-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RUEkC3lSOx2melLECq2OBDjjNxV3l+bhrvyzA/U/Ei2Cu+QjSPxKKBGqYtU2eqqT ptwsai5XomvdvUhswJKF9Q== 0000899243-02-002059.txt : 20020719 0000899243-02-002059.hdr.sgml : 20020719 20020717164625 ACCESSION NUMBER: 0000899243-02-002059 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020531 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020717 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BJ SERVICES CO CENTRAL INDEX KEY: 0000864328 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 630084140 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10570 FILM NUMBER: 02704904 BUSINESS ADDRESS: STREET 1: 5500 NW CENTRAL DR CITY: HOUSTON STATE: TX ZIP: 77210 BUSINESS PHONE: 7134624239 MAIL ADDRESS: STREET 1: 5500 NORTHWEST CENTRAL DR STREET 2: 5500 NORTHWEST CENTRAL DR CITY: HOUSTON STATE: TX ZIP: 77092 8-K/A 1 d8ka.txt FORM 8-K/A FOR THE PERIOD 5/31/2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ______________________ Date of Report (Date of earliest event reported): May 31, 2002 BJ SERVICES COMPANY (Exact name of registrant as specified in its charter) Delaware 001-10570 63-0084140 (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation) Identification No.) 5500 Northwest Central Drive Houston, Texas 77092 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 462-4239 ================================================================================ Item 2. Acquisition or Disposition of Assets A current report on Form 8-K, dated and filed June 14, 2002, reported that on May 31, 2002 BJ Services Company acquired OSCA, Inc. This Form 8-K/A amends such current report on Form 8-K to include Item 7(a)(i) Audited Financial Statements of the Business Acquired, Item 7(a)(ii) Unaudited Financial Statements of the Business Acquired, and Item 7(b) Pro Forma Financial Information. Item 5. Other Events and Regulation FD Disclosure On April 4, 2002, a Federal Court jury in Houston, Texas reached a verdict in the lawsuit against OSCA and other defendants (see Note 6 of the notes to the condensed consolidated financial statements in OSCA's quarterly report to shareholders for the fiscal quarter ended March 31, 2002). The jury found OSCA's share of the damages to be approximately $13.3 million. OSCA's claims against various insurers and its former insurance broker remain pending. The insurance coverage issues have been submitted to the Court and we are currently awaiting a decision. In the interim, the litigation against the former broker has been abated. Further, the court has delayed entry of the final judgment of the jury's verdict pending a ruling on the insurance coverage issues. Reference is made to the bromenated products supply agreement between OSCA and Great Lakes Corporation. As part of the OSCA acquisition agreements, Great Lakes agreed to give BJ Services Company a 90-day period following closing in which BJ Services Company can elect to terminate this supply agreement. Item 7. Financial Statements and Exhibits (a)(i) Audited financial statements of the Business Acquired. Report of Independent Auditors The Board of Directors and Stockholders OSCA, Inc. We have audited the accompanying consolidated balance sheet of OSCA, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statement of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides 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, 2001, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Indianapolis, Indiana January 21, 2002, except for Note 17, as to which the date is April 4, 2002 and Note 18, as to which the date is May 31, 2002 -2- OSCA, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share data) - --------------------------------------------------------------------------------
December 31, ------------ 2001 ------------ ASSETS Current Assets Cash and cash equivalents $ 8,487 Accounts and notes receivable, less allowance for 37,497 doubtful accounts of $543 Inventories 28,490 Prepaid expenses and other current assets 1,748 Deferred income taxes 2,311 -------------- Total current assets 78,533 Property and equipment, net 51,256 Goodwill, less accumulated amortization of $4,478 6,572 Other assets 1,425 -------------- Total Assets $ 137,786 ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 15,511 Accrued liabilities 5,242 Income taxes payable 2,117 Current portion of notes payable 118 Due to Great Lakes 4,406 -------------- Total current liabilities 27,394 Notes payable 27,118 Other long-term liabilities 970 Deferred income taxes 3,714 -------------- Total liabilities 59,196 -------------- Commitments and Contingencies Stockholders' Equity Class A common stock, $.01 par value, 25,000,000 shares authorized, 6,945,019 shares issued and outstanding 69 Class B common stock, $.01 par value, 40,000,000 shares authorized, 7,900,000 shares issued and outstanding 79 Additional paid-in capital 90,876 Retained deficit (10,565) Accumulated other comprehensive loss (1,869) -------------- Total stockholders' equity 78,590 -------------- Total Liabilities and Stockholders' Equity $ 137,786 ==============
See accompanying notes to consolidated financial statements. -3- OSCA, INC. CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) - -------------------------------------------------------------------------------- Year ended December 31, ------------ 2001 ------------ Net revenue $ 176,021 Operating expenses: Cost of goods sold and services 134,620 Selling, general and administrative 23,203 Amortization of intangibles 453 ---------- Total operating expenses 158,276 ---------- Operating income 17,745 Interest expense 1,512 Interest income (285) Foreign currency losses 368 Other expense - net 418 ---------- Income before income taxes 15,732 Income tax provision 6,012 ---------- Net income $ 9,720 ========== Earnings per share: Basic $ 0.66 Diluted $ 0.65 Weighted-average shares outstanding 14,841 Weighted-average shares outstanding assuming dilution 14,909 See accompanying notes to consolidated financial statements. -4- OSCA, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) - --------------------------------------------------------------------------------
Accumulated Additional Retained Other Common Paid-in Earnings Comprehensive Comprehensive Stock Capital (Deficit) Income (Loss) Income --------- ------------ ------------ ------------- ------------- Balance at January 1, 2001 $ 148 $ 90,798 $ (20,285) $ (1,940) Net income 9,720 $ 9,720 Exercise of stock options 78 For. currency trans. adj. 71 71 --------- ------------ ------------ --------- --------- Balance at Dec. 31, 2001 $ 148 $ 90,876 $ (10,565) $ (1,869) $ 9,791 ========= ============ ============ ========= =========
See accompanying notes to consolidated financial statements. -5- OSCA, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) - --------------------------------------------------------------------------------
Year ended December 31, ------------ 2001 ------------ Cash flows from operating activities: Net income $ 9,720 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangibles 9,152 Deferred income taxes 200 Loss on sale of property and equipment 61 Changes in operating assets and liabilities: Accounts and notes receivable, net 3,086 Inventories (1,276) Prepaid expenses and other current assets (424) Accounts payable 4,019 Due to Great Lakes 1,113 Accrued and other liabilities 1,550 Other (135) ---------- Net cash provided by operating activities 27,066 Cash flows from investing activities: Additions to property and equipment (19,765) Proceeds from sale of property and equipment 1,059 ---------- Net cash used in investing activities (18,706) Cash flows from financing activities: Repayments from notes payable, net (3,978) Proceeds from exercise of stock options 78 ---------- Net cash used in financing activities (3,900) ---------- Net increase in cash and cash equivalents 4,460 Cash and cash equivalents at beginning of year 3,551 Effect of exchange rate changes on cash and cash equivalents 476 ---------- Cash and cash equivalents at end of year $ 8,487 ==========
