjustments will be recorded in
stockholders equity.
Research and Development
Research and development costs are expensed as incurred. OSCA's
expenditures for product development and engineering were approximately $0.5
million, $0.3 million and $0.5 million for the years ended December 31, 1999,
2000 and 2001, respectively.
Income Taxes
OSCA uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting bases of assets and liabilities. Valuation allowances are
recorded to reduce deferred tax assets when it is more likely than not that a
tax benefit will not be realized.
Prior to the IPO, OSCA was included in the consolidated federal income
tax returns of Great Lakes. The consolidated tax provision for the years ended
December 31, 1999 and 2000 are presented as if OSCA had filed separate tax
returns for each of those years. OSCA did file a separate Federal Income Tax
return for the post IPO period ended December 31, 2000 and will file a separate
Federal Income Tax return for the year ended December 31, 2001.
All unremitted earnings of foreign subsidiaries and affiliates are
considered to be permanently invested and no provision for U.S. federal and
state income taxes on those earnings or translation adjustment has been
provided.
F-8
Stock-based Compensation
OSCA accounts for its stock-based compensation programs using the
intrinsic value method of accounting established by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees (APB 25)" and related
interpretations. Compensation cost for stock awards, if any, is measured as
the excess of the quoted market price of OSCA's stock at the date of grant over
the amount the employee must pay to acquire the stock.
New Accounting Standards
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
will apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net income
of $0.2 million ($.01 per basic share) per year. During 2002, OSCA will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of OSCA.
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 (FAS 144), which 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. FAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. OSCA expects to adopt FAS 144 as of
January 1, 2002 and has not determined the effect, if any, the adoption of FAS
144 will have on its financial position and results of operations.
Reclassifications
Certain items in the prior years' financial statements have been
reclassified to conform with the presentation in the current year.
3. RELATED PARTY TRANSACTIONS
OSCA purchases brominated products from Great Lakes, which constitute a
significant portion of the fluid products sold by OSCA. At the time of the IPO,
OSCA entered into a brominated products supply agreement with Great Lakes. Under
this agreement, Great Lakes has committed to provide OSCA with all or
substantially all of OSCA's requirements for brominated products, subject to a
cap. OSCA has committed to purchase at least 80% of its requirements for these
products from Great Lakes, subject to a minimum. The price will be determined
based on Great Lakes' cost plus a margin; however, during contract years three,
four and five and beyond, if OSCA is able to negotiate a lower price from a
third party supplier, Great Lakes must either meet that price or release OSCA
from 40%, 60% and 100%, respectively, of its annual requirements.
Prior to the IPO, intercompany charges for costs related to legal,
employer portion of 401(k) savings plan, liability insurance premiums,
restricted stock, employee participation in employee benefit plans covering
medical, dental, life, and long term disability insurance and certain other
miscellaneous selling, general and administrative costs. Certain of these costs
were direct charges, while other costs were allocated. To the extent specific
identification of costs charged directly to OSCA was not practicable, costs were
allocated by Great Lakes to OSCA using allocation percentages. These percentages
were determined by Great Lakes at the beginning of each year based upon the
estimated usage for each of Great Lakes subsidiaries. These percentages were
then multiplied by the total Great Lakes consolidated budgeted amounts for the
particular support service. These amounts were charged to OSCA on a monthly
basis. At year-end the consolidated
F-9
budgeted amounts were adjusted to actual. The allocation percentages were not
adjusted. In addition, a Great Lakes corporate overhead allocation was charged
to OSCA, based upon 0.5% of the monthly budgeted sales amounts. The allocated
costs and corporate overhead allocations charged to OSCA were $0.7 million, $0.2
million and $0.1 million for the years ended December 31, 1999, 2000 and 2001,
respectively. Following the IPO, OSCA incurred and paid for many of these costs
directly.
The amounts allocated by Great Lakes prior to the IPO were not
necessarily indicative of the actual costs which may have been incurred had OSCA
operated as an entity unaffiliated with Great Lakes. However, OSCA believes that
the allocations were reasonable and in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin No. 55.
Prior to the IPO, OSCA's operations and cash flow requirements had been
financed through its operating cash flows and advances from Great Lakes. In
addition, OSCA utilized the central cash management systems of Great Lakes. Cash
requirements during these periods were satisfied by cash transactions and
transfers accounted for through an intercompany account. After the IPO, OSCA did
not receive transfers of cash from Great Lakes nor did OSCA utilize the central
cash management systems of Great Lakes.
