Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-10068
ICO, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0566682
---------------------------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification Number)
5333 Westheimer, Suite 600, Houston, Texas 77056
- ------------------------------------------ ---------------------------------
(Address of Principal Executive Offices) (Zip Code)
(713) 351-4100
------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Common stock, without par value 25,010,012 shares
outstanding as of August 14, 2003
ICO, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and September 30, 2002. . . 3
Consolidated Statement of Operations for the Three and Nine Months
Ended June 30, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income (Loss) for the Three
and Nine Months Ended June 30, 2003 and 2002. . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks . . . . . . 21
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 22
-2-
ICO, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share data)
JUNE 30, SEPTEMBER 30,
2003 2002
------------ ------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,552 $ 129,072
Trade accounts receivables (less allowance for doubtful accounts of $1,998
and $1,695, respectively) 45,964 39,498
Inventories (less inventory reserve of $1,102 and $502, respectively) 25,833 19,367
Prepaid expenses and other 9,118 11,603
Oilfield Services assets held for sale 3,882 2,783
------------ ------------
Total current assets 86,349 202,323
------------ ------------
Property, plant and equipment, net 67,254 62,607
Goodwill 8,175 36,669
Other 1,075 3,082
------------ ------------
Total assets $ 162,853 $ 304,681
============ ============
LIABILITIES, STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE LOSS
- --------------------------------------------------------------------------
Current liabilities:
Short-term borrowings $ 13,316 $ 4,568
Current portion of long-term debt 3,127 2,793
Accounts payable 20,500 19,062
Accrued interest 122 4,006
Accrued salaries and wages 2,716 2,319
Income taxes payable 1,862 8,247
Other accrued expenses 8,434 8,760
Oilfield Services liabilities held for sale and retained 2,829 6,629
------------ ------------
Total current liabilities 52,906 56,384
------------ ------------
Deferred income taxes 4,733 6,525
Long-term liabilities 1,538 1,406
Long-term debt, net of current portion 23,854 128,877
------------ ------------
Total liabilities 83,031 193,192
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, without par value - 345,000 shares authorized; 322,500 shares
issued and outstanding with a liquidation preference of $32,250 13 13
Undesignated preferred stock, without par value- 105,000 shares authorized;
0 shares issued and outstanding -- --
Junior participating preferred stock, without par value
50,000 shares authorized; 0 shares issued and outstanding -- --
Common stock, without par value 50,000,000 shares authorized;
25,010,012 and 24,450,345 shares issued and outstanding, respectively 43,399 42,674
Additional paid-in capital 103,348 103,157
Accumulated other comprehensive loss (4,473) (9,608)
Accumulated deficit (62,465) (24,747)
------------ ------------
Total stockholders' equity 79,822 111,489
------------ ------------
Total liabilities and stockholders' equity $ 162,853 $ 304,681
============ ============
The accompanying notes are an integral part of these financial statements.
-3-
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 54,416 $ 46,971 $ 153,168 $ 131,679
Cost and expenses:
Cost of sales and services 45,988 37,137 127,463 105,818
Selling, general and administrative expense 8,858 7,266 25,907 21,968
Stock option compensation expense 14 -- 106 --
Depreciation 2,321 1,937 6,642 5,994
Amortization 52 566 238 1,597
Impairment, restructuring and other costs 806 1,782 806 1,782
------------ ------------ ------------ ------------
Operating loss (3,623) (1,717) (7,994) (5,480)
Other income (expense):
Interest income 9 83 283 371
Interest expense (672) (3,388) (3,124) (10,196)
Other income (expense) (28) 731 492 1,695
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes and (4,314) (4,291) (10,343) (13,610)
cumulative effect of change in accounting principle
Benefit for income taxes (360) (1,343) (1,872) (3,397)
------------ ------------ ------------ ------------
Loss from continuing operations before cumulative effect of change
in accounting principle (3,954) (2,948) (8,471) (10,213)
Income (loss) from discontinued operations, net of provision (benefit)
for income taxes of $459, $(372), $749 and $1,219, respectively (388) (370) 160 2,007
------------ ------------ ------------ ------------
Net loss before cumulative effect of change in accounting principle (4,342) (3,318) (8,311) (8,206)
Cumulative effect of change in accounting principle, net of benefit
for income taxes of $0, $0, $(580) and $0, respectively -- -- (28,863) --
------------ ------------ ------------ ------------
Net loss $ (4,342) $ (3,318) $ (37,174) $ (8,206)
------------ ------------ ------------ ------------
Preferred dividends -- (544) (544) (1,632)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (4,342) $ (3,862) $ (37,718) $ (9,838)
============ ============ ============ ============
Basic and diluted income (loss) per share:
Loss from continuing operations before cumulative effect
of change in accounting principle $ (.16) $ (.14) $ (.36) $ (.49)
Income (loss) from discontinued operations (.01) (.02) -- .08
------------ ------------ ------------ ------------
Net loss before cumulative effect of change in accounting
principle $ (.17) $ (.16) $ (.36) $ (.41)
Cumulative effect of change in accounting principle .00 .00 (1.16) .00
------------ ------------ ------------ ------------
Basic and diluted net loss per common share $ (.17) $ (.16) $ (1.52) $ (.41)
============ ============ ============ ============
Basic and diluted weighted average shares outstanding 24,960,000 24,450,000 24,812,000 23,876,000
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-4-
ICO, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2003 2002 2003 2002
-------- -------- --------- --------
Net loss $ (4,342) $ (3,318) $ (37,174) $ (8,206)
Other comprehensive income (loss)
Foreign currency translation adjustment 2,188 4,392 5,349 3,652
Unrealized loss on foreign currency hedges (151) (23) (214) (50)
-------- -------- --------- --------
Comprehensive income (loss) $ (2,305) $ 1,051 $ (32,039) $ (4,604)
======== ======== ========= ========
The accompanying notes are an integral part of these financial statements.
