<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission file number 0-30723
OSCA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0868136
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
156 COMMISSION BLVD.
LAFAYETTE, LA 70508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 337-837-6047
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class A - 5,600,000 Shares as of June 30, 2000
Class B - 8,400,000 Shares as of June 30, 2000
<PAGE> 2
Part I - Financial Statements
OSCA, INC.
CONSOLIDATED BALANCE SHEETS
(thousands)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 6,360 $ 3,898
Accounts and notes receivable, less allowance for 25,177 20,800
doubtful accounts of $654 in 2000 & $649 in 1999
Inventories 22,434 19,321
Prepaid expenses and other current assets 1,396 1,573
Deferred income taxes 1,659 1,465
Income taxes receivable -- 128
--------- ---------
Total current assets $ 57,026 $ 47,185
--------- ---------
Property and equipment, net 44,750 46,928
Goodwill and other intangibles, net 7,465 7,574
--------- ---------
Total Assets $ 109,241 $ 101,687
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 7,838 $ 6,496
Dividend note payable to Great Lakes Chemical Corp. 65,000
Accrued liabilities 4,711 5,051
Income taxes payable 765
Current portion of notes payable 118 118
--------- ---------
Total current liabilities $ 13,432 $ 76,665
--------- ---------
Note payable - related party 236 354
Long-term Debt 31,446
Deferred Income Taxes 1,573 957
Due to Great Lakes Chemical Corp. 2,545 43,641
--------- ---------
Total liabilities $ 49,232 $ 121,617
--------- ---------
Stockholders' equity (deficit):
Class A common stock, $.01 par value, 25,000,000 shares authorized 5,600,000 56 --
shares issued and outstanding
Class B common stock, $.01 par value, 40,000,000 shares authorized 8,400,000 84 84
Issued and outstanding
Additional Paid in Capital 79,331 690
Retained earnings (deficit) (16,929) (19,282)
Accumulated other comprehensive income (loss) (2,533) (1,422)
--------- ---------
Total stockholders' equity (deficit) 60,009 (19,930)
--------- ---------
Total liabilities and stockholders' equity $ 109,241 $ 101,687
========= =========
</TABLE>
2
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OSCA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ ------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues $28,882 $23,593 $55,383 $46,616
Operating expenses:
Cost of sales 20,956 19,706 41,336 38,154
Selling, administrative and research expenses 5,253 5,036 10,242 9,139
Amortization of intangibles 100 99 199 198
------------- -------------- ------------- ------------
Total operating expenses 26,309 24,841 51,777 47,491
------------- -------------- ------------- ------------
Operating income (loss) 2,573 (1,248) 3,606 (875)
Interest and other expense 125 2 132 262
Interest and other income 300 348 504 268
------------- -------------- ------------- ------------
Income (loss) before income taxes 2,748 (902) 3,978 (869)
Income taxes (benefit) 1,084 (550) 1,625 (530)
------------- -------------- ------------- ------------
Net income (loss) $ 1,664 $ (352) $ 2,353 $ (339)
============= ============== ============= ============
Earnings per share:
Basic $ 0.18 $ (0.04) $ 0.27 $ (0.04)
Diluted $ 0.18 $ (0.04) $ 0.27 $ (0.04)
Average shares outstanding 9,333 8,400 8,866 8,400
</TABLE>
3
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OSCA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,353 $ (339)
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization of intangibles 4,109 3,370
Deferred income taxes 422
Loss (gain) on sale of fixed assets (227) 37
Changes in operating assets and liabilities:
Accounts receivable, net (4,377) 4,087
Inventories (3,113) 3,769
Other current assets 177 (660)
Accounts payable 1,342 (4,802)
Intercompany changes (41,096) (1,361)
Accrued and other liabilities 553 (2,550)
-------- --------
Net Cash (Used) Provided by Operating Activities (39,857) 1,551
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (2,045) (5,151)
Purchase of other assets (90) (14)
Proceeds from the sales of fixed assets 483 1,442
-------- --------
Net Cash Used in Investing Activities (1,652) (3,723)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings and (repayments) from notes payable, net 31,328 (97)
Proceeds from stock options exercised 78,697 --
Cash dividends to Great Lakes Chemical Corp. (65,000) --
-------- --------
Net Cash Provided by (used in) Financing Activities 45,025 (97)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 3,516 (2,269)
Cash and Cash Equivalents at Beginning of Year 3,898 5,568
Other non-cash reconciling items:
Cumulative translation adjustment (1,054) (1,876)
-------- --------
Cash and Cash Equivalents at End of Period $ 6,360 $ 1,423
======== ========
Parentheses indicate decrease in cash and cash equivalents.
</TABLE>
4
<PAGE> 5
OSCA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 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 comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and
footnotes thereto, included in Form S-1.