A progression of the intercompany account with Great Lakes is as
follows:
<Table>
<Caption>
DECEMBER 31,
------------------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Balance at beginning of year $ 52,517 $ 43,641 $ 3,293
Inventory purchases 10,841 12,290 17,878
Interest expense -- 25 60
Net cash (received) paid by Great Lakes on behalf of OSCA 17,747 (12,644) (17,064)
Transfer of IPO Proceeds -- (20,799) --
Transfer of Loan Proceeds at IPO -- (31,000) --
Transfer of carve-out affiliates (42,179) -- --
Dividend -- 8,219 --
Other 4,715 3,561 239
-------- -------- --------
Balance at end of the year $ 43,641 $ 3,293 $ 4,406
======== ======== ========
</Table>
4. SPECIAL CHARGES
In 1998, a repositioning plan for OSCA was necessitated by a decline in
the world oil market which significantly reduced the near term requirements for
OSCA's oil and natural gas well products and services. The repositioning plan
provided for the return of one of OSCA's deepwater service vessels to the
lessor, the decommissioning of the related service equipment, the sale or
abandonment of a calcium chloride production facility and the reduction of its
workforce by approximately 100 employees.
In the fourth quarter of 1999, due to changing market conditions and a
recognition of the need to ensure a reliable source of supply of calcium
chloride, Great Lakes and OSCA made the decision to continue utilizing its
calcium chloride production facility for the foreseeable future. This decision
resulted in a change to the 1998 repositioning plan such that the calcium
chloride production facility would not be sold or abandoned. The carrying amount
of this asset to be disposed of was therefore adjusted upward by $2.5 million,
which was the carrying amount of the facility just prior to the approval of the
original 1998 repositioning plan. In addition, $50,000 of severance costs
related to the employees of this facility and included in the 1998 special
charge was also reversed. The total impact of these changes resulted in a credit
to special charges in the amount of $2.6 million. This credit has been reflected
in the 1999 statement of income as a component of operating income.
During a portion of 2000, the deepwater service vessel that was
scheduled to be returned to the lessor was utilized by OSCA in its operations.
During those times OSCA did not charge the reserve for the lease
F-10
payments on the vessel, but included them in its operating expenses. A reversal
of $.7 million was recorded to adjust the charge for the time period when the
vessel was utilized by OSCA and has been reflected in the 2000 statement of
income as a component of operating income.
NOTE 5. INVENTORIES
The major components of OSCA's inventories by business segment are as
follows:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
-------- --------
(in thousands)
Downhole Completion Tools
Finished Products $ 14,290 $ 16,544
Raw Materials 363 609
Reserves for obsolescence (350) (800)
Completion Fluids
Finished Products 11,962 10,597
Supplies 692 763
Reserves for obsolescence (400) (450)
Completion Services
Finished Products 426 973
Supplies 231 254
-------- --------
$ 27,214 $ 28,490
======== ========
</Table>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<Table>
<Caption>
DECEMBER 31,
----------------------
2000 2001
-------- --------
(in thousands)
Land $ 1,579 $ 1,925
Buildings and improvements 9,501 9,872
Machinery and equipment 65,104 71,798
Construction in progress 927 10,331
-------- --------
Total property and equipment 77,111 93,926
Accumulated depreciation (35,352) (42,670)
-------- --------
Net property and equipment $ 41,759 $ 51,256
======== ========
</Table>
Construction in progress at December 31, 2001 included approximately
$6.0 million related to OSCA's expansion in the land completion services
segment. In addition, approximately $2.2 million related to a new research and
design facility.
Depreciation expense included in the consolidated statements of income
was $6.9 million, $7.9 million and $8.7 million for the years ended December 31,
1999, 2000 and 2001, respectively. Maintenance and repairs charged to costs and
expenses were $2.3 million, $3.9 million and $6.7 million for the same periods,
respectively.
F-11
NOTE 7. DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2000 2001
------- -------
(in thousands)
Note payable, individual $ 354 $ 236
Notes payable, bank 30,860 27,000
------- -------
31,214 27,236
Less current maturities 118 118
------- -------
$31,096 $27,118
======= =======
</Table>
The note payable, individual was issued as a result of a business
acquisition in March 1998. The note payable is a non-interest bearing note and
is payable in five equal installments of $118,000 beginning on March 1, 1999.