-5-
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands)
NINE MONTHS ENDED
JUNE 30,
---------------------
2003 2002
---------- ---------
Cash flows from operating activities:
Net loss from continuing operations $ (37,334) $ (10,213)
Adjustments to reconcile net loss from continuing operations to
net cash provided by (used for) operating activities:
Depreciation and amortization 6,880 7,591
Proxy contest expense -- 746
Gain on sale of fixed assets (55) (564)
Cumulative effect of change in accounting principle before tax 29,443 --
Stock option compensation expense 106 --
Gain on early retirement of debt (14) (654)
Matching contribution to employee savings plan 349 408
Unrealized gain on foreign currency (419) (477)
Impairment, restructuring and other costs 712 1,533
Changes in assets and liabilities:
Receivables (2,167) (2,461)
Inventories (3,728) 1,122
Prepaid expenses and other assets (1,012) 3,115
Deferred taxes (4,189) (4,953)
Accounts payable 106 1,479
Accrued interest (3,884) (3,089)
Other liabilities (470) (379)
---------- ---------
Total adjustments 21,658 3,417
---------- ---------
Net cash used for operating activities for continuing operations (15,676) (6,796)
Net cash provided by (used for) operating activities for discontinued operations (6,542) 10,861
---------- ---------
Net cash provided by (used for) operating activities (22,218) 4,065
---------- ---------
Cash flows used for investing activities:
Capital expenditures (7,816) (7,782)
Proceeds from dispositions of property, plant and equipment 275 529
---------- ---------
Net cash used for investing activities for continuing operations (7,541) (7,253)
Net cash used for investing activities for discontinued operations -- (6,939)
---------- ---------
Net cash used for investing activities (7,541) (14,192)
---------- ---------
Cash flows used for financing activities:
Common stock transactions 9 4
Payment of dividend on preferred stock (1,088) (1,632)
Proceeds from debt 7,683 --
Term debt repayments (104,321) (9,541)
Debt retirement costs (483) --
Payment of credit facility costs -- (628)
---------- ---------
Net cash used for financing activities for continuing operations (98,200) (11,797)
Net cash used for financing activities for discontinued operations -- (468)
---------- ---------
Net cash used for financing activities (98,200) (12,265)
---------- ---------
Effect of exchange rates on cash 439 597
---------- ---------
Net decrease in cash and equivalents (127,520) (21,795)
Cash and equivalents at beginning of period 129,072 31,642
---------- ---------
Cash and equivalents at end of period $ 1,552 $ 9,847
========== =========
The accompanying notes are an integral part of these financial statements.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share data)
NOTE 1. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements," and accordingly do not include all information and footnotes
required under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Annual Report on Form
10-K for the year ended September 30, 2002 for ICO, Inc. In the opinion of
management, these interim financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of June 30, 2003, the
results of operations for the three and nine months ended June 30, 2003 and 2002
and the changes in its cash position for the nine months ended June 30, 2003 and
2002. Results of operations for the three and nine month periods ended June 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2003. For additional information, refer to the
consolidated financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2002.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement will be effective for contracts entered into, modified or designated
as hedges after June 30, 2003. The Company will adopt this standard on July 1,
2003 and does not expect it to have a material impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities in statements of financial position.
This statement will be effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company will adopt this
standard on July 1, 2003 and does not expect it to have a material impact on the
Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." The interpretation requires disclosure
about the nature and terms of obligations under certain guarantees that
companies have issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing a guarantee. The initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation were effective upon issuance of the
interpretation. The implementation of this interpretation did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, An Interpretation of Accounting
Research Bulletin No. 51." The primary objectives of FIN 46 are to provide
guidance on how to identify entities for which control is achieved through means
other than through voting rights (variable interest entities ("VIE")) and how to
determine when and which business enterprise should consolidate the VIE. This
new model for consolidation applies to an entity in which either (1) the equity
investors do not have a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. This
statement will be
-7-
effective no later than the beginning of the first interim or annual reporting
period that starts after June 15, 2003. The Company will adopt this standard on
July 1, 2003 and does not expect it to have a material impact on the Company's
financial statements.
NOTE 3. STOCK OPTION PLANS
Prior to fiscal year 2003, the Company accounted for its stock option plans
under recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Effective October 1, 2002, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") to all employee awards granted, modified or settled
after October 1, 2002. The Company adopted the prospective method to implement
SFAS 123 under the provisions of FASB Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure- an amendment of FASB
Statement No. 123. Awards under the Company's plans vest immediately or may
vest over periods of up to five years. The following table illustrates the
effect on net income and earnings per share if the fair value based method had
been applied to all outstanding and unvested awards in each period.
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss before cumulative effect of change in accounting
principle, as reported $(4,342) $(3,318) $(8,311) $(8,206)
Add: Stock-based employee compensation expense included in
reported net income 14 -- 106 --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (14) -- (106) (346)
------- ------- ------- -------
Pro forma net loss $(4,342) $(3,318) $(8,311) $(8,552)
======= ======= ======= =======
Basic and diluted loss per share, as reported $ (.17) $ (.16) $ (.36) $ (.41)
======= ======= ======= =======
Basic and diluted loss per share, pro forma $ (.17) $ (.16) $ (.36) $ (.43)
======= ======= ======= =======
NOTE 4. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 2002, the Company was required to adopt Financial
Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets,
which established Standards for reporting acquired goodwill and other intangible
assets. This statement accounts for goodwill based on the reporting units of the
combined entity into which an acquired entity is integrated. In accordance with
SFAS 142, goodwill and indefinite lived intangible assets are tested for
impairment at least annually at the reporting unit level, rather than being
amortized, and the amortization period of intangible assets with finite lives is
no longer limited to forty years. Using the discounted cash flow method under
the requirements of SFAS 142, the Company recorded an impairment of goodwill of
$28,863, net of income tax benefit of $580 during the three months ended
December 31, 2002 as a result of the adoption of SFAS 142 on October 1, 2002.
