<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-31956
PROSPECTUS
[LOGO OF OSCA, INC.]
5,600,000 Shares
OSCA, Inc.
Class A Common Stock
------------
OSCA, Inc. is selling 5,600,000 shares of its Class A common stock. The
underwriters named in this prospectus may purchase up to 840,000 additional
shares of Class A common stock from OSCA to cover over-allotments.
This is the initial public offering of our Class A common stock. The Class
A common stock will be quoted on the Nasdaq National Market under the symbol
"OSCA."
------------
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 7.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial Public Offering Price $ 15.50 $86,800,000
Underwriting Discount $ 1.085 $ 6,076,000
Proceeds to OSCA (before expenses) $14.415 $80,724,000
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about June 20,
2000.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
Salomon Smith Barney
Morgan Stanley Dean Witter
Simmons & Company
International
June 14, 2000
<PAGE>
Inside Front Cover Art
Title: None
Graphic: Collage of OSCA's business units
Caption: Artist's impression illustrating how our business units are focused on
well completion services.
Inside Fold-Out
Title: Examples of OSCA's Products and Services
Picture: OSCA Challenger, OSCA Discovery, Elkhorn River
Caption: Our marine well service vessels, the OSCA Challenger (top left), the
OSCA Discovery (center), and the Elkhourn River (bottom right), are capable of
operating in harsh deepwater environments and have the ability to service five
to ten wells per trip offshare.
Picture: Land-based coiled tubing unit
Caption: Land-based coiled tubing unit used to convey well stimulating
services.
Picture: Skid-mounted pressure pumping unit
Caption: Portable pressure pumping unit; used to apply sand control well
treatments.
Picture: Fluids filtration Unit
Caption: A portable fluids filtration unit used to clean contaminated
completion fluids.
Picture: Field technician working on downhole completion tool
Caption: A quality assurance technician inspects a packer assembly, one of our
downhole completion tools used in sand control.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our Class A common stock only in jurisdictions where offers and
sales are permitted.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Forward-Looking Statements................................................ 16
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Pro Forma Condensed Consolidated Financial Statements..................... 20
Report Of Independent Auditors............................................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 35
Management................................................................ 44
Our Relationship with Great Lakes......................................... 52
Principal Stockholder..................................................... 62
Description of Capital Stock.............................................. 62
Shares Eligible for Future Sale........................................... 70
Material United States Federal Tax Consequences to Non-United States
Holders.................................................................. 72
Underwriting.............................................................. 75
Legal Matters............................................................. 77
Experts................................................................... 77
Where You Can Find More Information....................................... 77
Index to Financial Statements............................................. F-1
</TABLE>
----------------
In this prospectus, "OSCA," the "company," "we," "us" and "our" each refers
to OSCA, Inc. and its subsidiaries, and "Great Lakes" refers to Great Lakes
Chemical Corporation. Prior to this offering, OSCA has been a wholly owned
subsidiary of Great Lakes.
----------------
Until July 9, 2000, all dealers that buy, sell or trade our Class A common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
----------------
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
We urge you to read this entire prospectus carefully, including the "Risk
Factors" section and the consolidated financial statements and related notes
and the pro forma condensed consolidated financial statements included
elsewhere in this prospectus.
OSCA
Our Company
Founded in 1979, OSCA provides specialized oil and 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. Well completion
activities are conducted after drilling and prepare the well to begin
production. Our products and services are focused on providing quality well
completions which is critical in optimizing the recovery of oil and gas. Our
products and services are primarily used in offshore environments, including
deepwater, where we have demonstrated the ability to service technically
challenging projects in harsh environments. Our equipment and technology are
also regularly adapted for onshore use. In 1999, we generated total revenue of
$91.9 million.
Our products and services provide the following benefits:
. 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;
. 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;
. 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
. enhancing well productivity by chemically stimulating the reservoir,
allowing faster production and, potentially, increasing the total
recovery of oil and gas.
Our products and services are available separately or as integrated systems
and are offered through our three business segments:
. Completion Fluids. We sell and recycle completion fluids and perform
related fluid maintenance activities. In addition to standardized
completion fluids, we provide a broad line of specially formulated and
customized completion fluids for high demand wells.
. Completion Services. We provide marine-based well completion services,
sand control and well stimulation pressure pumping and coiled tubing
services.
. Marine Service Vessels. Our marine service vessels, which have been
designed for enhanced safety and operating efficiency in deepwater
environments, allow us to perform sand control and well stimulation
pressure pumping and completion fluid delivery services under difficult
conditions.
. Skid-Mounted Pressure Pumping Services. We also provide our completion
services, to both land-based and offshore customers, through portable
skid-mounted equipment which can be placed directly on a rig or
platform.
. Coiled Tubing Services. These services involve the deployment of small
diameter steel pipe to manipulate downhole completion tools and apply
well stimulation chemicals.
1
<PAGE>
. Downhole Completion Tools. We design, build and install downhole
completion tools that direct the flow of oil and gas into the production
tubing and deploy gravel to control the migration of reservoir sand into
the well. Our downhole completion tools are designed for use in complex,
demanding wells, particularly in deepwater environments, and to save our
customers time and money.
Our Strategy
Our products and services are focused on value enhancing completion
activities that allow our customers to optimize the recovery of oil and gas.
Our strategy for future growth is to improve our market position by:
. Focusing on Optimizing Reservoir Productivity. We focus our technology
and completion service offerings singularly on optimizing reservoir
productivity, enabling us to be more responsive to our customers.
. Targeting Deepwater Activity. We have pioneered technologies that enable
our customers to operate in harsh, deepwater environments, where we
believe our expertise will enable us to continue to increase our market
share and capitalize on growth opportunities, particularly in the
deepwater Gulf of Mexico, Brazil and West Africa.
. Developing Leading Completion Technologies. We invest in research and
development to provide innovative, cost-effective completion technologies
which are tailored to customer-specific operating environments.
. Pursuing Strategic Acquisitions. We have acquired, and we intend to
continue to acquire, advanced completion technologies and companies that
complement our existing product and service offerings and expand our
geographic presence.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A common stock offered by OSCA:........ 5,600,000 shares
Common stock of OSCA to be outstanding
immediately after the offering:
Class A common stock....................... 5,600,000 shares
Class B common stock....................... 8,400,000 shares
Total.................................... 14,000,000 shares
Class B common stock of OSCA to be held by
Great Lakes immediately after the offering.. 8,400,000 shares
Use of proceeds.............................. We estimate that our net proceeds from the
offering will be about $78.7 million. We
will use the net proceeds from the
offering, including amounts we may receive
from the exercise of the underwriters'
over-allotment option, and approximately
$31.0 million that we will borrow under a
proposed credit facility and cash on hand
to repay indebtedness owed by us to Great
Lakes. See "Use of Proceeds."
Voting rights:
Class A common stock....................... One vote per share
Class B common stock....................... Ten votes per share
Proposed NASDAQ symbol....................... OSCA
</TABLE>
Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 840,000 shares of Class A
common stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 6,440,000 shares of Class A common stock will be outstanding after the
offering.
The number of shares of our common stock to be outstanding immediately after
the offering listed above does not take into account an estimated 460,000
shares of our Class A common stock that will be issuable upon exercise by our
employees and directors of stock options that will be granted in connection
with the offering and 540,000 additional shares of our Class A common stock
that will be reserved for issuance under our stock compensation plans. The
actual number of options will be determined at the time of the offering and are
expected to vest ratably over a three-year period. For a discussion of these
stock options, see "Management--Stock Compensation Plan" and "Management--
Incentive Compensation Plan."
RISK FACTORS
Before you invest in our Class A common stock, you should be aware that
there are various risks related to, among other things, our business, the oil
and gas exploration and development industry, our relationship with Great Lakes
and fluctuations in the price of our common stock. For more information about
these risks, read "Risk Factors." You should carefully consider these risk
factors together with all of the other information included in this prospectus.
3
<PAGE>
RELATIONSHIP WITH GREAT LAKES
We are currently a wholly-owned subsidiary of Great Lakes. After the
completion of this offering of Class A common stock, Great Lakes will own about
60.0% of the outstanding shares of our common stock, or about 56.6% if the
underwriters exercise their over-allotment option in full. Great Lakes will own
100% of the outstanding Class B common stock, which will represent 93.8% of the
combined voting power of all classes of voting stock of OSCA, or 92.9% of the
combined voting power of all classes of voting stock of OSCA if the
underwriters exercise their over-allotment option in full. Until Great Lakes
holds less than 50% of the voting power of our stock, Great Lakes will be able
to control the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary corporate transactions,
such as mergers.
Great Lakes has not reached any decision regarding whether or for how long
it will retain its stock ownership in our company. At present, Great Lakes has
no plan or intention to dispose of its shares of our Class B common stock. If
Great Lakes decides to divest its ownership in our Class B common stock, Great
Lakes may do so by distributing all of its shares of our Class B common stock
to the holders of Great Lakes' common stock, a process which we refer to as a
"distribution."
Prior to the consummation of this offering, we will enter into agreements
with Great Lakes that provide for the separation of our business operations
from Great Lakes and other provisions applicable to a divestiture, if any.
These agreements provide for, among other things, Great Lakes to continue to
supply us with brominated products essential to our operations and transition
services, including human resources and treasury functions. All of the
agreements providing for our separation from Great Lakes were made in the
context of a parent-subsidiary relationship and were negotiated in the overall
context of our separation from Great Lakes. The terms of these agreements may
be more or less favorable to us than if they had been negotiated with
unaffiliated third parties. See "Our Relationship With Great Lakes--
Arrangements With Great Lakes."
----------------
Our principal executive offices are located at 156 Commission Boulevard,
Lafayette, Louisiana 70508, and our telephone number is (318) 837-6047.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(in thousands, except share and per share data)
The following summary historical and pro forma financial and operating data
should be read along with "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," the consolidated financial statements
and related notes and the pro forma condensed consolidated financial statements
included elsewhere in this prospectus. You should also read "Risk Factors--Our
historical financial information may not be representative of our results as a
separate company."
The statement of operations data for each of the years in the three-year
period ended December 31, 1999 have been derived from the consolidated
financial statements audited by Ernst & Young LLP, independent auditors. The
statement of operations data for the three months ended March 31, 2000 and 1999
and the balance sheet data as of March 31, 2000 are derived from unaudited
financial statements. The statement of operations data for 1995 and 1996 are
based on our and Great Lakes' accounting records which, in management's
opinion, include all adjustments necessary for the fair presentation of our
financial position at such dates. The financial information included in this
prospectus does not necessarily reflect our results of operations, financial
position and cash flows in the future or what the results of operations,
financial position and cash flows would have been had we been a separate,
stand-alone entity during the periods presented.
We prepared the summary pro forma condensed consolidated financial
statements data to illustrate the estimated effects of this offering, our
separation from Great Lakes and related transactions as described in the notes
to such data. The pro forma statement of operations data for the year ended
December 31, 1999 and the three months ended March 31, 2000 are presented as if
these transactions had occurred as of January 1, 1999 and 2000, respectively.
The pro forma balance sheet data is presented as if these transactions had
occurred on March 31, 2000. We believe that the assumptions used provide a
reasonable basis for presenting the significant effects directly attributable
to this offering, our separation from Great Lakes and related transactions. The
pro forma data do not purport to represent what our results of operations would
actually have been if such transactions had in fact occurred on such date or to
project our results of operations for any future period.
<TABLE>
<CAPTION>
Pro Forma
-----------------------
Three
Three Months Ended Months
Year Ended December 31, March 31, Year Ended Ended
----------------------------------------------------- -------------------- December 31, March 31,
1995 1996 1997 1998 1999 1999 2000 1999 2000
--------- --------- --------- --------- --------- --------- --------- ------------ ----------
(unaudited) (audited) (unaudited) (unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............ $ 71,351 $ 95,685 $ 112,739 $ 113,369 $ 91,938 $ 23,023 $ 26,501 $ 91,938 $ 26,501
Operating expenses:
Cost of sales......... 48,126 65,916 78,026 88,800 74,635 16,862 19,472 75,645 19,402
Selling,
administrative and
research expenses.... 10,735 12,438 16,515 19,271 18,153 5,689 5,897 17,240 5,738
Amortization of
intangibles.......... 242 247 251 370 432 99 99 432 99
Special charges
(credit) (1)......... -- 3,100 -- 13,350 (2,550) -- -- (2,550) --
--------- --------- --------- --------- --------- --------- --------- ---------- ----------
Operating income
(loss)................ 12,248 13,984 17,947 (8,422) 1,268 373 1,033 1,171 1,262
Interest expense
(income), net......... 108 (46) (191) (137) (114) (41) (66) 2,393 561
Other expense (income),
net................... (855) (498) (16) 538 (724) 381 (131) (724) (131)
--------- --------- --------- --------- --------- --------- --------- ---------- ----------
Income (loss) before
income taxes.......... 12,995 14,528 18,154 (8,823) 2,106 33 1,230 (498) 832
Income tax provision
(benefit)............. 4,183 6,658 6,727 (1,943) 1,284 20 541 294 366
--------- --------- --------- --------- --------- --------- --------- ---------- ----------
Net income (loss)...... $ 8,812 $ 7,870 $ 11,427 $ (6,880) $ 822 $ 13 $ 689 $ (792) $ 466
========= ========= ========= ========= ========= ========= ========= ========== ==========
Earnings per share..... $ 1.05 $ .94 $ 1.36 $ (.82) $ .10 $ -- $ .08 $ (.06) $ .03
Weighted average shares
outstanding........... 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 14,000,000 14,000,000
Other Data:
Net cash provided by
operating activities.. $ 8,156 $ 9,359 $ 17,403 $ 28,068 $ 8,089 $ 1,514 $ 10,625 $ N/A $ N/A
Net cash used in
investing activities.. (9,973) (4,754) (18,665) (27,798) (5,962) (2,434) (538) N/A N/A
Net cash provided by
(used in) financing
activities............ (125) -- -- 793 (2,473) (22) -- N/A N/A
EBITDA (2)............. 15,918 17,749 22,318 (2,907) 9,304 1,587 3,223 9,207 3,452
Adjusted EBITDA (3).... 15,918 20,849 22,318 10,443 6,754 1,587 3,223 6,657 3,452
Depreciation and
amortization.......... 2,815 3,267 4,355 6,053 7,312 1,595 2,059 7,312 2,059
Capital expenditures... 9,986 6,301 18,913 24,140 5,873 3,547 863 5,873 863
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
At March 31,
2000
------------------
As
Actual Adjusted
-------- --------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)................................... $(19,949) $ 36,261
Property and equipment, net................................. 45,590 45,590
Total assets................................................ 110,200 101,410
Total debt.................................................. 116,338 31,472
Total stockholders' equity (deficit)........................ (19,582) 56,494
</TABLE>
--------
(1) In 1996, we incurred special charges of $3.1 million related to an asset
impairment. In 1998, we 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, we 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. See note 4 to our consolidated
financial statements.
(2) We define "EBITDA" as income (loss) before income taxes, plus depreciation,
amortization of intangibles and interest expense (income), net. We believe
EBITDA is a widely accepted indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(3) "Adjusted EBITDA" is EBITDA plus adjustments to eliminate the effect of
special charges (credit) of $3,100, $13,350 and $(2,550) in 1996, 1998 and
1999, respectively.
6
<PAGE>
RISK FACTORS
Before you invest in our Class A common stock, you should carefully consider
these risk factors together with all of the other information included in this
prospectus.
Our revenue, cash flow and earnings could be harmed by any decreases in the
level of oil and gas exploration and development activity.
Our operations are dependent on the level of oil and gas exploration and
development activity, particularly in the Gulf of Mexico. Any reduced activity
could cause significant declines in our revenue, cash flow and profitability.
The level of exploration and development activity is affected by both short-
term and long-term trends in oil and gas prices which, in turn, are related to
the demand for petroleum products and the current availability of oil and gas
resources. Oil and gas prices historically have reacted to actual and perceived
changes in oil and gas supplies and demand, which has resulted in varying
levels of exploration and production activity. Oil and gas prices are affected
by numerous factors, many of which are beyond our or our customers' control.
These factors include:
. the level of exploration activity;
. worldwide economic activity;
. interest rates and the cost of capital;
. environmental regulation;
. tax policies;
. political requirements of national governments;
. coordination by the Organization of Petroleum Exporting Companies (OPEC);
. the cost of producing oil and gas; and
. technological advances that reduce demand for petroleum products.
A significant or prolonged decline in future oil and gas prices would likely
result in reduced exploration and development and a decline in the demand for
our services. For example, during the last half of 1998 and the first half of
1999, oil prices declined to their lowest levels in over 12 years. The
resulting decline in exploration and development activities significantly
reduced demand for our products and services and subjected us to increased
pricing pressure. In recent years, consolidation in the oil and gas exploration
and production sector has also resulted in disruptions in the level of
exploration and production activity by some of our customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Because we will be controlled by Great Lakes unless it divests its Class B
shares, you will be unable to affect the outcome of stockholder voting during
that time.
After the completion of this offering of Class A common stock, Great Lakes
will remain in control of our company unless it divests its Class B shares, and
holders of our Class A shares will consequently be unable to influence the
outcome of any stockholder votes. Through its ownership of 100% of our
outstanding Class B common stock, Great Lakes will have 93.8% of the combined
voting power of all classes of voting stock of OSCA, or 92.9% of the combined
voting power of all classes of voting stock of OSCA if the underwriters
exercise their over-allotment option in full. As long as Great Lakes owns a
majority of the combined voting power of all classes of voting stock of OSCA,
Great Lakes will continue to be able to elect our entire board of directors and
to remove any director, with or without cause, and generally to determine the
outcome of all corporate actions requiring stockholder approval. As a result,
Great Lakes will be in a position to continue to control all matters affecting
our company, including:
. the composition of our board of directors and, through it, any
determination with respect to our direction and policies, including the
appointment and removal of officers;
. any determinations with respect to mergers or other business
combinations;
7
<PAGE>
. the acquisition or disposition of assets;
. future issuances of common stock or other securities;
. the incurrence of debt;
. amendments, waivers and modifications to all agreements with Great Lakes,
including those agreements providing for our separation from Great Lakes;
. the payment of dividends on our common stock; and
. determinations with respect to treatment of items in those of our tax
returns which are consolidated or combined with Great Lakes' tax returns.
After the closing of this offering, we expect that four of our five
directors will be directors and/or officers of Great Lakes. Our certificate of
incorporation and our bylaws provide that, so long as Great Lakes owns at least
a majority of the combined voting power of all classes of our voting stock,
many actions by our board of directors will require the approval of 66 2/3% of
the votes entitled to be cast by our voting stock. Thus, in order to take any
such action, the approval of Great Lakes will be required. See "Description of
Capital Stock--Anti-takeover Effects of Certificate and By-law Provisions."
If we lose key personnel or are unable to hire additional qualified personnel,
we may not be successful.
Our future success depends on our ability to retain our highly-skilled
engineers and technical sales and service personnel. The market for these
employees is very competitive and if we cannot continue to attract and retain
quality personnel, our ability to compete and to grow our business will be
severely limited. We expect that if conditions improve in the oil and gas
market generally, the supply of qualified engineers in completion fluids,
downhole completion tools and completion services could tighten substantially.
Furthermore, attracting and retaining scientific and engineering personnel in
our industry typically requires attractive compensation packages. A significant
increase in the wages paid by competing employers could result in a reduction
in our skilled labor force, increases in the rates of wages we must pay, or
both. Our success also depends upon the continuing contributions of our key
management, research, product development, sales and marketing, and
manufacturing personnel, many of whom would be difficult to replace, including
Robert L. Hollier, our president and chief executive officer, and Richard J.
Alario, our executive vice president. We do not have employment agreements with
any of our key management or other personnel, and we cannot assure you as to
how long they will remain with our organization. We also do not have any key
man life insurance policies for any of our personnel.
We may not be able to obtain additional capital to fund our growth and
operations on reasonable terms which could harm our business and negatively
impact our stockholders.
Following this offering, we do not expect to receive any future capital
contributions from Great Lakes. We may require additional financing from other
sources in the future to meet our capital needs. If adequate funds are not
available or are not available on reasonable terms, we may be unable to develop
or enhance our products and services, take advantage of future opportunities or
respond to competitive pressures, which could seriously harm our business. If
we raise additional funds through the issuance of debt or equity securities,
the percentage ownership of our existing stockholders may be reduced, the
securities issued may have rights, preferences and privileges senior to those
of our Class A common stock, and the terms of the securities may impose
restrictions on our operations. Since our credit rating will be lower than that
of Great Lakes, we will not be able to obtain financing with interest rates and
terms as favorable as those obtained by Great Lakes. For a discussion of these
and other factors affecting our liquidity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Because the market for our products and services is characterized by continual
and rapid technological developments, our future success will depend on our
ability to keep pace with these developments.
The market for our products and services is characterized by continual and
rapid technological developments that have resulted in, and will likely
continue to result in, substantial improvements in product
8
<PAGE>
function and performance. Our future success and profitability are dependent
upon our ability to:
. improve our existing product lines;
. address the increasingly sophisticated needs of our customers;
. maintain a reputation for technological innovation; and
. maintain market acceptance.
We believe that technological innovation is particularly important in our
downhole tools product lines. For example, products that we have introduced
since 1997 were responsible for over 38% of our net revenues for that segment
in 1999. In light of the market demands for leading technology, we also believe
that our success will depend on our ability to anticipate changes in technology
and industry standards and to respond to technological developments on a timely
basis, either internally or through strategic alliances. Current competitors or
new market entrants may develop new technologies, products or standards that
could render some of our products obsolete. We may not be successful in
developing and marketing, on a timely and cost-effective basis, product
enhancements or new products that respond to technological developments, that
are accepted in the marketplace or that comply with industry standards.
Our historical financial information may not be representative of our results
as a separate company.
The historical financial information we have included in this prospectus may
not reflect what our results of operations, financial position and cash flows
would have been had we been a separate, stand-alone entity during the periods
presented or what our results of operations, financial position and cash flows
will be in the future. This is because:
. we have made adjustments and allocations because Great Lakes did not
account for us as, and we were not operated as, a single stand-alone
business for all periods presented; and
. the information does not reflect many significant changes that will occur
in our funding and operations as a result of our separation from Great
Lakes, including employee and tax matters.
We cannot assure you that the adjustments and allocations we have made in
preparing our historical consolidated financial statements appropriately
reflect our operations during such period as if we had in fact operated as a
stand-alone entity or what the actual effect of our separation from Great Lakes
will be. Accordingly, we cannot assure you that our historical results of
operations are indicative of our future operating or financial performance. For
additional information, see "Selected Financial Data," "Pro Forma Condensed
Consolidated Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face significant competition from other providers of completion fluids, well
completion services and downhole completion tools, many of whom are larger than
we are and have significantly greater resources than we have.
The market for completion fluids, well completion services and downhole
completion tools is highly competitive, and several of our primary competitors
are diversified, multinational companies with substantially larger operating
staffs and greater capital resources. Furthermore, we have been operating in
two of our segments, completion services and downhole completion tools, for a
significantly shorter time than have most of our competitors. Because of their
greater resources, or their longer operating experience, some of our
competitors may be able to withstand future downturns in the oil and gas
industry better than we could.
Our operations are subject to hazards customary in the oilfield service
industry and marine operations. We may not have adequate insurance to cover all
these hazards.
Our operations are subject to many hazards associated with oilfield services
and with marine operations which may expose us to significant liabilities for
which we may not have adequate insurance coverage. Providing well completion
services requires the use of heavy equipment and hazardous chemicals, which may
subject us to liability claims by employees, customers and third parties.
Hazards, such as vessels capsizing, sinking, grounding, colliding and
sustaining damage from severe weather conditions, are inherent in offshore
9
<PAGE>
operations. These hazards can cause significant personal injury or loss of
life, severe damage to and destruction of property and equipment, contamination
of, or damage to, the environment and suspension of operations. The occurrence
of any one of these events may result in our being named as a defendant in
lawsuits asserting claims for substantial damages, environmental cleanup costs
and fines and/or penalties. We maintain an amount of insurance protection that
we consider adequate, but we cannot assure you that our insurance will be
sufficient or effective under all circumstances or against all hazards or
liabilities to which we may be subject. A successful claim for which we are not
fully insured could hurt our financial results and materially harm our
financial condition. In addition, we currently have the benefit of being
insured under Great Lakes' insurance coverage. We cannot assure you that
insurance coverage on a stand-alone basis will be available at all or at rates
or on terms similar to those available to Great Lakes. We may not be able to
maintain adequate insurance in the future at rates or on terms we consider
reasonable or acceptable. See "Business--Operating Hazards and Insurance."
Because our downhole completion tools and the use of coiled tubing are complex
and are deployed deep underground, any defects discovered subsequent to their
deployment could cause us to incur material repair or replacement costs and
could expose us to significant liabilities for damages suffered by our
customers.
Our downhole completion tools and use of coiled tubing are highly complex
and are deployed several miles below the earth's surface in sometimes complex
environments. The discovery of any defects in our downhole completion tools or
coiled tubing after deployment could result in product returns, diversion of
our resources, increased service and warranty costs, increased insurance costs,
and, in a worst case scenario, claims by our customers for rig downtime, lost
or damaged wells, personal injuries and/or environmental damages, any of which
could adversely affect our financial results. Any of these occurrences could
also result in the loss of or delay in market acceptance of our products, which
could harm our business and reputation and could impair our ability to grow.
A small number of customers account for a substantial portion of our revenue
and the loss of any of these customers could hurt our results and cause our
stock price to decline.
Our customer base has been and may continue to be concentrated with a small
number of customers accounting for a significant portion of our revenue. In
1999, British Borneo USA, Inc. accounted for 8.7% of our net revenue. In
addition, our next 14 customers accounted for 47.0% of our net revenue. If we
were to lose any of these customers, or if they were to reduce their orders for
our products and services, and we were not able to replace them with new
customer accounts, we would lose significant revenue and it could cause our
stock price to decline. In 1998, 15 customers accounted for 42.1% of our net
revenue.
Our business operations face risks associated with international operations,
which could hurt our results and therefore cause our stock price to decline.
We have significant operations outside the United States. International
operations, which constituted 15.2% and 11.9% of our net revenues in 1999 and
the three months ended March 31, 2000, respectively, are subject to a number of
risks and uncertainties, including:
. difficulties and costs associated with complying with a wide variety of
complex foreign laws, treaties and regulations;
. unexpected changes in regulatory environments;
. inadequate protection of intellectual property in foreign countries;
. legal uncertainties regarding, and timing delays and expenses associated
with, tariffs, export licenses, and other trade barriers;
. difficulties enforcing agreements and collecting receivables through
foreign legal systems;
. longer payment cycles of foreign customers compared with customers in the
United States;
. tax rates in foreign countries that may exceed those of the United States
and foreign earnings that may be subject to withholding requirements or
the imposition of tariffs or other restrictions;
10
<PAGE>
. exchange controls or other limitations on international currency
movements;
. political and economic instability;
. use of independent foreign sales agents who may not be as effective or
loyal as our employees;
. difficulties associated with managing a large organization spread
throughout various countries;
. nationalization of properties by foreign governments; and
. war and civil disturbances.
As we continue to expand our business globally, our success will be dependent,
in part, on our ability to anticipate and effectively manage these and other
risks. Any of these factors could impair our ability to expand into
international markets and could prevent us from increasing our revenue and our
profitability and meeting our growth objectives.
Moreover, our present plans for growth depend, in part, on expanding our
international operations. Our financial condition and prospects for growth
could be harmed by economic downturns in the specific regions in which we
operate or plan to operate in the future. For example, in 1998 and 1999 the
economic and industry downturn in Venezuela and other oil producing regions of
Latin America led to a reduction in demand for our products and services in
those areas and hurt our financial results. In addition, our results of
operations from international activities have been adversely affected by
significant decreases in well rig and drilling activity in the North Sea. For
example, while 80 rigs were in operation in the North Sea at the end of 1992,
there were only 34 rigs in operation in that same area at March 31, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Results of Operations", "--Results of Operations"
and "Selected Financial Data."
We face risks related to foreign currency exchange rates.
Approximately 8.1% of our net revenue and 13.3% operating expenses in 1999
were denominated in foreign currencies. For the three months ended March 31,
2000, 4.5% of our net revenue and 9.5% of our operating expenses were
denominated in foreign currencies. Because a portion of our revenue and
operating expenses are denominated in foreign currencies, we are subject to
foreign exchange risks that could adversely affect our operations. To the
extent that we incur expenses in U.S. dollars but earn revenue in foreign
currencies, any decrease in the values of those foreign currencies relative to
the U.S. dollar could cause our profit margins to decline or could cause our
products to be less competitive against those of foreign competitors. To the
extent that our foreign currency and receivables denominated in foreign
currency exceed our payables denominated in foreign currency, we have foreign
exchange exposure. At this time, we do not have any plans to hedge any of our
exposures to currency exchange rates.