See accompanying notes to consolidated financial statements. -6- OSCA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. Organization and Basis of Presentation See Note 18 regarding the May 31, 2002 sale of the Company. OSCA, Inc., including its consolidated subsidiaries, headquartered in Lafayette, Louisiana, is a partially-owned subsidiary of Great Lakes Chemical Corporation. OSCA provides specialized oil and natural gas well completion fluids, completion services and downhole completion tools to major oil companies and independent exploration and production companies, primarily in the Gulf of Mexico and in select international markets. OSCA has operations in the United States, United Kingdom, Norway, Italy and Central and South America. Prior to June 15, 2000, OSCA was a wholly-owned subsidiary of Great Lakes. In June 2000, Great Lakes sold 40% of its ownership interest in OSCA as part of an initial public offering. The transaction was effected through a recapitalization of OSCA whereby two classes of common stock were created (Class A and Class B). The Class A common stock was offered to the public as part of the IPO and Great Lakes retained 100% ownership of the Class B common stock. In July 2000, the over-allotment option granted to the underwriters was exercised and resulted in an additional distribution of stock that reduced Great Lakes' ownership by 3.4% to 56.6%. During 2001, Great Lakes sold 500,000 shares of OSCA stock reducing its Common Stock ownership to 53.2% as of December 31, 2001. Upon sale, these shares were automatically converted from Class B shares to Class A shares of OSCA's Common Stock. NOTE 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include all the accounts of OSCA and its subsidiaries as described above. All of OSCA's subsidiaries are wholly owned. All significant intercompany accounts and transactions are eliminated in consolidation. Significant accounts and transactions with Great Lakes are disclosed as related party transactions. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue from sales of products is recognized at the time title passes to the customer. Title passes upon delivery to the customer. Revenue from services is recognized as the services are provided to the customer. OSCA provides sales allowances for sales credits issued to customers in the normal course of business. The allowances are recorded as reductions of sales and are included in net revenue in the accompanying consolidated statement of income. The reduction included in net revenue was $4.7 million for the year ended December 31, 2001. Cash Equivalents OSCA considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. -7- Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. OSCA provides a reserve for slow moving and obsolete items. The reserve is based on a review of items which have not moved for a certain length of time. Property and Equipment Property and equipment is stated at cost. Improvements are capitalized and depreciated over the period of benefit. Maintenance and repairs are charged to operating expenses as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets which are as follows: . buildings and improvements -- 20-39 years . machinery and equipment -- 3-15 years Upon retirement or other disposal of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts. Any gains or losses are included in results of operations. Goodwill Goodwill, which represents the excess of cost over fair value of net assets acquired, is amortized using the straight-line method over 40 years Impairment of Long-Lived Assets When events or circumstances indicate that the carrying amount of long-lived assets to be held and used or intangible assets might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined based on discounted cash flow or appraised values, as appropriate. Foreign Currency Translation The results of operations for foreign subsidiaries, other than those located in highly inflationary countries, are translated into U.S. dollars using the average exchange rates during the year, while assets and liabilities are translated using end-of-period exchange rates. Resulting translation adjustments are recorded as foreign currency translation adjustments in stockholders' equity. Foreign currency gains and losses, resulting from transactions and resulting from translation of subsidiaries in highly inflationary countries (Venezuela), are determined using a combination of current and historical rates and are reported in the consolidated statement of income. Effective January 1, 2002, Venezuela was determined to no longer be hyperinflationary and therefore translation adjustments will be recorded in stockholders equity. Research and Development Research and development costs are expensed as incurred. OSCA's expenditures for product development and engineering were approximately $0.5 million for the year ended December 31, 2001. Income Taxes OSCA uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities in the balance sheet. The liability method requires that deferred income taxes reflect the tax -8- 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 and no provision for U.S. federal and state income taxes on those earnings or translation adjustment has been provided. Stock-based Compensation OSCA accounts for its stock-based compensation programs using the intrinsic value method of accounting established by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees (APB 25)" and related interpretations. Compensation cost for stock awards, if any, is measured as the excess of the quoted market price of OSCA's stock at the date of grant over the amount the employee must pay to acquire the stock. New Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. OSCA will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $0.2 million ($.01 per basic share) per year. During 2002, OSCA will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of OSCA. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. OSCA expects to adopt FAS 144 as of January 1, 2002 and has not determined the effect, if any, the adoption of FAS 144 will have on its financial position and results of operations. NOTE 3. Related Party Transactions OSCA purchases brominated products from Great Lakes, which constitute a significant portion of the fluid products sold by OSCA. At the time of the IPO, OSCA entered into a brominated products supply agreement with Great Lakes. Under this agreement, Great Lakes has committed to provide OSCA with all or substantially all of OSCA's requirements for brominated products, subject to a cap. OSCA has committed to purchase at least 80% of its requirements for these products from Great Lakes, subject to a minimum. The price will be determined based on Great Lakes' cost plus a margin; however, during contract years three, four and five and beyond, if OSCA is able to negotiate a lower price from a third party supplier, Great Lakes must either meet that price or release OSCA from 40%, 60% and 100%, respectively, of its annual requirements. A progression of the related party account with Great Lakes is as follows: Balance at January 1, 2001 $ 3,293 Inventory purchases 17,878 Interest expense 60 Net cash paid to Great Lakes (17,064) Other 239 ---------- Balance at December 31, 2001 $ 4,406 ========== -9- NOTE 4. Inventories The major components of OSCA's inventories by business segment are as follows: December 31, --------------- 2001 --------------- (in thousands) Downhole Completion Tools Finished Products $ 16,544 Raw Materials 609 Reserves for obsolescence (800) Completion Fluids Finished Products 10,597 Supplies 763 Reserves for obsolescence (450) Completion Services Finished Products 973 Supplies 254 -------- $ 28,490 ======== NOTE 5. Property and Equipment Property and equipment consisted of the following: December 31, -------------- 2001 -------------- (in thousands) Land $ 1,925 Buildings and improvements 9,872 Machinery and equipment 71,798 Construction in progress 10,331 -------- Total property and equipment 93,926 Accumulated depreciation (42,670) -------- Net property and equipment $ 51,256 ======== Construction in progress at December 31, 2001 included approximately $6.0 million related to OSCA's expansion in the land completion services segment. In addition, approximately $2.2 million related to a new research and design facility. Depreciation expense included in the consolidated statement of income was $8.7 million for the year ended December 31, 2001. Maintenance and repairs charged to costs and expenses was $6.7 million for the same period. -10- NOTE 6. Debt and Credit Arrangements Long-term debt consists of the following: December 31, -------------- 2001 -------------- (in thousands) Note payable, individual $ 236 Notes payable, bank 27,000 ------- 27,236 Less current maturities 118 ------- $27,118 ======= The note payable, individual was issued as a result of a business acquisition in March 1998. The note payable is a non-interest bearing note and is payable in five equal installments of $118,000 beginning on March 1, 1999. The individual to whom the note is payable is the former owner of the acquired business and is currently employed by OSCA. The notes payable to bank are borrowed against a credit facility of $40.0 million established in conjunction with the IPO. The debt arrangement consists of two components, a revolving loan and a swing line loan. As of December 31, 2001, the revolving loan portion outstanding was $27.0 million and matures on June 20, 2003 with interest at LIBOR plus 0.5% (4.23% at December 31, 2001). At December 31, 2001 no borrowings were outstanding on the swing loan which bears interest at LIBOR plus 1.0%. OSCA also incurs a commitment fee of 0.15% per annum for any unused portion of the credit facility. The unused portion is the total credit facility minus the revolving loan portion minus any outstanding letters of credit. There were no outstanding letters of credit at December 31, 2001. The obligations under this facility are guaranteed by Great Lakes to whom OSCA pays a fee of 