This impairment charge is reflected in the consolidated statement of operations
as a cumulative effect of change in accounting principle. The cessation of
goodwill amortization under SFAS 142 will result in a reduction of approximately
$1,140 in annual amortization expense, assuming no additional impairment of
goodwill. The following proforma information adjusts the historical financial
information to reflect the effect of not amortizing goodwill in accordance with
SFAS 142.
-8-
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Reported net loss before cumulative effect of change in accounting principle $ (4,342) $ (3,318) $ (8,311) $ (8,206)
Add back: goodwill amortization, net of income taxes of $0, $17, $0 and
$50, respectively -- 274 -- 810
-------- -------- -------- --------
Adjusted net loss before cumulative effect of change in accounting principle (4,342) (3,044) (8,311) (7,396)
Cumulative effect of change in accounting principle -- -- (28,863) --
-------- -------- -------- --------
Adjusted net loss $ (4,342) $ (3,044) $(37,174) $ (7,396)
======== ======== ======== ========
Basic and diluted income (loss) per share:
Reported net loss before cumulative effect of change in accounting principle $ (.17) $ (.16) $ (.36) $ (.41)
Add back: goodwill amortization, net of income taxes of $0, $17, $0 and $50,
respectively -- .01 -- .03
-------- -------- -------- --------
Adjusted net loss before cumulative effect of change in accounting principle (.17) (.15) (.36) (.38)
Cumulative effect of change in accounting principle -- -- (1.16) --
-------- -------- -------- --------
Adjusted net loss $ (.17) $ (.15) $ (1.52) $ (.38)
======== ======== ======== ========
NOTE 5. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
Earnings per share is based on earnings applicable to common shareholders
and is calculated using the weighted average number of common shares
outstanding. During the three and nine months ended June 30, 2003 and June 30,
2002, the potentially dilutive effects of the Company's exchangeable preferred
stock (which would have an anti-dilutive effect) and common stock options and
warrants, with exercise prices exceeding fair market value of the underlying
common shares, have been excluded from diluted earnings per share. Additionally,
the potentially dilutive effects of common stock options have been excluded from
diluted earnings per share for those periods in which the Company generated a
net loss. The total number of anti-dilutive securities for both the three and
nine months ended June 30, 2003 was 4,719,000 compared to 5,805,000 for the
three and nine months ended June 30, 2002.
NOTE 6. INVENTORIES
Inventories, net of reserves, consisted of the following:
JUNE 30, 2003 SEPTEMBER 30, 2002
-------------- ------------------
Finished goods $ 10,602 $ 7,547
Raw materials 13,487 10,664
Work in progress 401 201
Supplies 1,343 955
-------------- ------------------
Total inventory $ 25,833 $ 19,367
============== ==================
NOTE 7. IMPAIRMENT, RESTRUCTURING AND OTHER COSTS
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Severance $ 231 $ 249 $ 231 $ 249
Impairment of fixed assets 529 1,533 529 1,533
Other 46 -- 46 --
-------- -------- -------- --------
Total impairment, restructuring and other costs $ 806 $1,782 $ 806 $ 1,782
======== ======== ======== ========
-9-
During the third quarter of fiscal 2003, the Company recognized an
impairment of fixed assets of $529 at the Company's ICO Polymers North America
and UK locations. The North American impairment related to the Company's plans
to consolidate its China, Texas and Lovelady, Texas facilities during the first
half of the Company's fiscal year 2004 as part of its cost reduction program as
well as other grinding equipment. The UK impairment relates to the shutdown of
the facility's cryogenic processing line. During the third quarter of fiscal
2003, the Company also recognized $231 of severance expenses primarily related
to the Company's Italian subsidiary.
During the third quarter of fiscal 2002, the Company recognized a charge of
$1,533 related to the impairment of machinery and equipment of the Italian plant
closed in fiscal year 2002. This facility was closed due to its redundancy with
the Company's other nearby Italian facility performing similar services. In the
third quarter of fiscal 2002, the Company completed an evaluation of assets
contained in this facility and determined that these assets had a limited use or
were obsolete. During the third quarter of fiscal 2002, the Company also
recognized severance expenses of $249 related to the Company's Italian
subsidiary.
NOTE 8. INCOME TAXES
The Company's effective income tax rates were benefits of 8% and 18% during
the three and nine months ended June 30, 2003, respectively, compared to
benefits of 31% and 25% for the three and nine months ended June 30, 2002. The
three and nine months ended June 30, 2003 include a valuation allowance for two
of the Company's foreign operations because it is more likely than not that the
related deferred tax asset will not be realized. The amount of the valuation
allowance for the three and nine months ended June 30, 2003 was approximately
$410 and $630, respectively. Also impacting the tax benefit is the cessation of
amortizing goodwill during fiscal year 2003 (as discussed in Note 4 -
"Cumulative Effect of Change of Accounting Principle") which has the effect of
causing an increase in the effective tax rate benefit. During the nine months
ended June 30, 2002, a valuation allowance of $754 was placed against the
benefit of U.S. net operating losses which had the effect of reducing the tax
rate benefit during the period. The tax rate change was also due to a change in
the mix of pretax income or loss generated by the Company's operations in
various taxing jurisdictions.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has letters of credit outstanding in the United States of
approximately $2,090 and $2,405 as of June 30, 2003 and September 30, 2002,
respectively and foreign letters of credit outstanding of $2,580 and $2,290 as
of June 30, 2003 and September 30, 2002, respectively.