The individual to whom the note is payable is the former owner of the acquired
business and is currently employed by OSCA.
The notes payable to bank are borrowed against a credit facility of
$40.0 million established in conjunction with the IPO. The debt arrangement
consists of two components, a revolving loan and a swing line loan. As of
December 31, 2001, the revolving loan portion outstanding was $27.0 million and
matures on June 20, 2003 with interest at LIBOR plus 0.5% (4.23% at December 31,
2001). At December 31, 2001 no borrowings were outstanding on the swing loan
which bears interest at LIBOR plus 1.0%. OSCA also incurs a commitment fee of
0.15% per annum for any unused portion of the credit facility. The unused
portion is the total credit facility minus the revolving loan portion minus any
outstanding letters of credit. There were no outstanding letters of credit at
December 31, 2000 and 2001. The obligations under this facility are guaranteed
by Great Lakes to whom OSCA pays a fee of 0.15% per annum of the total credit
facility.
OSCA is subject to various financial covenants including a maximum
Funded Indebtedness to EBITDA ratio, a minimum Fixed Charge Coverage ratio and a
minimum Tangible Net Worth ratio. OSCA was in compliance with these covenants as
of December 31, 2001.
Based on long-term debt outstanding at December 31, 2001, maturities of
long-term debt are as follows: (in thousands)
<Table>
2002 $ 118
2003 $27,118
</Table>
Interest paid was approximately $37,000, $1.2 million and $1.4 million
for the years ended December 31, 1999, 2000 and 2001, respectively
NOTE 8. COMMITMENTS
Operating Leases
OSCA leases all three of its deepwater service vessels, land at several
of its operating facilities and various office facilities and equipment. Rent
expense incurred under these operating lease agreements was approximately $7.8
million, $9.4 million and $12.2 million for the years ended December 31, 1999,
2000 and 2001, respectively.
F-12
Future minimum lease obligations under noncancelable leases at December
31, 2001 are as follows: (in thousands)
<Table>
<Caption>
2002 $5,212
2003 1,189
2004 491
2005 284
2006 and thereafter 418
------
$7,594
======
</Table>
The future minimum lease payments listed above exclude operating leases
having initial or remaining noncancelable lease terms of one year or less.
Other Commitments
OSCA is expanding its land based completion services segment and has
purchase commitments at December 31, 2001 for approximately $9.0 million related
to that expansion.
NOTE 9. STOCKHOLDERS' EQUITY
Recapitalization
Prior to the recapitalization, OSCA's authorized stock consisted of 1.0
million issued and outstanding shares of no par value common stock, all of which
was owned by Great Lakes. In connection with the IPO, OSCA authorized 5.0
million shares of $.01 par value preferred stock, 25.0 million shares of $.01
par value Class A common stock and 40.0 million shares of $.01 par value Class B
common stock.
The Board of Directors of OSCA declared a dividend on Great Lakes' 1.0
million shares of no par value common stock in the amount of $65.0 million
pursuant to a successful completion of the IPO. This dividend was made in the
form of a non-interest bearing promissory note payable to Great Lakes and was
paid from the proceeds of the IPO. In addition, the Board of Directors of OSCA
declared a dividend on its common stock which required OSCA to pay to Great
Lakes any proceeds from the IPO in excess of amounts OSCA otherwise owed Great
Lakes. This dividend amounted to approximately $8.2 million.
Initial Public Offering (IPO)
In June 2000, OSCA sold 5.6 million shares of Class A common stock in
the IPO. In July 2000, the underwriters exercised the over-allotment option
granted to them and an additional 840,000 shares of Class A common stock were
sold. In addition, at the time of the IPO, Great Lakes' 1.0 million shares of no
par value common stock were converted into 8.4 million shares of Class B common
stock.
Voting Rights
Holders of Class B common stock have ten votes per share. Holders of
Class A common stock have one vote per share.