We may be unable to realize our business strategy of completing and integrating
strategic acquisitions.
There are risks associated with our business strategy to acquire, make
investments in, or enter into joint ventures or other strategic alliances with,
companies whose business complements our business. We may not be able to
identify suitable candidates to acquire or enter into joint ventures or other
arrangements with or we may not be able to obtain financing on satisfactory
terms for those activities. In addition, if we acquire a company, we could have
difficulty assimilating the personnel and operations of the acquired company,
which could prevent us from realizing expected synergies. This could disrupt
our ongoing business and distract our management. We cannot assure you that we
would succeed in overcoming these risks or any other problems in connection
with any acquisitions we may make or joint ventures we may enter into.
For a period generally ending two years after the time Great Lakes completes
a distribution of our common stock to Great Lakes stockholders, if any, we will
be subject to contractual restrictions which may limit our ability to make
acquisitions or enter into joint ventures or other strategic alliances. For a
discussion of the principal contractual restrictions to which we are subject,
see "Our Relationship With Great Lakes--
11
<PAGE>
Arrangements With Great Lakes--IPO and Distribution Agreement--Preservation of
the Tax-Free Status of a Distribution."
Several of our directors, and many of our executive officers, may have
conflicts of interest because they are also directors and/or executive officers
of Great Lakes or because of their ownership of Great Lakes stock.
We currently anticipate that, unless Great Lakes completes a divestiture of
our common stock, four members of our board of directors will be executive
officers and/or directors of Great Lakes. Our directors who are also directors
and/or executive officers of Great Lakes will have obligations to both
companies and may have conflicts of interest with respect to matters
potentially or actually involving or affecting us, such as acquisitions,
financings and other corporate opportunities that may be suitable for both us
and Great Lakes. See "Description of Capital Stock--Anti-takeover Effects of
Certificate and By-law Provisions."
Five of our directors and many of our executive officers may own Great Lakes
stock and/or options to acquire Great Lakes stock because of their
relationships with Great Lakes. That ownership could create, or appear to
create, potential conflicts of interest when directors and officers are faced
with decisions that could have different implications for us and Great Lakes.
See "Management--Stock Ownership of Directors and Executive Officers."
We may incur material costs in connection with our separation from Great Lakes,
particularly in connection with a distribution.
We may incur material costs and expenses, including additional taxes,
insurance and employee costs, greater than those we have planned for in
connection with our separation from Great Lakes. Specifically, if the
completion of a distribution of our common stock by Great Lakes is held to be
taxable for United States federal income tax purposes, Great Lakes could be
subject to a material amount of taxes. We will be liable to Great Lakes for any
corporate level taxes incurred by Great Lakes to the extent that those taxes
are attributable to specific actions or failures to act by us, or to specified
transactions involving us following a distribution of our common stock to Great
Lakes stockholders. For a description of Great Lakes' and our obligations in
connection with a distribution, see "Our Relationship With Great Lakes--
Arrangements With Great Lakes--IPO and Distribution Agreement."
Changes in tax law may prevent Great Lakes from pursuing a distribution of our
common stock, in which case, your investment could be impaired because we will
remain under Great Lakes' control.
The Clinton administration, in its fiscal year 2001 budget, has proposed to
change the definition of "control" for purposes of effecting a transaction such
as a distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. As proposed, the change would apply to transactions entered into on or
after the date of enactment. Although Great Lakes has no current intention to
effect such a distribution, if this or a similar proposal were enacted, Great
Lakes may not be able to make a distribution in a tax efficient manner. If
there are adverse tax consequences to Great Lakes in connection with a
distribution, Great Lakes may decide not to make a distribution. This could
impair the value of your investment in our company because the market may place
a lower value on our stock if we remain a majority-owned subsidiary of Great
Lakes than if we become an independent company. We cannot predict whether the
Clinton administration's proposal eventually will be enacted by Congress and,
if enacted, whether it will be in the form proposed.
The market price of our Class A common stock could be adversely affected by
sales of substantial amounts of our common stock in the public market.
Sales by Great Lakes or others of substantial amounts of our common stock in
the public market, or the perception that such sales might occur, could depress
the price of our Class A common stock. In addition to the adverse effect a
price decline could have on holders of our Class A common stock, that decline
would likely impede our ability to raise capital through the issuance of
additional shares of our common stock or other equity securities. Great Lakes
will hold 8,400,000 shares of our common stock following this offering which
will be 60.0% of our outstanding stock, or 56.6% if the underwriters exercise
their overallotment option in full.
12
<PAGE>
In addition, approximately 460,000 shares of our Class A common stock will be
issuable upon exercise by our management of stock options that were granted in
connection with this offering. These options vest and become exercisable
ratably over a three year period commencing one year from the date of this
offering. Although Great Lakes has agreed with Salomon Smith Barney that it
will not sell any of its shares for at least 180 days following the offering,
Salomon Smith Barney may release all or any portion of Great Lakes' shares from
this lock-up agreement at any time. Furthermore, after the lock-up period
expires, Great Lakes will be able to sell its shares in accordance with the
provisions of Rule 144 under the Securities Act or pursuant to the registration
rights that we have granted Great Lakes.
We cannot predict whether substantial amounts of our Class A common stock
will be sold in the open market in anticipation of, or following, any
divestiture of our Class B shares by Great Lakes. Great Lakes has the sole
discretion to determine the timing, structure and all terms of any divestiture
of our common stock, all of which could affect the level of market transactions
in our Class A common stock. In addition, if Great Lakes does not distribute to
the holders of its common stock all of the shares of OSCA common stock that
Great Lakes owns, Great Lakes and its transferees will have the right to
require us to register those shares of our common stock under the U.S. federal
securities laws for sale into the public market. See "Our Relationship With
Great Lakes--Arrangements With Great Lakes--Registration Rights Agreement" and
"Shares Eligible for Future Sale."
The disparate voting rights of our Class A shares and our Class B shares could
impair the value and liquidity of our Class A common stock.
The difference between the voting rights of our Class A common stock and our
Class B common stock could depress the value of the Class A common stock to the
extent that investors or any potential future purchaser of our common stock
ascribes value to the superior voting rights of the Class B shares. The
existence of two separate classes of common stock could result in less
liquidity for either class of common stock than if there were only one class.
See "Our Relationship With Great Lakes" and "Description of Capital Stock."
We are subject to contractual limitations by Great Lakes that could limit the
conduct of our business and our ability to pursue our business objectives and
business opportunities.
In connection with this offering, we have entered into an agreement with
Great Lakes that contains a number of restrictive covenants that, individually
or in the aggregate, could materially limit the way in which we conduct our
business and our ability to pursue our business objectives. Consequently, our
financial results might be weaker than what they would have been in the absence
of these restrictions and we may be unable to meet our growth objectives.
Covenants in our agreement with Great Lakes will, among other things, limit our
ability to complete acquisitions and divestitures, incur indebtedness and issue
capital stock. These covenants generally expire either two years after a
distribution of our common stock to Great Lakes stockholders, if any, or, if
Great Lakes determines not to complete a distribution, the last date on which
Great Lakes distributed any of our common stock. The limitations placed on us
by these restrictions could impair the value of your investment in our company.
For more information about these restrictions, see "Our Relationship With Great
Lakes--Arrangements With Great Lakes--IPO and Distribution Agreement."
We may be adversely affected by the environmental and safety regulations to
which we are subject.
We are subject to federal, state and local environmental and occupational
safety and health laws and regulations in the United States and other countries
in which we do business. We cannot assure you that we have been, or will be at
all times, in compliance with all these requirements. These requirements, and
enforcement of these requirements, may become more stringent in the future.
Although we cannot predict the ultimate cost of compliance with any future
requirements, the costs could be material. Non-compliance could subject us to
material liabilities, such as government fines, third-party lawsuits or the
suspension of operations. Through the routine course of providing our services,
we handle, store and transport bulk quantities of
13
<PAGE>
hazardous materials. If a leak or spill from our facilities or vessels or
otherwise occurred in connection with our operations, we could incur material
costs to remediate any resulting contamination. In addition, our business
depends on the demand for our services from the oil and gas industry and could
be materially impaired by changes in the environmental and safety regulations
relating to the oil and gas industry to the extent those regulations increase
our customers' costs or otherwise affect their demand for our products and
services or their ability generally to pursue exploration and development
activities. For more information about our environmental compliance and
potential environmental liabilities, see "Business--Environmental Matters."
We may have potential business conflicts of interest with Great Lakes with
respect to our past and ongoing relationships.
Unless Great Lakes completes a divestiture of our common stock, it will
continue to be our controlling stockholder. After this offering we will have
contractual arrangements with Great Lakes that require Great Lakes and its
affiliates to supply products and provide various transitional services to us.
As a result, conflicts of interest may arise between us and Great Lakes in a
number of areas relating to our past and ongoing relationships.
We cannot assure you that we will be able to resolve any potential conflicts
or that, if resolved, we would not be able to receive a more favorable
resolution if we were dealing with an unaffiliated party. Agreements we have
entered into with Great Lakes may be amended from time to time upon agreement
between the parties. For so long as we are controlled by Great Lakes, we cannot
assure you that Great Lakes would not require us to agree to an amendment to
any agreement that may be less favorable to us than the current terms of that
agreement. Our ability to incur indebtedness, make acquisitions and
dispositions and issue stock is subject to the terms of another agreement that
we have entered into with Great Lakes described elsewhere in this prospectus.
See "Our Relationship With Great Lakes--Arrangements With Great Lakes--IPO and
Distribution Agreement."
We have limited experience as a stand-alone company, and the transitional
services being provided to us by Great Lakes may not be sufficient to meet our
needs.
Since 1982, our business operations have been conducted by various entities
owned directly or indirectly by Great Lakes and since our acquisition by Great
Lakes, we have had no independent operating history. Following this offering,
we will be required to supplement our financial, administrative and other
resources to provide services necessary to operate successfully as a fully
independent company. These requirements will place an additional demand on our
management, and any failure to meet these challenges could significantly impair
our business.
While Great Lakes is contractually obligated to provide us with some
transitional services, we cannot assure you that such services will be
sustained at the same level as when we were part of Great Lakes or that we will
obtain the same benefits. Great Lakes is only obligated to provide these
transitional services for a limited period of time, generally until Great Lakes
completes a divestiture of our common stock. For more information about the
term of Great Lakes' obligation to provide these services, see "Our
Relationship with Great Lakes--Arrangements with Great Lakes--Services
Agreement." Furthermore, we cannot assure you that, after the expiration of
these various arrangements, we will be able to replace the transitional
services in a timely manner or on terms and conditions, including cost, as
favorable as those we will receive from Great Lakes.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Great Lakes. The prices charged to us under these agreements may be higher or
lower than the prices that may be charged by unaffiliated third parties for
similar services. For more information about these arrangements, see "Our
Relationship With Great Lakes--Arrangements With Great Lakes."
14
<PAGE>
Our results of operations are subject to quarterly fluctuations based on
changes in demand for our services by oil and gas companies. These
fluctuations could result in volatility in our stock price.
Our operations are subject to fluctuations in demand for our services by
oil and gas companies, which may cause our results of operations to fluctuate
on a quarterly basis. Our results of operations are dependent on the level of
well completion activity in the markets in which we operate, and such
activities are, in turn, subject to both short-term and long-term trends in
oil and gas prices. The timing and magnitude of our customers' purchases and
the incurrence of operating expenses by us can lead to significant
fluctuations in our quarterly results of operations, which may, in turn,
result in significant fluctuations in the price of our Class A common stock.
Provisions in our corporate documents, as well as provisions of Delaware law,
could discourage a change in control of our company that stockholders may
consider favorable. Consequently these provisions could depress the price of
our Class A common stock.
The existence of some provisions in our corporate documents and Delaware
law could delay or prevent a change in control of our company that
stockholders may consider favorable. This may reduce the market price of our
common stock. Our certificate of incorporation and bylaws contain provisions
that may make the acquisition of control of our company more difficult,
including provisions relating to the nomination, election and removal of
directors and limitations on actions by our stockholders. Delaware law also
imposes some restrictions on mergers and other business combinations between
us and any holder of 15% or more of our outstanding common stock. Great Lakes
is generally exempted from these provisions and will have special rights so
long as it owns at least a majority of our outstanding common stock. For a
description of these provisions and agreements, see "Description of Capital
Stock."
Our stock price may fluctuate significantly following the offering and you
could lose all or part of your investment as a result.
There previously has been no public market for our common stock, and we
cannot predict the extent to which investor interest in us will lead to the
development of a liquid trading market. You may not be able to resell your
Class A shares at or above the initial public offering price, which will be
determined through negotiations among us, Great Lakes and the representatives
of the underwriters and may not be indicative of prices that will prevail in
the trading market.
The market price of our Class A common stock may experience significant
fluctuations in response to:
. our operating results;
. changes in earnings estimates by securities analysts or our ability to
meet those estimates;
. news announcements regarding the oil and gas industry in general or us or
any of our customers or competitors;
. performance of similar companies; or
. other factors beyond our control.
The realization of any of the risks described in these "Risk Factors,"
including the possibility of substantial sales of our common stock and the
timing, structure and terms of a distribution could cause the market price of
our Class A common stock to decline significantly.
In addition, the stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of particular
companies which may depress the trading price of our Class A common stock.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including, without
limitation, statements concerning the conditions in the industries in which we
compete, our operations, economic performance and financial condition,
including in particular statements relating to our business and growth strategy
and product development efforts. The words "believe," "expect," "anticipate,"
"intend" and other similar expressions generally identify forward-looking
statements. Potential investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. These
forward-looking statements are based largely on our current expectations and
are subject to a number of risks and uncertainties, including, without
limitation, those identified under "Risk Factors" and elsewhere in this
prospectus and other risks and uncertainties indicated from time to time in our
filings with the SEC. Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in our business or growth strategy or an inability to execute
our strategy due to changes in our industry or the economy generally, the
emergence of new or growing competitors and various other competitive factors.
In light of these risks and uncertainties, there can be no assurance that the
matters referred to in the forward-looking statements contained in this
prospectus will in fact occur.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the offering of about
$78.7 million, or about $90.8 million if the underwriters exercise their over-
allotment option in full. In addition, we anticipate that we will borrow
approximately $31.0 million under a proposed credit facility that we will enter
into at or about the time of this offering.
We intend to use the aggregate proceeds of this offering, including amounts
we may receive from the exercise of the underwriters' over-allotment option,
and borrowings under the proposed credit facility and cash on hand to repay our
indebtedness to Great Lakes, which we estimate to be approximately $116.0
million. This indebtedness is payable upon demand and does not bear interest.
The remaining balance, if any, owed to Great Lakes after this repayment will be
contributed to us as equity capital from Great Lakes. In addition, our board of
directors declared a dividend on our common stock which requires us to pay to
Great Lakes proceeds from the offering in excess of amounts we otherwise owe to
Great Lakes. After this offering and the related transactions, we will have
approximately $6.0 million in cash or cash equivalents and approximately $9.0
million in availability under the proposed credit facility, which will be
available for general corporate purposes, including working capital and capital
expenditures. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
We do not expect to pay dividends on our common stock for the foreseeable
future. Instead, we anticipate that all of our earnings in the foreseeable
future will be used for working capital and other general corporate purposes.
The determination of any future cash dividends will depend upon declaration by
our board of directors and upon our financial condition, results of operations,
cash flow, the level of our capital expenditures, our future business prospects
and such other matters that our board of directors deems relevant. In addition,
we may be restricted in our ability to declare and pay dividends by the terms
of any credit facility or other financial instrument that we elect to enter
into from time to time. We are not currently subject to any such restriction,
but we cannot assure you that this will continue to be the case.
16
<PAGE>
CAPITALIZATION
Set forth below is the actual capitalization of our company at March 31,
2000 and as adjusted to give effect to:
. this offering,
. borrowings of approximately $31.0 million under a proposed credit
facility, and
. the related transactions described elsewhere in this prospectus.
You should read the information set forth below in conjunction with "Pro
Forma Condensed Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
At March 31, 2000
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 13,644 $ 6,000
======== ========
Debt:
Dividend note payable to Great Lakes................... $ 65,000 $ --
Due to Great Lakes..................................... 50,866 --
Notes payable--related party, including current
portion............................................... 472 472
Proposed credit facility............................... -- 31,000
-------- --------
Total debt:.......................................... 116,338 31,472
-------- --------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued or outstanding........... -- --
Class A common stock, $.01 par value, 25,000,000 shares
authorized, 5,600,000 shares issued and outstanding on
an as adjusted basis.................................. -- 56
Class B common stock, $.01 par value, 40,000,000 shares
authorized, 8,400,000 shares issued and outstanding... 84 84
Additional paid-in capital............................. 690 76,710
Retained earnings (deficit)............................ (18,593) (18,593)
Accumulated other comprehensive loss................... (1,763) (1,763)
-------- --------
Total stockholders' equity (deficit)................. (19,582) 56,494
-------- --------
Total capitalization............................... $ 96,756 $ 87,966
======== ========
</TABLE>
17
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
The following table sets forth our 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 three-year period ended December 31, 1999 and the
balance sheet data at December 31, 1998 and 1999 have been derived from our
consolidated financial statements and notes thereto, which are included
elsewhere in this prospectus, and have been audited by Ernst & Young, LLP
independent auditors. The statement of operations data and the balance sheet
data for the three months ended March 31, 1999 and 2000 are derived from
unaudited financial statements. The statement of operations data for 1995 and
1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are based
on our and Great Lakes' accounting records which, in management's opinion,
include all adjustments necessary for the fair presentation of our financial
position at such dates and the results of operation for such respective
periods. In addition, the historical consolidated statement of operations data
set forth below has been adjusted to reflect many significant changes that will
occur in the operations and funding of our company as a result of our
separation from Great Lakes. Our selected financial data should be read in
conjunction with, and are qualified by reference to, "Pro Forma Condensed
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes included elsewhere in this prospectus. The
financial information presented below may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-
alone entity during the periods presented. See "Risk Factors--Our historical
financial information may not be representative of our results as a separate
company."
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Statement of Operations
Data: (unaudited) (audited) (unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue ............ $ 71,351 $ 95,685 $ 112,739 $ 113,369 $ 91,938 $ 23,023 $ 26,501
Operating expenses:
Cost of sales.......... 48,126 65,916 78,026 88,800 74,635 16,862 19,472
Selling, administrative
and research expenses. 10,735 12,438 16,515 19,271 18,153 5,689 5,897
Amortization of
intangibles........... 242 247 251 370 432 99 99
Special charges
(credit) (1).......... -- 3,100 -- 13,350 (2,550) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss). 12,248 13,984 17,947 (8,422) 1,268 373 1,033
Interest expense
(income), net.......... 108 (46) (191) (137) (114) (41) (66)
Other expense (income),
net.................... (855) (498) (16) 538 (724) 381 (131)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 12,995 14,528 18,154 (8,823) 2,106 33 1,230
Income tax provision
(benefit).............. 4,183 6,658 6,727 (1,943) 1,284 20 541
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 8,812 $ 7,870 $ 11,427 $ (6,880) $ 822 $ 13 $ 689
========== ========== ========== ========== ========== ========== ==========
Earnings per share...... $ 1.05 $ .94 $ 1.36 $ (.82) $ .10 $ -- $ .08
Weighted average shares
outstanding............ 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000
Other Data:
Net cash provided by
operating activities... $ 8,156 $ 9,359 $ 17,403 $ 28,068 $ 8,089 $ 1,514 $ 10,625
Net cash used in
investing activities... (9,973) (4,754) (18,665) (27,798) (5,962) (2,434) (538)
Net cash provided by
(used in) financing
activities............. (125) -- -- 793 (2,473) (22) --
EBITDA (2).............. 15,918 17,749 22,318 (2,907) 9,304 1,587 3,223
Adjusted EBITDA (3)..... 15,918 20,849 22,318 10,443 6,754 1,587 3,223
Depreciation and
amortization........... 2,815 3,267 4,355 6,053 7,312 1,595 2,059
Capital expenditures.... 9,986 6,301 18,913 24,140 5,873 3,547 863
Balance Sheet Data (at
period end):
Working capital
(deficit).............. $ 28,209 $ 39,180 $ 48,937 $ 44,411 $ (29,480) $ 42,952 $ (19,949)
Property and equipment,
net.................... 19,836 19,534 34,085 46,054 46,928 46,915 45,590
Total assets............ 62,023 74,497 100,179 120,044 101,687 115,362 110,200
Total debt.............. 17,816 20,527 34,178 53,310 109,113 53,885 116,338
Total stockholder's
equity (deficit)/Great
Lakes Investment....... 35,671 43,519 54,928 47,724 (19,930) 46,325 (19,582)
</TABLE>
-------
18
<PAGE>
(1) In 1996, we incurred special charges of $3.1 million related to an asset
impairment. In 1998, we 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, we 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. See note 4 to our consolidated
financial statements.
(2) We define "EBITDA" as income (loss) before income taxes, plus depreciation,
amortization of intangibles and interest expense (income), net. We believe
EBITDA is a widely accepted indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(3) "Adjusted EBITDA" is EBITDA plus adjustments to eliminate the effect of
special charges (credit) of $3,100, $13,350 and $(2,550) in 1996, 1998 and
1999, respectively.
19
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We prepared the following unaudited pro forma condensed consolidated
financial statements as of and for the year ended December 31, 1999 and as of
and for the three months ended March 31, 2000 to illustrate the estimated
effects of this offering, our separation from Great Lakes and related
transactions as described below. The pro forma condensed consolidated statement
of operations for the year ended December 31, 1999 and the three months ended
March 31, 2000 is presented as if such transactions had occurred as of January
1, 1999 and 2000, respectively. The pro forma condensed consolidated balance
sheet data as of December 31, 1999 and March 31, 2000 are presented as if such
transactions had occurred on those dates. We believe that the assumptions used
provide a reasonable basis for presenting the significant effects directly
attributable to this offering, our separation from Great Lakes and related
transactions. The pro forma condensed consolidated financial statements do not
purport to represent what our results of operations or financial position would
actually have been if such transactions had in fact occurred on such dates or
to project our results of operations or financial position for any future
period or date. These statements should be read in connection 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 prospectus.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have examined the pro forma adjustments reflecting the transactions as
described in the notes and introduction to the pro forma condensed consolidated
financial statements and the application of those adjustments to the historical
amounts in the accompanying pro forma condensed consolidated balance sheet of
OSCA, Inc. as of December 31, 1999, and the pro forma condensed consolidated
statement of operations for the year then ended. The historical condensed
consolidated financial statements are derived from the historical financial
statements of OSCA, Inc., which were audited by us, and appear elsewhere in
this prospectus. Such pro forma adjustments are based upon management's
assumptions as described in the notes and introduction. Our examination was
made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
In addition, we have reviewed the related pro forma adjustments reflecting
the transactions as described in the notes and introduction to the pro forma
condensed consolidated financial statements and the application of those
adjustments to the historical amounts in the accompanying pro forma condensed
consolidated balance sheet of OSCA, Inc. as of March 31, 2000, and the pro
forma condensed consolidated statement of operations for the three months then
ended. The historical condensed consolidated financial statements are derived
from the historical consolidated financial statements of OSCA, Inc., which were
reviewed by us, and appear elsewhere in this prospectus. Such pro forma
adjustments are based upon management's assumptions as described in the notes
and introduction. Our review was made in accordance with standards established
by the American Institute of Certified Public Accountants.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transaction occurred at an earlier date. However, the pro forma condensed
consolidated financial statements are not necessarily indicative of the results
of operations or related effects on financial position that would have been
attained had the above-mentioned transaction actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the notes and introduction, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro forma
column reflects the proper application of those adjustments to the historical
consolidated financial statement amounts in the pro forma condensed
consolidated balance sheet as of December 31, 1999, and the pro forma condensed
consolidated statement of operations for the year then ended.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the
pro forma adjustments or the application of such adjustments to the pro forma
condensed consolidated balance sheet as of March 31, 2000, and the pro forma
condensed consolidated statement of operations for the three months then ended.
Based on our review, however, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the notes and introduction, that the related pro
forma adjustments do not give appropriate effect to those assumptions, or that
the pro forma column does not reflect the proper application of those
adjustments to the historical consolidated financial statement amounts in the
pro forma condensed consolidated balance sheet as of March 31, 2000, and the
pro forma condensed consolidated statement of operations for the three months
then ended.
Ernst & Young LLP
June 14, 2000
Indianapolis, Indiana
21
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- -----------
(in thousands,
except per share data)
<S> <C> <C> <C>
Net revenue.......................... $ 26,501 $ -- $ 26,501
Operating expenses:
Cost of sales...................... 19,472 (2,690)(1) 19,402
2,620 (2)
Selling, administrative and 5,897 (340)(3) 5,738
research expenses................. 181 (4)
Amortization of intangibles........ 99 -- 99
---------- ------- -----------
Operating income (loss).............. 1,033 229 1,262
Interest expense..................... 7 627 (5) 634
Interest income...................... (73) -- (73)
Other expense (income)--net.......... (131) -- (131)
---------- ------- -----------
Income (loss) before income taxes.... 1,230 (398) 832
Income tax provision (benefit)....... 541 (175) 366
---------- ------- -----------
Net income (loss).................... $ 689 $ (223) $ 466
========== ======= ===========
Earnings per share:
Basic and diluted.................. $ 0.08 $ 0.03 (6)
Weighted average shares
outstanding....................... 8,400,000 14,000,000 (6)
</TABLE>
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Pro
Historical Adjustments Forma
---------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.................. $ 13,644 $ 2,648 (9) $ 6,000
(10,292)(9)
Accounts and notes receivable, less
allowances................................ 18,410 -- 18,410
Inventories................................ 20,569 -- 20,569
Prepaid expenses and other current assets.. 2,561 (1,146)(7) 1,415
Deferred income taxes...................... 1,659 -- 1,659
Income taxes receivable.................... 197 -- 197
-------- -------- --------
Total current assets................... 57,040 (8,790) 48,250
-------- -------- --------
Property and equipment, net................ 45,590 -- 45,590
Goodwill and other intangibles, net........ 7,570 -- 7,570
-------- -------- --------
Total assets........................... $110,200 $ (8,790) $101,410
======== ======== ========
Liabilities and Stockholders' Equity
(Deficit):
Current liabilities:
Accounts payable........................... $ 8,155 $ -- $ 8,155
Dividend payable to Great Lakes............ -- 2,648 (9) --
(2,648)(9)
Dividend note payable to Great Lakes....... 65,000 (65,000)(9) --
Accrued liabilities........................ 3,716 -- 3,716
Current portion of notes payable........... 118 -- 118
-------- -------- --------
Total current liabilities.............. 76,989 (65,000) 11,989
Deferred income taxes...................... 1,573 -- 1,573
Note payable--related party................ 354 -- 354
Long-term debt............................. -- 31,000 (8)(9) 31,000
Due to Great Lakes......................... 50,866 (50,866)(9) --
Stockholders' equity (deficit)............. (19,582) 76,076 (9) 56,494
-------- -------- --------
Total liabilities and stockholders'
equity (deficit).................... $110,200 $ (8,790) $101,410
======== ======== ========
</TABLE>
23
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- -----------
(in thousands,
except per share data)
<S> <C> <C> <C>
Net revenue.......................... $ 91,938 $ -- $ 91,938
Operating expenses:
Cost of sales...................... 74,635 (9,178)(1) 75,645
10,188 (2)
Selling, administrative and 18,153 (1,637)(3) 17,240
research expenses................. 724 (4)
Amortization of intangibles........ 432 -- 432
Special charges (credit)........... (2,550) -- (2,550)
---------- ------- -----------
Operating income (loss).............. 1,268 (97) 1,171
Interest expense..................... 37 2,507 (5) 2,544
Interest income...................... (151) -- (151)
Other expense (income)--net.......... (724) -- (724)
---------- ------- -----------
Income (loss) before income taxes.... 2,106 (2,604) (498)
Income tax provision (benefit)....... 1,284 (990) 294
---------- ------- -----------
Net income (loss).................... $ 822 $(1,614) $ (792)
========== ======= ===========
Earnings per share:
Basic and diluted.................. $ 0.10 $ (0.06)(6)
Weighted average shares
outstanding....................... 8,400,000 14,000,000 (6)
</TABLE>
24
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro
Historical Adjustments Forma
---------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.................. $ 3,898 $ 2,013 (9) $ 3,898
(2,013)(9)
Accounts and notes receivable, less
allowances................................ 20,800 -- 20,800
Inventories................................ 19,321 -- 19,321
Prepaid expenses and other current assets.. 1,573 (930)(7) 643
Deferred income taxes...................... 1,465 -- 1,465
Income taxes receivable.................... 128 -- 128
-------- -------- --------
Total current assets................... 47,185 (930) 46,255
-------- -------- --------
Property and equipment, net................ 46,928 -- 46,928
Goodwill and other intangibles, net........ 7,574 -- 7,574
-------- -------- --------
Total assets........................... $101,687 $ (930) $100,757
======== ======== ========
Liabilities and Stockholders' Equity
(Deficit):
Current liabilities:
Accounts payable........................... $ 6,496 $ -- $ 6,496
Dividend payable to Great Lakes............ -- 2,013 (9) --
(2,013)(9)
Dividend note payable to Great Lakes....... 65,000 (65,000)(9) --
Accrued liabilities........................ 5,051 -- 5,051
Current portion of notes payable........... 118 -- 118
-------- -------- --------
Total current liabilities.............. 76,665 (65,000) 11,665
Deferred income taxes...................... 957 -- 957
Note payable--related party................ 354 -- 354
Long-term debt............................. -- 31,000 (8)(9) 31,000
Due to Great Lakes......................... 43,641 (43,641)(9) --
Stockholders' equity (deficit)............. (19,930) 76,711 (9) 56,781
-------- -------- --------
Total liabilities and stockholders'
equity (deficit).................... $101,687 $ (930) $100,757
======== ======== ========
</TABLE>
25
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Reflects the elimination of actual intercompany cost of sales related to
the purchase of brominated products from Great Lakes based upon a transfer
price.