Varco Indemnification Claims. Under the terms of the purchase agreement
relating to the sale of substantially all of the Company's oilfield services
business to Varco International, Inc., the Company has agreed, subject to
certain limitations, to indemnify Varco for losses arising out of our breach of
the representations and warranties contained in the purchase agreement, and has
placed $5,000 of the sale proceeds in escrow for one year from date of sale to
be used to pay for our indemnification obligations, should they arise. This
$5,000 in proceeds was included in the gain on the sale of the oilfield services
business recognized in fiscal year 2002. To date, Varco has submitted demands
for indemnification asserting aggregated losses in the range of $12,403 to
$16,883. A portion of those indemnity demands (aggregated losses of $365) relate
to product liability claims. The balance of the indemnity demands relate to
environmental claims arising out of operations at seventeen of the Company's
former plants in various U.S. locations. While we do not believe that Varco has
submitted any claims for which they would be entitled to any material indemnity
payment from the Company, we are investigating the substance of the demands made
by Varco. Because we cannot determine the validity of these claims at this time,
we have not reserved any amounts on our balance sheet in contemplation of such
liabilities. We can, however, give no assurance that the Company will not be
liable for these amounts or any additional amounts under the indemnification
provisions of the purchase agreement, which if liable, would result in an
expense to the discontinued operations section of the statement of operations.
Silicosis Related Claims. With regard to the Company's involvement in Pilar
Olivas, et al. v. ICO, Inc. et al. (the "Olivas litigation"), the Company has
obtained a summary judgment absolving it of any liability to the plaintiffs, and
has filed papers to sever those claims from the plaintiffs' remaining claims
against other parties in order to obtain dismissal from such proceeding.
-10-
The Company was recently served as a defendant in a lawsuit styled
Celestino Galvan and Alfred Rogers v. ICO, Inc., Baker Hughes, Inc., et al.
pending in Texas State Court in Orange County (the "Galvan and Rogers
litigation"). The plaintiffs in the Galvan and Rogers litigation allege that
they suffer from silicosis and were employees of Baker Hughes, which is also
named as a defendant. At this time, the Company cannot predict with any
reasonably certainty its potential exposure with respect to this matter.
The Company continues to be involved in Richard Koskey vs. ICO, Inc., Baker
Hughes, Inc., et al. (the "Koskey litigation").
For additional information regarding the Company's involvement in
silicosis-related litigation, see Part I, Item 3 of the Company's Form 10-K
filed December 20, 2002.
Other Legal Proceedings. The Company is also named as a defendant in
certain other lawsuits arising in the ordinary course of business. The outcome
of these lawsuits cannot be predicted with certainty.
NOTE 10. DISCONTINUED OPERATIONS
On September 6, 2002, the Company completed the sale of substantially all
of its Oilfield Services business ("Oilfield Services") to Varco International,
Inc. ("Varco"). The initial purchase price was subject to a post-closing working
capital adjustment for which $2,000 of the sale proceeds had been placed in
escrow. The post-closing working capital adjustment was settled on January 17,
2003 for $2,390. At September 30, 2002, the Company had recorded a receivable of
$1,808 which was the initial amount computed by Varco. The additional $582 was
recorded as additional gain on disposition of Oilfield Services and recorded
during the three months ended December 31, 2002. Additionally, $5,000 of the
sales proceeds were placed in escrow and will remain in escrow for one year from
the date of the sale. The escrowed funds will be used to cover any
indemnification claims by Varco against the Company. The $5,000 is included in
"prepaid expenses and other" on the consolidated balance sheet (see Note 9-
"Commitments and Contingencies"). In accordance with SFAS 144, the Oilfield
Services results of operations are presented as discontinued operations, net of
income taxes in the consolidated statement of operations. In addition, the
Oilfield Services assets held for sale and liabilities held for sale and
retained are shown as two separate line items in the consolidated balance sheet.
-11-
Assets and liabilities (including those retained) of discontinued
operations are as follows:
JUNE 30, SEPTEMBER 30,
2003 2002
------------- -------------
ASSETS
- ------
Trade accounts receivables $ 1,358 $ 495
Inventories 471 435
Property, plant and equipment, net 407 407
Goodwill 1,446 1,446
Other 200 --
------------- -------------
Total Oilfield Services assets held for sale $ 3,882 $ 2,783
============= =============
LIABILITIES
- -----------
Accounts payable $ 351 $ 458
Accrued insurance 1,276 2,261
Litigation settlement 165 2,850
Other 1,037 1,060
------------- -------------
Total Oilfield Services liabilities held for sale and retained $ 2,829 $ 6,629
============= =============
Of the $2,829 and $6,629 Oilfield Services liabilities held for sale and
retained as of June 30, 2003 and September 30, 2002, respectively, $516 and $510
relate to Oilfield Services liabilities held for sale. The remaining $2,313 and
$6,119 as of June 30, 2003 and September 30, 2002, respectively, were retained
by the Company in connection with the sale of the oilfield services business to
Varco, less amounts paid since the date of the sale.
See Note 13, "Subsequent Events," related to the sale of the remaining
oilfield service business.
NOTE 11. LONG-TERM DEBT
During the first quarter of fiscal year 2003, the Company repurchased
$104,480 principal amount of its 10 3/8% Senior Notes due 2007 at a weighted
average net discount of $976.78 per $1,000 principal amount plus accrued
interest in two separate transactions. The Company recorded a gain on these
purchases of approximately $14, net of transaction costs and write-off of debt
offering costs. The Company used the investment banking services of Jefferies
and Company to manage the repurchases. David E.K. Frischkorn, Jr., a member of
the Company's Board of Directors, was a Managing Director of Jefferies and
Company during the time of the Senior Notes repurchases. The Company paid
Jefferies and Company approximately $380 for their services related to this
transaction.
During the third quarter of fiscal 2002, the Company repurchased 10 3/8%
Senior Notes due in 2007 with a face value of $1,175, recognizing a net gain
before income tax of $165.