0.15% per annum of the total credit facility. OSCA is subject to various financial covenants including a maximum Funded Indebtedness to EBITDA ratio, a minimum Fixed Charge Coverage ratio and a minimum Tangible Net Worth ratio. OSCA was in compliance with these covenants as of December 31, 2001. Based on long-term debt outstanding at December 31, 2001, maturities of long-term debt are as follows (in thousands): 2002 $ 118 2003 $27,118 Interest paid was approximately $1.4 million for the year ended December 31, 2001. NOTE 7. Commitments Operating Leases OSCA leases all three of its deepwater service vessels, land at several of its operating facilities and various office facilities and equipment. Rent expense incurred under these operating lease agreements was approximately $12.2 million for the year ended December 31, 2001. -11- Future minimum lease obligations under noncancelable leases at December 31, 2001 are as follows: (in thousands) 2002 $5,212 2003 1,189 2004 491 2005 284 2006 and thereafter 418 ------ $7,594 ====== The future minimum lease payments listed above exclude operating leases having initial or remaining noncancelable lease terms of one year or less. Other Commitments OSCA is expanding its land based completion services segment and has purchase commitments at December 31, 2001 for approximately $9.0 million related to that expansion. NOTE 8. Stockholders' Equity Voting Rights Holders of Class B common stock have ten votes per share. Holders of Class A common stock have one vote per share. Share Activity The changes in common stock shares outstanding since January 1, 2001 are reflected below:
Class A Class B Total Common Common Common Stock Stock Stock ----------------------------------------------- Balance at January 1, 2001 6,440,000 8,400,000 14,840,000 Conversion of Shares 500,000 (500,000) Exercise of Options 5,019 5,019 ---------- ---------- ---------- Balance at December 31, 2001 6,945,019 7,900,000 14,845,019 ========== ========== ==========
NOTE 9. Employee Benefit Plans 401k Plan OSCA sponsors the OSCA Savings Plan (the "OSCA Plan") for its employees. The OSCA Plan has both 401(k) and profit sharing features. Under the plan, employees may contribute from 1% to 18% of their salary, limited to a maximum annual amount as set periodically by the Internal Revenue Service. OSCA matches 75% of the employee contribution up to 6% of annual compensation. OSCA also may elect to make a profit sharing contribution in an amount determined at its discretion, although no profit sharing contribution is required. Vesting of employer matching and profit sharing contributions occurs over a period of six years. OSCA's cost of matching contributions to the OSCA Plan was $1.0 million in 2001. -12- Stock Option Plan In June 2000, OSCA established a stock compensation plan for officers, employees and non-employee directors. The maximum number of shares authorized under the plan was 1.0 million shares. As of December 31, 2001, there were approximately 291,000 shares available for future grant. To date, OSCA has issued both restricted stock and nonqualified stock options under the plan. The restricted stock vests 100% on the fifth anniversary from the grant date. As of December 31, 2001, there were 41,350 shares of restricted stock outstanding, with none being vested. The nonqualified stock options vest over three years and expire 10 years from the date of grant. A summary of OSCA's stock option activity and related information for the year ended December 31 follows:
Weighted-average Shares Under Exercise Price Options per Share --------------- ---------------- Outstanding at Beginning of Year 470,850 $15.50 Granted 224,900 $21.53 Exercised (5,019) $15.50 Forfeited (28,043) $17.37 ------------ Outstanding at End of Year 662,688 $17.47 ============ Exercisable at End of Year 148,087 $15.50
Exercise price for options outstanding at December 31, 2001 ranged from $15.50 per share to $21.81 per share. The weighted-average remaining contractual life of those options is 8.71 years. OSCA follows Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25), to account for its stock option plan. As determined by applying the requirements of APB 25, no compensation cost is recorded because the price of the employees' stock options equals the market value of the underlying stock at the grant date. An alternative method of accounting for stock options is SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 requires that pro forma information regarding net income and earnings per share be presented as if OSCA had accounted for its employee stock options under the fair value method. The fair value for applicable options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: Risk-free interest rates 4.84% Dividend yield 0.00% Volatility factors .709 Expected life of the option 5 years For purposes of pro forma disclosure, the estimated fair value of the option is amortized to expense over the options' vesting period. OSCA's pro forma data under SFAS No. 123 is as follows:
Year Ended ------------------------------------- December 31, 2001 ------------------------------------- in thousands, except per share amounts) Pro forma net income $8,259 Pro forma earnings per share: Basic $ 0.56 Diluted $ 0.55 Weighted-average fair value of options granted per share $13.39
-13- NOTE 11. Income Taxes The components of income (loss) before income taxes are as follows:
Year Ended ----------------- December 31, 2001 ----------------- (in thousands) Domestic $ 16,983 Foreign (1,251) ------------ Total $ 15,732 ============
The components of the income tax provision are as follows:
Year Ended ----------------- December 31, 2001 ----------------- (in thousands) Current: Federal $ 5,507 State 189 Foreign 116 ------------ 5,812 ------------ Deferred: Federal 184 State 16 ------------ 200 ------------ $ 6,012 ============
A reconciliation of the effective income tax rate from the statutory U.S. federal income tax rate is as follows:
Year Ended ----------------- December 31, 2001 ----------------- U.S. federal income tax rate 35.0% State income taxes (net of federal benefit) .7 Foreign taxes .9 Goodwill amortization 1.2 Other .4 ---------- Effective income tax rate 38.2% ==========
-14- Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Components of deferred tax assets and liabilities are as follows:
December 31, 2001 ----------------- (in thousands) Deferred tax assets: Allowance for doubtful accounts $ 201 Inventory 1,497 Accrued liabilities 613 Foreign net operating loss carryforward 1,179 Other deductible temporary differences 107 ---------- Total deferred tax assets 3,597 Valuation allowance for deferred tax assets (815) ---------- Deferred tax assets after valuation allowance 2,782 Deferred tax liabilities: Property and equipment (4,185) ---------- Net deferred tax liability $ (1,403) ==========
At December 31, 2001, net operating loss (NOL) carryforwards of approximately $3.4 million were available to be applied against future taxable income of OSCA's subsidiaries, primarily for Venezuela and Mexico. The Venezuela NOL's are available through 2004. The Mexican NOL's are available through 2011. The NOL carryforwards relate to losses of these subsidiaries and can only be used to offset their taxable income. For financial reporting purposes, valuation allowances of $0.4 million were recognized in the year ended December 31, 2001 to offset the net deferred tax asset related to the NOL carryforwards. OSCA paid income taxes of approximately $4.0 million in 2001. NOTE 11. Earnings Per Share The computation of basic and diluted earnings per share is determined by dividing net income by the number of shares included as follows:
Year Ended -------------------------------------- December 31, 2001 -------------------------------------- (in thousands, except per share amounts) Numerator: Net income $ 9,720 ========= Denominator: Weighted-average shares - basic 14,841 Effect of dilutive securities: Stock options 68 --------- Weighted-average shares - diluted 14,909 ========= Basic EPS $ 0.66 Diluted EPS $ 0.65