(2) Reflects the estimated intercompany cost of sales related to the purchase
of brominated products from Great Lakes as determined under the Brominated
Products Supply Agreement entered into in connection with this offering.
(3) Reflects the elimination of allocated selling, administrative and research
expenses charged to OSCA by Great Lakes through the intercompany account.
(4) Reflects the estimated selling, administrative and research expenses to be
supplied by Great Lakes under the Services Agreement entered into in
connection with this offering and estimated selling, administrative and
research expenses for services obtained from third party providers upon
separation from Great Lakes.
(5) Adjustments to reflect interest expense and related fees to be incurred in
connection with estimated borrowings under a proposed third party credit
facility to be entered into at or about the time of the offering as
follows:
(a) Interest expense is based upon a floating rate credit facility using an
assumed current interest rate of 7.85%. A 0.125% increase in interest
rate would increase interest expense, and thereby decrease income
before taxes, by approximately $40,000 and $10,000 for the year ended
December 31, 1999 and the three months ended March 31, 2000
respectively.
(b) Fees include an annual fee equal to 0.15% of the committed amount under
the proposed credit facility payable to Great Lakes in respect of its
guarantee of that facility, and an annual commitment fee of 0.15% of
the unused committed amount payable to the lenders under that facility.
(6) Reflects the issuance of shares of Class A common stock, the
recapitalization of Great Lakes' Class B shares and related adjustments to
basic and diluted earnings per share in connection with the offering.
(7) Adjustment to recognize prepaid expenses related to the offering.
(8) Reflects the estimated borrowings under a proposed third party credit
facility to be entered into at the time of the offering.
(9) The pro forma adjustments for the proceeds of the offering are as follows:
(a) The total proceeds to be received at the time of the offering are
estimated to be $109.7 million, which includes net proceeds from the
offering of $78.7 million and estimated borrowings under the credit
facility of $31.0 million.
(b) Reflects the repayment to Great Lakes of $108.6 million and $115.9
million at December 31, 1999 and March 31, 2000, respectively. These
amounts include the dividend note payable to Great Lakes of $65.0
million and the intercompany balance due to Great Lakes of $43.6
million and $50.9 million at December 31, 1999 and March 31, 2000,
respectively. The December 31, 1999 repayment is from the net proceeds
from the offering and borrowings under the proposed credit agreement.
The March 31, 2000 repayment is from those sources plus cash on hand.
(c) Reflects the declaration and payment of an additional dividend
requiring OSCA to pay to Great Lakes proceeds from the offering in
excess of amounts OSCA otherwise owes Great Lakes. The amounts of these
dividends would have been $2.0 and $2.6 million at December 31, 1999
and March 31, 2000, respectively.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following section contains forward-looking statements including, without
limitation, statements relating to our plans, strategies, objectives,
expectations, intentions and resources. See "Forward-Looking Statements."
Basis of Presentation
The discussion and analysis of our financial condition and results of
operations should be read in conjunction with "Selected Financial Data," "Pro
Forma Condensed Consolidated Financial Statements" and the consolidated
financial statements and related notes, which appear elsewhere in this
prospectus.
Since 1982, our business operations have been conducted by various entities
owned directly or indirectly by Great Lakes. In order to accomplish this
offering and appropriately reflect the businesses to be included in this
offering, it was necessary for Great Lakes to transfer certain foreign
subsidiaries previously owned by Great Lakes to us. This transfer was completed
in December 1999 and resulted in our direct ownership of those subsidiaries.
Accordingly, financial information for 1999 is presented on a consolidated
basis. Prior to the transfer of these foreign subsidiaries, operations were
conducted by us and our subsidiaries and, in some cases, subsidiaries of Great
Lakes. Therefore, the financial information for the periods prior to the
transfer are presented on a combined basis.
The accompanying financial statements reflect the historical financial
position, results of operations, changes in stockholder's equity (deficit) and
cash flows directly related to us and our affiliates, adjusted to include only
those parts of our business which will remain part of our company after the
offering. 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 adjustments were made for all periods presented. These two businesses
consisted of the former environmental remediation services business owned by
OSCA through its wholly-owned subsidiary, OSCA de Mexico, 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" 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 will assume and will indemnify OSCA
for all claims, charges, assessments and liabilities, known and unknown,
directly or indirectly relating to these businesses. Additionally, Great Lakes
will be 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 our and Great Lakes'
historical accounting records and include the historical operations of entities
directly owned by us and operations transferred to us by Great Lakes in
December 1999. Accordingly, Great Lakes' net investment is shown in lieu of
stockholder's equity (deficit) in the financial statements prior to the
transfer.
The statements of operations include all material costs of doing business
including costs related to services provided to us by Great Lakes. Charges to
us 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 we had been operated as a separate
entity for the periods presented.
We are 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 our services depends primarily on activity in the oil and gas
exploration and production industry in the Gulf of Mexico and in select
international markets. This activity is driven mostly by current and
27
<PAGE>
expected market prices for oil and gas and by the exploration and production
budgets of our principal customers. These factors are largely dependent, in
turn, 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 our services.
Conversely, in periods of falling energy demand and commodity prices, demand
for our services generally declines. Historically, changes in the budgets and
activity levels of exploration and production companies have lagged significant
movements in oil and gas prices.
The effect of lower oil prices was evident during the second half of 1998
and first half of 1999 when the oil and gas industry experienced a significant
downturn. Oil prices declined to their lowest level in over 12 years. This
decline resulted in oil and gas companies canceling or deferring a significant
portion of their exploration and development activities, which led to reduced
demand for our products and services and increased pricing pressure.
Oil prices substantially recovered in the second half of 1999, and
exploration and production companies enjoyed improved operating results and
cash flows. In the fourth quarter of 1999, exploration and production activity
began to increase in the Gulf of Mexico. Recovery is lagging somewhat in
international markets but is expected to increase. Oil prices continued their
upward trend in the first quarter of 2000, temporarily reaching their highest
level since the Gulf War.
Merger activity among both major and independent oil and 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 our revenue are the number of wells completed in the
Gulf of Mexico and, to a lesser degree, growth in select international markets
such as Brazil, Venezuela and the North Sea. These drivers are, in turn,
dependent on the factors and dynamics described above.
The main components of our operating expenses are cost of sales and selling,
administrative and research expenses. Each of these expense items includes
expenses that, at least in the short term, are relatively fixed. Therefore, as
our revenues fluctuate in response to the factors and dynamics described above,
our expenses as a percentage of revenues fluctuate accordingly. During the last
industry downturn, in 1998 and 1999, we elected to maintain, and in some
instances expand, our productive and sales capacity to prepare ourselves for
the next industry expansion, and as a result our expenses increased
significantly as a percentage of revenues. This effect reversed itself in late
1999 and early 2000 as our revenues increased as a result of increased industry
activity.
28
<PAGE>
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 1997, 1998 and 1999 were derived from our audited consolidated
financial statements included elsewhere in this prospectus. 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 prospectus.
<TABLE>
<CAPTION>
Three
Months
Ended
Year ended December 31, March 31,
------------------------- ------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales....................... 69.2 78.3 81.2 73.2 73.5
Selling, administrative and research
expenses........................... 14.7 17.0 19.7 24.8 22.2
Amortization of intangibles......... 0.2 0.3 0.5 0.4 0.4
Special charges (credit)............ -- 11.8 (2.8) -- --
------- ------- ------- ----- -----
Total operating expenses.......... 84.1 107.4 98.6 98.4 96.1
------- ------- ------- ----- -----
Operating income (loss)............... 15.9 (7.4) 1.4 1.6 3.9
Interest expense (income), net........ (0.2) (0.1) (0.1) (0.1) (0.2)
Other expense (income), net .......... -- 0.5 (0.8) 1.6 (0.5)
------- ------- ------- ----- -----
Income (loss) before income taxes..... 16.1 (7.8) 2.3 0.1 4.6
Income tax provision (benefit)........ 6.0 (1.7) 1.4 0.1 2.0
------- ------- ------- ----- -----
Net income (loss)..................... 10.1 (6.1) 0.9 0.0 2.6
======= ======= ======= ===== =====
</TABLE>
Three months ended March 31, 2000 versus three months ended March 31, 1999
Net Revenue. Net revenue for the three months ended March 31, 2000 increased
$3.5 million, or 15.2%, to $26.5 million from $23.0 million for the three
months ended March 31, 1999. The increase was principally attributable to a
rise in oil prices that resulted in an increase in worldwide drilling
activities, particularly in the Gulf of Mexico.
Completion Fluids Revenue. Revenue for completion fluids and related
activities for the three months ended March 31, 2000 decreased $0.3 million, or
2.2%, to $13.2 million from $13.5 million for the three months ended March 31,
1999. The decrease was attributable to general price declines for completion
fluids in the industry resulting from increased competition, which was
particularly severe in the Gulf of Mexico, Latin America and the North Sea.
Completion Services Revenue. Revenue for completion services for the three
months ended March 31, 2000 increased $2.1 million, or 33.3%, to $8.4 million
from $6.3 million for the three months ended March 31, 1999. This increase was
attributable to improved rig activity levels in the Gulf of Mexico. Rig
activity levels in the Gulf of Mexico increased by over 20% for the first
quarter of 2000 as compared to the first quarter of 1999.
Downhole Completion Tools Revenue. Revenue for downhole completion tools for
the three months ended March 31, 2000 increased by $1.7 million, or 53.1%, to
$4.9 million from $3.2 million for the three months ended March 31, 1999. This
increase in revenue was due, in relatively equal parts, to market penetration
primarily attributable to the successful introduction of several new products
and to increases in our customers' rig activity in the Gulf of Mexico.
29
<PAGE>
Cost of Sales. Cost of sales for the three months ended March 31, 2000
increased $2.6 million, or 15.4%, to $19.5 million from $16.9 million from the
three months ended March 31, 1999. However, as a percentage of net revenue,
cost of sales increased to 73.5% for the three months ended March 31, 2000
versus 73.2% for the three months ended March 31, 1999. This increase was
mainly due to deeper price discounts for products and services.
Selling, Administrative and Research Expense. Selling, administrative and
research expense increased $0.2 million, or 3.5%, to $5.9 million for the three
months ended March 31, 2000 compared to $5.7 million for the three months ended
March 31, 1999. However, as a percentage of net revenue, selling,
administrative and research expense decreased from 24.8% to 22.2%, as a result
of increased net revenues. We expect selling, administrative and research
expense to continue to decrease as a percentage of net revenue.
Amortization of Intangibles. Amortization of intangibles remained constant.
Operating Income. As a result of the foregoing, operating income increased
$0.6 million to $1.0 million for the three months ended March 31, 2000 compared
to $0.4 million for the three months ended March 31, 1999. Operating income
from completion fluids, completion services and downhole completion tools was
$0.4 million, $1.1 million and $0.2 million, respectively, for the three months
ended March 31, 2000.
Interest Expense (Income), Net. Net interest income was flat for the three
months ended March 31, 2000 compared to the three months ended March 31, 1999.
Other Expense (Income), Net. Other expense (income) was $(0.2) million for
the three months ended March 31, 2000 compared to $0.4 million for the three
months ended March 31, 1999. The difference was primarily due to a gain on the
sale of assets in the United Kingdom of $0.2 million for the three months ended
March 31, 2000 versus a charge of $0.3 million for uninsured losses for the
three months ended March 31, 1999.
Income Tax Provision. The income tax provision for the three months ended
March 31, 2000 was $0.5 million, resulting in an effective tax rate of 44.0%,
while for the three months ended March 31, 1999 the income tax provision was
$20,000, resulting in an effective tax rate of 60.6%. The differences between
the effective tax rates for these periods and the statutory U.S. Federal income
tax rate relate primarily to non-reciprocal tax benefits on foreign losses.
Net Income. Net income for the three months ended March 31, 2000 increased
$0.7 million to $0.7 million from $13,000 for the three months ended March 31,
1999.
1999 versus 1998
Net Revenue. Net revenue for 1999 decreased $21.5 million, or 19.0%, to
$91.9 million from $113.4 million for 1998. The decrease was principally
attributable to a sharp decline in oil prices that resulted in a decrease in
worldwide drilling activities, particularly in the Gulf of Mexico.
Completion Fluids Revenue. Revenue for completion fluids and related
activities for 1999 decreased $16.8 million, or 24.9%, to $50.6 million from
$67.4 million for 1998. The decrease was attributable to decreases in our
customers' rig activity and general price declines in the industry, which were
particularly severe in the Gulf of Mexico, Latin America and the North Sea.
Completion Services Revenue. Revenue for completion services for 1999
decreased $7.6 million, or 22.8%, to $25.7 million from $33.3 million for 1998.
This decrease was primarily attributable to lower rig activity levels. Rig
activity levels in the Gulf of Mexico decreased by approximately 17% for 1999
as compared to 1998. This decrease led to general price declines in the
completion services industry.
30
<PAGE>
Downhole Completion Tools Revenue. Revenue for downhole completion tools for
1999 increased by $3.1 million, or 24.6%, to $15.7 million from $12.6 million
for 1998. This increase in revenue was driven by market penetration primarily
attributable to the successful introduction of several new products. This
revenue increase was achieved despite decreases in our customers' rig activity
and general industry price declines.
Cost of Sales. Cost of sales for 1999 decreased $14.2 million, or 16.0%, to
$74.6 million from $88.8 million from 1998. However, as a percentage of
revenue, cost of sales increased to 81.2% for 1999 versus 78.3% for 1998. This
increase was mainly due to deeper price discounts for products and services,
partially offset by a $3.4 million reduction in our workforce and related
costs.
Selling, Administrative and Research Expense. Selling, administrative and
research expense decreased $1.1 million, or 5.7%, to $18.2 million for 1999
compared to $19.3 million for 1998. The decrease was mainly due to our response
to lower industry activity. Selling, administrative and research expense
increased as a percentage of net revenues primarily due to lower net revenues
as a result of the sharp decline in oil prices combined with the fixed nature
of a portion of these expenses.
Amortization of Intangibles. Amortization of intangibles increased $62,000
to $432,000 for 1999 compared to $370,000 for 1998. The increase reflects a
full year of goodwill and other intangibles associated with the acquisition of
Cain Oil Tools, Inc. in March 1998.
Special Charges. Special charges were $13.4 million in 1998. The components
of the charge include asset impairments of $5.4 million, write-down of the
carrying value of an asset to be disposed of by $2.5 million, severance costs
of $0.3 million, lease costs of $4.4 million and other related charges of $0.8
million. In 1999, due to changing market conditions and a recognition of the
need to ensure a reliable source of supply of calcium chloride, a decision was
made to continue using the 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. Based on that decision, a special charge credit of $2.5
million was recognized as a result of the upward adjustment of the carrying
value of an asset held for disposal which was written down in 1998. The amount
of depreciation suspended on the facility in 1999 was approximately $0.2
million. In addition, the remaining credit related to the reversal of $0.1
million of severance costs was taken as a 1998 special charge. We anticipate
annual aggregate cost savings from the repositioning plan, which was fully
implemented in early 1999, to be approximately $7.6 million. In addition, we
believe the reserve balance of $1.9 million at December 31, 1999 represents its
remaining cash obligations which are to be paid through April 2001. Additional
information regarding the special charges is provided in Note 4 to the
consolidated financial statements.
Operating Income. As a result of the foregoing, operating income increased
$9.7 million to $1.3 million for 1999 compared to ($8.4) million for 1998.
Operating income from completion fluids, completion services and downhole
completion tools was $5.0 million, $(0.7) million and $0.6 million,
respectively, for 1999.
Interest Expense (Income), Net. Net interest income was flat for the year
ended December 31, 1999 compared to the prior year.
Income Tax Provision (Benefit). The income tax provision for 1999 was $1.3
million, resulting in an effective tax rate of 61.0%, while in 1998 the income
tax benefit was ($1.9) million, resulting in an effective tax rate of (22.0%).
The differences between the effective tax rates for these periods and the
statutory U.S. federal income tax rate relate primarily to non-reciprocal tax
benefits on foreign losses.
Net Income. Net income for 1999 increased $7.7 million to $0.8 million from
$(6.9) million for 1998.
31
<PAGE>
1998 versus 1997
Net Revenue. Net revenue for 1998 increased $0.7 million, or 0.6%, to $113.4
million from $112.7 million for 1997. The slight increase in revenue despite
decreased rig activity was principally attributable to increased market share
in completion services partially offset by increased competition and flat sales
in our downhole completion tool business.
Completion Fluids Revenue. Revenue for completion fluids and related
activities for 1998 decreased $14.6 million, or 17.8%, to $67.4 million from
$82.0 million for 1997. This decrease in revenue was the result of increased
competition and resulting pricing pressure in the wholesale business. In
response, we shifted our focus from lower margin wholesale business to higher
margin retail business. This shift resulted in a decrease in total volume sold.
In addition, completion fluids revenue, beginning in mid-1998, was impacted by
a general downturn in industry activity from 1997, which was particularly
severe in Latin America and the North Sea.
Completion Services Revenue. Revenue for completion services for 1998
increased $15.7 million, or 89.2%, to $33.3 million from $17.6 million for
1997. This increase was attributable to market share growth due to the addition
of capacity in this product line.
Downhole Completion Tools Revenue. Revenue for downhole completion tools for
1998 decreased by $0.3 million, or 2.3%, to $12.6 million from $12.9 million
for 1997. This decrease was primarily attributable to price declines that were
largely offset by market share growth and $1.8 million of revenue generated by
Cain Oil Tools, Inc., which we acquired in March 1998.
Cost of Sales. Cost of sales for 1998 increased $10.8 million, or 13.8%, to
$88.8 million from $78.0 million for 1997. As a percentage of revenue, cost of
sales increased to 78.3% for 1998 versus 69.2% for 1997. This increase was
attributable to deeper discounts for products and services in 1998 and
increases in depreciation of $1.6 million and employee-related costs of $4.7
million.
Selling, Administrative and Research Expense. Selling, administrative and
research expense increased $2.8 million, or 17.0%, to $19.3 million for 1998
compared to $16.5 million for 1997. The increase was due to an increase in
employee-related costs primarily related to increased employment cost as we
added technical sales representatives and R&D engineers to meet increased
customer requirements. The increase in headcount coupled with revenue that was
less than anticipated increased our selling, administrative and research
expense from 14.6% of net revenue in 1997 to 17.0% of net revenue in 1998.
Amortization of Intangibles. Amortization of intangibles increased $119,000
to $370,000 for 1998 compared to $251,000 for 1997. The increase resulted from
goodwill and other intangibles associated with the acquisition of Cain Oil
Tools, Inc. in March 1998.
Special Charges. We incurred special charges of $13.4 million in 1998, as
previously discussed. There were no special charges in 1997.
Operating Income. As a result of the foregoing, operating income decreased
$26.3 million, to ($8.4) million for 1998 compared to $17.9 million for 1997.
Operating income from completion fluids, completion services and downhole
completion tools was $1.0 million, $(2.9) million and $(3.2) million,
respectively, for 1998.
Interest Expense (Income), Net. Net interest income for 1998 was relatively
flat as compared to the prior year.
Other Expense (Income), Net. Other expense was $538,000 for 1998 as compared
to $(16,000) in 1997. This increase was principally attributable to increased
foreign currency translation expense.
Income Tax Provision (Benefit). As a result of the decrease to income before
income taxes, income tax provision decreased $8.6 million, to ($1.9) million
for 1998 compared to $6.7 million for 1997.
32
<PAGE>
Net Income. Net income for 1998 decreased $18.3 million, to ($6.9) million
from $11.4 million for 1997.
Liquidity and Capital Resources
Our primary uses for cash are working capital, capital expenditures and
acquisitions. Historically, our cash sources have been cash provided by
operations and cash provided by intercompany borrowings from Great Lakes. To
the extent our future cash requirements exceed the cash provided by
operations, we will fund those requirements through debt or equity financing
activities. As of March 31, 2000, we had cash and working capital of $13.6
million and $(19.9) million, respectively. The working capital deficit on
March 31, 2000 reflects a $65.0 million dividend note payable to Great Lakes
that we expect to repay with the proceeds of this offering. As of March 31,
2000, after giving effect to this offering and related transactions, we would
have had cash and working capital of $6.0 million and $36.3 million,
respectively.
Net cash provided by operating activities for 1997, 1998 and 1999 and the
three months ended March 31, 1999 and 2000 was $17.4 million, $28.1 million,
$8.1 million, $1.5 million and $10.6 million, respectively. Net cash used in
investing activities for 1997, 1998 and 1999 and the three months ended March
31, 1999 and 2000 was $18.7 million, $27.8 million, $6.0 million, $2.4 million
and $0.5 million, respectively. Our primary use of funds in 1997, 1998, 1999
and the three months ended March 31, 1999 and 2000 was for the acquisition of
property and equipment which required the use of approximately $18.9 million,
$24.1 million, $5.9 million, $3.5 million and $0.9 million of cash,
respectively.
At or about the time of this offering, we anticipate that we will enter
into a revolving credit facility. The revolving credit facility is expected to
bear interest at a floating rate and provide for up to $40.0 million of
borrowings in the United States, subject to borrowing base limitations. At the
time we enter into the revolving credit facility, we expect that borrowings
under the revolving credit facility will total $31.0 million. The proceeds
from those borrowings will be used to repay indebtedness owed to Great Lakes.
Borrowings under the revolving credit facility are expected to mature in 2003.
The revolving credit facility will be guaranteed by Great Lakes, so long as
Great Lakes maintains a controlling interest in our company. We will pay Great
Lakes an annual fee equal to 0.15% of the committed amount under the revolving
credit facility for this guarantee.
We estimate that cash generated from operations through 2000 will be
sufficient to meet our cash operating requirements during that time, including
but not limited to planned capital expenditures and material commitments under
our operating leases. Our capital expenditures are primarily for replacement
and maintenance of existing property and equipment and the acquisition of
other equipment we use in our business. At this time, we believe the
significant investments in capital equipment that we have made in the past are
sufficient to support growth through 2002. We expect total capital
expenditures in 2000 to be approximately $3.8 million. Our minimum lease
obligations under noncancelable leases for 2000 are approximately $9.4
million. For more information about our lease obligations, see note 9 to our
consolidated financial statements.
If we should decide to pursue one or more acquisition opportunities during
2000, our ability to finance any such acquisitions will be a critical element
of our analysis. Prior to the completion of a distribution of our common stock
to Great Lakes stockholders, we have agreed to limit the amount of equity we
may issue, or debt we may incur, which may make it more difficult to pursue
strategic acquisitions. For more information, see "Our Relationship With Great
Lakes--Arrangements With Great Lakes--IPO and Distribution Agreement." We may
require additional equity or debt financing to meet our working capital
requirements or to fund our 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 us.
Foreign Currency Exchange Rate Risk
A portion of our revenue and operating expenses are denominated in foreign
currencies. As a result, we are subject to foreign exchange risks that could
adversely affect our operations. To the extent that we incur
33
<PAGE>
expenses in U.S. dollars but earn revenue in foreign currencies, any decrease
in the values of those foreign currencies relative to the U.S. dollar could
cause our profit margins to decline or could cause our products to be less
competitive against those of foreign competitors.
We do not intend to comprehensively hedge our exposure to currency rate
changes, although we 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 March 31, 2000, we had no open foreign currency hedged
positions. The effect of loss (gain) on translation for 1997, 1998 and 1999 and
the three months ended March 31, 1999 and 2000 were $(30,000), $523,000,
$580,000, $23,000 and $70,000, respectively.
Tax Matters
As a result of this offering, we will not be able to combine the results of
our operations with those of Great Lakes in reporting income for U.S. federal,
non-U.S., and most state income tax purposes. We believe this will not have a
material adverse effect on our net income. At the time we are no longer
included in Great Lakes' consolidated U.S. federal income tax return, we may
become exposed to having our U.S. tax liability computed under the U.S. federal
alternative minimum tax. Such a computation could have a material adverse
effect on the year-to-year timing of our cash flow.
Inflation
The impact of inflation on our business has not been material during the
periods presented.
Recently Issued Accounting Pronouncements
Effective January 1, 1999, we adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This
accounting standard specifically defines the criteria under which costs
incurred in connection with internal-use computer software projects are to be
treated as a current period expense or to be capitalized. Adoption of SOP 98-1
increased 1999 operating costs by approximately $70,000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement, as amended by SFAS No.
137, will be effective for us beginning with the first quarter of 2001. The
Statement requires companies to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Hedge ineffectiveness, the amount by which the
change in the value of a hedge does not exactly offset the change in the value
of the hedged item, will be immediately recognized in earnings. We are
evaluating the new statement's provisions and have not yet determined the
impact of adoption on the results of operations or financial position.
Impact of Year 2000
In late 1999, we completed our remediation and testing relating to the Year
2000 computer issue. As a result of those efforts, we experienced no
significant disruptions in mission critical information technology and non-
information technology systems and believe those systems successfully responded
to the Year 2000 date change. We expensed approximately $228,000 during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 problems that may arise are addressed promptly.
34
<PAGE>
BUSINESS
Our Company
Founded in 1979, OSCA provides specialized oil and 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. Well completion
activities are conducted after drilling and prepare the well to begin
production. Our products and services are focused on providing quality well
completions which is critical in optimizing the recovery of oil and gas. Our
products and services are primarily used in offshore environments, including
deepwater, where we have demonstrated the ability to service technically
challenging projects in harsh environments. Our equipment and technology are
also regularly adapted for onshore use. In 1999, we generated total revenue of
$91.9 million.
Our products and services provide the following benefits:
. 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;
. 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;
. 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
. enhancing well productivity by chemically stimulating the reservoir,
allowing faster production and, potentially, increasing the total
recovery of oil and gas.
We pioneered the use of high density clear brines for non-damaging
completion and workover fluids applications, adding related fluid maintenance
services to our product offerings in 1980. Throughout the 1980s and early
1990s, we continued to expand our product and service offerings by entering the
sand control and pressure pumping segments and the downhole gravel pack tool
market by acquiring the assets of Completion Services, Inc. in July 1993 from
its individual shareholders for total cash consideration of $4.0 million. In
1997, we expanded the geographical markets in which we operate by engaging in
marine well stimulation services and coiled tubing in the Gulf of Mexico. In
March 1998, we augmented our line of downhole completion tools through the
acquisition of Cain Oil Tools, Inc. from its individual shareholders for total
cash consideration, including repayment of debt, of $3.3 million. Through our
acquisition of Cain Oil Tools, we were able to expand our tool offerings beyond
downhole gravel pack tools. In addition, this acquisition gave us the ability
to manufacture our own tools, as opposed to assembling our tools from parts
purchased from third party suppliers. Continuing to find better ways to serve
our customers, we completed construction of our downhole tools test facility
and began operations at the C-Port I loading facility in Fourchon, Louisiana in
1999. We were incorporated in Delaware in 1979.
Our Strategy
Our products and services are focused on value enhancing completion
activities that allow our customers to optimize the recovery of oil and gas.