F-13
Share Activity
The changes in common stock shares outstanding since January 1, 1999
are reflected below:
<Table>
<Caption>
CLASS A CLASS B TOTAL
COMMON COMMON COMMON
STOCK STOCK STOCK
---------- ---------- ----------
Balance at January 1, 1999 -- -- --
Capitalization of consolidated entity -- 8,400,000 8,400,000
---------- ---------- ----------
Balance at December 31, 1999 -- 8,400,000 8,400,000
Sale of Stock 6,440,000 -- 6,440,000
---------- ---------- ----------
Balance at December 31, 2000 6,440,000 8,400,000 14,840,000
Conversion of Shares 500,000 (500,000) --
Exercise of Options 5,019 -- 5,019
---------- ---------- ----------
Balance at December 31, 2001 6,945,019 7,900,000 14,845,019
========== ========== ==========
</Table>
NOTE 10. EMPLOYEE BENEFIT PLANS
401k Plan
Prior to the IPO, substantially all OSCA employees were eligible to
participate in a defined contribution 401(k) plan sponsored by Great Lakes (the
"Great Lakes Plan"). Under the Great Lakes Plan, eligible employees were able to
contribute a portion of their salary until retirement and OSCA matched a portion
of the employee's contribution. Total expense under the Great Lakes Plan
amounted to approximately $0.3 million and $0.1 million in 1999 and 2000,
respectively. The costs of this plan were charged to OSCA through the
intercompany account with Great Lakes.
After the IPO, OSCA sponsored the OSCA Savings Plan (the "OSCA Plan")
for its employees to replace the Great Lakes Plan. Amounts applicable to OSCA
employees who were in the Great Lakes Plan were transferred from the Great Lakes
Plan to the OSCA Plan upon its origination. OSCA employees became 100% vested in
contributions made on their behalf into the Great Lakes Plan.
The OSCA Plan has both 401(k) and profit sharing features. Under the
plan, employees may contribute from 1% to 18% of their salary, limited to a
maximum annual amount as set periodically by the Internal Revenue Service. OSCA
matches 75% of the employee contribution up to 6% of annual compensation. OSCA
also may elect to make a profit sharing contribution in an amount determined at
its discretion, although no profit sharing contribution is required. Vesting of
employer matching and profit sharing contributions occurs over a period of six
years. OSCA's cost of matching contributions to the OSCA Plan was $0.4 million
in 2000 and $1.0 million in 2001.
Stock Option Plan
In June 2000, OSCA established a stock compensation plan for officers,
employees and non-employee directors. The maximum number of shares authorized
under the plan was 1.0 million shares. As of December 31, 2001, there were
approximately 291,000 shares available for future grant. To date, OSCA has
issued both restricted stock and nonqualified stock options under the plan. The
restricted stock vests 100% on the fifth anniversary from the grant date. As of
December 31, 2001, there were 41,350 shares of restricted stock outstanding,
with none being vested. The nonqualified stock options vest over three years and
expire 10 years from the date of grant. A summary of OSCA's stock option
activity and related information for the years ended December 31 follows:
F-14
<Table>
<Caption>
WEIGHTED-AVERAGE
EXERCISE PRICE PER
SHARES UNDER OPTIONS SHARE
------------------------- ------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Outstanding at Beginning of Year -- 470,850 $ 15.50
Granted 474,300 224,900 $ 15.50 $ 21.53
Exercised -- (5,019) -- $ 15.50
Forfeited (3,450) (28,043) $ 15.50 $ 17.37
-------- --------
Outstanding at End of Year 470,850 662,688 $ 15.50 $ 17.47
======== ========
Exercisable at End of Year -- 148,087 -- $ 15.50
</Table>
Exercise price for options outstanding at December 31, 2001 ranged from
$15.50 per share to $21.81 per share. The weighted-average remaining contractual
life of those options is 8.71 years.