NOTE 2: SPECIAL CHARGES
During 1998, in connection with a Great Lakes repositioning plan, OSCA
recognized a special charge of $13.4 million or $8.3 million after income taxes.
Of the $13.4 million, $10.1 million was recorded for actions taken in the third
quarter of 1998 and another $2.6 million 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
$2.6 million.
A summary of spending against the reserve for special charges since March 31,
2000 is as follows (in thousands):
SPENDING
3 MONTHS 3 MONTHS
DEC 31 ENDED ENDED JUN 30
1999 3/31/00 6/30/00 2000
-------------------------------------
Lease costs (Completion Services) $1,783 $756 $136 $891
Other (Completion Fluids) 69 -- -- 69
------ ---- ---- ----
$1,852 $756 $136 $960
====== ==== ==== ====
5
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NOTE 3: INVENTORIES
The major components of OSCA's inventories are as follows:
JUNE 30, DEC 31,
---------- ----------
2000 1999
---------- ----------
(IN THOUSANDS)
Raw materials $ 70 $ 195
Finished products 22,364 19,126
---------- ----------
$ 22,434 $ 19,321
========== ==========
NOTE 4: INCOME TAXES
A reconciliation of the U. S. Federal income tax rate to the effective income
tax rate follows:
SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
-------- --------
U.S. Federal income tax rate 35.0% 35.0%
State income taxes (net of federal benefit) 1.3 1.0
Foreign taxes 1.9 16.3
Goodwill amortization 1.2 4.6
Other 1.4 3.7
-------- --------
40.8% 60.6%
======== ========
NOTE 5: COMPREHENSIVE INCOME
Comprehensive income was as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------- ------------------
2000 1999 2000 1999
------ ----- ------ -------
Net income (loss) $1,664 $(352) $2,353 $ (339)
Other comprehensive (loss) (770) (366) (1,111) (1,778)
------ ----- ------ -------
Comprehensive income (loss) $ 894 $(718) $1,242 $(2,117)
====== ===== ====== =======
6
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NOTE 6: EARNINGS PER SHARE
The computation of basic and diluted earnings per share is determined by
dividing net income as reported as the numerator, by the number of shares
included in the denominator as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share 9,333 8,400 8,866 8,400
(weighted - average shares)
Effect of dilutive securities 6 0 3 0
--------- --------- --------- ---------
Denominator for diluted earnings per share 9,339 8,400 8,869 8,400
========= ========= ========= =========
</TABLE>
NOTE 7: CHANGE IN CAPITAL DUE TO INITIAL PUBLIC OFFERING
During June of 2000, OSCA sold 5,600,000 shares of Class A common stock at
$15.50 per share, in an Initial Public Offering The sale represented 40% of the
ownership in OSCA. In addition, OSCA borrowed $31.0 million against a $40.0
million credit facility established in conjunction with the Initial Public
Offering.
The source and use of these funds are as follows:
(in thousands)
SOURCE OF FUNDS
Sale of stock $ 86,800
Underwriters commission & fees 6,076
Other IPO costs 2,027
---------
Net proceeds from sale 78,697
Bank borrowings 31,000
---------
Total sources of funds $ 109,697
=========
USE OF FUNDS
Payment of dividend note payable to Great Lakes $ 65,000
Intercompany payable to Great Lakes 44,697
---------
Total use of funds $ 109,697
=========
The net proceeds from the sale of the Class A shares increased common stock by
$56,000 and increased paid in capital by $78.6 million.
7
<PAGE> 8
NOTE 8: SEGMENT INFORMATION
OSCA is organized into three global business segments: Completion Fluids,
Completion Services and Downhole Completion Tools. The units are organized to
offer a distinct but synergistic group of products, technology and services.
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.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
(IN THOUSANDS)
Net revenues by segment to external
customers:
Completion Fluids $11,568 $13,599 $24,734 $27,111
Completion Services 9,216 5,332 17,662 11,656
Downhole Completion Tools 8,098 4,662 12,987 7,849
------- ------- ------- -------
$28,882 $23,593 $55,383 $46,616
======= ======= ======= =======
Segment operating income (loss):
Completion Fluids $ 1,190 $ 301 $ 1,616 $ 1,715
Completion Services 21 (1,121) 1,112 (1,137)
Downhole Completion Tools 2,028 321 2,224 290
------- ------- ------- -------
Total operating income of 3,239 (499) 4,952 868
reportable segment
Corporate and Other (666) (749) (1,346) (1,743)
------- ------- ------- -------
Operating income (loss) 2,573 (1,248) 3,606 (875)
Interest and other expense 125 2 132 262
Interest and other income 300 348 504 268
------- ------- ------- -------
Income (Loss) before income taxes $ 2,748 $ (902) $ 3,978 $ (869)
======= ======= ======= =======
NOTE 9: SUBSEQUENT EVENTS
In July 2000, OSCA sold 840,000 shares of its Class A common stock at $15.50 per
share to cover over allotments. Net proceeds from this sale have been paid to
Great Lakes.