Our strategy for future growth is to improve our market position by:
. Focusing on Optimizing Reservoir Productivity. We focus all of our
technology and service offerings on optimizing reservoir productivity,
primarily through the completion of the well. We believe this focused
strategy enables us to be more responsive to our customers' needs, thus
allowing us to compete effectively against larger and more diversified
companies.
. Targeting Deepwater Activity. The deepwater Gulf of Mexico is currently
one of the world's most attractive exploration and development areas due
to its large reserve potential. We believe that the number of deepwater
development wells in the Gulf of Mexico will grow at a rate greater than
that of shallow water wells. Deepwater development wells generate
significantly more revenue per well due to their high completion fluid
volume requirements and technically demanding nature. We have pioneered
technologies that enable our customers to operate in this harsh
environment. We believe our deepwater
35
<PAGE>
expertise will enable us to continue to increase our 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.
. Developing Leading Completion Technologies. We work closely with our
customers to deliver specialized completion solutions thereby
strengthening our competitive position. We intend to continue to invest
in research and development to provide innovative, cost-effective
completion solutions tailored to customer-specific operating
environments. A principal benefit of our technologically advanced
products is that they assist us in promoting the sale of associated
products and services.
. Pursuing Strategic Acquisitions. We have made several strategic
acquisitions that complement our product and service offerings and expand
our geographic presence. Our current strategy is to acquire advanced
completion technologies and related products and services that will
enhance our competitive position. While we continually evaluate strategic
acquisition opportunities, we currently have no agreements in place
regarding future acquisitions.
Industry Overview
Demand for well completion services is driven primarily by:
. the levels of exploration and development activity for oil and gas in
response to worldwide demand;
. the rate of discovery of new oil and gas fields;
. the changing production profiles of existing fields, including
deterioration of production rates due to reservoir degradation and
depletion;
. the level of drilling activity, specifically in our case the level of
offshore drilling activity; and
. the characteristics of the reservoir which dictate the type of completion
that is required.
Generally, oil and gas companies reduce exploration and development
activity during periods of weak oil prices and increase this activity during
periods of strong oil prices. The extent to which the revenue of our 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 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 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 our services could exceed the historical
correlation between drilling rig count and completions activity.
Drilling activity is largely dependent on the prices of oil and gas. Oil
service activity, in turn, is primarily driven by the number of oil and 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, a recent recovery in oil
prices to above $20 per barrel has led to a recovery in North American
drilling activity during the last half of 1999.
Due to "aging" oilfields and lower-cost sources of oil internationally,
drilling activity in the United States has declined more than 75% from its
peak in 1981. Record low drilling activity levels were experienced in 1986,
1992 and again in early 1999. The U.S. drilling activity temporarily rebounded
during 1997, exceeding 1,000 active rigs for the first time since 1991;
however, it subsequently retracted due to weak oil prices. Although drilling
activity had begun to recover somewhat during the second half of 1999, the
U.S. average active rig count for 1999 represented the lowest in recent
history and was down substantially from the average levels of both 1997 and
1998.
36
<PAGE>
The decline in natural gas related drilling activity in the Gulf of Mexico
over recent periods was not as severe as the decline in oil related drilling
activity in the region. Natural gas related activity in the Gulf of Mexico has
also begun to recover more quickly than oil related activity.
Due to low oil prices, international drilling activity also reached record
low levels during 1999 as each of our international regions experienced
activity declines. Most international regions are not expected to recover until
the middle of 2000.
The demand for products and services in our industry is impacted by changing
production profiles in existing fields. Additionally, many new oil and gas
fields exhibit reservoir characteristics that require more complex completion
and stimulation services. In addition, natural gas wells are generally higher
pressured and require higher weight, higher cost completion fluids which result
in gas wells being more profitable to us than oil wells.
Products and Services
Our products and services, which are available separately or as integrated
systems, are offered through our three business segments.
Completion Fluids
We sell and recycle clear completion fluids and perform 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. We provide standardized completion fluids as
well as a broad line of specially formulated and customized completion fluids
for high demand wells. Completion fluids represented $50.6 million, or 55.1%,
of our net revenue in 1999. For more financial information about our completion
fluids business segment, see note 14 to our consolidated financial statements.
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 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 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, we deploy filtering equipment and technicians that
work in conjunction with our on-site fluid engineers to maintain the solids-
free condition of the completion fluids throughout the project. We provide 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.
We were one of the first companies to use high density clear fluids as non-
damaging alternatives to solids-laden drilling mud for completion activities.
We supply 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. We provide high performance fluids and related services for initial
completion and remedial well activities, commonly known as workovers.
The C-Port 1 Loading Facility
We are 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, which we
37
<PAGE>
believe is the most active deepwater region in the world. 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.
We own and operate a fluids distribution plant on property leased at C-Port
1. Our distribution plant represents an innovation in the preparation and
delivery of completion fluids to our customers. We are able to blend multiple
fluids simultaneously, which enables us to service multiple customers. Our
integrated fluid reclamation equipment allows us to recycle used fluids and
prepare those fluids for reuse. Our 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 our customers. Our
presence at the C-Port 1 facility has positioned us to supply completion fluids
to the majority of the high profile projects in the Gulf of Mexico.
Completion Services
We provide 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 our downhole completion tools and
completion fluids, are either delivered directly by one of our 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 $25.7 million, or 27.9%, of our net revenue in 1999. For more
financial information about our completion services business segment, see note
14 to our consolidated financial statements.
Marine Well Services
Our marine well service vessels, the OSCA Challenger, the OSCA Discovery and
the Elkhorn River, are helping to establish new industry standards for
workboat-based well completion and stimulation services. These vessels are
capable of operating in harsh deepwater environments and are among the most
advanced service vessels in the world. Our marine well services group combines
state-of-the-art engineering and highly-trained service personnel to provide
sand control and well stimulation pressure pumping and completion fluid
delivery services. Our vessels are specifically designed for enhanced safety
and operating efficiency and feature dynamic positioning, which allows our
vessels to maintain position without anchors through the use of onboard
propulsion and satellite navigation systems. We believe our vessels have the
highest sea-state readiness ratings in their class. Whether the customer is
working in shallow or deep water, we believe that we can provide the most cost-
effective, high performance well services in the marine environment.
These vessels are fitted with specifically designed equipment to improve
operational efficiency and reduce logistical complexity and have the following
features:
. computer controlled satellite navigation system;
. up to 10,500 pumping hydraulic horsepower/50 barrels per minute
capability;
. on-board quality assessment and quality control lab;
. the ability to service five to ten wells per trip offshore; and
. the ability to work in up to 15 foot seas and 40 knot winds.
Our 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.
38
<PAGE>
Skid-Mounted Pressure Pumping Services
Our 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 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. Our 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
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 use principally 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:
. avoiding well shut-down during workover operations, reducing the risk of
reservoir damage;
. the ability to deploy and remove coiled tubing significantly faster than
conventional drill pipe, which must be jointed and unjointed;
. the ability to direct fluids into a well with more precision, allowing
for localized stimulation treatments, well cleanout, scale removal and
paraffin removal;
. providing a conduit for the source of energy to power a downhole motor;
. faster manipulation of downhole completion tools; and
. the smaller size and mobility of a coiled tubing unit, which enhances
access to remote or offshore fields.
Downhole Completion Tools
We focus 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 gas into the production tubing. Downhole completion
tools represented $15.7 million, or 17.0%, of our net revenue in 1999. For more
financial information about our downhole completion tools business segment, see
note 14 to our consolidated financial statements.
Our downhole sand control tools are sold as complete systems. We customize
these systems based on each well's particular characteristics, including
downhole pressure, depth and diameter. Many wells produce from more than one
reservoir simultaneously. Depending on the customer's preference, we have 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. Our field specialists, working with the rig
crews, deploy our tools in the well during the completion process.
In addition to tools that are designed to control sand migration, we also
provide 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 we can deliver through
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 of the U.S., such as Latin America, are now
providing opportunities for market expansion.
39
<PAGE>
We currently employ 14 tool design engineers to design our advanced downhole
completion tools. In addition, we employ 12 applications engineers that work
with customers to customize downhole tool systems and generate written
procedures that are specific to each well's parameters. We also employ 15
completion tool specialists to deploy our downhole completion tool systems in
the field.
International Operations
We operate in many of the major international oil and gas producing markets
of Latin America and Europe. We generally provide products and services to our
international customers through wholly owned foreign subsidiaries located in
Venezuela, Brazil, Mexico, Scotland, Italy and Norway. We seek to operate in
those markets where we can achieve and maintain a significant market share
position and earn attractive returns on our investment. For example, in the
first quarter of 2000, we were able to leverage our experience in the deepwater
Gulf of Mexico to commence deepwater activities off the coast of Brazil. In the
future, we anticipate expanding our international operations to include West
Africa and Asia. Our international operations represented $14.0 million, or
15.2%, of our net revenue in 1999. For more financial information on our
international operations, see note 14 to our consolidated financial statements.
Customers and Marketing
Our customers include major oil companies and international and domestic
independent exploration and production companies, including foreign state-owned
oil and gas enterprises. In 1999, British Borneo USA, Inc. accounted for 8.7%
of our net revenue. In addition, our next 14 customers accounted for 47.0% of
our net revenue. If we were to lose any of these customers, or if they were to
reduce their orders for our products and services, and we were not able to
replace them with new customer accounts, we would lose significant revenue and
it could cause our stock price to decline. In 1998, 15 customers accounted for
42.1% of our net revenue.
We devote a considerable portion of our marketing time and effort to develop
and maintain relationships with key customers. In some cases, we provide one or
more of our engineers to work with customers at their locations. This
cooperative effort promotes long-term relationships with customers who look to
us for assistance with their demanding projects and schedules.
We market our oilfield products and services primarily through our direct
sales force located in 10 sales offices throughout the world. We also use
designated agents and distributors in nearly every major oil and gas producing
region in the world. International markets we serve include the U.K. and
Norwegian sectors of the North Sea, Mexico, Venezuela, Brazil, Italy, the Asia
Pacific, the Middle East and North and West Africa.
Technology and New Product Development
Our recent inventions and innovations in fluids technology include:
InsulGel(TM) insulating packer fluids, which maintain heat in wells to reduce
paraffin and hydrate problems, NoCal HTLC(TM), a non-corrosive packer fluid for
severe environments, and the PAC-Valve(TM), a pressure actuated downhole
control valve that can be activated from the surface as opposed to requiring
mechanical activation using downhole well intervention equipment. Our
technologically advanced products enable us to promote the sale of other
related products and services.
Our main research and development facility in Lafayette, Louisiana is
staffed with experts in completion and workover fluids and includes a complete
fluid technical service lab. We believe activities conducted at this facility
played a major role in establishing our completion fluids business worldwide.
In April 1999, we 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. We measure
the impact of different raw materials, operating conditions and design
specifications in determining optimal tool configuration. Since our 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 our research
40
<PAGE>
and development facilities to the field, our applications engineering group
works with sales, R&D, operations and customers to integrate our products and
services into comprehensive well completion programs.
Our product development strategy is driven by a structured evaluation and
screening process. Our selection process focuses on practical solutions to
current and near-term customer problems. We involve our customers early in each
development project to promote, maintain and assess their interest in the
project. We screen projects for commercial viability and fund only those which
we believe to be likely candidates for commercial success.
We have a policy of seeking patents on new products, processes or
improvements when patent protection has a significant commercial benefit. We do
not believe any individual patent is of material importance to our business as
a whole or that the success of our business is dependent upon our patent
portfolio.
Facilities
We have operations worldwide including our corporate headquarters facilities
in Lafayette, Louisiana. We have 10 sales offices, including three in the
United States and seven in the international regions that we serve.
Distribution and logistics are provided through 17 distribution sites, with
nine in the United States and eight in key international locations. The
facilities in Geismar, Louisiana and Mansfield, Texas are combined
manufacturing and distribution sites.
C-Port 1--Port Fourchon, Louisiana
We are the exclusive on-site supplier of completion fluids at the C-Port 1
loading facility at Port Fourchon, Louisiana. C-Port 1 is a state-of-the-art
facility especially designed for the demands of deepwater wells. We own and
operate a world-class fluid distribution plant on property that we lease under
an agreement that expires in 2008.
Other Distribution Facilities
Our U.S. distribution facilities are located in the Gulf Coast region, in
close proximity to both product supplies and customer concentrations. We
believe that our strategic locations make us one of the highest value suppliers
in the Gulf of Mexico and in select international markets. Our 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 2000
and 2008.
We operate distribution facilities in the following locations:
Domestic International
.Cameron, Louisiana .Anaco, Venezuela*
.Port Fourchon, Louisiana .Cabimas, Venezuela
.Geismar, Louisiana* .Punta de Mata, Venezuela
.Intracoastal City, Louisiana
.Aberdeen, Scotland
.Lafayette, Louisiana .Peterhead, Scotland
.Venice, Louisiana .Macae, Brazil
.Aransas Pass, Texas .Ravenna, Italy
.Freeport, Texas* .Tanager, Norway
.Mansfield, Texas .Paraiso, Mexico
--------
* facilities owned by OSCA
41
<PAGE>
Manufacturing Plant--Geismar, Louisiana
We operate a calcium chloride manufacturing plant with nine employees 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 our domestic oilfield needs and part of our 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 our downhole
completion tools and a significant portion of our sand control tools. The
facility employs 31 people, including machinists, quality control personnel and
sales and support. In addition, this facility supports and distributes a full
line of mechanical and hydraulic set packer equipment to supply the non-sand
control completion and workover markets. We lease this facility under an
agreement that expires on January 1, 2003.
Total rent expense incurred in 1999 for our leased facilities was
approximately $1.2 million. For more information about our lease obligations,
see note 9 to our consolidated financial statements.
Competition
Our 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; Ambar, Inc.; and Tetra
Technologies, Inc. Our 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. We believe that the three principal bases of competition in our
industry are service record, reputation and pricing.
Suppliers
In the past, we have purchased nearly all of the brominated chemicals we
require to support our completion fluids business from Great Lakes. In
connection with this offering, we will enter into a brominated products supply
agreement with Great Lakes. Under this agreement, Great Lakes has committed to
provide us with all or substantially all of our requirements for brominated
products, subject to a cap. We have committed to purchase at least 80% of our
requirements for these products, 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 we are able to negotiate a lower
price from a third party supplier, Great Lakes must either meet that price or
release us from 40%, 60% and 100%, respectively, of our annual requirements.
For more information, see "Our Relationship With Great Lakes--Arrangements With
Great Lakes--Brominated Products Supply Agreement." Other 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 we utilize more than one supplier for each item.
Employees
At March 31, 2000, we had a total of 393 employees, 335 of which were based
in the United States. None of our employees are covered by collective
bargaining agreements. We believe that our relationships with our employees are
good.
Operating Hazards and Insurance
Our operations are subject to the risks inherent in manufacturing products,
providing services in the oil and gas industry, storing, handling and
transporting hazardous substances in bulk and operating in the marine
42
<PAGE>
environment. These risks include personal injury and loss of life, business
interruptions, loss of production, property and equipment damage, and
contamination of and damage to the environment. Damages arising from an
occurrence at locations where we presently or have in the past operated may
result in the assertion of potentially large claims against us or the
imposition of other obligations of significant cost.
We maintain a comprehensive insurance package covering our assets and
operations, including product liability and workers' compensation insurance, at
levels that we believe to be appropriate. This insurance is subject to
deductibles, significant amounts of self-insurance retention per occurrence and
some exclusions to coverage.
Environmental Matters
We are subject to federal, state and local environmental and occupational
safety and health laws and regulations in the United States and other countries
in which we do business. These regulations govern, among other things, the
storage, handling and transportation of hazardous materials in connection with
our vessel and manufacturing operations and our 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.
Through the routine course of providing our services, we handle, store and
transport bulk quantities of hazardous materials. Accordingly, if leaks or
spills of hazardous materials occur from our facilities, vessels or otherwise
in connection with our operations, we may be responsible under applicable
environmental laws for the costs of investigating and remediating any resulting
contamination of, or damage to, the environment. We have implemented and
continue 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, we are investigating a release of zinc
bromide solution, which is used in our operations, from one of our facilities
that occurred in July 1998. Because the matter is still under review by the
State of Louisiana, we cannot yet determine what corrective action, if any, may
be required.
Legal Proceedings
We are a party to various routine legal proceedings. These primarily involve
commercial claims, products liability claims, personal injury claims and
workers' compensation claims. We cannot predict the outcome of these lawsuits,
legal proceedings and claims with certainty. Nevertheless, we believe that the
outcome of all of these proceedings, even if determined adversely, would not
have a material adverse effect on our business or financial condition.
43
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees of OSCA
Set forth below is information concerning the executive officers and key
employees of our company and the individuals who are serving on our board of
directors. Our board of directors currently has eight members. Four of our
directors, Mark P. Bulriss, Martin M. Hale, Mack G. Nichols and Mark E.
Tomkins, are currently executive officers and/or directors of Great Lakes.
Messrs. Bulriss and Tomkins have advised us that they will resign from our
board should Great Lakes decide to complete a divestiture of our common stock.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Robert L. Hollier 57 President, Chief Executive Officer and Director
Richard J. Alario 45 Executive Vice President
Steven J. Brading 48 Vice President and Chief Financial Officer
Senior Vice President--Western Hemisphere
Donald H. Michel 48 Operations
Michael W. Landry 52 Vice President--Completion Fluids
James H. Tycer 51 Vice President--Completion Services
Arthur B. Carroll 47 Vice President--Industry Relations
Kenneth R. Simpkins 46 Vice President--Research and Development
Bruce C. Leininger 50 Vice President--Human Resources
Mark P. Bulriss 48 Chairman of the Board
Martin M. Hale 59 Director
Mack G. Nichols 61 Director
Richard A. Pattarozzi 56 Director
W. Bernard Pieper 67 Director
Mark E. Tomkins 44 Director
John L. Whitmire 59 Director
</TABLE>
Robert L. Hollier has served as our President and Chief Executive Officer
since August 1979. Prior to founding OSCA, he served as vice president and
chief operating officer of Gulf Coast Drilling Fluids, Inc. from 1970 to 1979.
Prior to his tenure at Gulf Coast, Mr. Hollier was employed by the Amoco
Production Company from 1963 to 1970.
Richard J. Alario has been our Executive Vice President since May 1999.
Since joining OSCA in 1981, Mr. Alario has managed numerous business units and
functions, including sales and marketing and international operations. Prior to
joining OSCA, Mr. Alario was employed by Ashland Chemical Company from 1978 to
1981. Mr. Alario is a director of the National Ocean Industries Association.
Steven J. Brading joined OSCA in May 1999 as our Vice President and Chief
Financial Officer. From 1993 to 1999, Mr. Brading was employed by the Camco
Products and Services division of Camco International, Inc., most recently as
vice president of finance and information systems. Prior to 1993, Mr. Brading
was employed by LTV Corporation as the controller of its drilling equipment
division. Mr. Brading is a certified public accountant.
Donald H. Michel is our Senior Vice President--Western Hemisphere
Operations. Mr. Michel rejoined our company in April 1999. Mr. Michel
originally joined OSCA as a vice president in 1986 and was employed by OSCA
until 1996. From 1996 until 1998, Mr. Michel was part owner of Wesco Well
Screens, a downhole tool manufacturing company. From 1998 until April 1999, Mr.
Michel was president and part owner of Oilfield Manufacturing, Inc., also a
downhole tools manufacturing company.
44
<PAGE>
Michael W. Landry has been our Vice President--Completion Fluids since May
1999. Mr. Landry joined OSCA in 1980 and has served in various capacities,
including completion fluids engineer, operations manager, manager/manufacturing
and maintenance, human resources manager and service line manager/completion
fluids. Prior to joining OSCA, Mr. Landry was a drilling mud engineer for GH
Fluid Services.
James H. Tycer has been our Vice President--Completion Services at OSCA
since March 1998. Prior to joining OSCA in 1996, Mr. Tycer held numerous
positions with BJ Services from 1981 to 1996, most recently as Gulf Coast
regional manager of coiled tubing and nitrogen services for BJ Services/NOWSCO.
Arthur B. Carroll has been our Vice President--Industry Relations since
1998. Prior to joining OSCA in 1994, Mr. Carroll served in various capacities
at OHM Corporation from 1984 to 1994, most recently as a district manager in
charge of environmental remediation services. From 1979 to 1984, Mr. Carroll
held the positions of vice president of operations and vice president of sales
for Geo Vann Sand Control.
Kenneth R. Simpkins has been our Vice President--Research and Development
since June 1994. Prior to joining OSCA, Mr. Simpkins was employed by
Schlumberger Well Services, a subsidiary of Schlumberger Limited, from 1977 to
1994. While at Schlumberger Well Services, Mr. Simpkins served in various
capacities, including general field engineer, sales engineer and a district
manager.
Bruce C. Leininger has been our Vice President--Human Resources since
November 1999. Prior to joining OSCA, Mr. Leininger served as the vice
president of human resources at Belco Energy Corp., a subsidiary of Belco Oil &
Gas Corp., from 1998 to 1999. From 1996 to 1998, Mr. Leininger was vice
president of human resources operations for Ikon Office Solutions. From 1994 to
1996, Mr. Leininger was a human resources consultant for Napa Valley Solutions.
Mark P. Bulriss is the Chief Executive Officer and President of Great Lakes
Chemical Corporation and was recently named Chairman of the Board of Great
Lakes effective May 2000. He has been one of our directors since February 2000.
Mr. Bulriss joined Great Lakes in April 1998 from AlliedSignal, Inc., where he
was president of the Polymers Division since 1996. He joined AlliedSignal in
1993 as president of the Laminates business unit, and became president of the
Electronic Materials Division in 1995. Prior to joining AlliedSignal, Mr.
Bulriss spent 16 years with GE Plastics.
Martin M. Hale has been one of our directors since February 2000. Until
December 1999, Mr. Hale was executive vice president and a director of Hellman
Jordan Management Co., Inc., a registered investment advisor specializing in
asset management and a subsidiary of United Asset Management Corporation. Prior
to 1983, Mr. Hale was the president and chief executive officer of Marsh &
McLennan Asset Management Corporation. Mr. Hale also serves as a director of
Great Lakes Chemical Corporation and Octel Corp., a former subsidiary of Great
Lakes which was spun off in 1998.
Mack G. Nichols has been one of our directors since February 2000. Mr.
Nichols, prior to his retirement, was president and chief operating officer and
a director of Mallinckrodt Inc., a diversified chemical and healthcare company
from 1995 to 1998. Mr. Nichols served as the president and chief executive
officer of Mallinckrodt Specialty Chemical Company, a wholly-owned subsidiary
of Mallinckrodt Inc., from 1989 to 1995. He is currently a director of Great
Lakes Chemical Corporation and has served as a director of A.P. Green
Industries, Inc., the National Association of Manufacturers and the Chemical
Manufacturers Association.
Richard A. Pattarozzi has been one of our directors since April 2000. Mr.
Pattarozzi was the president and chief executive officer of Shell Deepwater
Development Co. and Shell Deepwater Production Co. from 1995 to 1999. From
March 1999 until his retirement on January 1, 2000, Mr. Pattarozzi served as
vice president of Shell Offshore Inc. He currently serves as a director of R &
B Falcon Corp., a worldwide oil drilling contractor, and Stone Energy
Corporation, an independent oil and gas exploration company.
45
<PAGE>
W. Bernard Pieper has been one of our directors since April 2000. Mr. Pieper
served as vice chairman and chief operating officer of Halliburton Company from
1994 until his retirement in 1996. Mr. Pieper has served as a director of
Highlands Insurance Group, Inc., a property and casualty insurance business,
since 1996.
Mark E. Tomkins is the Senior Vice President and Chief Financial Officer of
Great Lakes Chemical Corporation and has been one of our directors since
February 2000. Mr. Tomkins joined Great Lakes in August 1998 from AlliedSignal,
Inc., where he was vice president of finance and business development of the
Polymers Division since 1996. He held the same position with AlliedSignal's
Electronic Materials Division in 1996. Prior to joining AlliedSignal, Mr.
Tomkins held various corporate and operating finance positions with Monsanto
Company.
John L. Whitmire has been one of our directors since April 2000. Mr.
Whitmire was chairman of the board and chief executive officer of Union Texas
Petroleum Holdings, Inc. from 1996 until 1998 when Union Texas Petroleum
Holdings was acquired by Atlantic Richfield Company. Before joining Union Texas
Petroleum Holdings, Mr. Whitmire served in various capacities for more than 30
years with Phillips Petroleum Company, including executive vice president-
exploration and production and as a director from 1994 to 1996. Mr. Whitmire
has served as chairman of the board for CONSOL Energy Inc. and CONSOL Inc.
since March 1999. In addition, Mr. Whitmire is a director of the National
Audubon Society, Thermon Industries and Global Marine, Inc.
Committees of the Board of Directors
We intend to have two standing committees: an audit committee and a
compensation committee. The audit committee will select, subject to
shareholders' approval, the independent public accountants to audit our annual
financial statements and will establish the scope of, and oversee, the annual
audit. The compensation committee will determine the compensation for employee
directors and, after receiving and considering the recommendation of our chief
executive officer, all of our officers and any other employee that the
compensation committee may designate from time to time. The compensation
committee will also approve and administer employee benefit plans.
The audit committee and the compensation committee will each consist of
three directors who meet all requirements imposed by SEC rules and regulations
or rules and regulations of any exchange or trading system on which our
securities are listed. The audit committee will be composed of three
independent directors, each of whom will be able to read and understand
fundamental financial statements, including a company's balance sheet, income
statement and statement of cash flows. In addition, at least one member of the
audit committee will have had past employment experience in accounting or
finance, including a current or past position as a chief executive officer,
chief financial officer or other senior officer with financial oversight
responsibilities. The initial members of the audit committee will be Messrs.
Hale, Pattarozzi, Pieper and Whitmire. In keeping with NASDAQ listing
requirements, our board of directors will adopt a charter for our audit
committee. We will file this charter at least once every three years as an
appendix to the annual proxy statement that we will file with the SEC. We
expect that, so long as Great Lakes owns a majority of our outstanding common
stock, the majority of the members of the compensation committee will be
directors who are also directors of Great Lakes.
Our board may establish other committees from time to time to facilitate the
management of the business and affairs of our company.
Compensation Committee Interlocks and Insider Participation
We currently do not have a compensation committee. The historical
compensation arrangements for Robert Hollier were established by the
compensation committee of Great Lakes' board of directors. The historical
compensation arrangements for all of our other executive officers were
established by Robert Hollier in accordance with Great Lakes' compensation
policies. On a going forward basis, any changes in the compensation
arrangements of our executive officers will be determined by the compensation
committee of our board of directors.
46
<PAGE>
Compensation of Directors
Directors who are also employees of Great Lakes or OSCA will receive no
remuneration for serving as directors, committee chairpersons or committee
members. Non-employee directors will receive compensation of $20,000 per year
and meeting fees of $1,000 per meeting. Non-employee directors will receive an
additional fee of $2,000 per year for serving as chairperson of a board
committee. Non-employee directors will also receive an initial grant of options
to purchase a number of shares of Class A common stock to be determined at the
consummation of this offering with an exercise price equal to the initial
public offering price or the fair market value on the date of grant. Such
options will be granted under our 2000 Stock Compensation Plan and will vest
ratably over a three year period. All directors will be reimbursed for their
out-of-pocket expenses incurred in connection with serving on our board.
Stock Ownership of Directors and Executive Officers
All of our stock is currently owned by Great Lakes and thus none of our
officers or directors own any of our common stock. To the extent directors and
officers of OSCA own shares of Great Lakes common stock at the time of a
distribution of our common stock to Great Lakes stockholders, if any, they will
participate in the distribution on the same terms as other holders of Great
Lakes common stock.
The following table sets forth the number of shares of Great Lakes common
stock and currently exercisable options to purchase such stock beneficially
owned on December 31, 1999 by each director and each of the executive officers
named in the summary compensation table in the "--Executive Compensation"
section below, and all directors and executive officers of OSCA as a group.
Except as otherwise noted, the individual director or executive officer or his
family members had sole voting and investment power with respect to the
identified securities.