During the first quarter of fiscal 2002, the Company repurchased $2,250
principal amount of its 10 3/8% Senior Notes due in 2007, recognizing a net gain
before income tax of $489.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13 and Technical Corrections. SFAS 145 rescinds SFAS 4,
Reporting Gains and Losses from Extinguishment of Debt. By rescinding FASB
Statement No. 4, gains or losses from extinguishment of debt that do not meet
the criteria of APB No. 30 should not be reported as an extraordinary item and
should be reclassified to income from continuing operations in all periods
presented. APB No. 30 states that extraordinary items are events and
transactions that are distinguished by their unusual nature and by the
infrequency of their occurrence. SFAS 145 became effective for the Company on
October.1, 2002, and the Company's early retirement of the Senior Notes is not
considered extraordinary under APB No. 30. Therefore, the Company has recorded
the gains of $14 and $654 as other income in the consolidated statement of
operations for the three and nine months ended June 30, 2003 and 2002,
respectively.
-12-
NOTE 12. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include debt obligations
carrying variable interest rates, and forward purchase contracts intended to
hedge accounts payable obligations denominated in currencies other than a given
operation's functional currency. Forward currency contracts are used by the
Company as a method to establish a fixed functional currency cost for certain
raw material purchases denominated in non-functional currency (typically the
U.S. Dollar).
The following table summarizes the Company's market-sensitive financial
instruments. These transactions are considered non-trading activities.
ON-BALANCE SHEET FINANCIAL INSTRUMENTS
- -----------------------------------------
VARIABLE INTEREST RATE DEBT: WEIGHTED
US$ EQUIVALENT AVERAGE INTEREST RATE
------------------------- -------------------------
JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
CURRENCY DENOMINATION 2003 2002 2003 2002
- --------------------- --------- -------------- --------- --------------
British Pounds Sterling (1) $ 2,022 $ 2,815 5.75% 5.75%
U.S. Dollar (1) 6,187 -- 4.03% --
New Zealand Dollar (1) 1,244 521 7.23% 6.61%
Euro (1) 3,117 715 5.12% 5.73%
Swedish Krona (1) 705 446 5.45% 4.90%
Malaysian Ringett (1) 41 71 8.15% 8.75%
(1) Maturity dates are expected to be less than one year.
The Company does not have any financial instruments classified as
off-balance sheet as of June 30, 2003 and September 30, 2002.
FORWARD PURCHASE CONTRACTS: JUNE 30, 2003 SEPTEMBER 30, 2002
- --------------------------------- ------------------------------ ------------------------------------
RECEIVE US$/PAY NZ$:
- --------------------
Contract Amount US $236 None
Average Contractual Exchange Rate (US$/NZ$) .5775
Expected Maturity Dates July 2003
RECEIVE US$/PAY AUSTRALIAN $:
- -----------------------------
Contract Amount US $2,352 US $770
Average Contractual Exchange Rate (US$/A$) .6232 (US$/A$) .5421
Expected Maturity Dates July 2003 through October 2003 October 2002 through November 2002
NOTE 13. SUBSEQUENT EVENTS
On July 31, 2003 the Company sold its remaining oilfield service business
to Permian Enterprises, Ltd. for $4,110 and the assumption of certain
liabilities, subject to adjustments. The Company does not expect the sale to
result in a material impact on the Company's statement of operations in the
fourth quarter.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INTRODUCTION
- ------------
The Company's revenues are primarily derived from (1) product sales and (2)
toll services in the polymers processing industry. Product sales involve the
Company purchasing resin which is further processed within the Company's
operating facilities. The further processing of the material may involve size
reduction services and/or compounding services. Compounding services include
the manufacture and sale of concentrates. After processing, the Company then
sells the finished products to customers. Toll services involve both size
reduction and compounding services whereby these services are performed using
customer owned material. Service revenues are recognized as the services are
performed and, in the case of product sales, revenues are recognized when the
title of the product passes to the customer, which is generally upon shipment to
third parties.
Cost of sales and services is primarily comprised of purchased raw
materials, compensation and benefits to non-administrative employees, occupancy
costs, repair and maintenance, electricity and equipment costs and supplies.
Selling, general and administrative expenses consist primarily of compensation
and related benefits to the sales and marketing, executive management,
information technology, accounting, legal, human resources and other
administrative employees of the Company, other sales and marketing expenses,
communications costs, systems costs, insurance costs and legal and accounting
professional fees.
Demand for the Company's products and services tends to be driven by
overall economic factors and, particularly, consumer spending. The trend of
applicable resin prices also impacts customer demand. As resin prices are
falling, customers tend to reduce their inventories and, therefore, reduce their
need for the Company's products and services. Conversely, as resin prices are
rising, customers often increase their inventories and accelerate their
purchases of products and services from the Company. Additionally, demand for
the Company's products and services tends to be seasonal, with customer demand
being weakest during the Company's first fiscal quarter due to the holiday
season and also due to property taxes levied in the U.S. on customers'
inventories on January 1. The Company's fourth fiscal quarter also tends to be
softer compared to the Company's second and third fiscal quarters, in terms of
customer demand, due to vacation periods in the Company's European markets.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
The Company's consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made by management
during their preparation. The following is a discussion of the Company's
critical accounting policies pertaining to use of estimates, revenue and related
cost recognition, impairment of long-lived assets and currency translation.
Use of Estimates- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant areas requiring use
of estimates relate to post-retirement and other employee benefit liabilities,
valuation allowances for deferred tax assets, workers compensation, allowance
for doubtful accounts related to accounts receivable, commitments and
contingencies, and fair value of financial instruments. Actual results could
differ from these estimates. Management believes that its estimates are
reasonable.
Revenue and Related Cost Recognition- The Company recognizes revenue from
services upon completion of the services and related expenses are recognized as
incurred. For product and equipment sales, revenues and related expenses are
recognized when ownership is transferred, which generally occurs when the
products are shipped.