NOTE 12. Risk Management Activities OSCA is exposed to fluctuations in oil and natural gas prices, foreign currency rates and interest rates which can affect the revenue, cost of operating, investing and financing. OSCA's management has not used financial and commodity-based derivative contracts to reduce the risk related to those fluctuations in overall earnings and cash flow. -15- Commodity Price Risk The level of oil and natural gas exploration and development activity is affected by both short-term and long-term trends in oil and natural gas prices which, in turn, are related to the demand for petroleum products and the current availability of oil and natural gas resources. Any reduced activity could result in declines in the demand for the products and services provided by OSCA. Concentration of Credit Risk The market and customers for OSCA's products and services are primarily major oil companies and independent exploration and production companies. OSCA performs ongoing credit evaluations of its customers and provides allowances for probable credit losses when necessary. Collateral is generally not required. Fair Value of Financial Instruments The carrying value of OSCA's financial instruments, which include primarily cash and cash equivalents, accounts receivable and long-term debt, approximate fair value. Foreign Currency Exchange Rate Risk OSCA has foreign currency exchange rate risk resulting from operations in Europe and Latin America. Historically, OSCA has not hedged its exposure to currency rate changes or foreign currency exchange rate risk. Interest Rate Risk OSCA is subject to interest rate risk on its long-term debt arrangements. Historically, OSCA has not hedged its exposure to interest rate risk. NOTE 13. Segment Information OSCA is organized into three global business segments: Completion Fluids, Completion Services and Downhole Completion Tools. The units are organized to offer a distinct but synergistic group of products, technology and services. The completion fluids segment sells and recycles clear completion fluids and performs related fluid maintenance services, such as filtration and reclamation. OSCA also provides a broad line of specially formulated and customized completion fluids. Completion fluids are used to control well pressure, clean the well subsequent to drilling activities and facilitate other completion activities, while minimizing reservoir damage. The completion services segment provides sand control pressure pumping, marine well services and coiled tubing services to perform gravel packing, frac packing and well stimulation. The purpose of sand control pressure pumping is to force fluids, and gravel pack sand into the well to act as a downhole filter to inhibit the flow of sand into the well. Coiled tubing is utilized to convey chemicals that stimulate the well or deliver downhole equipment during well completion, or during the production phase in order to stimulate well production rates. Completion services are provided either by portable equipment placed directly on a well, rig or platform or delivered via a fleet of advanced marine vessels. The downhole completion tools segment designs, builds and installs downhole completion tools for wells that are primarily used to control the migration of reservoir sand into the well. The downhole completion tools help to prevent the deterioration of the reservoir. Assets included in Unallocated Assets principally are cash and cash equivalents; accounts and notes receivable; deferred income taxes; goodwill and other assets. Segment assets primarily include inventory and property and equipment. Geographic sales information is reported based on the location that invoices the external customer. Geographic long-lived assets are grouped by the location of the reporting country. -16- OSCA evaluates performance and allocates resources based on operating income which represents net revenue less cost of goods sold and services and allocated selling, general and administrative expenses, including depreciation. Intersegment net revenue and transfers are recorded at OSCA's cost; there is no intercompany income or loss on intersegment net revenue or transfers. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Year Ended ------------------ December 31, 2001 ------------------ (in thousands) Net Revenue by Segment to External Customers: Completion Fluids $ 71,551 Completion Services 51,500 Downhole Completion Tools 52,970 --------------- $ 176,021 =============== Segment Operating Income (Loss): Completion Fluids $ 6,176 Completion Services 4,210 Downhole Completion Tools 11,397 --------------- 21,783 Corporate and Other (4,038) --------------- $ 17,745 =============== Segment Assets: Completion Fluids $ 23,123 Completion Services 27,347 Downhole Completion Tools 22,020 Corporate and Other 7,257 --------------- 79,747 Unallocated Assets 58,039 --------------- $ 137,786 =============== Fixed Asset Additions: Completion Fluids $ 2,929 Completion Services 13,209 Downhole Completion Tools 1,286 Corporate and Other 2,341 --------------- $ 19,765 =============== Depreciation Expense: Completion Fluids $ 1,721 Completion Services 4,758 Downhole Completion Tools 667 Corporate and Other 1,598 --------------- $ 8,744 =============== Geographic Information: Net Revenue by Segment to External Customers: United States $ 147,869 Foreign 28,152 --------------- $ 176,021 =============== Long-lived Assets: United States $ 53,805 Foreign 5,448 --------------- $ 59,253 ===============
NOTE 14. Economic Dependency In 2001, one customer, Chevron USA, Inc., accounted for approximately 10% of OSCA's net revenue. -17- NOTE 15. Contingencies Newfield Case On September 18, 2000, OSCA was served with notice that a lawsuit was filed against it and other named defendants on September 1, 2000 in the District Court of Harris County, Texas. The action is brought by certain underwriting syndicates of Lloyd's of London who claim to be subrogated to the claim of their insureds, Newfield Exploration Company, Apache Oil Corporation, Continental Land & Fur, and Fidelity Oil ("Plaintiffs"). The other defendants include High Pressure Integrity, Inc. and Chalmers, Collins & Alwell, Inc. On September 8, 2000, OSCA filed a lawsuit against the Plaintiffs and the other defendants in the United States District Court, Western District of Louisiana, Lafayette-Opelousas Division. Other actions have also been filed in connection with the same circumstances. All actions have now been consolidated into one proceeding in the United States District Court, Southern District of Texas. The lawsuits relate to a blowout of a well situated in the Gulf of Mexico, offshore Louisiana, for which OSCA and others were engaged to perform specific workover operations. In the Texas case, Plaintiffs seek damages, interest and other costs in the approximate amount of $21.4 million, alleging that OSCA and the other defendants breached their contracts to perform workover operations, and were negligent in performing those operations. OSCA alleges negligence against the Plaintiffs and other defendants and seeks damages, interest, costs and general and equitable relief. OSCA has amended its complaint to include Cardinal Wireline Service, who was performing wireline operations aboard the platform immediately before the blowout. OSCA has also filed a third party demand against its underwriters and insurance broker in support of coverage of claims asserted against OSCA in the Newfield matter. OSCA has denied that it breached its contract or was negligent and intends to vigorously defend itself and to prosecute the merits of its claims. Mediation has been set in the combined lawsuits for March 5, 2002, and a trial date of March 14, 2002 has been set. On February 22, 2002, the court issued preliminary rulings in the case, one of which was partial summary judgment in favor of Newfield and against OSCA on the issue of breach of contract, and one of which was a dismissal of OSCA's claims against Cardinal Wireline Service. The court specifically stated, and OSCA believes, that this ruling is not dispositive as to whether OSCA's actions caused the blowout and whether OSCA is therefore liable for damages to Newfield. OSCA intends to defend the case vigorously. While it is not possible to predict the outcome of legal actions brought by or against OSCA, management is unable to determine whether the outcome of the legal actions will have a material adverse effect on the results of operations in any particular period. However, management does not believe that the outcome will have a material adverse effect on OSCA's consolidated financial position or liquidity. See Note 17. Insurance OSCA is partially self-insured for employee health insurance claims and incurs a maximum of $80,000 per employee under medical claims. While OSCA has workers compensation and automobile liability insurance coverage, both policies have a deductible of $250,000 per incident. Although OSCA believes that adequate reserves have been provided for expected liabilities arising from its insurance obligations, management's estimates of these liabilities may change in the future as circumstances develop. General OSCA may be subject to various legal proceedings, claims and litigation arising from a variety of matters including governmental regulations, environmental matters, commercial matters, product liability, personal injury, workers' compensation claims and other matters arising out of the ordinary course of its business. In general, while the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists, in the opinion of management, the resolution of these legal proceedings and claims will not have a material adverse effect on OSCA's financial position, liquidity or results of operations. -18- Change of Control OSCA has entered into change in control agreements with several of its executive officers. Under these agreements, OSCA or its successor would make lump sum severance payments to the individuals under certain circumstances. NOTE 16. Acquisition In January of 