NOTE 10: CONTINGENCIES
There have been no significant subsequent developments related to the
contingencies reported in the Company's Form S-1.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------
This Management's Discussion and Analysis of Results of Operations and Financial
Condition should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
S-1 and the unaudited interim consolidated financial statements included
elsewhere in this report. All reference to earnings per share contained in this
report are diluted earnings per share unless otherwise noted.
The following table sets forth the percentage relationship to net revenue of
certain income statement items for the Company's operations:
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(%) (%)
Net revenue 100.0 100.0 100.0 100.0
Gross profit 27.4 16.5 25.4 18.1
Selling, general & admin. expenses 18.5 21.8 18.9 20.0
Operating income 8.9 (5.3) 6.5 (1.9)
Interest and other expense 0.4 0 0.2 .6
Interest and other income 1.0 1.5 0.9 .6
Income before income taxes 9.5 (3.8) 7.2 (1.9)
Income taxes 3.7 (2.3) 2.9 (1.2)
Net income (loss) 5.8 (1.5) 4.3 (0.7)
===== ===== ===== =====
RESULTS OF OPERATIONS
Revenues in the second quarter increased 22.5% to $28.9 million from $23.6
million compared to the corresponding period in 1999. Volume expansion
accompanied by moderate price increases in Completion Services and Downhole
Tools drove the increase. Pricing in Completion Fluids appeared to stabilize
during the period.
Costs of goods sold increased 6.1% to $20.9 million from $19.7 million, however
gross profit margin improved to 27.4% from 16.5% as compared to second quarter
1999 reflecting the effect of the increased volume, favorable product mix and
price improvement.
Selling, general and administrative expenses increased to $5.4 million over the
prior year period of $5.1 million. This increase is primarily due to the
addition of technical personnel required to support increasing exploration and
production activity, particularly in the Gulf of Mexico.
9
<PAGE> 10
Operating income improved to $2.6 million for the reporting period as compared
to an operating loss of ($1.2) million last year. Net income was $1.7 million,
or $0.18 per share compared to a net loss of ($0.4) million or ($.04) per share
one year ago.
For the first six months, revenues increased 19% to $55.4 million from $46.6
million one year ago. The increase was primarily due to rising well completion
activity in the Gulf of Mexico driven by high commodity prices for oil and gas.
Net income for the six months was $2.4 million, or $0.27 per share, as compared
to a net loss of ($0.3) million or ($.04) per share for the corresponding period
last year.
Interest and other income was $0.3 million, for the three months ended June 30,
2000 equivalent to that for the same period in 1999. Interest and other expense
increased $0.1 million for the three months ended June 30, 2000 from the same
period last year due to the $31.0 million interest bearing loan established in
June of 2000.
SEGMENT INFORMATION
Set forth below is a discussion of the operations of the Company's business
segments: Completion Fluids, Completion Services and Downhole Completion Tools.
Operating income, which is the income measure the company uses to evaluate
business segment performance, represents net sales less costs of products sold,
selling, general and administrative expenses.
COMPLETION FLUIDS BUSINESS UNIT
The Completion Fluids business unit is a market leader in the sale and service
of high-density brine completion fluids and related onsite fluid maintenance
services including filtration, engineering and performance additives. Results
for the quarter and first six months follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net revenues $11.6 $13.6 $24.7 $27.1
Operating income $ 1.2 $ 0.3 $ 1.6 $ 1.7
Completion Fluids revenue for the quarter decreased 14.9% to $11.6 million
compared to $13.6 million one year ago, reflecting lower selling prices and
curtailed activity from two of the Company's contract customers. However,
operating income increased 300% to $1.2 million from $0.3 million due to
improved product mix led by sales of high-value proprietary fluid systems.
For the six months ended in June, Revenues decreased 8.8% to $24.7 million from
$27.1 million a year ago. As in the reporting quarter, this reflects lower
selling prices for conventional fluid systems. Operating income was down 5.8% to
$1.6 million compared to $1.7 million last year.
Completion Fluids has been operating under intense pricing pressure resulting in
price erosion of 10% since the second quarter of 1999. Prices appeared to
stabilize during the quarter. At the same time OSCA's focus on high demand
completions and proprietary products contributed to an operating margin
10
<PAGE> 11
improvement of 8% over the corresponding quarter in 1999. This is particularly
noteworthy in view of the price decline in the market.