Impairment of Property and Equipment- Property and equipment are reviewed
for impairment whenever an event or change in circumstances indicates the
carrying amount of an asset or group of assets may not be recoverable. The
impairment review includes comparison of future cash flows expected to be
generated by the
-14-
asset or group of assets with the associated assets' carrying value. If the
carrying value of the asset or group of assets exceeds the expected future cash
flows (undiscounted and without interest charges), an impairment loss is
recognized to the extent that the carrying amount of the asset exceeds its fair
value.
Impairment of Goodwill and Other Intangible Assets- Effective October 1,
2002, the Company was required to adopt Financial Accounting Standards No. 142
("SFAS 142"), Goodwill and Other Intangible Assets, which established Standards
for reporting acquired goodwill and other intangible assets. This statement
accounts for goodwill based on the reporting units of the combined entity into
which an acquired entity is integrated. In accordance with SFAS 142, goodwill
and indefinite lived intangible assets are tested for impairment at least
annually at the reporting unit level, rather than being amortized, and the
amortization period of intangible assets with finite lives is no longer limited
to forty years.
Currency Translation- Amounts in foreign currencies are translated into
U.S. dollars. When local functional currency is translated to U.S. dollars, the
effects are recorded as a separate component of Other Comprehensive Income.
Exchange gains and losses resulting from foreign currency transactions are
recognized in earnings.
The fluctuations of the U.S Dollar against the Euro, Swedish Krona, British
Pound, New Zealand Dollar, and the Australian Dollar have impacted the
translation of revenues and expenses of the Company's international operations.
The table below summarizes the impact of changing exchange rates for the above
currencies for the three and nine months ended June 30, 2003 and 2002.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2003 2002 2003 2002
--------- -------- -------- --------
Net revenues $ 4,418 $ 179 $ 13,021 $ 467
Operating income (loss) (160) -- (77) 11
Pre-tax loss (209) (3) (232) 3
Net loss (266) -- (2,327) 3
Stock Options- Effective October 1, 2002, the Company adopted the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123") to all employee awards granted, modified
or settled after October 1, 2002. The Company adopted the prospective method to
implement SFAS 123 under the provisions of FASB Statement No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure- an amendment of FASB
Statement No. 123. Awards under the Company's plans vest over periods ranging
from immediate vesting to five years (see Note 3- "Stock Option Plans").
RESULTS OF OPERATIONS
- -----------------------
Three and Nine Months Ended June 30, 2003 Compared to the Three and Nine Months
Ended June 30, 2002
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ------------------------------------------
NET REVENUES 2003 % of Total 2002 % of Total 2003 % of Total 2002 % of Total
------- ---------- ------- ---------- -------- ---------- -------- ----------
Product Sales $46,104 85% $38,020 81% $128,617 84% $105,214 80%
Toll Services 8,312 15% 8,951 19% 24,551 16% 26,465 20%
------- ---------- ------- ---------- -------- ---------- -------- ----------
Total Revenues $54,416 100% $46,971 100% $153,168 100% $131,679 100%
======= ======= ======== ========
REVENUES. Revenues increased $7,445 or 16% and $21,489 or 16% during the
three and nine months ended June 30, 2003, respectively, compared to the same
period of fiscal 2002. Product sales revenues increased $8,084 or 21% to
$46,104 for the three months ended June 30, 2003 and $23,403 or 22% to $128,617
for the nine months ended June 30, 2003 compared to the same periods of fiscal
2002. The increase in product sales revenue was
-15-
caused by an increase in product sales volumes, and in particular, sales of the
Company's powders for the rotational molding industry, and stronger foreign
currencies compared to the U.S. Dollar (See Item 2. Management's discussion and
analysis of financial condition and results of operations- "Critical Accounting
Policies"). Toll service revenues declined $639 or 7% to $8,312 during the
three months ended June 30, 2003 and $1,914 or 7% to $24,551 during the nine
months ended June 30, 2003, compared to the same periods of fiscal 2002,
respectively. The declines were caused by lower processing volumes in the
United States and Europe resulting from reduced customer demand and loss of
certain customers, offset by the impact of stronger foreign currencies compared
to the U.S. Dollar.
COSTS AND EXPENSES. Gross margins (calculated as the difference between
revenues and cost of sales, divided by revenues) declined to 15.5% and 16.8%,
during the three and nine months ended June 30, 2003, compared to 20.9% and
19.6%, during the three and nine months ended June 30, 2002, respectively.
Gross margins declined due to a change in revenue mix resulting from an increase
in product sales combined with a decline in toll processing volumes and, to a
lesser extent, an inventory reserve of $521 recorded in the three months ended
June 30, 2003. Service revenues generally provide higher profit margins
because, unlike product sales, the Company does not purchase raw materials for
these transactions. The change in revenue mix was particularly pronounced
within the Company's European and North American operations. Weak operating
performance of the Company's Italian and Swedish business units also contributed
to the decline in gross margins. Strong results generated by the Company's
Asian operations for the nine months ended June 30, 2003 partially offset the
adverse impact of the factors discussed above.
Selling, general and administrative expenses increased $1,592 or 22% during
the three months ended June 30, 2003 and $3,939 or 18% during the nine months
ended June 30, 2003, compared to the same periods of fiscal 2002. As a
percentage of revenues, selling, general and administrative expenses were 16%
and 17%, during the three and nine months ended June 30, 2003 compared to 15%
and 17% for the three and nine months ended June 30, 2002. The increase in
selling, general and administrative expenses during the three and nine months
ended June 30, 2003 was due to the strengthening of the Euro and other foreign
currencies relative to the U.S. Dollar, an increase in sales and marketing
expenses (including travel costs) relating to the Company's effort to increase
product sales revenues, an increase in compensation expenses due to an increase
in the number of Corporate office employees and an increase in expenses incurred
by the Company's Brazilian operations which began production in September 2002.