2002, OSCA completed the acquisition of substantially all of the assets of Ancor Services, Inc. Ancor provided land based well stimulation products and services to oil and natural gas production companies in East Texas and North Louisiana. The purchase price for the assets of approximately $1.9 million was paid utilizing available cash. As part of the acquisition, OSCA also compensated the owners of Ancor for noncompete agreements and consulting services. OSCA paid $0.9 million toward the noncompete agreements at closing and has an obligation to pay another $1.2 million over the next four years. The consulting services of $0.8 million was paid at closing. NOTE 17. Subsequent Event -- Newfield Verdict On April 4, 2002, a Federal Court jury in Houston, Texas reached a verdict in the lawsuit against OSCA and other defendants (see Note 15). The jury found OSCA and the other defendants responsible for those claims and found OSCA's share of the damages to be approximately $13.3 million. As a result, OSCA will record a charge to earnings in this amount in the first quarter of 2002. The Company intends to appeal the verdict. NOTE 18. Subsequent Event - Sale of Company On May 31, 2002, OSCA completed a merger with BJ Services Company. Under the terms of the agreement BJ Services Company acquired all of the outstanding shares of OSCA for $28.00 per share in cash. A special committee of independent members of OSCA's Board reviewed the transaction on behalf of the public shareholders and recommended the transaction to the complete OSCA Board, which then unanimously approved the merger agreement. The transaction has a total equity value of approximately $420.0 million. NOTE 19. Quarterly Data (Unaudited) A summary of the quarterly results of operations for the year ended December 31, 2001 follows: Three Months Ended ------------------------------------------------ March 31 June 30 September 30 December 31 ---------- --------- ------------ ----------- (in thousands, except per share amounts) 2001: Net revenue $ 43,757 $ 41,882 $ 48,537 $ 41,845 Gross profit $ 11,293 $ 10,103 $ 13,128 $ 6,877 Income before income taxes $ 4,548 $ 3,777 $ 7,014 $ 393 Net income $ 2,820 $ 2,413 $ 4,415 $ 72 Earnings per share: Basic $ .19 $ .16 $ .30 $ .01 Diluted $ .19 $ .16 $ .30 $ .01 Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total computed for the year. -19- (a)(ii) Unaudited financial statements of the Business Acquired. OSCA, INC. CONSOLIDATED BALANCE SHEETS Three Months Ended March 31, 2002 (in thousands, except share data) - --------------------------------------------------------------------------------
March 31, December 31, 2002 2001 ----------- ------------ (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 1,221 $ 8,487 Restricted cash 7,228 Accounts and notes receivable, less allowance for doubtful accounts of $693 at March 31 and $543 at December 31 32,856 37,497 Inventories 28,564 28,490 Income tax recoverable 6,207 Prepaid expenses and other current assets 3,944 1,748 Deferred income taxes 2,463 2,311 ---------- ---------- Total current assets 82,483 78,533 Property and equipment, net 57,113 51,256 Goodwill 6,572 6,572 Covenants not to compete, less accumulated amortization of $1,027 at at March 31 and $882 at December 31 2,098 143 Other assets 1,322 1,282 ---------- ---------- Total Assets $ 149,588 $ 137,786 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 15,678 $ 15,511 Litigation reserve 13,408 Accrued liabilities 5,527 5,242 Income taxes payable 85 2,117 Current portion of notes payable 118 118 Due to Great Lakes 2,217 4,406 ---------- ---------- Total current liabilities 37,033 27,394 Notes payable 36,039 27,118 Other long-term liabilities 1,893 970 Deferred income taxes 5,025 3,714 ---------- ---------- Total liabilities 79,990 59,196 ---------- ---------- Stockholders' equity: Class A common stock, $.01 par value, 25,000,000 shares authorized, 6,957,692 shares issued and outstanding at March 31, 2002, 6,945,019 shares issued and outstanding at December 31, 2001 69 69 Class B common stock, $.01 par value, 40,000,000 shares authorized, 7,900,000 shares issued and outstanding at March 31, 2002 and December 31, 2001 79 79 Additional paid-in capital 91,134 90,876 Retained deficit (19,994) (10,565) Accumulated other comprehensive loss (1,690) (1,869) ---------- ---------- Total stockholders' equity 69,598 78,590 ---------- ---------- Total Liabilities and Stockholders' Equity $ 149,588 $ 137,786 ========== ==========
See notes to condensed consolidated financial statements. -20- OSCA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 2002 (in thousands, except per share data) - -------------------------------------------------------------------------------- Three Months Ended March 31, --------------------------- 2002 2001 ----------- ------------ (Unaudited) Net revenue $ 35,570 $ 43,757 Operating Expenses: Cost of goods sold and services 29,473 32,464 Selling, general and administrative 6,219 5,394 Litigation verdict 13,541 Amortization of intangibles 147 99 ----------- ---------- Total operating expenses 49,380 37,957 ----------- ---------- Operating (loss) income (13,810) 5,800 Interest expense (324) (461) Interest income 23 64 Foreign currency losses (214) (277) Other expense, net (121) (578) ----------- ---------- (Loss) income before income taxes (14,446) 4,548 Income tax (benefit) expense (5,017) 1,728 ----------- ---------- Net (loss) income $ (9,429) $ 2,820 =========== ========== (Loss) earnings per share: Basic $ (0.63) $ 0.19 Diluted $ (0.63) $ 0.19 Weighted average shares outstanding 14,851 14,840 Weighted average shares outstanding assuming dilution 14,851 14,911 See notes to condensed consolidated financial statements. -21- OSCA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2002 (in thousands) - --------------------------------------------------------------------------------
Three Months Ended March 31 ----------------------- 2002 2001 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (9,429) $ 2,820 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization of intangibles 2,785 2,144 Deferred income taxes 1,159 1 Loss on sale of property and equipment 78 Tax benefit on exercised stock options 49 Changes in operating assets and liabilities, net of effect of business acquired: Accounts and notes receivable, net 4,641 (3,765) Inventories (38) 660 Income taxes (8,239) Other current assets (2,196) 150 Accounts payable 167 5,905 Litigation reserve 13,408 Due to Great Lakes (2,189) 260 Accrued liabilities (15) 652 Other (911) (331) ---------- ---------- Net Cash (Used in) Provided by Operating Activities (730) 8,496 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (6,994) (3,301) Acquisition of business (1,879) Cash deposited in restricted cash account related to BJ Merger (7,228) Proceeds from the sales of property and equipment 256 21 ---------- ---------- Net Cash Used in Investing Activities (15,845) (3,280) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 209 Net borrowings (repayments) of notes payable 8,921 (3,842) ---------- ---------- Net Cash Provided by (Used in) Financing Activities 9,130 (3,842) ---------- ---------- Net (decrease) increase in Cash and Cash Equivalents (7,445) 1,374 Cash and Cash Equivalents at Beginning of Year 8,487 3,551 Effect of exchange rate changes on cash and cash equivalents 179 60 ---------- ---------- Cash and Cash Equivalents at End of Period $ 1,221 $ 4,985 ========== ==========
See notes to condensed consolidated financial statements. -22- OSCA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2002 (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of OSCA, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. 2. PENDING MERGER AND ACQUISITIONS Pending Merger On February 20, 2002, OSCA announced that it entered into a definitive merger agreement with BJ Services Company. Under the terms of the agreement, BJ Services will acquire all of the outstanding shares of OSCA for $28.00 per share in cash. A special committee of independent members of OSCA's Board reviewed the transaction on behalf of the public stockholders and recommended the transaction to the complete OSCA Board, which then unanimously approved the merger agreement. The transaction has a total equity value of approximately $420.0 million. Great Lakes Chemical Corporation, which owns approximately 53% of OSCA's outstanding Common Stock and holds approximately 92% of the voting power, has delivered its written stockholder consent approving the transaction with BJ Services. The Great Lakes consent constitutes sufficient action by OSCA stockholders to approve the transaction. The transaction is subject to regulatory approvals and OSCA has received those approvals including those under the Hart-Scott-Rodino Antitrust Improvements Act. OSCA has filed an information statement describing the transaction with the Securities and Exchange Commission and mailed such statement to OSCA stockholders on May 2, 2002. OSCA anticipates the merger to close on May 31, 2002. There can be no assurance that the merger