<TABLE>
<CAPTION>
Shares Beneficially Owned
------------------------------
Great Lakes Common Stock
------------------------------
Number of Percentage of
Name and Address Shares(1) Class
---------------- --------- --------------
<S> <C> <C>
Directors and Executive Officers:
Mark P. Bulriss............................... 402,571 *
Mark E. Tomkins............................... 13,687 *
Robert L. Hollier............................. 84,479 *
Martin M. Hale................................ 219,074 *
Mack G. Nichols............................... 2,600 *
W. Bernard Pieper............................. 0 *
Richard A. Pattarozzi......................... 450 *
John L. Whitmire.............................. 0 *
Richard J. Alario............................. 10,858 *
James H. Tycer................................ 1,963 *
All directors and executive officers of OSCA
as a group (7 persons)....................... 735,232 *
</TABLE>
--------
* Less than one percent.
(1) Includes options exercisable within 60 days of the date shown.
47
<PAGE>
Executive Compensation
The following table sets forth compensation information for the chief
executive officer and our two other executive officers whose total annual
salary and bonus exceeded $100,000 for 1999. All information set forth in this
table reflects compensation earned by the named individuals for services with
us and our subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Awards
---------------------------------------- ------------
Securities
Fiscal Other Annual Underlying All Other
Name and Position Year Salary Bonus Compensation (1) Options Compensation (2)
----------------- ------ -------- ------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Hollier....... 1999 $276,578 $46,000 -- 12,500 $14,629
1998 273,825 33,200 -- 14,319 8,042
1997 264,981 38,000 -- 10,000 9,121
Richard J. Alario....... 1999 142,034 -- -- 2,500 10,616
James H. Tycer.......... 1999 103,385 -- -- 2,000 7,778
</TABLE>
--------
(1) None of the perquisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the total annual salary
and bonus received by each named executive officer.
(2) These amounts represent (i) employer matching contributions made under
Great Lakes' 401(k) and Supplemental Savings Plan and (ii) contributions by
OSCA on behalf of the named executive officer to the OSCA Profit Sharing
Plan.
Mr. Hollier's bonus amounts were determined under Great Lakes' incentive
compensation plan, which provides incentive compensation in the form of cash
bonuses to executive officers, managers and other selected key employees who
have a broad impact on performance. Under the plan, participants are eligible
to receive annual incentive awards equivalent to approximately 7.5% to 75% of
base salary based upon each executive's level of responsibility and the
attainment of pre-established goals. The majority of Mr. Hollier's award was
tied to the attainment of performance objectives for OSCA.
As a separate company, we will establish executive compensation practices
that will link compensation with our performance as well as the price of our
common stock. We expect a significant portion of the executive's long-term
incentive pay to be linked to the performance of our common stock through the
grant of stock options. We will continually review our executive compensation
programs to ensure they are competitive with those generally prevailing in its
industry.
Grants of Great Lakes Stock Options
The following table shows all grants of options to acquire shares of Great
Lakes common stock granted to the executive officers named in the summary
compensation table in the "--Executive Compensation" section above under the
Great Lakes 1998 Stock Compensation Plan for 1999. All options to purchase
Great Lakes common stock held by our employees will continue in accordance with
the plans under which they were granted. At the time Great Lakes ceases to own
50% of the voting power of our common stock, all OSCA employees will be treated
as terminated employees under Great Lakes' stock compensation plans and their
unexercised options will be canceled after 90 days.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rate of
Stock Price
Number of Appreciation
Securities % of Total Market for Option Term
Underlying Options Exercise or Price on (3)
Options Granted in Base Price Date of Expiration -----------------
Name Granted (1) Fiscal Year ($/Share) (2) Grant Date 5% ($) 10%($)
---- ----------- ----------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert L. Hollier....... 12,500 1.69% $35.75 $35.75 2/14/09 $281,000 $712,250
Richard J. Alario....... 2,500 0.34% 35.75 35.75 2/14/09 56,200 142,450
James H. Tycer.......... 2,000 0.27% 35.75 35.75 2/14/09 44,960 113,960
</TABLE>
48
<PAGE>
--------
(1) Each option has a term of ten years and is exercisable in cumulative 33%
installments commencing one year from the date of grant with full vesting
occurring on the third anniversary of the date of the grant.
(2) The exercise price for each grant made under Great Lakes' option plans is
equal to the closing market price of Great Lakes common stock on the day
prior to such option grant.
(3) Amounts reflect assumed rates of appreciation set forth in the executive
compensation disclosure rules of the SEC. Actual gains, if any, on stock
option exercises depend on the future performance of Great Lakes common
stock and overall market conditions. At an annual rate of appreciation of
5% per year for the option term, the price of Great Lakes common stock
would be approximately $58.23 per share. At an annual rate of appreciation
of 10% per year for the option term, the price of Great Lakes common stock
would be approximately $92.73 per share.
Exercises of Stock Options
The following table shows aggregate exercises of options to purchase Great
Lakes common stock in 1999 by the executive officers named in the summary
compensation table in the "--Executive Compensation" section above.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
End End ($) (1)
-------------- --------------
Shares Acquired on Unexercisable/ Unexercisable/
Name Exercise Value Realized ($) Exercisable Exercisable
---- ------------------ ------------------ -------------- --------------
<S> <C> <C> <C> <C>
Robert L. Hollier....... -- $ -- 25,864/70,544 $38,284/34,627
Richard J. Alario....... 1,271 32,890 4,715/8,253 5,490/6,843
James H. Tycer.......... -- -- 3,069/534 249/5,374
</TABLE>
--------
(1) Based on the market price of Great Lakes common stock at December 31, 1999.
Change in Control Agreements
Prior to the consummation of this offering, we will enter into change in
control agreements with Messrs. Hollier, Alario, Tycer and Brading. Under these
agreements, OSCA or its successor would make a lump sum severance payment to
Mr. Hollier, Alario or Brading, as applicable, in an amount equal to two times,
in the case of Messrs. Hollier, Alario and Brading, or one time, in the case of
Mr. Tycer, his base salary in the event that his employment with OSCA is
terminated without cause or he resigns for good reason within one year of a
change in control of OSCA. In addition, Mr. Hollier has entered into a change
in control agreement with Great Lakes, which provides that Mr. Hollier would
receive a lump sum payment equal to three times his base salary in the event
that his employment with OSCA is terminated without cause or he resigns for
good reason within one year of a change in control of Great Lakes. For purposes
of these agreements between us and the executive officers named above and our
2000 Stock Compensation Plan described below, a "change in control" means the
following:
. any unrelated person is or becomes the "beneficial owner," as defined in
Rule 13d-3 under the Exchange Act, directly or indirectly, of OSCA
securities representing more than 20% of the combined voting power of our
then outstanding securities, other than securities acquired directly from
us;
. a merger or consolidation with or into any other corporation, other than
(1) a merger or consolidation which results in our directors immediately
prior to such merger or consolidation continuing to constitute at
least a majority of our board of directors or the board of the
surviving entity or its parent, or
(2) a merger or consolidation effected to implement a recapitalization of
OSCA or similar transaction in which no unrelated person is or
becomes the beneficial owner, directly or indirectly, of OSCA
49
<PAGE>
securities representing 20% or more of the combined voting power of
our then outstanding securities, other than securities acquired
directly from us;
. our stockholders approve any plan or proposal for our liquidation or
dissolution or the consummation of a sale or disposition of all or
substantially all our assets, other than a sale or disposition to a
related entity; or
. if, at the end of any two year period, our board does not consist of at
least a majority of directors who were either directors at the beginning
of that two year period or whose appointment, election or nomination to
the board was approved by a vote of at least two-thirds of the directors
then in office.
For purposes of the change in control agreements and the 2000 Stock
Incentive Plan, where a change in control results from a series of related
transactions, the change in control will be deemed to have occurred on the date
of the consummation of the first related transaction. These change in control
provisions will not be triggered by a distribution of our common stock to Great
Lakes stockholders.
Notwithstanding any other provision of the change in control agreements or
the 2000 Stock Incentive Plan, as applicable, a change in control will not be
deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record
holders of our common stock immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of our assets immediately
following this transaction or series of transactions.
Stock Compensation Plan
Prior to the consummation of this offering, Great Lakes, as our sole
shareholder, and our board of directors is expected to approve our 2000 Stock
Compensation Plan. The stock plan will be administered by the compensation
committee. Individuals who are executive officers, key employees or non-
employee directors will be eligible to participate in the stock plan. The
compensation committee will be authorized to select participants and determine
the terms and conditions of the awards under the stock plan. The stock plan
provides for the issuance of stock options or other stock-based awards,
including awards determined in accordance with our 2000 Incentive Compensation
Plan described below. An aggregate of 1,000,000 shares of our Class A common
stock will be reserved for issuance under the stock plan, subject to certain
adjustments reflecting changes in our capitalization. The stock plan provides
that each participant will be limited to receiving awards relating to no more
than 150,000 shares of Class A common stock per year.
Options granted under the stock plan may be either incentive stock options
or such other forms of non-qualified stock options as the compensation
committee may determine. Incentive stock options are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and will be subject to the various
limitations imposed by Section 422 of the Internal Revenue Code.
Options granted under the stock plan may be subject to time vesting and
other restrictions at the sole discretion of the compensation committee. All
options will vest upon a change in control as defined above under "Change in
Control Agreements."
Our board of directors generally will have the power and authority to amend
the stock plan at any time without shareholder approval, subject to applicable
federal securities and tax laws limitations, including regulations of the
Nasdaq National Market. Under the rules of the Nasdaq National Market, however,
material amendments to the stock plan would require shareholder approval.
Incentive Compensation Plan
Prior to the consummation of this offering, our board of directors is
expected to approve our 2000 Incentive Compensation Plan. The incentive
compensation plan will provide for cash and restricted stock
50
<PAGE>
awards based on our financial performance as a company and each individual's
performance, as determined by the compensation committee in its sole
discretion. Target incentive awards under the incentive compensation plan are
expected to range from 7.5% to 60% of a participant's base salary, depending on
the participant's level of responsibility. Awards are expected to be based 75%
on our overall profitability and 25% on individual achievement. We expect the
awards to consist primarily of cash, however, if we exceed our profitability
target by more than 200%, the award component based on profitability above the
200% level may be paid in shares of restricted stock. Those restricted share
awards will be issued under the stock incentive plan and will be subject to the
various terms and conditions of that plan.
51
<PAGE>
OUR RELATIONSHIP WITH GREAT LAKES
We are currently a wholly-owned subsidiary of Great Lakes. After the
completion of this offering of Class A common stock, Great Lakes will own about
60.0% of the outstanding shares of our common stock, or about 56.6% if the
underwriters exercise their over-allotment option in full. Great Lakes will own
100% of the outstanding Class B common stock, which will represent 93.8% of the
combined voting power of all classes of voting stock of OSCA, or 92.9% of the
combined voting power of all classes of voting stock of OSCA if the
underwriters exercise their over-allotment option in full. Until Great Lakes
holds less than 50% of the voting power of our stock, Great Lakes will be able
to control the vote on all matters submitted to stockholders, including the
election of directors and the approval of extraordinary corporate transactions,
such as mergers.
Great Lakes has not made any decision regarding whether or for how long it
will retain its stock ownership in our company. At present, Great Lakes has no
plan or intention to dispose of its shares of our Class B common stock. Whether
Great Lakes completes a divestiture of our common stock, and how such a
divestiture would occur, will depend on a variety of considerations and
economic factors, including the market prices of our and Great Lakes' common
stock, the business prospects for each entity, the ability to divest our stock
on a tax-free basis and the availability of other strategic alternatives.
If Great Lakes decides to complete a divestiture of our common stock, Great
Lakes may do so by distributing its Class B common stock to Great Lakes
stockholders, a process that we refer to as a "distribution." A distribution
could be accomplished through one of the following:
. Split-Off--an exchange offer by Great Lakes in which holders of its
common stock would be offered the option of tendering some or all of
their shares in exchange for shares of our common stock; or
. Spin-Off--a pro rata distribution by Great Lakes of its shares of our
common stock to holders of its common stock; or
. Combined Split-Off/Spin-Off--some combination of the above
transactions.
Great Lakes is free to divest its shares of our Class B common stock through
means other than a distribution to Great Lakes stockholders. Great Lakes has
the sole discretion to determine the timing, structure and all terms of any
divestiture. Great Lakes has also advised us that it would not complete a
divestiture if its board of directors determines that a divestiture is not in
the best interests of Great Lakes and its stockholders. Great Lakes has further
advised us that it currently expects that the principal factors that it would
consider in making this determination, as well as the principal factors that it
would consider in making the determination as to the timing, structure and
terms of a divestiture, would be:
. the market price of our Class A common stock;
. the market price of Great Lakes' common stock;
. satisfaction that a divestiture by means of a distribution to Great Lakes
stockholders would be tax-free to Great Lakes and its stockholders and as
to the other tax consequences of the transactions;
. other conditions affecting our business or the business of Great Lakes;
and
. the availability of other strategic alternatives.
If Great Lakes decides to pursue a divestiture, we believe that we will
realize benefits from this offering and a divestiture. We believe that our
separation from Great Lakes will:
. create an organizational structure through which we will have better
access to capital markets;
. permit us to adopt aggressive investment and acquisition programs;
. allow us to offer incentives to our employees that are more closely
linked to our market performance; and
. allow us to focus on our core business strengths as an independent
company, rather than as part of a multinational specialty chemicals
company.
52
<PAGE>
Arrangements With Great Lakes
The terms of our separation from Great Lakes and many of the transactions
being undertaken in connection therewith are governed by a master separation
agreement, which we refer to as the "Separation Agreement," and a number of
additional agreements described below. These other agreements include
agreements relating to this offering and a distribution to Great Lakes
stockholders, the registration of Great Lakes' remaining shares of Class B
common stock, the provision of transitional services by Great Lakes, the supply
of brominated chemicals by Great Lakes and the tax treatment of our possible
separation from Great Lakes. All of the agreements providing for our separation
from Great Lakes were made in the context of parent-subsidiary relationship and
were negotiated in the overall context of our separation from Great Lakes. The
terms of these agreements may be more or less favorable to us than if they had
been negotiated with unaffiliated third parties.
We have set forth below a summary description of the Separation Agreement
and the additional agreements described above. This description, which
summarizes the material terms of these agreements, does not purport to be
complete and is qualified in its entirety by reference to the full text of
these agreements. These agreements, including the Separation Agreement, the IPO
and Distribution Agreement, the Registration Rights Agreement, the Services
Agreement, the Brominated Products Supply Agreement and the Tax Disaffiliation
Agreement, have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.
Separation Agreement
We have historically been operated as a wholly owned subsidiary of Great
Lakes. We have directly owned most of our assets with the exception of some of
our current European subsidiaries that were transferred to us in contemplation
of our separation from Great Lakes. The Separation Agreement sets forth our
arrangements with Great Lakes with respect to any additional corporate
transactions that may be required to effect the transfer of any remaining
assets and the assumption of any remaining liabilities necessary to separate
our company from Great Lakes.
We have assumed, and indemnified Great Lakes for, all liabilities and all
claims related to our business and Great Lakes has retained, and will indemnify
us for, all liabilities and all claims related to its business. In addition,
Great Lakes has agreed to indemnify us for all liabilities related to our
former environmental remediation services business in Mexico and our
participation in a joint venture formed to provide services associated with
pipeline commissioning and infrastructure support services primarily in the
Gulf of Mexico. In exchange for this indemnity, we have agreed that Great Lakes
will be entitled to all rights and beneficial interests and all tangible and
intangible assets relating to these businesses. We have agreed to cooperate
with each other in the defense of any and all claims covered by these
provisions of the Separation Agreement.
The Separation Agreement also allocates responsibility and liability for
many employee related matters. Among other things, it provides that we will
establish our own employee benefit plans before January 1, 2001, which
generally will be the same as Great Lakes' employee benefit plans. Some Great
Lakes' 401(k) Plan assets will be transferred from trusts associated with Great
Lakes' 401(k) Plan to the corresponding trusts for our 401(k) Plan.
The Separation Agreement also contains provisions that govern the resolution
of disputes, controversies or claims that may arise between us and Great Lakes.
The Separation Agreement provides that the parties will use all commercially
reasonable efforts to settle all disputes arising in connection with the
Separation Agreement without resorting to mediation, arbitration or otherwise.
If these efforts are unsuccessful, any party may submit the dispute for non-
binding mediation by delivering notice to the other party of the dispute and
expressly requesting mediation. If, after mediation, the parties disagree
regarding the mediator's recommendation, the dispute will be submitted to
binding arbitration in accordance with the terms of the Separation Agreement.
53
<PAGE>
IPO and Distribution Agreement
General. We will enter into an Initial Public Offering and Distribution
Agreement, which we refer to as the "IPO and Distribution Agreement," with
Great Lakes which governs our respective rights and duties with respect to this
offering and a distribution to Great Lakes stockholders, if any, and contains
covenants designed to facilitate a distribution and to protect its intended
tax-free nature. However, we cannot assure you as to whether or when a
distribution will occur. See "Risk Factors--We will be controlled by Great
Lakes unless it divests its Class B shares, and our other stockholders will be
unable to affect the outcome of stockholder voting during that time."
The Distribution. If Great Lakes decides to pursue a distribution to Great
Lakes stockholders, we have agreed that we will cooperate with Great Lakes in
all respects to accomplish a distribution and, at Great Lakes' direction,
promptly take all actions necessary or desirable to effect a distribution to
Great Lakes stockholders, including the registration under the Securities Act
of 1933, as amended, of Great Lakes' shares of our capital stock. Great Lakes
has the sole discretion to determine whether to proceed with all or part of a
distribution to Great Lakes stockholders and all terms of that distribution,
including the form, structure and terms of any transaction(s) and/or
offering(s) to effect a distribution and the timing of and conditions to the
consummation of a distribution.
Preservation of the Tax-free Status of a Distribution. If Great Lakes
decides to pursue a distribution to Great Lakes stockholders, Great Lakes would
intend for a distribution to qualify as a tax-free distribution under Section
355 of the tax code to Great Lakes and its stockholders. We have agreed to
covenants in the IPO and Distribution Agreement that are intended to preserve
the tax-free status of a distribution to Great Lakes stockholders. We may take
any action otherwise prohibited by these covenants only if Great Lakes has
determined, in its sole and absolute discretion, that the action would not
jeopardize the tax-free status of a distribution. See "--Cooperation on Tax
Matters." Some of these covenants are described in greater detail below:
. Stock Issuance. Prior to the completion of a distribution to Great Lakes
stockholders, we have agreed not to issue or agree to issue shares of our
capital stock in an amount that would result in Great Lakes ceasing to
own an amount of our capital stock which constitutes "control" for
purposes of Section 368(c) of the tax code or any successor statute or
provision, as such definition may be amended from time to time. This
covenant will not prohibit us from issuing stock options and restricted
stock awards to our employees so long as we repurchase sufficient shares
of our capital stock prior to the date when such options and awards
become exercisable to ensure that Great Lakes' continues to have control
of us and Great Lakes approves of our procedures in connection with these
repurchases.
. Acquisition Transactions. Until two years after the completion of a
distribution to Great Lakes stockholders, or, if Great Lakes determines
not to complete a distribution, the last date on which Great Lakes
distributed any OSCA common stock in connection with a distribution, we
have agreed not to enter into or permit any transaction or series of
transactions which would result in a person or persons acquiring or
having the right to acquire shares of our capital stock that would
comprise 50% or more of either the value of all outstanding shares of our
capital stock or the total combined voting power of our outstanding
voting stock.
. Continuation of Active Trade or Business. Until two years after the
completion of a distribution to Great Lakes stockholders, or, if Great
Lakes determines not to complete a distribution, the last date on which
Great Lakes distributed any OSCA common stock in connection with a
distribution, we have agreed to continue to conduct the active trade or
business, within the meaning of Section 355 of the tax code, of our
company as we conducted it immediately prior to the completion of a
distribution. During such time, we have agreed not to:
. liquidate, dispose of or otherwise discontinue any portion of our
active trade or business with a value in excess of $25 million; or
. dispose of any business or assets that would cause us to be operated
in a manner inconsistent in any material respect with the business
purposes for a distribution as described to the IRS or tax counsel.
54
<PAGE>
Also, until two years after the completion of a distribution, we have
agreed not to liquidate, dispose of, or otherwise discontinue the conduct
of any portion of our active trade or business if such liquidation,
disposition or discontinuance would breach the covenant described below
regarding our continuity of business.
. Continuity of Business. Until two years after the completion of a
distribution to Great Lakes stockholders, or, if Great Lakes determines
not to complete a distribution, the last date on which Great Lakes
distributed any OSCA common stock in connection with a distribution, we
have agreed that:
. we will not voluntarily dissolve or liquidate; and
. except in the ordinary course of business, neither we nor any of our
direct or indirect subsidiaries will sell, transfer, or otherwise
dispose of or agree to dispose of assets, including any shares of
capital stock of our subsidiaries, that, in the aggregate, constitute
more than:
(x) 60% of our gross assets; or
(y) 60% of our consolidated gross assets and those of our
subsidiaries.
For this purpose, we are not deemed to directly or indirectly control a
subsidiary unless we own, directly or indirectly, shares constituting
control for tax purposes.
. Discharge of Intracompany Debt. Prior to the first date on which Great
Lakes distributes any of our common stock in connection with a
distribution, we have agreed to fully discharge and satisfy all debt that
we owe Great Lakes. For this purpose, debt does not include payables
arising in the ordinary course of business. Until two years after the
completion of a distribution, or, if Great Lakes determines not to
complete a distribution, the last date on which Great Lakes distributed
any OSCA common stock in connection with a distribution, we will not be
able to have any indebtedness payable to Great Lakes.
In the event that Great Lakes notifies us that it no longer intends to
proceed with or complete a distribution to Great Lakes stockholders and Great
Lakes has not yet distributed any of its OSCA common stock, these covenants to
preserve the tax-free status of a distribution will terminate.
Cooperation on Tax Matters. We and Great Lakes have agreed to procedures
with respect to the tax-related covenants in the IPO and Distribution
Agreement. We are required to notify Great Lakes if we desire to take any
action prohibited by the tax-related covenants described above. Upon this
notification, if Great Lakes determines that the proposed action might
jeopardize the tax-free status of a distribution to Great Lakes stockholders,
Great Lakes has agreed to elect either to:
. use all commercially reasonable efforts to obtain a private letter ruling
from the IRS or a tax opinion that would permit us to take the desired
action, and we have agreed to cooperate in connection with such efforts;
or
. provide all reasonable cooperation to us in connection with our obtaining
an IRS ruling or tax opinion.
In either case, Great Lakes has agreed to bear its reasonable costs and
expenses of obtaining an IRS ruling or tax opinion.
In addition, in the event that Great Lakes, at any time prior to a
distribution, ceases to own our common stock constituting control for tax
purposes, we have agreed to cooperate and take (or refrain from taking) all
actions reasonably requested by Great Lakes or necessary so as to permit Great
Lakes to regain ownership of our common stock which constitutes control for tax
purposes in a manner that would not jeopardize the tax-free status of the
distribution.
Indemnification for Tax Liabilities. We have generally agreed to indemnify
Great Lakes and its affiliates against any and all tax-related losses incurred
by Great Lakes in connection with any proposed tax assessment or tax
controversy with respect to a distribution to Great Lakes stockholders to the
extent caused by any breach by us of any of our representations, warranties or
covenants made in the IPO and Distribution Agreement. This indemnification does
not apply to actions which Great Lakes permits us to take as a result of a
determination under the tax-related covenants described above.
55
<PAGE>
Other OSCA Covenants. After the offering, Great Lakes will continue to own a
significant portion of our common stock. As a result, Great Lakes will continue
to include us as a "subsidiary" for various financial reporting, accounting and
other purposes. Accordingly, we have agreed to additional covenants in the IPO
and Distribution Agreement. Some of these covenants are described below:
. Covenants Regarding the Incurrence of Debt. For so long as Great Lakes
continues to own at least 50% of our outstanding common stock, the amount
of our indebtedness for borrowed money will affect Great Lakes' financial
position. Thus, we have agreed to the following limitations on our
ability to incur debt during that time:
. we will not, without Great Lakes' consent, incur indebtedness in
excess of an aggregate $40.0 million outstanding at any time;
. we may, however, incur indebtedness in connection with an acquisition
so long as the entity we are acquiring meets certain capital
requirements and our indebtedness after giving effect to the
transaction would not exceed $50.0 million; and
. we may not, without Great Lakes' consent, consummate or agree to
consummate any acquisition that does not meet our debt thresholds.
. Other Covenants. For so long as Great Lakes continues to own at least 50%
of our outstanding common stock, we have agreed that:
. we will not, without Great Lakes' prior written consent, which it may
withhold in its sole and absolute discretion, take any action which
has the effect of limiting Great Lakes' ability to freely sell,
pledge or otherwise dispose of shares of our common stock or limiting
the legal rights of or denying any benefit to Great Lakes as an OSCA
stockholder in a manner not applicable to our stockholders generally;
. we will not, without Great Lakes' prior written consent, which it may
withhold in its sole and absolute discretion, issue any shares of
common stock or any rights, warrants or options to acquire our common
stock, if after giving effect to such issuance, Great Lakes would own
less than 50% of the then outstanding shares of our common stock; and
. to the extent that Great Lakes is a party to, or enters into, any
agreements that provide that actions of its subsidiaries may result
in its being in breach or default under any agreement, and we have
been advised of the existence of these agreements, we will not take
any actions that may result in Great Lakes being in breach or
default.
. Financial Information. We have agreed that, for so long as Great Lakes is
required to consolidate our results of operations and financial position
or account for its investment in our company, we will:
. provide Great Lakes with financial information regarding our company
and our subsidiaries;
. provide Great Lakes copies of all quarterly and annual financial
information and other reports and documents we intend to file with
the SEC prior to such filings, as well as final copies upon filing;
. provide Great Lakes with copies of our budgets and financial
projections, as well as the opportunity to meet with our management
to discuss such budgets and projections;
. consult with Great Lakes regarding the timing and content of earnings
releases; and
. cooperate fully, and cause our accountants to cooperate fully, with
Great Lakes in connection with any of its public filings.
This covenant is subject to provisions intended to protect the
confidentiality commitments we have made to our customers.
. Auditors and Audits; Annual Statements and Accounting. We have agreed
that, for so long as Great Lakes is required to consolidate our results
of operations and financial position or account for its investment in our
company under the equity method of accounting (in accordance with
generally accepted accounting principles), we will:
. not change our auditors without Great Lakes' prior written consent,
which will not be unreasonably withheld;
56
<PAGE>
. use our best efforts to enable our auditors to complete their audit
of our financial statements such that they will date their opinion
the same date that they date their opinion on Great Lakes' financial
statements;
. provide to Great Lakes and its auditors all information required for
Great Lakes to meet its schedule for the filing and distribution of
its financial statements;
. make available to Great Lakes and its auditors work papers related to
the annual audit of our company as well as access to the personnel
who perform the annual audit and our and our subsidiaries' books and
records so that Great Lakes and its auditors may conduct reasonable
audits relating to our financial statements;
. adhere to generally accepted accounting principles, applied in a
manner consistent with Great Lakes;
. notify and consult with Great Lakes regarding any changes to our
accounting principles;
. and make any changes to our accounting estimates and principles
requested by Great Lakes.
We have generally agreed to indemnify Great Lakes and its affiliates
against all liabilities arising out of any incorrect, inaccurate or
incomplete financial or other information we provide to Great Lakes
pursuant to the terms of the IPO and Distribution Agreement.
Indemnification Relating to the Offering and a Distribution. We have
generally agreed to indemnify Great Lakes and its affiliates against all
liabilities arising out of any material untrue statements and omissions in any
and all registration statements, including this prospectus, information
statements and/or other documents filed with the SEC in connection with a
distribution. However, our indemnification obligations to Great Lakes do not
apply to information relating to Great Lakes, excluding information relating to
us. Great Lakes has agreed to indemnify us for this information.
Expenses. In general, unless otherwise provided for in the IPO and
Distribution Agreement or any other agreement, we and Great Lakes will pay our
own respective costs and expenses incurred in connection with the offering and
a distribution to Great Lakes stockholders.
. Expenses Relating to the Offering. We will be responsible for the payment
of all costs, fees and expenses relating to the offering, including, but
not limited to, the payment of (a) the costs, fees and expenses of all of
Great Lakes' financial, legal, accounting and other advisors incurred in
connection with the offering and (b) any internal fees, costs and
expenses incurred by Great Lakes or any Great Lakes affiliate in
connection with the offering. Great Lakes will be entitled to any and all
amounts received from the underwriters as reimbursement for any costs,
fees and expenses relating to the offering. We will pay any underwriting
discounts and commissions.