OSCA follows Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees (APB 25), to account for its stock option plan. As
determined by applying the requirements of APB 25, no compensation cost is
recorded because the price of the employees' stock options equals the market
value of the underlying stock at the grant date. An alternative method of
accounting for stock options is SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). SFAS No. 123 requires that pro forma information
regarding net income and earnings per share be presented as if OSCA had
accounted for its employee stock options under the fair value method. The fair
value for applicable options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
2000 2001
-------- --------
Risk-free interest rates 6.23% 4.84%
Dividend yield 0.00% 0.00%
Volatility factors .715 .709
Expected life of the option 6 years 5 years
</Table>
For purposes of pro forma disclosure, the estimated fair value of the
option is amortized to expense over the options' vesting period. OSCA's pro
forma data under SFAS No. 123 is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 2001
--------- ---------
(in thousands except per share amounts)
Pro forma net income $ 6,639 $ 8,259
Pro forma earnings per share:
Basic $ 0.56 $ 0.56
Diluted $ 0.56 $ 0.55
Weighted-average fair value of options granted per share $ 10.62 $ 13.39
</Table>
NOTE 11. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 2000 2001
-------- -------- --------
(in thousands)
Domestic $ 3,531 $ 11,312 $ 16,983
Foreign (1,425) 338 (1,251)
-------- -------- --------
Total $ 2,106 $ 11,650 $ 15,732
======== ======== ========
</Table>
F-15
The components of the income tax provision are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
------- ------- -------
(in thousands)
Current:
Federal $(1,284) $ 2,287 $ 5,507
State (157) (250) 189
Foreign 180 686 116
------- ------- -------
(1,261) 2,723 5,812
------- ------- -------
Deferred:
Federal 2,344 1,571 184
State 201 140 16
------- ------- -------
2,545 1,711 200
------- ------- -------
$ 1,284 $ 4,434 $ 6,012
======= ======= =======
</Table>
A reconciliation of the effective income tax rate from the statutory
U.S. federal income tax rate is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 2000 2001
------ ------ ------
U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of federal benefit) 1.0 (1.4) .7
Foreign taxes 16.3 2.9 .9
Goodwill amortization 4.6 0.8 1.2
Other 4.1 0.8 .4
------ ------ ------
Effective income tax rate 61.0% 38.1% 38.2%
====== ====== ======
</Table>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Components of deferred tax
assets and liabilities are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------
2000 2001
------- -------
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 204 $ 201
Inventory 1,304 1,497
Accrued liabilities 274 613
Special charges 101 --
Foreign net operating loss carryforward 1,141 1,179
Other deductible temporary differences 59 107
------- -------
Total deferred tax assets 3,083 3,597
Valuation allowance for deferred tax assets (829) (815)
------- -------
Deferred tax assets after valuation allowance 2,254 2,782
Deferred tax liabilities:
Property and equipment (3,457) (4,185)
------- -------
Net deferred tax asset (liability) $(1,203) $(1,403)
======= =======
</Table>
At December 31, 2000 and 2001, net operating loss (NOL) carryforwards
of approximately $3.4 million for each year were available to be applied against
future taxable income of OSCA's subsidiaries, primarily for Venezuela and
Mexico. The Venezuela NOL's are available through 2004. The Mexican
F-16
NOL's are available through 2011. The NOL carryforwards relate to losses of
these subsidiaries and can only be used to offset their taxable income. For
financial reporting purposes, valuation allowances of $0.1 million and $0.4
million have been recognized in the years ended December 31, 2000 and 2001,
respectively to offset the net deferred tax asset related to these NOL
carryforwards.
OSCA paid income taxes of approximately $2.8 million and $4.0 million
in 2000 and 2001, respectively. In 1999 and the pre-IPO period of 2000, OSCA was
included in the Great Lakes consolidated tax return.
NOTE 12. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is determined
by dividing net income by the number of shares included as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
------- ------- -------
(in thousands, except per share data)
Numerator:
Net income $ 822 $ 7,216 $ 9,720
======= ======= =======
Denominator:
Weighted-average shares - basic 8,400 11,826 14,841
Effect of dilutive securities:
Stock options -- 1 68
------- ------- -------
Weighted-average shares - diluted 8,400 11,827 14,909
======= ======= =======
Basic EPS $ 0.10 $ 0.61 $ 0.66
Diluted EPS $ 0.10 $ 0.61 $ 0.65
</Table>
Prior to 2000, weighted-average shares consisted of 8.4 million Class B
Common Shares held by Great Lakes, which was converted from 1.0 million shares
at the recapitalization. In 2000, weighted-average shares consisted of the Class
B Common Stock held by Great Lakes plus the 6.4 million shares of Class A Common
Stock issued in connection with the IPO.
NOTE 13. RISK MANAGEMENT ACTIVITIES
OSCA is exposed to fluctuations in oil and natural gas prices, foreign
currency rates and interest rates which can affect the revenue, cost of
operating, investing and financing. OSCA's management has not used financial and
commodity-based derivative contracts to reduce the risk related to those
fluctuations in overall earnings and cash flow.
Commodity Price Risk
The level of oil and natural gas exploration and development activity
is affected by both short-term and long-term trends in oil and natural gas
prices which, in turn, are related to the demand for petroleum products and the
current availability of oil and natural gas resources. Any reduced activity
could result in declines in the demand for the products and services provided by
OSCA.