will be consummated in accordance with the terms of the merger agreement, if at all. Ancor Services, Inc. On January 3, 2002, OSCA completed the acquisition of substantially all of the assets of Ancor Services, Inc. Ancor provided land based well stimulation products and services to oil and natural gas production companies in East Texas and North Louisiana. The assets acquired included a cement plant, specialized vehicles, shop trucks and office furniture. The acquisition has been accounted for using the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations. Ancor's operating results since January 3, 2002 have been consolidated with the operating results of OSCA. The acquired assets were recorded at fair value with no goodwill being recorded. The purchase price for the assets of approximately $1.9 million was paid utilizing available cash. As part of the acquisition, OSCA also compensated the owners of Ancor for entering into noncompete agreements and for performing consulting services. OSCA paid $0.9 million toward the noncompete agreements at closing and has an obligation to pay another $1.2 million over the next four years. The obligation due within the next year of $0.3 million is included in accrued expenses and the long-term obligation of $0.9 million is recorded in other long-term liabilities. The consulting services of $0.8 million were paid at closing. -23- 3. RESTRICTED CASH OSCA has deposited funds into a Rabbi Trust to cover some, but not all of its obligations to senior management of OSCA should a change of control and related termination of employment occur as a result of the merger with BJ Services. The manager of the Rabbi Trust has invested the funds into a money market account. If the merger is not completed, the funds will be returned to OSCA's unrestricted cash account. 4. INVENTORIES The major components of OSCA's inventories are as follows: March 31, December 31, ----------- ------------ 2002 2001 ----------- ------------ Downhole Completion Tools Finished products $ 18,342 $ 16,544 Raw materials 600 609 Reserves for obsolescence (900) (800) Completion Fluids Finished products 9,373 10,597 Supplies 744 763 Reserves for obsolescence (450) (450) Completion Services Finished products 607 973 Supplies 248 254 ---------- ---------- $ 28,564 $ 28,490 ========== ========== 5. GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001 with early adoption permitted for companies with fiscal years beginning after March 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. OSCA adopted the new rules on accounting for goodwill and other intangible assets effective January 1, 2002. OSCA has not yet performed its transitional impairment test in conjunction with the adoption of SFAS 142. The following information relates to intangible assets still subject to amortization under SFAS 142: Estimated amortization expense (in thousands): For the year ended 12/31/02 $578 For the year ended 12/31/03 485 For the year ended 12/31/04 460 For the year ended 12/31/05 360 For the year ended 12/31/06 360 -24- The following table provides the comparable effects excluding the prior amortization expense of goodwill: Three Months Ended March 31, ------------------------- 2002 2001 ---------- --------- (in thousands, except per share data) Reported net (loss) income before change in accounting principle $ (9,429) $ 2,820 Add back: goodwill amortization (net of tax) 43 --------- --------- Adjusted net (loss) income (9,429) 2,863 ========= ========= Reported basic (loss) earnings per share before change in accounting principle $ (0.63) $ 0.19 Add back: goodwill amortization (net of tax) --------- --------- Adjusted basic (loss) earnings per share $ (0.63) $ 0.19 ========= ========= Reported diluted (loss) earnings per share before change in accounting principle $ (0.63) $ 0.19 --------- --------- Adjusted diluted (loss) earnings per share (0.63) $ 0.19 ========= ========= 6. LITIGATION On September 18, 2000, OSCA was served with notice that a lawsuit was filed against it and other named defendants on September 1, 2000 in the District Court of Harris County, Texas. The action is brought by certain underwriting syndicates of Lloyd's of London who claim to be subrogated to the claim of their insureds, Newfield Exploration Company, Apache Oil Corporation, Continental Land & Fur, and Fidelity Oil ("Plaintiffs"). The other defendants include High Pressure Integrity, Inc. and Chalmers, Collins & Alwell, Inc. On September 8, 2000, OSCA filed a lawsuit against the Plaintiffs and the other defendants in the United States District Court, Western District of Louisiana, Lafayette-Opelousas Division. Other actions have also been filed in connection with the same circumstances. All actions have now been consolidated into one proceeding in the United States District Court, Southern District of Texas. The lawsuits relate to a blowout of a well situated in the Gulf of Mexico, offshore Louisiana, for which OSCA and others were engaged to perform specific workover operations. In the Texas case, Plaintiffs seek damages, interest and other costs in the approximate amount of $21.5 million, alleging that OSCA and the other defendants breached their contracts to perform workover operations, and were negligent in performing those operations. OSCA alleges negligence against the Plaintiffs and other defendants and seeks damages, interest, costs and general and equitable relief. OSCA filed a third party demand against its underwriters and insurance broker in support of coverage of claims asserted against OSCA in the Newfield matter. On April 4, 2002, a Federal Court jury in Houston, Texas reached a verdict in the lawsuit against OSCA and other defendants. The jury found OSCA and the other defendants responsible for those claims and found OSCA's share of the damages to be approximately $13.3 million. A charge of $13.5 million has been recorded in the first quarter of 2002, which includes $0.2 million of legal fees incurred during the quarter. In connection with the lawsuit, OSCA asserted claims against its insurers and insurance brokers in support of insurance coverage for this incident. OSCA's insurers have denied coverage for this incident and a related trial on these insurance coverage claims is scheduled to begin on May 20, 2002. The court has not yet entered a final judgment on the liability claim and OSCA does not expect final judgment to be entered until completion of the related insurance trial. Any recoveries as a result of the insurance trial will be recognized in the period in which recovery occurs. -25- 7. LONG-TERM DEBT During the quarter ended March 31, 2002, OSCA borrowed approximately $8.9 million under its $40.0 million credit facility with a bank. These borrowings resulted in $35.9 million being outstanding as of March 31, 2002. The borrowings were used to fund the restricted cash (note 3) and the Ancor acquisition (note 2). As a result of the litigation verdict (note 6), OSCA was in violation of covenants related to funded indebtedness and fixed charge coverage ratios. On April 30, 2002, the lenders granted OSCA a modification in the calculation of those two covenants which brought OSCA into compliance. 8. COMPREHENSIVE (LOSS) INCOME Comprehensive (loss) income was as follows (in thousands): Three Months Ended March 31, --------------------------- 2002 2001 ---------- ------------ Net (loss) income $ (9,429) $ 2,820 Foreign currency translation 179 (110) -------- -------- Comprehensive (loss) income $ (9,250) $ 2,710 ======== ======== 9. (LOSS) EARNINGS PER SHARE The computation of basic and diluted (loss) earnings per share is determined by dividing net (loss) income by the number of shares as follows (in thousands, except per share data):
Three Months Ended March 31, ---------------------------- 2002 2001 ------------ ---------- Numerator: Net (loss) income $ (9,429) $ 2,820 ======== ======== Denominator: Weighted-average shares - basic 14,851 14,840 Effect of dilutive securities - stock options 71 -------- -------- Weighted-average shares - diluted 14,851 14,911 ======== ======== Basic (loss) earnings per share $ (0.63) $ 0.19 ======== ======== Diluted (loss) earnings per share $ (0.63) $ 0.19 ======== ========
Restricted stock and options to purchase 101,548 shares of OSCA's common stock were not included in the computation of diluted (loss) earnings per share for the three months ended March 31, 2002 as the effect would have been antidilutive due to the net loss for the period. 10. SEGMENT INFORMATION OSCA is organized into three global business segments: - Completion Fluids, - Completion Services and - Downhole Completion Tools. The segments are organized to offer a distinct but synergistic group of products, technology and services. -26- OSCA evaluates performance and allocates resources based on operating income which represents net revenue less cost of sales and allocated selling, general and administrative expenses. Intersegment net revenue and transfers are recorded at OSCA's cost, and therefore there is no intercompany income or loss recorded.