The Company also incurred lower proxy expense in the nine month comparison due
to the $746 recorded in the quarter ended March 31, 2002 related to the
Company's payment to Travis Street Partners ("TSP") of 528,834 shares of common
stock with a value of $746, representing reimbursement of expenses incurred by
TSP in connection with TSP's successful proxy contest in 2001.
Depreciation and amortization expenses decreased to $2,373 and $6,880
during the three and nine months ended June 30, 2003 from $2,503 and $7,591
during the same period of fiscal 2002. These declines were primarily due to the
Company no longer amortizing goodwill as a result of the adoption of FAS 142
(See Note 4- "Cumulative Effect of Change in Accounting Principle").
IMPAIRMENT, RESTRUCTURING AND OTHER COSTS.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Severance $ 231 $ 249 $ 231 $ 249
Impairment of fixed assets 529 1,533 529 1,533
Other 46 -- 46 --
------ ------ ------ ------
Total impairment, restructuring and other costs $ 806 $1,782 $ 806 $1,782
====== ====== ====== ======
-16-
During the third quarter of fiscal 2003, the Company recognized an
impairment of fixed assets of $529 at the Company's ICO Polymers North America
and UK locations. The North American impairment related to the Company's plans
to consolidate its China, Texas and Lovelady, Texas facilities during the first
half of the Company's fiscal year 2004 as part of its cost reduction program as
well as other grinding equipment. The UK impairment relates to the shutdown of
the facility's cryogenic processing line. During the third quarter of fiscal
2003, the Company also recognized $231 of severance expenses primarily related
to the Company's Italian subsidiary.
During the third quarter of fiscal 2002, the Company recognized a charge of
$1,533 related to the impairment of machinery and equipment of the Italian plant
closed in fiscal year 2002. This facility was closed due to its redundancy with
the Company's other nearby Italian facility performing similar services. In the
third quarter of fiscal 2002, the Company completed an evaluation of assets
contained in this facility and determined that these assets had a limited use or
were obsolete. During the third quarter of fiscal 2002, the Company also
recognized severance expenses of $249 related to the Company's Italian
subsidiary.
OTHER INCOME (EXPENSE). Other income (expense) for the three and nine
months ended June 30, 2003 was $(691) and $(2,349) compared to $(2,574) and
$(8,130) for the same periods in 2002. This decline in expense was due to a
reduction in net interest expenses of $2,642 or 80% during the three months
ended June 30, 2003 and $9,542 or 97% for the nine months ended June 30, 2003
due to the repurchase of $104,480 of Senior Notes during the first quarter of
fiscal 2003. The decline in net interest expense was offset by lower other
income (expense). Other income (expense) decreased $759 and $1,203 for the three
and nine months ended June 30, 2003. The three months ended June 30, 2002
included a gain on the repurchase of $1,175 of the Company's 10 3/8% Senior
Notes of $165 and an unrealized foreign currency gain due primarily to the
strengthening of the Euro compared to the U.S. Dollar of $553. The nine months
ending June 30, 2003 other income (expense) of $492 is primarily due to an
unrealized foreign currency gain due to the strengthening of the Euro compared
to the U.S. Dollar. The nine months ended June 30, 2002 consists of a $654 gain
on the early retirement of $3,425 10 3/8% Senior Notes, a $564 gain on the sale
of fixed assets primarily associated with the sale of the Company's UK color
concentrates business and an unrealized foreign currency gain primarily due to
the strengthening of the Euro compared to the U.S. Dollar of $477.
INCOME TAXES. The Company's effective income tax rates were benefits of 8%
and 18% during the three and nine months ended June 30, 2003, respectively,
compared to benefits of 31% and 25% for the three and nine months ended June 30,
2002. The three and nine months ended June 30, 2003 include a valuation
allowance for two of the Company's foreign operations because it is more likely
than not that the related deferred tax asset will not be realized. The amount of
the valuation allowance for the three and nine months ended June 30, 2003 was
approximately $410 and $630, respectively. Also impacting the tax benefit is the
cessation of amortizing goodwill during fiscal year 2003 (as discussed in Note 4
- - "Cumulative Effect of Change of Accounting Principle") which has the effect of
causing an increase in the effective tax rate benefit. During the nine months
ended June 30, 2002, a valuation allowance of $754 was placed against the
benefit of U.S. net operating losses which had the effect of reducing the tax
rate benefit during the period. The tax rate change was also due to a change in
the mix of pretax income or loss generated by the Company's operations in
various taxing jurisdictions.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. In accordance with SFAS
144, the Oilfield Services results of operations are presented as discontinued
operations, net of income taxes in the consolidated statement of operations.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2003 2002 2003 2002
-------- --------- -------- -------
Revenues $ 1,553 $ 28,626 $ 4,496 $88,505
Operating income 66 (674) 326 3,397
Income from discontinued operations before loss on disposal, net
of income taxes 46 (370) 215 2,007
Loss on disposal of discontinued operations, net of income taxes of
$434, $0, $635 and $0 (434) -- (55) --
Income from discontinued operations before the loss on disposition, net of
income taxes, improved during the three months ended June 30, 2003 compared to
the three months ended June 30, 2002 due to a decline in
-17-
impairment, restructuring and other costs of $2,200 offset by the sale of
substantially all of the Company's oilfield services business. The comparative
nine month periods income from discontinued operations before loss on disposal,
net of income taxes decreased due to the sale of substantially all of the
Company's oilfield services business offset by a reduction in impairment,
restructuring and other costs. The loss on disposition of discontinued
operations, net of income taxes, is due to the $582 gain recorded on the
finalization of the post-closing working capital adjustment (See Note 10-
"Discontinued Operations") offset by tax expense recorded in the three months
ended June 30, 2003 related to the fiscal year 2002 gain on the sale of
substantially all of the Company's oilfield services business as a result of
finalizing and filing the U.S. tax return in June 2003. See Note 13, "Subsequent
Events," related to the sale of the remaining oilfield services business.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective October 1,
2002, the Company was required to adopt Financial Accounting Standards No. 142
("SFAS 142"), Goodwill and Other Intangible Assets, which established Standards
for reporting acquired goodwill and other intangible assets. This statement
accounts for goodwill based on the reporting units of the combined entity into
which an acquired entity is integrated. In accordance with SFAS 142, goodwill
and indefinite lived intangible assets are tested for impairment at least
annually at the reporting unit level, rather than being amortized, and the
amortization period of intangible assets with finite lives is no longer limited
to forty years. Using the discounted cash flow method under the requirements of
SFAS 142, the Company recorded an impairment of goodwill of $28,863, net of
income tax benefit of $580 during the three months ended December 31, 2002 as a
result of the adoption of SFAS 142 on October 1, 2002. The goodwill impaired
was derived from business acquisitions made before fiscal year 2001. This
impairment charge is reflected in the consolidated statement of operations as a
cumulative effect of change in accounting principle. The cessation of goodwill
amortization under SFAS 142 will result in a reduction of approximately $1,140
in annual amortization expense, assuming no additional impairment of goodwill.