Concentration of Credit Risk
The market and customers for OSCA's products and services are primarily
major oil companies and independent exploration and production companies. OSCA
performs ongoing credit evaluations of its customers and provides allowances for
probable credit losses when necessary. Collateral is generally not required.
F-17
Fair Value of Financial Instruments
The carrying value of OSCA's financial instruments, which include
primarily cash and cash equivalents, accounts receivable and long-term debt,
approximate fair value.
Foreign Currency Exchange Rate Risk
OSCA has foreign currency exchange rate risk resulting from operations
in Europe and Latin America. Historically, OSCA has not hedged its exposure to
currency rate changes or foreign currency exchange rate risk.
Interest Rate Risk
OSCA is subject to interest rate risk on its long-term debt
arrangements. Historically, OSCA has not hedged its exposure to interest rate
risk.
NOTE 14. SEGMENT INFORMATION
OSCA is organized into three global business segments: Completion
Fluids, Completion Services and Downhole Completion Tools. The units 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
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.
Assets included in Unallocated Assets principally are cash and cash
equivalents; accounts and notes receivable; deferred income taxes; goodwill and
other assets. Segment assets primarily include inventory and property and
equipment. Geographic sales information is reported based on the location that
invoices the external customer. Geographic long-lived assets are grouped by the
location of the reporting country.
OSCA evaluates performance and allocates resources based on operating
income which represents net revenue less cost of goods sold and services and
allocated selling, general and administrative expenses, including depreciation.
Intersegment net revenue and transfers are recorded at OSCA's cost; there is no
intercompany income or loss on intersegment net revenue or transfers. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
F-18
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
--------- --------- ---------
(in thousands)
NET REVENUE BY SEGMENT TO EXTERNAL CUSTOMERS:
Completion Fluids $ 50,621 $ 55,168 $ 71,551
Completion Services 25,666 43,511 51,500
Downhole Completion Tools 15,651 33,282 52,970
--------- --------- ---------
$ 91,938 $ 131,961 $ 176,021
========= ========= =========
SEGMENT OPERATING INCOME (LOSS):
Completion Fluids $ 5,046 $ 5,606 $ 6,176
Completion Services (696) 6,262 4,210
Downhole Completion Tools 621 4,125 11,397
--------- --------- ---------
4,971 15,993 21,783
Corporate and Other (3,703) (3,356) (4,038)
--------- --------- ---------
$ 1,268 $ 12,637 $ 17,745
========= ========= =========
SEGMENT ASSETS:
Completion Fluids $ 22,546 $ 23,635 $ 23,123
Completion Services 21,893 19,381 27,347
Downhole Completion Tools 11,263 16,600 22,020
Corporate and Other 10,547 9,357 7,257
--------- --------- ---------
66,249 68,973 79,747
Unallocated Assets 35,438 55,333 58,039
--------- --------- ---------
$ 101,687 $ 124,306 $ 137,786
========= ========= =========
FIXED ASSET ADDITIONS:
Completion Fluids $ 200 $ 632 $ 2,929
Completion Services 3,256 2,218 13,209
Downhole Completion Tools 661 384 1,286
Corporate and Other 1,756 1,173 2,341
--------- --------- ---------
$ 5,873 $ 4,407 $ 19,765
========= ========= =========
DEPRECIATION EXPENSE:
Completion Fluids $ 1,821 $ 1,739 $ 1,721
Completion Services 3,575 3,915 4,758
Downhole Completion Tools 338 464 667
Corporate and Other 1,146 1,747 1,598
--------- --------- ---------
$ 6,880 $ 7,865 $ 8,744
========= ========= =========
GEOGRAPHIC INFORMATION:
NET REVENUE BY SEGMENT TO EXTERNAL CUSTOMERS:
United States $ 77,895 $ 112,861 $ 147,869
Foreign 14,043 19,100 28,152
--------- --------- ---------
$ 91,938 $ 131,961 $ 176,021
========= ========= =========
LONG-LIVED ASSETS:
United States $ 50,592 $ 45,772 $ 53,805
Foreign 3,910 3,979 5,448
--------- --------- ---------
$ 54,502 $ 49,751 $ 59,253
========= ========= =========
</Table>
F-19
NOTE 15. ECONOMIC DEPENDENCY
In 2001, one customer, Chevron USA, Inc., accounted for approximately
10% of OSCA's net revenue. In addition, OSCA's top fifteen customers accounted
for 52% of its net revenue in 2000 and 59% of its net revenue in 2001.