. Expenses Relating to a Distribution. Great Lakes will generally be
responsible for the payment of all costs, fees and expenses relating to a
distribution to Great Lakes stockholders; provided that we will be
responsible for the payment of (a) the costs, fees and expenses of all of
our financial, legal, accounting and other advisors incurred in
connection with a distribution and (b) any internal fees, costs and
expenses incurred by us or any of our affiliates in connection with a
distribution.
Registration Rights Agreement
In the event that Great Lakes does not divest itself of all of its shares of
our common stock in a distribution, Great Lakes could not freely sell all of
its shares without registration under the Securities Act. Accordingly, we have
entered into a Registration Rights Agreement with Great Lakes to provide it
with registration rights relating to the shares of our common stock which it
holds.
Shares Covered. The Registration Rights Agreement covers those shares of our
common stock that are held by Great Lakes immediately following this offering
and any other shares of our common stock that Great Lakes acquires thereafter.
57
<PAGE>
Demand Registrations. Great Lakes may request registration, which we refer
to as a "demand registration," under the Securities Act of all or any portion
of our shares that it owns covered by the Registration Rights Agreement and we
will be obligated to register such shares as requested by Great Lakes.
. Terms of Each Offering. Great Lakes will designate the terms of each
offering effected pursuant to a demand registration, which may take any
form, including:
(1) an underwritten public offering;
(2) a shelf registration;
(3) a registration in connection with the distribution of, or exchange
of or offer to exchange, shares of our common stock to holders of debt or
equity securities of Great Lakes, any of its subsidiaries or affiliates or
any other person; or
(4) a distribution in connection with the registration by Great Lakes or
any of its subsidiaries or affiliates thereof of securities convertible
into, exercisable for or otherwise related to such shares of our common
stock.
Except for an offering described in clauses (3) and (4) above, each demand
registration must meet a minimum aggregate expected offering price.
. Timing of Demand Registrations. We are not required to undertake a demand
registration within 90 days of the effective date of a previous demand
registration, other than a demand registration that was effected as a
shelf registration. Also, we have the right to postpone the filing or
effectiveness of any demand registration for up to 90 days if in the
reasonable judgment of our legal counsel that the demand registration
would reasonably be expected to have a material adverse effect on any
existing proposal or plans by our company to engage in material
transactions; provided, however, that we may exercise this right only
once in any 12-month period.
. Priority on Demand Registrations. Other parties, including OSCA, can
participate in any demand registration only if all of the securities
Great Lakes proposes to include in such registration are so included.
. Selection of Professionals. Great Lakes will select the investment
banker(s) and manager(s), subject to our reasonable objection in some
circumstances, as well as any financial printer, solicitation and/or
exchange agent and counsel for the offering. We will select our own
outside counsel and independent auditors.
Piggyback Registrations. The Registration Rights Agreement also provides for
"piggyback" registration rights for Great Lakes. Whenever we propose to
register any of our securities under the Securities Act for ourselves or
others, subject to customary exceptions, we must provide prompt notice to Great
Lakes and include in such registration all shares of our stock which Great
Lakes requests to be included, each of which we refer to as a "piggyback
registration."
. Priority on Piggyback Registrations. If a piggyback registration is being
made on our behalf and the underwriters advise us that cutbacks are
necessary, we must include in such registration:
. first, the securities we propose to offer;
. second, the securities requested to be included by Great Lakes; and
. third, any other securities requested to be included in such
registration.
If a piggyback registration is being made on behalf of other holders of our
securities and the underwriters advise us that cutbacks are necessary, we
must include in such registration:
. first, the securities requested to be included by the holders
requesting such registration and the securities requested to be
included by Great Lakes, pro rata among these holders and Great Lakes
on the basis of the number of securities owned by each applicable
holder; and
. second, any other securities requested to be included in such
registration.
58
<PAGE>
Selection of Underwriters. In many circumstances, Great Lakes has the right
to reasonably object to our selection of any investment banker(s) and
manager(s) in connection with a piggyback registration.
Holdbacks. The Registration Rights Agreement contains customary holdback
provisions, including covenants by us not to effect a public sale or
distribution of our securities during periods prior to and following the date
of any registration statement filed in connection with a demand registration or
a piggyback registration.
Registration Procedures and Expenses. The Registration Rights Agreement sets
forth customary registration procedures, including a covenant by us to make
available our senior management for road show presentations. We will be
obligated to pay all registration expenses incurred in connection with the
Registration Rights Agreement, including all filing fees, fees and expenses of
compliance with securities and/or blue sky laws, financial printing expenses,
fees and disbursements of custodians, transfer agents, exchange agents and/or
information agents, as well as fees and disbursements of counsel for our
company and the fees of all independent certified public accountants,
underwriters, excluding discounts and commissions, and other persons retained
by us. In addition, we must reimburse Great Lakes for the fees and
disbursements of its outside counsel as well as out-of-pocket expenses incurred
in connection with any such registration.
Indemnification. The Registration Rights Agreement contains customary
indemnification and contribution provisions by us for the benefit of Great
Lakes and any underwriters. Great Lakes has agreed to indemnify us and any
underwriter solely with respect to information provided by Great Lakes.
Transfer. Great Lakes may transfer shares covered by the Registration Rights
Agreement and the holders of such transferred shares will be entitled to the
benefits of the Registration Rights Agreement; provided that each such
transferee agrees to be bound by the terms of the Registration Rights
Agreement. These transferees will be entitled to the rights available to Great
Lakes described above; provided, however, that the holder or holders of a
majority of the shares covered by the Registration Rights Agreement will be
entitled to exercise these rights. Any successor entities to our company will
be bound by the terms of the Registration Rights Agreement.
Duration. The registration rights under the Registration Rights Agreement
will remain in effect with respect to any shares of our common stock until:
. the applicable shares have been sold pursuant to an effective
registration statement under the Securities Act;
. the applicable shares have been sold to the public pursuant to Rule 144
under the Securities Act, or any successor provision;
. the applicable shares have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall have
been delivered by the company and subsequent public distribution of them
shall not require registration of them under the Securities Act or any
similar state law;
. the applicable shares have ceased to be outstanding; or
. in the case of shares held by a transferee of Great Lakes, when those
shares become eligible for sale pursuant to Rule 144(k) under the
Securities Act, or any successor provision.
Brominated Products Supply Agreement
We will enter into the "Brominated Products Supply Agreement" which governs
the arrangements by which Great Lakes will supply us with brominated products.
The Brominated Products Supply Agreement has an initial term that expires on
December 31, 2004, and is renewable for successive one year periods unless
either party gives notice of its desire to terminate the agreement at least
twelve months prior to any successive renewal term. Under this agreement, we
are obligated to purchase from Great Lakes, and Great Lakes is obligated to
supply us with, at least 80% of our annual requirements for these products,
subject to a maximum amount which will vary depending upon our average
purchases over the preceding three year period.
59
<PAGE>
The contract price for brominated products will be determined based on
Great Lakes' cost plus a margin.
Beginning in the third year of the agreement, if we receive a bona fide
written offer for the same or similar products on the same or similar terms
and conditions for a net price lower than the price under the agreement, Great
Lakes is required to match this offer or release us from our obligations to
purchase a maximum portion of our requirements as set forth below:
. For contract year three: 40% of our annual requirements.
. For contract year four: 60% of our annual requirements.
. For contract year five and for all years thereafter: 100% of our annual
requirements.
Unless the release provisions described above apply, we are required to buy
a minimum volume, regardless of our actual requirements.
Tax Disaffiliation Agreement
We will enter into a "Tax Disaffiliation Agreement" with Great Lakes which
governs the allocation of federal, state, local and foreign tax liabilities
and contains agreements with respect to other tax matters. The Tax
Disaffiliation Agreement becomes effective at the time of the offering and
sets forth the procedures for preparing and filing tax returns, paying tax
liabilities, amending returns, tax audits and contests and record retention.
Under the Tax Disaffiliation Agreement, until we cease to be a member of
the Great Lakes consolidated group for federal, state, local or foreign tax
purposes Great Lakes generally will be responsible for preparing and filing,
including any amendments thereto, the Great Lakes consolidated tax group's
federal income tax return and consolidated or combined state and local tax
returns, and Great Lakes will pay the taxes due with respect to such tax
returns. For tax periods during which we are a member of the Great Lakes
consolidated tax group, we will calculate our tax liability as if we were a
separate affiliated group of corporations filing a consolidated return, but we
will pay our calculated taxes to Great Lakes, which will then file the
consolidated or combined return with the appropriate tax authorities. In
connection with any applicable tax return, Great Lakes will have the exclusive
right, in its sole discretion, to determine the manner in which that tax
return will be prepared and filed, including the manner in which any item of
gain, loss, deduction, credit or other attribute shall be reported, whether
any extensions may be requested, the tax elections that will be made by us and
our subsidiaries, whether any claims for refunds will be filed, and whether
any refunds shall be used as credits against other taxes. There may be some
U.S. state or local jurisdictions in which we will file a separate tax return
for tax periods before tax deconsolidation. In that circumstance, we would
file the income tax return with the appropriate tax authorities, and pay the
tax directly to the tax authority.
We will prepare and file all tax returns and pay all taxes due with respect
to all tax returns required to be filed by us for all tax periods after we
cease to be a member of the Great Lakes consolidated tax group and for state,
local and foreign jurisdictions in which our return is not combined or
consolidated with Great Lakes's return. Without the prior written consent of
Great Lakes, we may not amend any tax return for a period in which we were a
member of the Great Lakes consolidated tax group. Some specified net operating
losses, net capital losses, unused tax credits and other deductible or
creditable tax attributes of ours or any of our subsidiaries, which we refer
to as "tax attributes," may be relinquished by us under the Tax Disaffiliation
Agreement. Other than those tax attributes required to be allocated to us
under the appropriate federal, state, local, or foreign tax law, no tax
attributes will be allocated to us on a carry-forward basis after the
deconsolidation nor will any carryback attributes of ours be allowed to be
utilized for a consolidated tax return period.
Great Lakes has the sole right to represent the interests of the Great
Lakes consolidated tax group, including our company, in any tax audits,
litigation or appeals that involve, directly or indirectly, periods prior to
the time that we cease to be a member of the Great Lakes consolidated tax
group, unless we are solely liable
60
<PAGE>
for the taxes at issue and any redetermination of taxes would not result in any
additional tax liability or detriment to any member of the Great Lakes
consolidated tax group. In addition, we and Great Lakes have agreed to provide
each other with the cooperation and information reasonably requested by the
other in connection with tax planning, the preparation or filing of any tax
return, the determination and payment of estimated tax and in the conduct any
tax audits, litigation or appeals.
We and Great Lakes have agreed to indemnify each other for tax or other
liabilities resulting from the failure to pay any taxes required to be paid
under the Tax Disaffiliation Agreement, tax or other liabilities resulting from
negligence in supplying inaccurate or incomplete information or the failure to
cooperate with the preparation of any tax return or the conduct of any tax
audits, litigation or appeals. The Tax Disaffiliation Agreement requires us to
retain records, documents and other information necessary for the preparation
of tax returns or for the audit thereof and to provide reasonable access to
Great Lakes with respect to such records, documents and information.
Services Agreement
We will enter into a "Services Agreement" with Great Lakes, pursuant to
which Great Lakes will furnish us with a number of transitional services. These
services will generally be provided to us for an amount that is reasonably
related to Great Lakes' costs and will include, among other things:
. treasury and cash management;
. risk management;
. human resources and benefits administration support;
. purchasing; and
. legal assistance on an as-needed basis.
The Services Agreement will remain in force until the first to occur of:
. a distribution of our common stock to Great Lakes stockholders;
. a divestiture of our common stock by Great Lakes;
. the date on which our credit facility is no longer outstanding;
. our termination of all of the transitional services; or
. the termination of the Services Agreement by either us or Great Lakes
because of an uncured default by either of us, declaration of the
agreements invalidity under applicable law or force majeure.
61
<PAGE>
PRINCIPAL STOCKHOLDER
Prior to the offering of Class A common stock, all of the outstanding shares
of our common stock will be owned by Great Lakes, a publicly held company that
is listed on the New York Stock Exchange under the symbol "GLK." At this time,
none of our officers or directors own any shares of our common stock. After the
offering, Great Lakes will own 8,400,000 shares of our Class B common stock
representing 60.0% of the outstanding shares of our common stock, or about
56.6% if the underwriters exercise their over-allotment option in full. Great
Lakes will own 100% of the outstanding Class B common stock, which will
represent 93.8% of the combined voting power of all classes of voting stock of
OSCA, or 92.9% of the combined voting power of all classes of voting stock of
OSCA if the underwriters exercise their over-allotment option in full. Except
for Great Lakes, we are not aware of any person or group that will beneficially
own more than 5% of the outstanding shares of our common stock following the
offering. The address of Great Lakes' principal executive office is 500 East
96th Street, Suite 500, Indianapolis, Indiana 46240.
DESCRIPTION OF CAPITAL STOCK
General
At the time of the offering, the authorized capital stock of OSCA will
consist of:
. 25,000,000 shares of Class A common stock, par value $.01 per share,
. 40,000,000 shares of Class B common stock, par value $.01 per share and
. 5,000,000 shares of preferred stock, par value $.01 per share, none of
which is outstanding as of the date hereof.
Of the authorized shares of Class A common stock, 5,600,000 shares are being
offered hereby, or 6,440,000 shares if the underwriters exercise their over-
allotment option in full. Of the 40,000,000 authorized shares of Class B common
stock, 8,400,000 shares will be outstanding and held by Great Lakes or one or
more of its affiliates on the closing date. The material terms and provisions
of our certificate of incorporation affecting the relative rights of the Class
A common stock, the Class B common stock and the preferred stock are described
below. The following description of our capital stock is intended as a summary
only and is qualified in its entirety by reference to the forms of our
certificate of incorporation and by-laws filed with the registration statement
of which this prospectus forms a part, and to the General Corporation Law of
the State of Delaware.
Common Stock
Voting Rights
The holders of Class A common stock and Class B common stock generally have
identical rights, except that holders of Class A common stock are entitled to
one vote per share while holders of Class B common stock are entitled to ten
votes per share. Holders of shares of Class A common stock and Class B common
stock are not entitled to cumulate their votes in the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority of the votes entitled to be cast by the holders of Class A common
stock and Class B common stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any preferred stock. Except as otherwise provided by law or in our
certificate of incorporation, amendments to our certificate of incorporation
must be approved by a majority of the votes entitled to be cast by the holders
of Class A common stock and Class B common stock, voting together as a single
class. However, there is an exception for amendments to our certificate of
incorporation that would alter or change the powers, preferences or special
rights of the Class A common stock or the Class B common stock so as to affect
them adversely. In that case, any amendments also must be approved by a
majority of the votes entitled to be cast by the holders of the shares that
would be adversely affected by the amendment voting as a separate class.
Therefore, holders of Class A common stock are not entitled to vote on any
alteration or change in the powers, preferences or special rights of the Class
B
62
<PAGE>
common stock that would not adversely affect the rights of holders of Class A
common stock. For purposes of the foregoing provisions, any provision for the
voluntary, mandatory and other conversion or exchange of the Class B common
stock into or for Class A common stock on a one-for-one basis shall be deemed
not to adversely affect the rights of the Class A common stock. Any amendment
to our certificate of incorporation to increase the authorized shares of any
class of our capital stock requires the approval only of a majority of the
votes entitled to be cast by the holders of Class A common stock and Class B
common stock, voting together as a single class.
Dividends
Subject to any preferential rights of outstanding preferred stock, holders
of our common stock will share equally on a per share basis in any dividend
declared by our board of directors. Dividends payable in shares of common stock
may be paid only as follows:
. shares of Class A common stock may be paid only to holders of Class A
common stock, and shares of Class B common stock may be paid only to
holders of Class B common stock; and
. the number of shares so paid will be equal on a per share basis with
respect to each outstanding share of Class A common stock and Class B
common stock.
We may not reclassify, subdivide or combine shares of either class of common
stock without at the same time proportionally reclassifying, subdividing or
combining shares of the other class.
Conversion
Each share of Class B common stock is convertible while held by Great Lakes
or any of its subsidiaries, excluding OSCA, at the option of the holder into
one share of Class A common stock. Following any distribution of Class B common
stock to securityholders of Great Lakes in a transaction, including any
distribution intended to qualify as a tax-free distribution under Section 355
of the tax code, or any successor statute, shares of Class B common stock will
no longer be convertible into shares of Class A common stock.
Prior to any tax-free distribution, any shares of Class B common stock
transferred to a person other than Great Lakes or any of its affiliates,
excluding OSCA, will automatically be converted into shares of Class A common
stock. Shares of Class B common stock transferred to Great Lakes' stockholders
in any tax-free distribution will not be converted into shares of Class A
common stock. In addition, following any tax-free distribution, shares of Class
B common stock will be transferable as Class B common stock, subject to
applicable laws.
All shares of Class B common stock will automatically be converted into
Class A common stock if:
. a tax-free distribution has not occurred and
. the number of outstanding shares of Class B common stock owned by Great
Lakes, together with its subsidiaries, excluding OSCA, falls below 50% of
the aggregate number of outstanding shares of our common stock.
This automatic conversion of Class B common stock into Class A common stock
will prevent Great Lakes from decreasing its economic interest in us to less
than 50% while still retaining control of more than 80% of the voting power for
our capitalized stock. All conversions will be effected on a share-for-share
basis.
Other Rights
In the event of a liquidation, dissolution or winding up of OSCA, all
holders of our common stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of common stock.
No shares of either class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of our common stock or other
securities.
63
<PAGE>
Upon the closing of the offering, all the outstanding shares of Class A
common stock and Class B common stock will be validly issued, fully paid and
nonassessable.
Preferred stock
Our board of directors is empowered, without approval of our stockholders,
to cause shares of preferred stock to be issued from time to time in one or
more series and with the designations, preferences and other rights as shall be
described in the applicable resolutions adopted by our board. Among the
specific matters that may be determined by our board of directors are:
. the voting rights, if any, of each series;
. the rate of dividends, if any;
. whether dividends, if any, will be cumulative or noncumulative;
. the terms of redemption, if any;
. the rights of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of our company; and
. rights and terms of conversion or exchange, if any.
The board of directors may issue preferred stock with voting and other rights
that could adversely affect the voting power of the holders of the common
stock. In addition, an issuance of preferred stock could have anti-takeover
effects. We have no present plans to issue any shares of preferred stock. The
ability of our board of directors to issue preferred stock could have the
effect of delaying, deferring or preventing a change in control of OSCA or the
removal of existing management.
Anti-takeover Effects of Certificate and By-law Provisions
General
Provisions of our certificate of incorporation and by-laws summarized below
may have an anti-takeover effect and may delay, deter, or prevent a tender
offer or takeover attempt that a stockholder might consider to be in its best
interest, including offers or attempts that might result in a premium being
paid over the market price for the shares of common stock held by stockholders.
Board of Directors
The certificate of incorporation and by-laws provide that the board of
directors will be divided into three classes of directors, with the classes to
be nearly equal in number as possible. One class will be originally elected for
a term expiring at the annual meeting of stockholders to be held in 2001. The
second class will be originally elected for a term expiring at the annual
meeting of stockholders to be held in 2002. The third class will be originally
elected for a term expiring at the annual meeting of stockholders to be held in
2003. Each director is to hold office until his or her successor is duly
elected and qualified. Commencing with the 2001 annual meeting of stockholders,
directors elected to succeed directors whose terms then expire will be elected
for a term which will expire at the third succeeding annual meeting of
stockholders after their election. Each director will hold office until their
successor is duly elected and qualified.
The certificate of incorporation and by-laws provide that the board of
directors shall initially consist of eight members. The certificate of
incorporation and by-laws further provide that the number of directors of OSCA
shall be fixed from time to time exclusively by resolution adopted by the
affirmative vote of a majority of the entire board of directors. However, the
board shall consist of not more than fifteen nor less than six directors. In
addition, the certificate of incorporation provides that any vacancies will be
filled by the affirmative vote of a majority of the remaining directors, even
if less than a quorum, or by a sole remaining director. If any vacancy to the
board was caused by the action of stockholders, however, only our stockholders
will be permitted to fill that vacancy.
64
<PAGE>
The certificate of incorporation and the by-laws provide that, except as
provided below, directors may be removed, with or without cause, by the
affirmative vote of shares representing a majority of the votes entitled to be
cast by the then outstanding shares of voting stock; provided, however, that
during the period:
. beginning on the first date that Great Lakes, together with its
subsidiaries, excluding OSCA, ceases to beneficially own shares
representing 50% or more of the votes entitled to be cast by voting
stock, which we refer to as the "First Trigger Date," and
. ending on the first date that Great Lakes, together with its
subsidiaries, excluding OSCA, ceases to beneficially own shares
representing 30% or more of the votes entitled to be cast by voting
stock, which we refer to as the "Second Trigger Date,"
directors may be removed, with or without cause, only by the affirmative vote
of shares representing not less than 66 2/3% of the votes entitled to be cast
by voting stock. Notwithstanding the foregoing, from and after the Second
Trigger Date, our directors may only be removed for cause. In addition, this
removal may only be made by the affirmative vote of shares representing a
majority of the votes entitled to be cast by voting stock. Unless the board of
directors has made a determination that removal is in our best interests, in
which case the following definition shall not apply, "cause" for removal of a
director shall be deemed to exist only if:
. the director whose removal is proposed has been convicted, or when a
director is granted immunity to testify when another has been convicted,
of a felony by a court of competent jurisdiction and such conviction is
no longer subject to direct appeal;
. that director has been found by the affirmative vote of a majority of the
directors then in office at any regular or special meeting of the board
of directors called for that purpose or by a court of competent
jurisdiction to have been guilty of willful misconduct in the performance
of his duties to OSCA in a matter of substantial importance to us; or
. that director has been adjudicated by a court of competent jurisdiction
to be mentally incompetent, which mental incompetency directly affects
his ability as a director.
Whenever holders of outstanding shares of one or more series of preferred stock
are entitled to elect directors of OSCA pursuant to the provisions contained in
the resolutions of the board of directors providing for the establishment of
that series, however, any director of ours so elected may be removed in
accordance with the provision of those resolutions.
The by-laws provide that:
. prior to the First Trigger Date, a majority of the directors on the
compensation committee of the board of directors shall be directors
designated by Great Lakes and
. on and after the First Trigger Date, but so long as Great Lakes owns
shares representing 10% or more of the votes entitled to be cast by the
voting stock, the compensation committee shall include at least one
director designated by Great Lakes.
Advance Notice Procedures
The by-laws provide for an advance notice procedure for the nomination,
other than by or at the direction of the board of directors, of candidates for
election as directors, as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at these meetings will have to be received
in writing by us not less than 90 nor more than 120 days prior to the
anniversary of the previous year's annual meeting of stockholders. In addition,
any notice must contain information concerning the person to be nominated or
the matters to be brought before the meeting and concerning the stockholder
submitting the proposal. The certificate of incorporation and the by-laws
provide that, so long as Great Lakes owns shares representing 10% or more of
the votes entitled to be cast by the voting stock, Great Lakes is exempt from
the foregoing advance notice procedures for director nominations and
shareholder proposals.
65
<PAGE>
Special Meetings
Unless otherwise required by our certificate of incorporation, the by-laws
provide that special meetings of stockholders may be called only by specified
officers of ours or by any officer at the request of the board of directors or
a committee of our board. Special meetings cannot be called by stockholders.
The certificate of incorporation and the by-laws expressly deny stockholders
the right to call special meetings after the Second Trigger Date. In addition,
the certificate of incorporation and the by-laws provide that, prior to the
Second Trigger Date, any action required or permitted to be taken by
stockholders may be effected by written consent. After the Second Trigger Date,
however, any such action may be effected only at a duly called annual or
special meeting of stockholders and may not be effected by a written consent.
No business other than that stated in the notice of that meeting may be
transacted at any special meeting.
Fair Price Provision
The certificate of incorporation includes a "fair price" provision which
prohibits specified business combinations, as we define below, with a related
person, as we define below, unless:
(a) the holders of both classes of common stock receive in the business
combination the same consideration as the other class and either:
(1) the same consideration in form and amount per share as the
highest consideration paid by the related person in a tender or
exchange offer in which the related person acquired at least 50% of
either the outstanding stock of either the Class A common stock or the
outstanding Class B common stock and which was consummated not more
than one year prior to the business combination or the entering into of
a definitive agreement for the business combination, or
(2) not less in amount, as to cash, or fair market value, as to non-
cash consideration, than the highest price paid or agreed to be paid by
the related person for shares of Class A common stock, Class B common
stock or voting stock in any transaction that either resulted in:
(x) the related person's beneficially owning 15% or more of the
Class A common stock, Class B voting stock or voting stock or
(y) was effected at a time when the related person beneficially
owned 15% or more of the Class A common stock, the Class B common
stock or voting stock,
in either case occurring not more than one year prior to the business
combination, or
(b) the transaction is approved by
(1) a majority of continuing directors as we define below, or
(2) shares representing:
(x) not less than 66 2/3% of the votes entitled to be cast by the
voting stock,
(y) not less than 50.01% of the votes entitled to be cast by the
voting stock not beneficially owned by the related person, and
(z) from and after the First Trigger Date, a majority of the
votes entitled to be cast by the holders of each class of common
stock, excluding all shares beneficially owned by any related
person, voting separately as a class.
After the Second Trigger Date, however, the required approval percentages in
clauses (b)(2) (x) and (y) increase to 80% and 66 2/3%, respectively. These
approvals are also required to amend the fair price provisions. The fair price
provision will not be applicable at the time that all shares of Class B common
stock have been converted into or exchanged for Class A common stock.
66
<PAGE>
Under the fair price provision, a "related person" is any person:
. other than Great Lakes and its affiliates and associates, that
beneficially owns 15% or more of the outstanding Class A common stock or
Class B common stock or the Class A common stock and Class B common stock
taken together or
. is an affiliate of ours and at any time within the preceding two-year
period was the beneficial owner of 15% or more of the outstanding Class A
common stock or Class B common stock.
The relevant "business combinations" involving OSCA covered by the fair
price provision are:
(1) any merger or consolidation of OSCA or any subsidiary of ours with
or into a related person or an affiliate of a related person,
(2) any sale, lease, exchange, transfer or other disposition of all or
substantially all of our assets to a related person or an affiliate of a
related person,
(3) specified reclassifications, recapitalizations and other corporate
actions requiring a stockholder vote that have the effect of increasing by
more than one % the proportionate share of Class A common stock or Class B
common stock beneficially owned by the related person or an affiliate of a
related person and
(4) a dissolution of OSCA caused or proposed by a related person or an
affiliate of a related person.
A "continuing director" is a director who is unaffiliated with the related
person and who was a director before the related person became a related
person, and any successor of a continuing director who is unaffiliated with a
related person and is recommended or nominated to succeed a continuing
director by a majority of the continuing directors.
Amendment
Stockholder amendments to a number of provisions contained in our
certificate of incorporation and by-laws require the approval by shares
representing not less than 66 2/3% of the votes entitled to be cast by the
voting stock, voting together as a single class. These provisions include,
among other things:
. provisions with respect to stockholder action by written consent;
. stockholder rights to call special meetings;
. advance notice procedures, including Great Lakes' exemption from those
procedures; and
. board classification and removal of directors.
After the Second Trigger Date, however, approval of 80% of the votes entitled
to be cast by the voting stock, voting together as a single class, is required
to amend any of the foregoing provisions. In addition, after the First Trigger
Date, if there are any shares of Class B common stock outstanding, approval by
a majority of the votes entitled to be cast by the holders of each class of
common stock, voting separately by class, is also required. The by-laws may
also be amended by action of the board of directors.
Contractual Relations among OSCA, Great Lakes And Related Entities
The certificate of incorporation provides that, if specified disclosure
conditions are satisfied and if fair as to us as of the time it is authorized,
approved or ratified by our board of directors, by a committee thereof or by
the stockholders, no contract, agreement, arrangement or transaction between:
(a) us and Great Lakes,
(b) us and one or more of the directors or officers of Great Lakes or a
related entity, as we define below, or
(c) us and any related entity
67
<PAGE>
will be void or voidable solely because Great Lakes, any related entity or any
one or more of the officers or directors of the OSCA, Great Lakes or any
related entity are parties to that contract, agreement, arrangement or
transaction. In addition, no such contract, agreement, arrangement or
transaction will be void or voidable solely because those directors or officers
are present at, or participate in, the meeting of the board of directors or a
committee of the board that authorizes the contract, agreement, arrangement or
transaction. Furthermore, the contract, agreement, arrangement or transaction
will not be void or voidable solely because votes of those directors or
officers are counted for that purpose. In the event of the foregoing, Great
Lakes, any related entity and those directors and officers:
. will have fully satisfied and fulfilled their fiduciary duties to us and
our stockholders with respect thereto,
. will not be liable to us or our stockholders for any breach of fiduciary
duty by reason of the entering into, performance or consummation of any
such contract, agreement, arrangement or transaction,
. will be deemed to have acted in good faith and in a manner such persons
reasonably believe to be in and not opposed to the best interests of OSCA
and
. will be deemed not to have breached their duties of loyalty to us and our
stockholders and not to have derived an improper personal benefit
therefrom.