COMPLETION SERVICES
The Completion Services business unit consists of the Marine Well Service, Skid
Pumping Service and Coiled Tubing Service product lines. Results for the quarter
and first six months follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------- ----------------------
2000 1999 2000 1999
---------- --------- --------- ----------
Net revenues $ 9.2 $5.3 $17.7 $11.7
Operating income $ 0.0 ($1.1) $ 1.1 $(1.1)
Completion Services revenue increased 73.6% versus the second quarter 1999.
Revenues for the first six months increased 51.3% compared to the same period
last year. Second quarter 2000 operating income improved $1.1 million (100%)
from second quarter 1999 and $2.2 million (200.0%) for the first six months.
New contracts in Brazil, market penetration and higher activity levels combined
to drive the improvements in revenue. The increased volumes coupled with higher
selling prices are responsible for the significant improvement in operating
income during the quarter and for the first six months.
DOWNHOLE COMPLETION TOOLS
The Downhole Completion Tools business unit provides downhole sand control tools
and production packers/accessories. Results for the quarter and first six months
follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------- ----------------------
2000 1999 2000 1999
---------- --------- --------- ----------
Net revenues $ 8.1 $4.7 $13.0 $ 7.8
Operating income $ 2.0 $0.3 $ 2.2 $ 0.3
Completion Tools revenues increased 72.3% from second quarter of 1999. Revenues
in the first six months increased 66.7% compared to the corresponding period in
1999. Second quarter 2000 operating income improved $1.3 million (566.7%) from
second quarter 1999 and $1.9 million (633.3%) for the first six months.
11
<PAGE> 12
The significant improvement in revenue and operating income reflects gains in
market share and increased well completion activities. OSCA's expanding
intelligent well completion technology has positioned this business unit as the
front runner in high demand well completions.
FINANCIAL CONDITION & LIQUIDITY
Inventories were $22.4 million at June 30, 2000, an increase of $3.1 million
from year- end and $1.7 million from a year ago. The increase in inventories are
due to higher activity levels in the Downhole Completion Tool business.
Accounts receivable increased $4.4 million to $25.2 million at June 30, 2000, as
compared to December 31, 1999. The increase was due entirely to increases in
revenue as days sales outstanding decreased by 2 days over the prior period.
Current liabilities decreased $63.3 million to $13.4 million at June 30, 2000
from $76.7 million at December 31, 1999. The decrease was primarily attributable
to payment of the dividend note payable to Great Lakes. (See Note 7 to the
Consolidated Financial Statement.)
Long term debt increased to $31.3 million at June 30, 2000, as the company
established a line of credit with Bank One as part of the Initial Public
Offering of Class A common stock. (See Note 7 to the Consolidated Financial
Statement.)
Intercompany payables to Great Lakes decreased $41.1 million to $2.5 million at
June 30, 2000 from $43.6 million at year-end. Proceeds for this reduction came
primarily from the IPO proceeds and the line of credit established as part of
the Initial Public Offering. (See Note 7 to the Consolidated Financial
Statement.)
Capital spending for the first six months amounted to $2.0 million. Spending for
the year is expected to be approximately $4.0 million.
Additional paid in capital increased $78.6 million and common stock increased
$56,000 from year-end. The increase was due to the sale of 5,600,000 shares of
Class A common stock.
FORWARD LOOKING STATEMENT
This report contains forward looking statements involving risks and
uncertainties that affect the Company's operations as discussed in the Form S-1
filed with the Securities and Exchange Commission. Accordingly, there is no
assurance that the Company's expectations will be realized.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities
As discussed in the Registration Statement related to our Initial Public
Offering, we paid the net proceeds from the Initial Public Offering to Great
Lakes as repayment of outstanding indebtedness.
Item 4. Submission of Matters to a Vote of Security Holders
Under Section 228 of the General Corporation Law of the State of Delaware, on
April 26, 2000, Great Lakes Chemical Corporation, as our sole stockholder, by
written consent without a meeting, adopted resolutions approving our Amended and
Restated Bylaws and electing Richard A. Pattarozzi, W. Bernard Pieper and John
L. Whitmire as directors.
Also under Section 228 of the General Corporation Law of the State of Delaware,
on June 6, 2000, Great Lakes Chemical Corporation, as our sole stockholder, by
written consent without a meeting, adopted resolutions:
1. Approving our Amended and Restated Certificate of Incorporation.
2. Appointing Ernst & Young, LLP as our outside independent accounting
firm.
3. Approving the adoption of our 2000 Stock Compensation Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of the report are listed below:
Exhibits Number
(27) Financial Data Schedule
(b) The Company did not file, nor was it required to file, a form 8-K during
the quarter for which this report was filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 9, 2000 By: /s/ Steven J. Brading
---------------- -----------------------------
Steven J. Brading
Vice President & Chief Financial Officer
13