NOTE 16. CONTINGENCIES
Newfield Case
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, Plaintiffs seek damages,
interest and other costs in the approximate amount of $21.4 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 has amended its complaint
to include Cardinal Wireline Service, who was performing wireline operations
aboard the platform immediately before the blowout. OSCA has also filed a third
party demand against its underwriters and insurance broker in support of
coverage of claims asserted against OSCA in the Newfield matter.
OSCA has denied that it breached its contract or was negligent and
intends to vigorously defend itself and to prosecute the merits of its claims.
Mediation has been set in the combined lawsuits for March 5, 2002, and a trial
date of March 14, 2002 has been set. On February 22, 2002, the court issued
preliminary rulings in the case, one of which was partial summary judgment in
favor of Newfield and against OSCA on the issue of breach of contract, and one
of which was a dismissal of OSCA's claims against Cardinal Wireline Service. The
court specifically stated, and OSCA believes, that this ruling is not
dispositive as to whether OSCA's actions caused the blowout and whether OSCA is
therefore liable for damages to Newfield. OSCA intends to defend the case
vigorously. While it is not possible to predict the outcome of legal actions
brought by or against OSCA, management is unable to determine whether the
outcome of the legal actions will have a material adverse effect on the results
of operations in any particular period. However, management does not believe
that the outcome will have a material adverse effect on OSCA's consolidated
financial position or liquidity.
Insurance
OSCA is partially self-insured for employee health insurance claims and
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 develop.
General
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.
F-20
Change of Control
OSCA has entered into change in control agreements with several of its
executive officers. Under these agreements, OSCA or its successor would make
lump sum severance payments to the individuals under certain circumstances.
NOTE 17. ACQUISITION
In January of 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 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 noncompete agreements and 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
consulting services of $0.8 million was paid at closing.
NOTE 18. SUBSEQUENT EVENT
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 shareholders 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 Common Stock, 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, including those
under the Hart-Scott-Rodino Antitrust Improvements Act. OSCA will file with the
Securities and Exchange Commission and mail to OSCA shareholders an information
statement describing the transaction. There can be no assurance that the merger
will be consummated in accordance with the terms of the merger agreements, if at
all.
F-21
NOTE 19. QUARTERLY DATA (UNAUDITED)
A summary of the quarterly results of operations for the years ended
December 31, 1999, 2000 and 2001 follows:
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(in thousands, except per share amounts)
1999:
Net revenue $ 23,023 $ 23,593 $ 21,625 $ 23,697
Gross profit $ 4,575 $ 3,887 $ 4,022 $ 4,819
Income (loss) before income taxes $ 33 $ (902) $ (334) $ 3,309
Net income (loss) $ 13 $ (352) $ (130) $ 1,291
Earnings (loss) per share:
Basic $ .00 $ (.04) $ (.02) $ .15
Diluted $ .00 $ (.04) $ (.02) $ .15
2000:
Net revenue $ 26,501 $ 28,882 $ 34,136 $ 42,442
Gross profit $ 6,121 $ 7,926 $ 8,595 $ 11,095
Income before income taxes $ 1,230 $ 2,748 $ 2,693 $ 4,979
Net income $ 689 $ 1,664 $ 1,744 $ 3,119
Earnings per share:
Basic $ .08 $ .18 $ .12 $ .21
Diluted $ .08 $ .18 $ .12 $ .21
2001:
Net revenue $ 43,757 $ 41,882 $ 48,537 $ 41,845
Gross profit $ 11,293 $ 10,103 $ 13,128 $ 6,877
Income before income taxes $ 4,548 $ 3,777 $ 7,014 $ 393
Net income $ 2,820 $ 2,413 $ 4,415 $ 72
Earnings per share:
Basic $ .19 $ .16 $ .30 $ .01
Diluted $ .19 $ .16 $ .30 $ .01
</Table>
Earnings (loss) per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share may
not equal the total computed for the year.