A "related entity" is a corporation, partnership, association or other
organization in which one or more of our directors has a financial interest.
Delaware Business Combination Statute
Section 203 of the Delaware General Corporation Law provides that, subject
to exceptions specified therein, an "interested stockholder" of a Delaware
corporation shall not engage in any "business combination," including general
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the time
that such stockholder becomes an interested stockholder unless:
. prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding specified shares, or
. on or subsequent to such time, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
specified business combinations proposed by an interested stockholder following
the announcement or notification of one of specified transactions involving the
corporation and a person who:
. had not been an interested stockholder during the previous three years or
. became an interested stockholder with the approval of a majority of the
corporation's directors,
if such transaction is approved or not opposed by a majority of the directors
who were directors prior to any person becoming an interested stockholder
during the previous three years or were recommended for election or elected to
succeed such directors by a majority of such directors.
68
<PAGE>
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include:
. any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the date of determination and
. the affiliates and associates of any such person.
Great Lakes and its affiliates, however, are excluded from the definition of
"interested stockholder" under the terms of Section 203. Under some
circumstances, Section 203 makes it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. We have not elected to be exempt from the
restrictions imposed under Section 203.
Limitations on Directors' Liability
The certificate of incorporation provides that no director of OSCA shall be
liable to OSCA or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. in respect of unlawful dividend payments or stock redemptions or
repurchases as provided in Section 174 of the Delaware General
Corporation Law or
. for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and those of our
stockholders, through stockholders' derivative suits on behalf of OSCA, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above. Our by-laws provide for indemnification of
directors and officers to the maximum extent permitted by Delaware law. In
addition, we expect to enter into indemnification agreements with each of our
directors providing for indemnification of those directors to the fullest
extent permitted by applicable law.
Listing
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "OSCA."
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock is Norwest
Shareholder Services.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
General
The 5,600,000 shares of our Class A common stock sold in the offering, or
6,440,000 shares if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction under the Securities Act,
except for any such shares which may be acquired by an "affiliate" as that term
is defined in Rule 144 promulgated under the Securities Act, which shares will
remain subject to the resale limitations of Rule 144.
The shares of our common stock that will continue to be held by Great Lakes
after the offering constitute "restricted securities" within the meaning of
Rule 144, and will be eligible for sale by Great Lakes in the open market after
the offering, subject to customary contractual lockup provisions and the
applicable requirements of Rule 144, both of which are described below. We have
granted registration rights to Great Lakes. See
"--Registration Rights of Great Lakes."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of
shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock; and
. the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to post-sale notice requirements and the
availability of current public information about us.
In the event that any person other than Great Lakes who is deemed to be an
affiliate purchases shares of our Class A common stock pursuant to the offering
or acquires shares of our Class A common stock pursuant to one of our employee
benefit plans, the shares held by such person are required under Rule 144 to be
sold in brokers' transactions, subject to the volume limitations described
above. Shares properly sold in reliance upon Rule 144 to persons who are not
affiliates are thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Great Lakes may complete a divestiture of our common stock
through a distribution to Great Lakes stockholders. See "Our Relationship With
Great Lakes." Any shares distributed by Great Lakes will be eligible for
immediate resale in the public market without restrictions by persons other
than our affiliates. Our affiliates would be subject to the restrictions of
Rule 144 described above other than the one-year holding period requirement.
We, Great Lakes and our officers and directors have agreed that, without the
prior written consent of Salomon Smith Barney Inc. on behalf of the
underwriters, they will not, during the period ending 180 days after the date
of this prospectus, sell or otherwise dispose of any shares of our common
stock, subject to specified exceptions. See "Underwriting."
An aggregate of 1,000,000 shares of our Class A common stock are reserved
for issuance under our stock plans. We intend to file registration statements
on Form S-8 covering the issuance of shares of our Class A common stock
pursuant to the plans. Accordingly, the shares issued pursuant to the plans
will be freely tradable, subject to the restrictions on resale by affiliates
under Rule 144.
Registration Rights of Great Lakes
Pursuant to the Registration Rights Agreement, Great Lakes may require us to
register under the Securities Act all or any portion of our common stock that
it holds. Any of Great Lakes' shares of our common stock
70
<PAGE>
registered pursuant to the Registration Rights Agreement would be eligible for
immediate resale in the public market without restrictions by persons other
than our affiliates. For more information regarding the Registration Rights
Agreement, see "Our Relationship With Great Lakes--Arrangements With Great
Lakes--Registration Rights Agreement."
Any sales of substantial amounts of our common stock in the public market,
whether as a result of a distribution to Great Lakes stockholders, Great Lakes'
registration rights or otherwise, or the perception that such sales might
occur, could have a material adverse effect on the market price of our common
stock. See "Risk Factors--The market price of our Class A common stock could be
adversely affected by sales of substantial amounts of our common stock in the
public market."
71
<PAGE>
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
General
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of common stock by
a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is defined as
any person or entity that is, for U.S. federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
foreign estate or trust. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing, temporary and proposed Treasury regulations, and administrative and
judicial interpretations of the Code, all as in effect or proposed on the date
of this prospectus and all of which are subject to change, possibly with
retroactive effect, or different interpretations. This discussion is limited to
Non-U.S. Holders who hold shares of common stock as capital assets within the
meaning of Section 1221 of the Code. Moreover, this discussion is for general
information only and does not address all of the tax consequences that may be
relevant to particular Non-U.S. Holders in light of their personal
circumstances, nor does it discuss tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence.
An individual may, subject to specified exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year. For such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year are counted. Resident aliens
are subject to U.S. federal income tax as if they were U.S. citizens.
Each prospective purchaser of common stock is advised to consult a tax advisor
with respect to specific tax consequences to that purchaser of purchasing,
owning and disposing of our common stock in light of that purchaser's
individual circumstances, as well as any tax consequences that may arise under
the laws of any U.S. state, municipality or other taxing jurisdiction.
Dividends
In the event that dividends are paid on shares of common stock, dividends
paid to a Non-U.S. Holder of common stock will be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as may be specified by
an applicable income tax treaty. To claim the benefit of a lower rate under an
income tax treaty, a Non-U.S. Holder of common stock must properly file with
the payor an IRS Form 1001, or successor form, claiming an exemption from or
reduction in withholding under such tax treaty.
Any dividends paid on shares of common stock to a Non-U.S. Holder will not
be subject to withholding tax, but instead will be subject to U.S. federal
income tax on a net basis at applicable graduated individual or corporate rates
if:
. dividends are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, will be attributable to a United States permanent
establishment of the Non-U.S. Holder; and
. an IRS Form 4224, or successor form, is filed with the payor.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax"
at a rate of 30% or such lower rate as may be specified by an applicable income
tax treaty.
Unless the payer has knowledge to the contrary, dividends paid prior to
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above
and for purposes of determining the applicability of a tax treaty rate.
However, recently
72
<PAGE>
finalized Treasury Regulations pertaining to U.S. federal withholding tax
provide that a Non-U.S. Holder must comply with certification procedures, or,
in the case of payments made outside the United States with respect to an
offshore account, documentary evidence procedures, directly or under specified
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid after December 31,
2000. In addition, the final withholding tax regulations will require a Non-
U.S. Holder who provides an IRS Form 4224 or successor form, as discussed
above, also to provide its U.S. taxpayer identification number.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the IRS.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of common stock
unless:
(1) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States and, where a tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Holder;
(2) in the case of a Non-U.S. Holder who is an individual and holds the
common stock as a capital asset, such holder is present in United States
for 183 or more days in the taxable year of the sale or other disposition
and other conditions are met; or
(3) OSCA is or has been a "U.S. real property holding corporation" (a
"USRPHC") for U.S. federal income tax purposes, as discussed below.
An individual Non-U.S. Holder who falls under clause (1) above will, unless
an applicable treaty provides otherwise, be taxed on his or her net gain
derived from the sale under regular graduated United States federal income tax
rates. An individual Non-U.S. Holder who falls under clause (2) above will be
subject to a flat 30% tax on the gain derived from the sale, which may be
offset by some United States capital losses.
A Non-U.S. Holder that is a foreign corporation falling under clause (1)
above will be taxed on its gain under regular graduated U.S. federal income tax
rates and may be subject to an additional branch profits tax equal to 30% of
its effectively connected earnings and profits within the meaning of the Code
for the taxable year, as adjusted for specified items, unless it qualifies for
a lower rate under an applicable income tax treaty.
A corporation is a USRPHC if the fair market value of the U.S. real property
interests held by the corporation is 50% or more of the aggregate fair market
value of its U.S. and foreign real property interests and any other assets used
or held for use by the corporation in a trade or business. Based on its current
and anticipated assets, OSCA believes that it is not currently, and is likely
not to become, a USRPHC. However, since the determination of USRPHC status is
based upon the composition of the assets of OSCA from time to time, and because
there are uncertainties in the application of relevant rules, there can be no
assurance that OSCA will not become a USRPHC. If we were to become a USRPHC,
then gain on the sale or other disposition of common stock by a Non-U.S. Holder
generally would be subject to U.S. federal income tax unless both:
. the common stock was "regularly traded" on an established securities
market within the meaning of applicable Treasury regulations; and
. the Non-U.S. Holder actually or constructively owned 5% or less of the
common stock during the shorter of the five-year period preceding such
disposition or the Non-U.S. Holder's holding period.
Non-U.S. Holders should consult their tax advisors concerning any U.S. tax
consequences that may arise if we were to become a USRPHC.
73
<PAGE>
Federal Estate Tax
Common stock owned or treated as owned by an individual Non-U.S. Holder at
the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, and may be subject to U.S. federal estate tax
unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding Tax
We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty or other
relevant agreements.
Backup withholding is imposed at the rate of 31% on specified payments to
persons that fail to furnish identifying information to the payer. Backup
withholding generally will not apply to dividends paid prior to January 1, 2001
to a Non-U.S. Holder at an address outside the United States, unless the payer
has knowledge that the payee is a U.S. person. In the case of dividends paid
after December 31, 2000, the final withholding tax regulations provide that a
Non-U.S. Holder generally will be subject to withholding tax at a 31% rate
unless specified certification procedures, or, in the case of payments made
outside the United States with respect to an offshore account, documentary
evidence procedures, are complied with, directly or under other circumstances
through an intermediary. Backup withholding and information reporting generally
will also apply to dividends paid on common stock at addresses inside the
United States to Non-U.S. Holders that fail to provide identifying information
in the manner required. The final withholding tax regulations provide
presumptions under which a Non-U.S. Holder would be subject to backup
withholding and information reporting unless certification from the holder of
the Non-U.S. Holder's Non-U.S. status is provided.
Payment of the proceeds of a sale of common stock effected by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
common stock by or through a foreign office of a broker. If, however, such
broker is, for U.S. federal income tax purposes, a U.S. person, a controlled
foreign corporation, or a foreign person that derives 50% or more of its gross
income for specified periods from the conduct of a trade or business in the
United States, or, in addition, for periods after December 31, 2000, a foreign
partnership that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as partners one or
more U.S. persons that, in the aggregate, hold more than 50% of the income or
capital interest in the partnership, such payments will be subject to
information reporting, but not backup withholding, unless such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and other specified conditions are met or the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the Non-U.S. Holder's U.S. federal
income tax liability provided the required information is furnished in a timely
manner to the IRS.
74
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to each underwriter, the number
of shares set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc........................................ 2,394,005
Morgan Stanley & Co. Incorporated............................... 1,755,603
Simmons & Company International................................. 1,170,402
Dain Rauscher Incorporated...................................... 93,330
Goldsmith & Harris, Inc. ....................................... 93,330
McDonald Investments Inc., a KeyCorp Company.................... 93,330
---------
Total....................................................... 5,600,000
---------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of particular legal matters by the underwriters' counsel and to other
conditions. The underwriters are obligated to purchase all the shares, other
than those covered by their over-allotment option described below, if they
purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Morgan Stanley & Co.
Incorporated, and Simmons & Company International are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to particular dealers at the public offering price less a
concession not in excess of $0.65 per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share on
sales to other dealers. If all the shares are not sold at the initial offering
price, the underwriters may change the public offering price and other selling
terms. The representatives have advised us that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 840,000 additional shares of our
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent this option
is exercised, each underwriter will be obligated, subject to some conditions,
to purchase a number of additional shares approximately proportionate to that
underwriter's initial purchase commitment.
We, our officers and directors and Great Lakes have agreed that, for a
period of 180 days from the date of this prospectus, we will not, without the
prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of our common stock or any securities convertible into, or exercisable
or exchangeable for, our common stock. Salomon Smith Barney Inc., in its sole
discretion, may release any of the securities subject to these lock-up
agreements at any time without notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares was
determined by negotiation among us and the representatives. Among the factors
considered in determining the initial public offering price were:
. our record of operations;
. our current financial condition;
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the industry in which
we compete;
. our management; and
. currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies
considered comparable to us.
75
<PAGE>
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may
not develop and continue after this offering.
Our Class A common stock will be included for quotation on the Nasdaq
National Market under the symbol "OSCA."
The following table shows the underwriting discounts and commissions that we
will pay to the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of Class A common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
---------- ----------
<S> <C> <C>
Per Share........................................... $ 1.085 $ 1.085
Total............................................... $6,076,000 $6,987,400
</TABLE>
At our request, the underwriters reserved up to five percent of the Class A
common stock to be sold, at the initial public offering price, to our
directors, officers and employees, officers, the directors and employees of
Great Lakes, and other persons having business relationships with us. This
directed share program will be administered by Salomon Smith Barney Inc. The
number of shares of common stock available for sale to the general public will
be reduced to the extent that these individuals purchase reserved shares. Any
reserved shares that are not purchased through this directed share program will
be offered by the underwriters to the general public on the same basis as the
other shares offered by this prospectus. We have agreed to indemnify the
underwriters against certain liabilities and expenses, including liabilities
under the Securities Act of 1933, in connection with sales of the directed
shares.
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of Class A common stock in the
open market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of bids for or purchases of
shares made to prevent or retard a decline in the market price of the shares
while this offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the shares to be higher than
it would otherwise be in the open market in the absence of such transactions.
Salomon Smith Barney Inc. may effect these transactions on the Nasdaq National
Market or in the over-the-counter market, or otherwise, and may discontinue
them at any time.
We estimate that our total expenses for this offering will be $2,000,000.
From time to time, Salomon Smith Barney Inc. and Simmons & Company
International and their affiliates have provided, and may continue to provide,
investment banking services, investment trading services and general financing
and banking services to Great Lakes, for which they receive customary fees. The
representatives or their respective affiliates may in the future perform
various similar investment banking and advisory services for us from time to
time, for which we will pay them customary fees.
76
<PAGE>
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
The validity of the Class A common stock offered hereby and other legal
matters will be passed upon for us by Kirkland & Ellis (a partnership including
professional corporations), Chicago, Illinois. Certain legal matters will be
passed upon for the underwriters by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for each
of the three years in the period ended December 31, 1999 and have examined the
pro forma adjustments to the December 31, 1999 financial statements, as set
forth in their reports. We have included our financial statements and schedule
and pro forma financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration statement
on Form S-1 under the Securities Act with respect to the common stock offered
hereby. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. Some items
are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to the company and its common stock, reference
is made to the registration statement and the exhibits and any schedules filed
therewith. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or other documents filed as an exhibit to the
registration statement, each statement being qualified in all respects by such
reference. A copy of the registration statement, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site at http://www.sec.gov, from which interested persons can
electronically access the registration statement, including the exhibits and
any schedules thereto.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OSCA, Inc. and Subsidiaries
Audited Financial Statements
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-3
Consolidated Statements of Operations for 1997, 1998 and 1999........... F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficit) for
1997, 1998 and 1999.................................................... F-5
Consolidated Statements of Cash Flows for 1997, 1998 and 1999........... F-6
Notes to Consolidated Financial Statements.............................. F-7
Unaudited Interim Financial Statements
Consolidated Balance Sheet at March 31, 2000............................ F-19
Consolidated Statements of Operations for the Three Months Ended March
31, 1999 and 2000...................................................... F-20
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1999 and 2000...................................................... F-21
Notes to Unaudited Consolidated Financial Statements.................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder OSCA, Inc.
We have audited the accompanying consolidated balance sheets of OSCA, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statements of operations, changes in stockholder's equity (deficit) and cash
flows for each of the three years ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index at item 16(b).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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, 1998 and 1999 and the consolidated results of
their operations and their cash flows for each of the three years ended
December 31, 1999, 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.
Ernst & Young LLP
Indianapolis, Indiana
February 11, 2000, except for Note 15,
as to which the date is June 14, 2000
F-2
<PAGE>
OSCA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 5,568 $ 3,898
Accounts and notes receivable, less allowances of $919 in
1998 and $798 in 1999...................................... 30,682 20,800
Inventories................................................. 24,523 19,321
Prepaid expenses and other current assets................... 996 1,573
Deferred income taxes....................................... 1,176 1,465
Income taxes receivable..................................... 797 128
-------- --------
Total current assets.................................... 63,742 47,185
-------- --------
Property and equipment, net................................. 46,054 46,928
Goodwill and other intangibles, net......................... 7,917 7,574
Deferred income taxes....................................... 2,331 --
-------- --------
Total assets............................................ $120,044 $101,687
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable............................................ $ 11,482 $ 6,496
Dividend note payable to Great Lakes........................ -- 65,000
Accrued liabilities......................................... 7,528 5,051
Current portion of notes payable............................ 321 118
-------- --------
Total current liabilities............................... 19,331 76,665
-------- --------
Deferred income taxes....................................... -- 957
Note payable--related party................................. 472 354
Due to Great Lakes.......................................... 52,517 43,641
Great Lakes Investment...................................... 47,724 --
Stockholder's equity (deficit):
Class B common stock, $.01 par value, 40,000,000 shares
authorized, 8,400,000 shares issued and outstanding at
December 31, 1999........................................ -- 84
Additional paid-in capital................................ -- 690
Retained earnings (deficit)............................... -- (19,282)
Accumulated other comprehensive loss...................... -- (1,422)
-------- --------
Total stockholder's equity (deficit).................... -- (19,930)
-------- --------
Total liabilities and stockholder's equity
(deficit)/Great Lakes' investment...................... $120,044 $101,687
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OSCA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for earnings per share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenue.................................. $ 112,739 $ 113,369 $ 91,938
Operating expenses:
Cost of sales.............................. 78,026 88,800 74,635
Selling, administrative and research
expenses.................................. 16,515 19,271 18,153
Amortization of intangibles................ 251 370 432
Special charges (credit)................... -- 13,350 (2,550)
---------- ---------- ----------
Total operating expenses................. 94,792 121,791 90,670
---------- ---------- ----------
Operating income (loss)...................... 17,947 (8,422) 1,268
Interest expense............................. 5 91 37
Interest income.............................. (196) (228) (151)
Foreign currency translation................. (30) 523 (586)
Other expense (income)--net.................. 14 15 (138)
---------- ---------- ----------
Income (loss) before income taxes............ 18,154 (8,823) 2,106
Income tax provision (benefit)................. 6,727 (1,943) 1,284
---------- ---------- ----------
Net income (loss)............................ $ 11,427 $ (6,880) $ 822
========== ========== ==========
Earnings per share:
Basic and diluted.......................... $ 1.36 $ (.82) $ .10
========== ========== ==========
Weighted average shares outstanding--basic
and diluted............................... 8,400,000 8,400,000 8,400,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OSCA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other
Great Lakes Common Paid-in Earnings Comprehensive Comprehensive
Investment Stock Capital (Deficit) Income (loss) Income (loss)
----------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ 43,519 $-- $-- $ -- $ --
Net income............ 11,427 -- -- -- -- $11,427
Foreign currency
translation
adjustment......... (19) -- -- -- (19)
-------
-- $11,408
=======
-------- ---- ---- -------- -------
Balance at December 31,
1997................... 54,927 -- -- -- --
Net loss.............. (6,880) -- -- -- -- $(6,880)
Foreign currency
translation
adjustment......... (323) -- -- -- -- (323)
-------
$(7,203)
=======
-------- ---- ---- -------- -------
Balance at December 31,
1998................... 47,724 -- -- -- --
Net income............ -- -- -- 822 -- $ 822
Foreign currency
translation
adjustment......... (1,324) -- -- -- -- (1,324)
Dividends............. -- -- -- (67,152) --
-------
$ (502)
=======
Capitalization of
consolidated entity.... (46,400) 84 690 47,048 (1,422)
-------- ---- ---- -------- -------
Balance at December 31,
1999................... $ -- $ 84 $690 $(19,282) $(1,422)
======== ==== ==== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OSCA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 11,427 $ (6,880) $ 822
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation and amortization of intangibles... 4,355 6,053 7,312
Deferred income taxes.......................... (160) (4,312) 2,999
Special charges................................ -- 13,350 (2,550)
Loss (gain) on sale of fixed assets............ (4) -- 619
Changes in operating assets and liabilities:
Accounts and notes receivable, net............. (4,139) 396 9,882
Inventories.................................... (6,809) (2,739) 5,202
Prepaid expense and other current assets....... (781) (369) 92
Accounts payable............................... (86) 3,889 (4,986)
Intercompany changes........................... 11,928 20,062 (8,876)
Accrued and other liabilities.................. 1,672 (1,382) (2,427)
-------- -------- -------
Net cash provided by operating activities........ 17,403 28,068 8,089
Cash flows from investing activities:
Additions to property and equipment............ (18,913) (24,140) (5,873)
Purchase of other assets....................... (14) (3,658) (89)
Proceeds from sale of fixed assets............. 262 -- --
-------- -------- -------
Net cash used in investing activities............ (18,665) (27,798) (5,962)
Cash flows from financing activities:
Borrowings and (repayments) from notes payable,
net........................................... -- 793 (321)
Cash dividend to Great Lakes................... -- -- (2,152)
-------- -------- -------
Net cash provided by (used in) financing
activities.................................... -- 793 (2,473)
Net increase (decrease) in cash and cash
equivalents..................................... (1,262) 1,063 (346)
-------- -------- -------
Cash and cash equivalents at beginning of year... 6,109 4,828 5,568
Effect of exchange rate changes on cash........ (19) (323) (1,324)
-------- -------- -------
Cash and cash equivalents at end of year......... $ 4,828 $ 5,568 $ 3,898
======== ======== =======
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-6
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for per share data)
1. Organization and Basis of Presentation
OSCA, Inc., including its consolidated subsidiaries, ("OSCA"), headquartered
in Lafayette, Louisiana, is a wholly-owned subsidiary of Great Lakes Chemical
Corporation ("Great Lakes"). OSCA provides specialized oil and 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 Latin America.
In September 1999, Great Lakes announced its intention to sell a portion of
its ownership interest in OSCA as part of an initial public offering (IPO)
scheduled to occur sometime in the first half of 2000. The transaction will be
effected through a recapitalization of OSCA whereby two classes of common stock
will be created (Class A and Class B). The Class A common stock will be offered
to the public as part of the IPO and Great Lakes will retain 100% ownership of
the Class B common stock. The actual number of shares of Class A and Class B
common stock to be issued and outstanding will be determined at the time of the
offering.
In order to accomplish the IPO and appropriately reflect the OSCA businesses
to be included in the IPO, it was necessary for Great Lakes to transfer to OSCA
certain foreign subsidiaries previously owned by Great Lakes. This transfer was
completed in December 1999 and resulted in direct ownership of those
subsidiaries by OSCA. Accordingly, financial information for 1999 is presented
on a consolidated basis. Prior to the transfer of these foreign subsidiaries in
December 1999, operations were conducted by OSCA, subsidiaries of OSCA and, in
some cases, subsidiaries of Great Lakes. Therefore, the financial information
for the periods prior to the transfer are presented on a combined basis.
The accompanying financial statements reflect the historical financial
position, results of operations, changes in stockholder's equity (deficit) and
cash flows directly related to OSCA and its affiliates, adjusted to include
only those parts of the OSCA business which are to remain 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 assets,
liabilities and results of operations of two businesses owned by OSCA. These
adjustments were made for all periods presented. 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 will assume and will indemnify OSCA
for all claims, charges, assessments and liabilities, known and unknown,
directly or indirectly relating to these businesses. Additionally, Great Lakes
will be 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 stockholder's equity in the financial
statements prior to the transfer.
The statements of operations 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
F-7
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and allocated charges which management believes to be reasonable. These charges
are not necessarily indicative of the costs and expenses that would have
resulted if OSCA had been operated as a separate entity for the periods
presented. OSCA management estimates the incremental recurring corporate
administrative expenses that would have been incurred by OSCA on a stand alone
basis to be approximately $750 annually for all periods presented.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include all accounts of the Company as
described above. All significant intercompany accounts and transactions are
eliminated in consolidation. Significant accounts and transactions with Great
Lakes are disclosed as related party transactions (Note 3).
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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. 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
operations. The reductions included in net revenue were $255, $498 and $214 for
the years ended 1997, 1998 and 1999, respectively.
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.
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 (FIFO) method, calculated using weighted average
cost.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. The
estimated useful lives for purposes of computing depreciation are: buildings,
20-39 years; equipment, 7-15 years; and office and computer equipment, 3-5
years. Maintenance and repair costs are charged to expense as incurred.
F-8
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets and Intangible 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. Long-lived assets that are held for disposal are reported at the
lower of the assets' carrying amount or fair value less costs related to the
assets' disposition.
Earnings Per Share
Basic and diluted earnings per share of OSCA have been calculated using the
weighted average common shares issued in connection with OSCA's capitalization
of the consolidated entity. These shares are assumed to be outstanding for all
periods of OSCA presented.
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 currency translation adjustments in stockholder's
equity/Great Lakes investment. For subsidiaries in highly inflationary
countries, currency gains and losses resulting from translation and
transactions are determined using a combination of current and historical
rates and are reported in the consolidated statement of operations.
Research and Development
Research and development costs are expensed as incurred. OSCA's
expenditures for product development and engineering were approximately $428,
$452 and $548 in 1997, 1998 and 1999, respectively.
Income Taxes
OSCA and its affiliates are included in the consolidated income tax returns
of Great Lakes. The consolidated tax provision is presented as if OSCA filed
separate tax returns.
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.
All unremitted earnings of foreign subsidiaries and affiliates are
considered to be permanently invested.
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.
New Accounting Standards
Effective January 1, 1999, OSCA adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
F-9
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Internal Use." This accounting standard specifically defines the criteria under
which costs incurred in connection with internal-use computer software projects
are to be treated as a current period expense or to be capitalized. Adoption of
SOP 98-1 increased 1999 operating costs by approximately $70,000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement, as amended by SFAS No.
137, will be effective for OSCA beginning with the first quarter of 2001. The
Statement requires companies to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Hedge ineffectiveness, the amount by which the
change in the value of a hedge does not exactly offset the change in the value
of the hedged item, will be immediately recognized in earnings. OSCA is
evaluating the new statement's provisions and has not yet determined the impact
of adoption on the results of operations or financial position.
3. Related Party Transactions and Corporate Allocations
OSCA purchases brominated products from Great Lakes, which constitute a
significant portion of the fluid products sold by OSCA. Such purchases are
charged to OSCA through an intercompany account, and are reflected in cost of
sales. In addition, Great Lakes provides certain support services to OSCA
including legal, tax, treasury, employee benefits administration, audit and
corporate development services. These support services are also charged to OSCA
through an intercompany account. Certain of these charges are based on specific
identification of Great Lakes administrative costs attributable to OSCA.
The following table summarizes the purchases, direct corporate charges and
cost allocations included in the accompanying statements of operations:
<TABLE>
<CAPTION>
Year Ended
Statement of Operations Caption December 31,
------------------------------- ----------------------
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
Cost of sales..................................... $25,587 $15,011 $9,178
Selling, administrative and research.............. $ 4,803 $ 5,831 $5,711
</TABLE>
Explanations of the composition and the method of allocation for the above
captions are as follows:
Cost of sales
This caption represents the purchased cost of the brominated products
from Great Lakes. These costs are directly charged based upon a transfer
price.