Three Months Ended March 31, ---------------------------- 2002 2001 ------------ ---------- Net revenues by segment to external customers: Completion Fluids $ 10,347 $ 17,346 Completion Services 13,027 12,608 Downhole Completion Tools 12,196 13,803 --------- --------- $ 35,570 $ 43,757 ========= ========= Segment operating (loss) income: Completion Fluids $ (449) $ 1,479 Completion Services (722) 1,860 Downhole Completion Tools 1,544 3,249 --------- --------- Total operating income of reportable segment 373 6,588 Corporate and Other (14,183) (788) --------- --------- Operating (loss) income (13,810) 5,800 Interest expense, net (301) (397) Other expense, net (335) (855) --------- --------- (Loss) income before income taxes $ (14,446) $ 4,548 ========= =========
11. CONTINGENCIES OSCA is partially self-insured for employee health insurance claims and generally incurs a maximum of $80,000 per employee under medical claims. While OSCA has workers compensation and automobile liability insurance coverage, both policies have a deductible of $250,000 per incident. Although OSCA believes that adequate reserves have been provided for expected liabilities arising from its insurance obligations, management's estimates of these liabilities may change in the future as circumstances warrant. OSCA may be subject to various legal proceedings, claims and litigation arising from a variety of matters including governmental regulations, environmental matters, commercial matters, product liability, personal injury, workers' compensation claims and other matters arising out of the ordinary course of its business. In general, while the effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists, in the opinion of management, the resolution of these legal proceedings and claims will not have a material adverse effect on OSCA's financial position, liquidity or results of operations. 12. NEW ACCOUNTING STANDARDS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, Accounting for Impairment of Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. OSCA's adoption of SFAS 144 has not had a material impact on its financial position and results of operations. -27- (b) Pro forma financial information. Pro Forma Financial Information (Unaudited) The following pro forma financial statements are based on the historical financial information of BJ Services Company ("BJ Services") and OSCA, Inc. ("OSCA") giving effect to the OSCA acquisition under the purchase method of accounting with certain adjustments described in the accompanying Notes to Pro Forma Financial Statements. The pro forma financial statements are derived from the historical consolidated financial statements of BJ Services and OSCA for the indicated periods which, in the case of the statements of operations of OSCA, differ from the period used for presentation of its financial statements. The historical information with respect to OSCA has been taken from or based upon its annual report on Form 10-K for the fiscal year ended December 31, 2001, and its quarterly reports on Form 10-Q for the fiscal quarters ended September 30, 2001 and March 31, 2002. In the case of OSCA, the statement of operations for the twelve months ended September 30, 2001 was derived by combining the last three months of its fiscal year ended December 31, 2000 with the first nine months of its fiscal 2001 and the statement of operations for the six months ended March 31, 2002 was derived by adding the last three months from its fiscal year ended December 31, 2001 and the three months ended March 31, 2002. The Pro Forma Statement of Financial Position was prepared as if the OSCA acquisition had occurred on March 31, 2002. The Pro Forma Statements of Operations were prepared as if the OSCA acquisition had occurred on October 1, 2000 and do not include any estimate for loss of revenue from overlapping locations, any consolidation savings or the effect of any modifications in operations that might have occurred had BJ Services owned and operated the businesses during the periods presented except as described in the Notes to the Pro Forma Financial Statements. The pro forma financial statements should be read in conjunction with the Notes to the Pro Forma Financial Statements and with the consolidated financial statements of BJ Services and OSCA and the related notes thereto. The pro forma financial statements have been prepared based upon assumptions deemed appropriate by management of BJ Services. This information is prepared for informational purposes only and is not necessarily indicative of the actual results that would have been achieved had the OSCA Acquisition and related financing occurred on these dates, or of future results. Actual results of OSCA's operations will be included with the results of BJ Services only from the date on which the OSCA acquisition was consummated. -28- PRO FORMA STATEMENT OF FINANCIAL POSITION (UNAUDITED) March 31, 2002
Historical Pro Forma -------------------------- ------------------------------- BJ Services OSCA Adjustments Combined -------------- ----------- ------------------- ---------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 68,560 $ 8,449 $ (14,500) (2) $ (61,943) (3) 566 Receivables - net 358,396 32,856 391,252 Inventories: Products 69,956 27,572 97,528 Work-in-process 1,901 1,901 Parts 65,695 992 66,687 ------------- ----------- ----------- ------------- Total inventories 137,552 28,564 166,116 Deferred income taxes 9,388 2,463 11,851 Other current assets 43,066 10,151 7,725 (1) 60,942 ------------- ----------- ----------- ------------- Total current assets 616,962 82,483 (68,718) 630,727 Property - net 721,601 57,113 778,714 Deferred income taxes 58,046 6,600 (1) 64,646 Goodwill 476,771 6,572 361,829 (1) 845,172 Other assets 24,349 3,420 8,200 (2) 35,969 ------------- ----------- ----------- ------------- $ 1,897,729 $ 149,588 $ 307,911 $ 2,355,228 ============= =========== =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 141,867 $ 15,678 $ $ 157,545 Short-term borrowings and current portion of long-term debt 4,012 118 4,130 Accrued employee compensation and benefits 49,153 2,694 51,847 Litigation reserve 13,408 13,408 Income and other taxes 29,621 85 29,706 Payable to affiliates 2,217 2,217 Accrued insurance 10,265 10,265 Other accrued liabilities 65,470 2,833 4,200 (1) 72,503 ------------- ----------- ----------- ------------- Total current liabilities 300,388 37,033 4,200 341,621 Long-term debt 79,234 36,039 408,309 (3) (35,000) (3) 488,582 Deferred income taxes 6,308 5,025 11,333 Other long-term liabilities 136,760 1,893 138,653 Stockholders' equity 1,375,039 69,598 (98,298) (1) 35,000 (3) (6,300) (2) 1,375,039 -------------- ----------- ------------- ------------- $ 1,897,729 $ 149,588 $ 307,911 $ 2,355,228 ============= =========== ============= =============
See Notes to Pro Forma Financial Statements (Unaudited) -29- PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) Twelve Months Ended September 30, 2001