F-22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<Table>
<Caption>
ADDITIONS(1)
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ---------- ---------- ---------- ---------
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 919 $ 438 $ -- $ 559(2) $ 798
======== ======== ======== ======== ======
Reserve for inventory obsolescence $ -- $ 400 $ -- $ -- $ 400
======== ======== ======== ======== ======
Valuation allowance for
deferred tax assets $ 396 $ 404 $ -- $ -- $ 800
======== ======== ======== ======== ======
Reserve included in accrued liabilities:
Reserve for special charge $ 3,849 $ (2,550) $ -- $ (553) $1,852
======== ======== ======== ======== ======
YEAR ENDED DECEMBER 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 798 $ -- $ -- $ 240(2) $ 558
======== ======== ======== ======== ======
Reserve for inventory obsolescence $ 400 $ 350 $ -- $ -- $ 750
======== ======== ======== ======== ======
Valuation allowance for
deferred tax assets $ 800 $ 29 $ -- $ -- $ 829
======== ======== ======== ======== ======
Reserve included in accrued liabilities:
Reserve for special charge $ 1,852 $ (688) $ -- $ 892 $ 272
======== ======== ======== ======== ======
YEAR ENDED DECEMBER 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 558 $ (15) $ -- $ -- $ 543
======== ======== ======== ======== ======
Reserve for inventory obsolescence $ 750 $ 500 $ -- $ -- $1,250
======== ======== ======== ======== ======
Valuation allowance for
deferred tax assets $ 829 $ 382 $ -- $ 396(3) $ 815
======== ======== ======== ======== ======
Reserve included in accrued liabilities:
Reserve for special charge $ 272 $ -- $ -- $ 272 $ --
======== ======== ======== ======== ======
</Table>
- ----------
(1) Net of recoveries
(2) Uncollectible accounts written off, expiring net operating losses
(3) Expiring net operating losses
S-1
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit No. Description
- ----------- -----------
3.1 Form of Restated Certificate of Incorporation of OSCA, Inc.
(incorporated by reference to OSCA's Registration Statement on Form
S-1 No. 333-31956).
3.2 Form of Amended and Restated By-Laws of OSCA, Inc. (incorporated by
reference to OSCA's Registration Statement on Form S-1 No.
333-31956).
4.1 Credit Agreement by and among OSCA, Inc., Bank One, Louisiana,
N.A., Hibernia National Bank, Lasalle Bank N.A., and National City
Bank of Indiana dated June 20, 2000 (incorporated by reference to
OSCA's Annual Report or Form 10K for the year ended December 31,
2000)
10.1 Form of Master Separation Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.2 Form of Services Agreement between OSCA, Inc. and Great Lakes dated
June 20, 2000 (incorporated by reference to OSCA's Registration
Statement on Form S-1 No. 333-31956).
10.3 Form of Tax Disaffiliation Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.4 Form of IPO and Distribution Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
10.5 Form of Registration Rights Agreement between OSCA, Inc. and Great
Lakes dated June 20, 2000 (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
</Table>
<Table>
10.6 Form of Brominated Products Supply Agreement between OSCA, Inc. and
Great Lakes dated June 20, 2000 (incorporated by reference to
OSCA's Registration Statement on Form S-1 No. 333-31956).
10.7 OSCA, Inc. 2000 Incentive Compensation Plan (incorporated by
reference to OSCA's Registration Statement on Form S-1 No.
333-31956).
10.8 OSCA, Inc. 2000 Stock Incentive Plan (incorporated by reference to
OSCA's Registration Statement on Form S-1 No. 333-31956).
10.9 Amended and restated Change in Control Agreement between OSCA, Inc.
and Robert L. Hollier dated October 26, 2000 (incorporated by
reference to OSCA's annual report on Form 10-K for the year ended
December 31, 2000).
10.10 Amended and restated Change in Control Agreement between OSCA, Inc.
and Richard J. Alario, Steven J. Brading, Don H. Michel and Stephen
M. Gray dated October 26, 2000 (incorporated by reference to OSCA's
Annual Report on Form 10K for the year ended December 31, 2000).
10.11 Amendment to the Amended and Restated Change in Control Agreement
between OSCA, Inc. and Robert L. Hollier, Richard J. Alario, Steven
J. Brading, Donald H. Michel and Stephen M. Gray (filed herewith).
10.12 Amendment to the Amended and Restated Change in Control Agreement
between OSCA, Inc. and Robert L. Hollier, Richard J. Alario, Steven
J. Brading, Donald H. Michel and Stephen M. Gray (filed herewith).
21.1 Subsidiaries of OSCA (incorporated by reference to OSCA's
Registration Statement on Form S-1 No. 333-31956).
23.1 Consent of Ernst & Young LLP (filed herewith).
24.1 Power of Attorney (included in signature page)
</Table>