Selling, administrative and research expenses
Costs within this caption primarily include 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, administrative and
research costs. Certain of these costs were direct charges, while other
costs were allocated. To the extent specific identification of costs
charged directly to OSCA is not practicable, costs are allocated by Great
Lakes to OSCA using allocation percentages. These percentages are
determined by Great Lakes at the beginning of each year based upon the
estimated usage for each of Great Lakes subsidiaries. These percentages are
then multiplied by the total Great Lakes consolidated
F-10
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
budgeted amounts for the particular support service. These amounts are
charged to OSCA on a monthly basis. At year end the consolidated budgeted
amounts are adjusted to actual. The allocation percentages are not
adjusted. In addition, a Great Lakes corporate overhead allocation is
charged to OSCA, based upon 0.5% of the monthly budgeted sales amounts. The
allocated costs and corporate overhead allocations charged to OSCA were
$1,122, $1,323 and $1,637 for the years ended December 31, 1997, 1998 and
1999, respectively.
The amounts allocated by Great Lakes are 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 are
reasonable and in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 55.
OSCA's operations and cash flow requirements have 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.
A progression of the intercompany account with Great Lakes is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998 1999
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year................ $ 57,445 $32,455 $ 52,517
Inventory purchases......................... 29,666 17,311 10,841
Selling, administrative and research
expenses................................... 4,803 5,831 5,711
Net cash (received) paid by Great Lakes on
behalf of OSCA............................. (66,381) (5,434) 17,747
Transfer of carve-out affiliates............ -- -- (42,179)
Other....................................... 6,922 2,354 (996)
-------- ------- --------
Balance at end of the year.................. $ 32,455 $52,517 $ 43,641
======== ======= ========
</TABLE>
4. Special Charges
In the first quarter of 1998, the Board of Directors of OSCA's parent
company, Great Lakes, appointed a new chief executive officer at Great Lakes
and over the following months, a new senior management team was assembled.
Beginning in the third quarter of 1998, Great Lakes began work on a plan to
fundamentally alter how Great Lakes conducts business around the world and to
improve the operating income of its businesses, including the OSCA business, by
repositioning the business to enhance competitiveness and productivity and
increase responsiveness to customer needs.
The 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 gas well products and services. The repositioning plan provided for the
remaining lease payments on one of OSCA's deepwater service vessels that was
returned to the lessor, the decommissioning of the related service equipment,
the sale or abandonment of a production facility and the reduction of its
workforce by approximately 100 employees.
Accordingly, in 1998, OSCA recognized a special charge of $13,350 or $8,280
after income taxes. Special charges are reflected in the consolidated statement
of operations as a separate component of operating income. Of the $13,350,
$10,800 was recorded for actions taken in the third quarter of 1998 and another
$2,550 was recorded in the fourth quarter of 1998.
F-11
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Details of the 1998 special charge and a reconciliation to the reserve
balance at December 31, 1999 follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
Amount Balance at Balance at
of Charge 1998 December 31, 1999 1999 December 31,
Description in 1998 Activity 1998 Activity Reversals 1999
----------- --------- -------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Asset Impairment (non
cash):
Completion Services... $ 4,800 $(4,800) $ -- $ -- $ -- $ --
Completion Fluids..... 3,120 (3,120) -- 2,500 (2,500) --
------- ------- ------ ------- ------- ------
7,920 (7,920) -- 2,500 (2,500) --
Severance Costs:
Completion Fluids..... 50 -- 50 -- (50) --
Corporate and Other... 200 (200) -- -- -- --
------- ------- ------ ------- ------- ------
250 (200) 50 -- (50) --
Lease Costs (Completion
Services):............. 4,400 (791) 3,609 (1,826) -- 1,783
Other (Completion
Fluids):............... 780 (590) 190 (121) -- 69
------- ------- ------ ------- ------- ------
$13,350 $(9,501) $3,849 $ 553 $(2,550) $1,852
======= ======= ====== ======= ======= ======
</TABLE>
The 1998 asset impairment losses include charges for the removal and
abandonment of service equipment on one of OSCA's leased deepwater oil well
service vessels. The annual amount of depreciation expense which would have
been incurred had this service equipment not been impaired was approximately
$980. In addition, included in this caption is the write down of the carrying
value of OSCA's calcium chloride production facility, an asset held for sale,
to fair value. The amount of depreciation suspended on the calcium chloride
production facility in 1999 was approximately $230.
The 1998 severance costs include the cost of separation payments to certain
employees who were terminated. Certain of these costs were individually
negotiated with the employee, while others were determined based upon the
provisions of statutory or contractual severance plans. The repositioning plan
provided for the elimination of approximately 100 positions which included 66
marine well service and support employees, 20 manufacturing employees and 14
administrative and technical employees. Payments related to these costs are
substantially complete.
The lease component of the repositioning plan represents remaining lease
payments, net of sublease income, on one of OSCA's deepwater oil well service
vessels. Payments under the lease agreement extend through 2001.
The other 1998 special charges relate to various costs and expenses incurred
for the repositioning of OSCA's Latin American operations, including downsizing
the Venezuela operations and exiting the Bolivian marketplace. Spending
associated with these charges is also substantially complete.
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 $2,500,
which was the carrying amount of the facility just prior to the approval of the
original 1998 repositioning plan. In addition, $50 of severance costs related
to the employees of this facility and included in the 1998 special charge have
also been reversed. The total impact of these changes resulted in a credit to
special charges in the amount of $2,550. This credit has been reflected in the
1999 statement of operations as a component of operating income.
F-12
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventories
The major components of OSCA's inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Raw materials............................................. $ 128 $ 195
Finished products......................................... 24,395 19,126
------- -------
$24,523 $19,321
======= =======
</TABLE>
6. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Land.................................................. $ 1,161 $ 1,199
Buildings and improvements............................ 9,609 13,437
Machinery, equipment and computer hardware............ 37,896 63,964
Construction in progress.............................. 22,110 328
-------- --------
Total property and equipment.......................... 70,776 78,928
Accumulated depreciation.............................. (24,722) (32,000)
-------- --------
Net property and equipment............................ $ 46,054 $ 46,928
======== ========
</TABLE>
Depreciation expense included in the consolidated statements of operations
was $4,104, $5,683 and $6,880 for the years ended December 31, 1997, 1998 and
1999, respectively. Maintenance and repairs charged to costs and expenses were
$1,771, $2,478 and $2,331 for the same periods, respectively.
7. Employee Benefit Plans
OSCA participates in a defined contribution 401(k) retirement plan sponsored
by Great Lakes. The plan covers substantially all full time employees upon date
of hire. Under the Plan, eligible employees may contribute a portion of their
salary until retirement and OSCA matches a portion of the employee's
contribution. Total expense under the Plan amounted to $147, $81, and $315, in
1997, 1998, and 1999, respectively. The costs of this plan are charged to OSCA
through the intercompany account with Great Lakes.
8. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Goodwill................................................ $11,119 $11,119
Non-compete and other identifiable intangibles.......... 1,128 1,217
------- -------
Total intangibles....................................... 12,247 12,336
Accumulated amortization................................ (4,330) (4,762)
------- -------
Total intangibles, net.................................. $ 7,917 $ 7,574
======= =======
</TABLE>
Goodwill, which represents the excess of cost over fair value of net assets
acquired, is amortized using the straight-line method over 40 years. The other
intangible assets, consisting primarily of the cost of a non-compete agreement
is being amortized using the straight-line method over the term of the non-
compete agreement of 5 years.
F-13
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Lease Obligations
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
$3,591, $7,130 and $7,807 for the years ended December 31, 1997, 1998 and
1999, respectively.
Future minimum lease obligations under noncancelable leases at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Obligation
--------------
(in thousands)
<S> <C>
2000....................................................... $ 9,380
2001....................................................... 6,201
2002....................................................... 3,695
2003....................................................... 2,616
2004 and thereafter........................................ 917
-------
Total...................................................... $22,809
=======
</TABLE>
10. Income Taxes
The following is a summary of domestic and foreign income before income
taxes, the components of the provision (benefit) for income taxes, a
reconciliation of the U.S. federal income tax rate to the effective income tax
rate, and the components of deferred tax assets and liabilities.
The components of income (loss) before income taxes for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Domestic........................................ $16,243 $(6,560) $ 3,531
Foreign......................................... 1,911 (2,263) (1,425)
------- ------- -------
$18,154 $(8,823) $ 2,106
======= ======= =======
</TABLE>
The components of the income tax provision (benefit) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal........................................ $5,639 $ 1,675 $(1,284)
State.......................................... 263 212 (157)
Foreign........................................ 736 238 180
------ ------- -------
6,638 2,125 (1,261)
------ ------- -------
Deferred:
Federal........................................ 82 (3,747) 2,344
State.......................................... 7 (321) 201
------ ------- -------
89 (4,068) 2,545
------ ------- -------
$6,727 $(1,943) $ 1,284
====== ======= =======
</TABLE>
F-14
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the effective tax rate from statutory U.S. federal
income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ----
<S> <C> <C> <C>
U.S federal income tax rate........................... 35.0% (35.0)% 35.0%
State income taxes (net of federal benefit)........... 0.9 (0.8) 1.0
Foreign taxes......................................... 0.2 11.2 16.3
Goodwill amortization................................. 0.4 1.0 4.6
Other................................................. 0.5 1.6 4.1
---- ----- ----
Effective income tax rate............................. 37.0% (22.0)% 61.0%
==== ===== ====
</TABLE>
Components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... $ 272 $ 247
Inventory............................................. 881 902
Special charges....................................... 4,237 1,127
Payroll and related liabilities....................... 23 316
Goodwill and intangibles.............................. 53 55
Foreign net operating loss carryforward............... 396 800
Other deductible temporary differences................ 215 83
------- -------
Total deferred tax assets............................... 6,077 3,530
Valuation allowance for deferred tax assets........... (396) (800)
------- -------
Deferred tax assets after valuation allowance........... 5,681 2,730
Deferred tax liabilities:
Property and equipment................................ (2,174) (2,222)
------- -------
Net deferred tax asset.................................. $ 3,507 $ 508
======= =======
</TABLE>
At December 31, 1999, a net operating loss (NOL) carryforward of
approximately $2,353 is available to be applied against future taxable income
of OSCA's Venezuelan subsidiary. The NOL is available through 2002. The NOL
carryforward relates to losses of this subsidiary and can only be used to
offset taxable income of OSCA in Venezuela. For financial reporting purposes, a
valuation allowance of $800 has been recognized to offset the net deferred tax
asset related to this NOL carryforward.
The 1999 current federal income tax benefit of $(1,284) is included in the
consolidated balance sheets as a component of amounts Due to Great Lakes.
11. Debt Arrangements
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1999
----- -----
(in
thousands)
<S> <C> <C>
Note payable to related party................................ $ 590 $ 472
Notes payable to bank........................................ 203 --
----- -----
793 472
Less current maturities...................................... 321 118
----- -----
$ 472 $354
===== =====
</TABLE>
F-15
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The note payable to a related party 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 beginning on the first
anniversary date. The individual to whom the note is payable is the former
owner of the acquired business and who is currently employed by OSCA.
Notes payable to bank consists primarily of notes assumed by OSCA as part of
the business acquisition noted above. The notes bore interest at 10.53% and
10.85% per annum and were paid in full in October 1999.
Future maturities of long-term debt for the succeeding five years are as
follows: 2000, $118; 2001, $118; 2002, $118; 2003, $118; and 2004, $0.
On December 30, 1999, the Board of Directors of OSCA declared a dividend of
$65,000 which was made in the form of a non-interest bearing demand note
payable to Great Lakes.
Interest paid was approximately $5, $91 and $37 in 1997, 1998 and 1999,
respectively.
12. Contingencies
OSCA may be subject to various legal proceedings and claims 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 the consolidated operating results or
consolidated financial position of OSCA.
13. Risk Management Activities
OSCA provides specialized oil and 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 Kingdom,
Norway, Italy and Latin America and is exposed to fluctuations in oil and 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 in
overall earnings and cash flow.
Commodity Price Risk
The level of oil and gas exploration and development activity is affected by
both short-term and long-term trends in oil and gas prices which, in turn, are
related to the demand for petroleum products and the current availability of
oil and gas resources. Any reduced activity could result in declines in the
demand for the products and services provided by OSCA.
Foreign Currency 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 rate risk.
Interest Rate Risk
Historically, OSCA has had no significant interest rate risk to manage.
F-16
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information
OSCA is organized into three global business segments: Completion Fluids,
Downhole Completion Tools and Completion Services. The units are organized to
offer a distinct 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 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.
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. Working in conjunction with the downhole completion tools and
completion fluids segments, 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.
Assets included in Corporate and Other principally are cash and cash
equivalents; accounts receivable; deferred income taxes; goodwill and other
intangibles; other assets; and certain unallocated plant and equipment. Segment
assets primarily include inventory and property and equipment (at cost).
Geographic sales information is reported based on the location which invoices
the external customer. Geographic long-lived assets are grouped by the location
of the reporting country. Intersegment sales are insignificant and are
eliminated in consolidation.
15. Subsequent Events
Recapitalization
As of December 31, 1999, OSCA's authorized stock consisted of 1 million
issued and outstanding shares of no par value common stock, all of which was
owned by OSCA's parent company, Great Lakes Chemical Corporation. In connection
with the Offering, OSCA intends to authorize 5 million shares of $.01 par value
preferred stock, 25 million shares of $.01 par value Class A common stock and
40 million shares of $.01 Class B common stock. In addition, at the time of the
Offering, Great Lakes Chemical Corporation's 1 million shares of no par value
common stock will be converted into 8.4 million shares of Class B common stock.
Share and Per Share Information
All references in the consolidated financial statements to share and per
share data have been adjusted to give effect to the recapitalization described
above.
Dividends
In connection with the Offering, the Board of Directors of OSCA declared a
dividend on Great Lakes Chemical Corporation's 1 million shares of no par value
common stock in the amount of the entire proceeds of the sale of the Option
Securities to the Underwriters, pursuant to the Underwriting Agreement. This
dividend was made in the form of a non-interest bearing promissory note payable
to Great Lakes and is payable only from the proceeds of the sale of the Option
Securities, and shall terminate with no payment required upon the termination
of the Underwriters' option to purchase the Option Securities. In addition, the
Board of Directors of OSCA declared a dividend on its common stock which
requires OSCA to pay to Great Lakes proceeds from the Offering in excess of
amounts OSCA otherwise owes Great Lakes.
F-17
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
OSCA evaluates performance and allocates resources based on operating profit
which represent net revenue less cost of sales, allocated selling,
administrative and research expenses and special charges. Intersegment net
revenue and transfers are recorded at OSCA's cost; there is no intercompany
profit 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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Net Revenue by Segment to External
Customers:
Completion Fluids......................... $ 81,988 $ 67,420 $50,621
Completion Services....................... 17,615 33,278 25,666
Downhole Completion Tools................. 12,876 12,625 15,651
-------- -------- -------
Total Net Revenue of Reportable Segments.. 112,479 113,323 91,938
Corporate and Other....................... 260 46 --
-------- -------- -------
112,739 113,369 91,938
-------- -------- -------
Segment Operating Income (Loss):
Completion Fluids......................... 14,120 1,001 5,046
Completion Services....................... 2,455 (2,851) (696)
Downhole Completion Tools................. 2,932 (3,192) 621
-------- -------- -------
19,507 (5,042) 4,971
Total Operating Loss of Reportable
Segments Corporate and Other.............. (1,560) (3,380) (3,703)
-------- -------- -------
17,947 (8,422) 1,268
-------- -------- -------
Segment Assets:
Completion Fluids......................... 26,756 27,506 22,546
Completion Services....................... 16,294 22,789 21,893
Downhole Completion Tools................. 5,327 9,362 11,263
Corporate and Other....................... 7,466 10,920 10,547
-------- -------- -------
55,843 70,577 66,249
-------- -------- -------
Unallocated Assets........................ 44,336 49,467 35,438
-------- -------- -------
Total Consolidated Assets................. 100,179 120,044 101,687
-------- -------- -------
Fixed Asset Additions:
Completion Fluids......................... 8,413 7,831 200
Completion Services....................... 9,484 12,223 3,256
Downhole Completion Tools................. 179 2,368 661
Corporate and Other....................... 837 1,718 1,756
-------- -------- -------
18,913 24,140 5,873
-------- -------- -------
Depreciation Expense:
Completion Fluids......................... 1,850 1,798 1,821
Completion Services....................... 1,264 2,570 3,575
Downhole Completion Tools................. 310 561 338
Corporate and Other....................... 680 754 1,146
-------- -------- -------
4,104 5,683 6,880
-------- -------- -------
Geographic Information
Net Revenue by Segment to External
Customers:
United States............................. 84,502 84,405 77,895
Foreign................................... 28,237 28,964 14,043
-------- -------- -------
112,739 113,369 91,938
-------- -------- -------
Long-lived Assets:
United States............................. 36,463 48,640 50,592
Foreign................................... 3,681 5,331 3,910
-------- -------- -------
40,144 53,971 54,502
-------- -------- -------
</TABLE>
F-18
<PAGE>
OSCA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 3,898 $ 13,644
Accounts and notes receivable, less allowances of $798
in 1999 and $804 in 2000............................. 20,800 18,410
Inventories........................................... 19,321 20,569
Prepaid expenses and other current assets............. 1,573 2,561
Deferred income taxes................................. 1,465 1,659
Income taxes receivable............................... 128 197
-------- --------
Total current assets.............................. 47,185 57,040
-------- --------
Property and equipment, net........................... 46,928 45,590
Goodwill and other intangibles, net................... 7,574 7,570
-------- --------
Total assets...................................... $101,687 $110,200
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 6,496 $ 8,155
Dividend note payable to Great Lakes.................. 65,000 65,000
Accrued liabilities................................... 5,051 3,716
Current portion of notes payable...................... 118 118
-------- --------
Total current liabilities......................... 76,665 76,989
-------- --------
Deferred income taxes................................. 957 1,573
Note payable--related party........................... 354 354
Due to Great Lakes.................................... 43,641 50,866
Stockholder's equity (deficit):
Class B common stock, $.01 par value, 40,000,000
shares authorized, 8,400,000 shares issued and
outstanding........................................ 84 84
Additional paid-in capital.......................... 690 690
Retained earnings (deficit)......................... (19,282) (18,593)
Accumulated other comprehensive (loss).............. (1,422) (1,763)
-------- --------
Total stockholder's equity (deficit).............. (19,930) (19,582)
-------- --------
Total liabilities and stockholder's equity
(deficit)........................................ $101,687 $110,200
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
OSCA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for earnings per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1999 2000
---------- ----------
(Unaudited)
<S> <C> <C>
Net revenue............................................ $ 23,023 $ 26,501
Operating expenses:
Cost of sales........................................ 16,862 19,472
Selling, administrative and research expenses........ 5,689 5,897
Amortization of intangibles.......................... 99 99
---------- ----------
Total operating expenses........................... 22,650 25,468
---------- ----------
Operating income (loss)................................ 373 1,033
Interest expense....................................... 4 7
Interest income........................................ (45) (73)
Foreign currency translation........................... 23 70
Other expense (income)--net............................ 358 (201)
---------- ----------
Income before income taxes............................. 33 1,230
Income tax provision................................... 20 541
---------- ----------
Net income............................................. $ 13 $ 689
========== ==========
Earnings per share:
Basic and diluted.................................... $ -- $ 0.08
========== ==========
Weighted average shares outstanding--basic and
diluted............................................. 8,400,000 8,400,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
OSCA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 2000
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 13 $ 689
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of intangibles.............. 1,595 2,059
Deferred income taxes..................................... -- 422
Gain on sale of fixed assets.............................. -- 179
Changes in operating assets and liabilities:
Accounts receivable, net.................................. 1,499 2,390
Inventories............................................... 1,462 (1,248)
Prepaid expenses and other current assets................. 206 (1,057)
Accounts payable.......................................... (2,251) 1,659
Intercompany changes...................................... 598 7,225
Accrued and other liabilities............................. (1,608) (1,335)
------- -------
Net cash provided by operating activities................... 1,514 10,625
Cash flows from investing activities:
Additions to property and equipment....................... (3,547) (863)
Purchase of other assets.................................. (77) (94)
Proceeds from sale of fixed assets........................ 1,190 419
------- -------
Net cash used in investing activities....................... (2,434) (538)
Cash flows from financing activities:
Borrowings and (repayments) from notes payable, net....... (22) --
Cash dividend to Great Lakes.............................. -- --
------- -------
Net cash used in financing activities....................... (22) --
Net increase (decrease) in cash and cash equivalents........ (942) 10,087
------- -------
Cash and cash equivalents at beginning of period............ 5,568 3,898
Effect of exchange rate changes on cash................... (1,412) (341)
------- -------
Cash and cash equivalents at end of period.................. $ 3,214 $13,644
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of OSCA, Inc.
and its consolidated subsidiaries ("OSCA") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes necessary
for a fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended March 31, 2000
and 1999 reflect, in the opinion of management, all material adjustments
(consisting of normal recurring adjustments) necessary for a fair financial
statement presentation. The results for the interim period are not necessarily
indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and
footnotes thereto, included in this Form S-1.
2. Related Party Transactions and Corporate Allocations
OSCA purchases bromine-based fluids from Great Lakes, which comprise a
significant portion of the products sold by OSCA. Such purchases are charged to
OSCA through an intercompany account, reflected in cost of sales, and are in
accordance with a bromine supply agreement between the Company and Great Lakes.
In addition, Great Lakes provides certain support services to the Company
including legal, tax, treasury, employee benefits administration, audit and
corporate development services. These support services are also charged to OSCA
through an intercompany account. Certain of these charges are based on specific
identification of Great Lakes administrative costs attributable to OSCA. To the
extent such identification is not practicable, charges are allocated by Great
Lakes to the Company based on various formulas which reasonably approximate the
actual costs incurred.
The following table summarizes the purchases, direct corporate charges and
cost allocations included in the accompanying statements of operations:
<TABLE>
<CAPTION>
Three Months
Ended March
31,
-------------
Statement of Operations Caption 1999 2000
------------------------------- ------ ------
<S> <C> <C>
Cost of sales.............................................. $2,515 $2,690
Selling, administrative and research....................... $1,176 $ 793
</TABLE>
Explanations of the composition and the method of allocation for the above
captions are as follows:
Cost of Sales
This caption represents the purchased cost of the bromine~-based fluids
from Great Lakes. These costs are directly charged based upon an
established transfer price as provided in a bromine supply agreement
between the Company and Great Lakes.
Selling, Administrative and Research Expenses
Costs within this caption primarily include intercompany charges for
costs related to legal, 401(k) savings plan, liability insurance premiums,
restricted stock for a Company executive, employee
F-22
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
participation in employee benefit plans covering medical, dental, life
insurance, and long term disability and certain other miscellaneous
general, administrative and research costs. Certain of these costs were
direct charges, while other costs were allocated. To the extent specific
identification of costs charged directly to OSCA is not practicable, costs
are allocated by Great Lakes to OSCA using allocation percentages. These
percentages are determined by Great Lakes at the beginning of each year
based upon the estimated usage for each of Great Lakes subsidiaries. These
percentages are then multiplied by the total Great Lakes consolidated
budgeted amounts for the particular support service. These amounts are
charged to OSCA on a monthly basis. At year end the consolidated budgeted
amounts are adjusted to actual. The allocation percentages are not
adjusted. In addition, a Great Lakes corporate overhead allocation is
charged to OSCA, based upon 0.5% of the monthly budgeted sales amounts. The
allocated costs and corporate overhead allocations charged to OSCA were
$484 and $136 for the three months ended March 31, 1999 and 2000,
respectively.
The amounts allocated by Great Lakes are not necessarily indicative of the
actual costs which may have been incurred had the Company operated as an entity
unaffiliated with Great Lakes. However, the Company believes that the
allocations are reasonable and in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 55.
OSCA's operations and cash flow requirements have been financed through its
operating cash flows and advances from Great Lakes. In addition, the Company
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.
A progression of the intercompany account with Great Lakes is as follows:
<TABLE>
<CAPTION>
March 31,
----------------
1999 2000
------- -------
(in thousands)
<S> <C> <C>
Balance at beginning of period.......................... $52,517 $43,641
Inventory purchases..................................... 3,355 2,270
Selling, administrative and research expenses........... 1,176 793
Net cash (received) paid by Great Lakes on behalf of
OSCA................................................... (96) 2,025
Other................................................... (3,838) 2,137
------- -------
Balance at end of period................................ $53,114 $50,866
======= =======
</TABLE>
3. Special Charges
During 1998, in connection with a Great Lakes repositioning plan, OSCA
recognized a special charge of $13,350 or $8,280 after income taxes. Of the
$13,350, $10,800 was recorded for actions taken in the third quarter of 1998
and another $2,550 was recorded in the fourth quarter of 1998. In addition, in
the fourth quarter of 1999, due to certain changes in the repositioning plan,
OSCA recognized a credit to special charges in the amount of $2,550.
A summary of spending against the reserve for special charges since December
31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 Spending 2000
------------ -------- ---------
<S> <C> <C> <C>
Lease Costs (Completion Services)......... $1,783 $756 $1,027
Other (Completion Fluids)................. 69 -- 69
------ ---- ------
$1,852 $756 $1,096
====== ==== ======
</TABLE>
F-23
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Inventories
The major components of OSCA's inventories are as follows:
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------- -------
(in thousands)
<S> <C> <C>
Raw materials............................................. $ 198 $ 83
Finished products......................................... 22,863 20,486
------- -------
$23,061 $20,569
======= =======
</TABLE>
5. Income Taxes
A reconciliation of the U.S. Federal income tax rate to the effective income
tax rate follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 2000
------- -------
<S> <C> <C>
U.S. federal income tax rate............................ 35.0% 35.0%
State income taxes (net of federal benefit)............. 1.0 1.7
Foreign taxes........................................... 16.3 4.0
Goodwill amortization................................... 4.6 2.0
Other................................................... 3.7 1.3
------- -------
60.6% 44.0%
======= =======
</TABLE>
6. Comprehensive Income
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months
Ended March
31,
--------------
1999 2000
------- -----
(in
thousands)
<S> <C> <C>
Net income................................................ $ 13 $ 689
Other comprehensive income (loss)......................... (1,412) (341)
------- -----
Comprehensive income...................................... $(1,399) $ 348
======= =====
</TABLE>
F-24
<PAGE>
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. 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 group of products, technology and services.
OSCA evaluates performance and allocates resources based on operating income
which represents net revenue less cost of sales, allocated selling,
administrative and research expenses. Intersegment net revenue and transfers
are recorded at OSCA's cost; there is no intercompany income or loss on
intersegment net revenue or transfers.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 2000
------- -------
(in thousands)
<S> <C> <C>
Net revenue by segment to external customers:
Completion fluids........................................ $13,512 $13,166
Completion services...................................... 6,324 8,446
Downhole completion tools................................ 3,187 4,889
------- -------
Total net revenue of reportable segments............... 23,023 26,501
Corporate and other...................................... -- --
------- -------
$23,023 $26,501
======= =======
Segment operating income (loss):
Completion fluids........................................ $ 1,414 $ 426
Completion services...................................... (16) 1,091
Downhole completion tools................................ (31) 196
------- -------
Total operating income of reportable segments.......... 1,367 1,713
Corporate and other...................................... (994) (680)
------- -------
Operating income .......................................... 373 1,033
Interest expense........................................... 4 7
Interest income............................................ (45) (73)
Foreign currency translation............................... 23 70
Other expense (income)--net................................ 358 (201)
------- -------
Income before income taxes................................. $ 33 $ 1,230
======= =======
</TABLE>
F-25
<PAGE>
Inside Back Cover
Title: OSCA's Facilities
Background: Aerial photograph of Lafayette headquarters
Caption: Aerial photograph of our headquarters, and assembly/distribution
facility, in Lafayette, Louisiana.
Inset: Picture of C-Port 1 facility
Caption: Our fluid distribution plant at the C-Port 1 loading facility at Port
Fourchon, Louisiana.
Inset: Picture of Houston Test Center
Caption: Our downhole tool research facility in Houston, Texas. This facility
provides for critical interaction with customers in the engineering,
manufacturing and testing of tools.
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
5,600,000 Shares
OSCA, Inc.
Class A Common Stock
LOGO OF OSCA, INC.
--------
PROSPECTUS
June 14, 2000
--------
Salomon Smith Barney
Morgan Stanley Dean Witter
Simmons & Company
International
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