Historical Pro Forma ------------------------- ------------------------------ BJ Services OSCA Adjustments Combined ----------- ------------ ------------------ ---------- (in thousands, except per share data) Revenue $ 2,233,520 $ 176,618 $ $ 2,410,138 Operating Expenses: Cost of sales and services 1,553,990 131,001 1,684,991 Selling, general and administrative 129,571 22,950 152,521 Goodwill amortization 13,739 407 14,146 Unusual charge (688) (688) ------------- ----------- ----------- ------------- Total operating expenses 1,697,300 153,670 1,850,970 Operating Income 536,220 22,948 559,168 Interest expense (13,282) (1,775) (11,136) (4) (26,193) Interest income 2,567 291 2,858 Foreign currency gain (loss) 240 (538) (298) Other income (expense) - net 3,436 (610) 2,826 ------------- ----------- ----------- ------------- Income before income taxes 529,181 20,316 (11,136) 538,361 Income tax expense 179,922 7,551 (3,898) (5) 183,575 ------------- ----------- ----------- ------------- Net income $ 349,259 $ 12,765 $ (7,238) $ 354,786 ============= =========== =========== ============= Earnings per share: Basic $ 2.13 $ 2.16 Diluted $ 2.09 $ 2.12 Weighted-average shares outstanding 163,885 163,885 Weighted-average shares outstanding assuming dilution 167,080 167,080
See Notes to Pro Forma Financial Statements (Unaudited) -30- PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) Six Months Ended March 31, 2002
Historical Pro Forma --------------------------- ------------------------------- BJ Services OSCA Adjustments Combined ------------- ------------ ------------- ------------ (in thousands, except per share data) Revenue $ 952,449 $ 77,415 $ $ 1,029,864 Operating Expenses: Cost of sales and services 724,193 64,441 788,634 Selling, general and administrative 62,624 12,480 75,104 Goodwill amortization 292 292 Unusual charge - Litigation Verdict 13,541 13,541 ----------- ----------- ---------- ----------- Total operating expenses 786,817 90,754 877,571 Operating Income (loss) 165,632 (13,339) 152,293 Interest expense (2,310) (625) (5,568) (4) (8,503) Interest income 677 173 850 Foreign currency gain (loss) 328 (149) 179 Other income (expense) - net (1,412) (113) (1,525) ----------- ----------- ---------- ----------- Income (loss) before income taxes 162,915 (14,053) (5,568) 143,294 Income tax expense (credit) 57,020 (4,696) (1,949) (5) 50,375 ----------- ----------- ---------- ----------- Net income (loss) $ 105,895 $ (9,357) $ (3,619) $ 92,919 =========== =========== ========== =========== Earnings (loss) per share: Basic $ 0.67 $ 0.59 Diluted $ 0.66 $ 0.58 Weighted-average shares outstanding 157,249 157,249 Weighted-average shares outstanding assuming dilution 160,476 160,476
See Notes to Pro Forma Financial Statements (Unaudited) -31- NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except per share data) (1) The pro forma financial statements reflect the purchase of 100% of the outstanding shares of OSCA common stock at a price of $28.00 per share. In accordance with purchase accounting, the assets and liabilities of OSCA will be recorded on BJ Services' books at estimated fair market value with the remaining purchase price reflected as goodwill. Valuation and other studies that will be used to determine the fair market values of OSCA's assets and liabilities are not yet available. Accordingly, for purposes of these pro forma financial statements, the allocation of the purchase price has been made based on historical book value of OSCA. Such allocation of the purchase price is, therefore, preliminary and the final allocation may be substantially different The following reflects management's estimates of the necessary adjustments to OSCA's historical statement of financial position: BJ Services Consideration Paid: Cash to OSCA stockholders $ 416,252 Settlement of options 8,000 Payment of debt assumed 35,000 Transaction costs 11,000 --------- Total consideration $ 470,252 Less: OSCA's stockholders' equity, as adjusted 98,298 --------- Net adjustment $ 371,954 --------- Allocation of Adjustment: Deferred tax asset $ 6,600 Other assets 7,725(a) Accrual for severance, facility closings and other non-recurring costs associated with the acquisition (4,200) Goodwill 361,829(b) --------- $ 371,954 =========
(a) Adjustment to record a receivable from Great Lakes Chemical Corporation for their portion of OSCA's obligation of $13.3 million relating to the lawsuit (the Newfield Litigation) described in Note 6 of the notes to condensed consolidated financial statements in OSCA's quarterly report to shareholders for the fiscal quarter ended March 31, 2002. Great Lakes undertook this obligation in an Indemnification Agreement with BJ Services Company dated February 20, 2002. (b) Upon completion of the valuation of assets purchased, certain finite lived tangible and/or intangible assets may be identified or revalued. For each $25 million of such assets the annual amortization (assuming an average useful life of 10 years) would result in a reduction of net income of $1.6 million or $.01 per diluted share. (2) Reflects material cash transactions directly related to the OSCA acquisition as follows: Payment of change of control agreements $ 6,300 Payment of note issuance costs 8,200 --------- $ 14,500 --------- -32- (3) Financing of the total consideration is summarized as follows: Cash and Cash equivalents: Payment of debt assumed $ 35,000 Transaction costs 11,000 Settlement of options 8,000 Payments to OSCA shareholders in excess of proceeds from issuance of convertible senior notes 7,943 ---------- Total cash and cash equivalents $ 61,943 Gross proceeds from issuance of senior convertible notes 408,309 ---------- Total consideration $ 470,252 ========== (4) On April 19, 2002, BJ Services sold senior convertible notes with a face value at maturity of $516.4 million for gross proceeds of $408.3 million. The effective interest rate on these borrowings is 1.625%, resulting in annual interest expense of $8.4 million. Annual amortization of $2.7 million of note issuance costs has been added to the $8.4 million of interest expense in this pro forma adjustment. (5) Adjustment to reflect assumed tax rate of 35% for the tax effect of the pro forma adjustments. -33- Exhibits: --------- Exhibit Name -------------------------------------------------------------- 23.1 Consent of Ernst & Young LLP -34- SIGNATURE 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. BJ SERVICES COMPANY By: /s/ Margaret Barrett Shannon --------------------------------------- Margaret Barrett Shannon Vice President -- General Counsel and Secretary Date: July 17, 2002 Exhibit Index Exhibits: --------- Exhibit Name -------------------------------------------------------------- 23.1 Consent of Ernst & Young LLP EX-23.1 3 dex231.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-36754, 33-52506, 33-62098, 33-58637, 333-88151, 333-88773, 333-61294 and 333-73348 of BJ Services Company on Form S-8 of our report dated January 21, 2002, with respect to the consolidated financial statements of OSCA, Inc. for the year ended December 31, 2001 included in this Current Report on Form 8-K/A of BJ Services Company. /s/ ERNST & YOUNG LLP Indianapolis, Indiana July 17, 2002 -----END PRIVACY-ENHANCED MESSAGE-----