NET LOSS. For the three and nine months ended June 30, 2003, the Company
generated net losses of $(4,342) and $(37,174), compared to net losses of
$(3,318) and $(8,206) for the comparable period in fiscal 2002, due to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES. The following are considered by
management as key measures of liquidity applicable to the Company:
JUNE 30, 2003 SEPTEMBER 30, 2002
------------- ------------------
Cash and cash equivalents $ 1,552 $ 129,072
Working capital 33,443 145,939
Cash and cash equivalents declined $127,520 and working capital declined
$112,496 during the nine months ended June 30, 2003 due to the factors described
below.
For the nine months ended June 30, 2003, cash used for operating activities
relating to continuing operations increased to $15,676 compared to $6,796 during
the nine months ended June 30, 2002. The increase in cash used for operating
activities occurred primarily due to an increase in accounts receivable,
inventory, deferred taxes and payment of accrued interest expense.
For the nine months ended June 30, 2003, cash provided by (used for)
discontinued operations decreased to $(6,542) due to the sale of substantially
all of the Company's oilfield services business as well as the Company's
domestic tax payments made in fiscal year 2003 associated with the fiscal year
2002 sale.
Capital expenditures for continuing operations totaled $7,816 during the
nine months ended June 30, 2003. The Company anticipates that available cash and
existing credit facilities will be sufficient to fund remaining fiscal 2003
capital expenditure requirements.
Cash used for financing activities relating to continuing operations was
$98,200 during the nine months ended June 30, 2003 compared to cash used of
$11,797 during the nine months ended June 30, 2002. The change was primarily
the result of increased debt repayments due to the retirement of $104,480 of
Senior Notes during the first quarter of fiscal year 2003.
-18-
Cash used for investing and financing activities for discontinued
operations decreased in the nine months ended June 30, 2003 due to the sale of
substantially all of the Company's oilfield services business.
As of June 30, 2003 the Company had approximately $11,350 of additional
borrowing capacity available under various foreign and domestic credit
arrangements. In April 2002, the Company established a three-year domestic
credit facility secured by domestic receivables and inventory with a maximum
borrowing capacity of $15,000. The borrowing capacity varies based upon the
levels of domestic receivables and inventory. As of June 30, 2003, the Company
had approximately $5,675 of borrowing capacity under the domestic credit
facility.
The Company's foreign credit facilities are generally secured by assets
owned by foreign subsidiaries of the Company and also carry various financial
covenants. The Company's domestic credit facility is secured by domestic
receivables, inventory and certain domestic property, plant and equipment and
carries a variable interest rate. The variable interest rate is currently equal
to either one-quarter (1/4%) percent per annum in excess of the prime rate or
two and one-quarter (2 1/4%) percent per annum in excess of the adjusted euro
dollar rate and may be adjusted depending upon the Company's leverage ratio, as
defined, and excess credit availability under the credit facility. The Company's
domestic credit facility contains customary financial covenants which vary
depending upon excess availability, as defined in the credit facility agreement.
The Company's domestic credit facility contains a number of covenants
including, among others, limitations on the ability of the Company and its
restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends
or redeem any capital stock, (iii) incur liens or other encumbrances on their
assets, (iv) enter into transactions with affiliates, (v) merge with or into any
other entity or (vi) sell any of their assets. In addition, any "change of
control" of the Company or its restricted subsidiaries will constitute a default
under the facility ("change of control" means (i) the sale, lease or other
disposition of all or substantially all of the assets of such entity, (ii) the
adoption of a plan relating to the liquidation or dissolution of such entity,
(iii) any person or group becoming beneficial owner of more than 50% of the
total voting power of the voting stock of such entity or (iv) until April 2004,
a majority of the members of the board of directors of any such entity no longer
being "continuing directors" where "continuing directors" means the members of
the board on the date of the credit facility and members that were nominated for
election or elected to the board with the affirmative vote of a majority of the
"continuing directors" who were members of the board at the time of such
nomination or election).
The Company anticipates that existing cash balances, together with the
borrowing capacity will provide adequate liquidity for fiscal 2003. There can,
however, be no assurance the Company will be successful in obtaining sources of
capital that will be sufficient to support the Company's capital requirements
during fiscal year 2004 and beyond.
In connection with the Company's October 2002 tender offer for the
Company's outstanding Senior Notes, the terms of the Senior Notes indenture were
amended significantly. The amended Senior Notes indenture contains a number of
covenants including: restrictions on the sale of assets of the Company in excess
of $150,000 and a change of control provision that requires the Company to
repurchase all of the Senior Notes at a repurchase price in cash equal to 101%
of the principal amount of the Senior Notes upon the occurrence of a change of
control. A "change of control" means (i) the sale, lease or other disposition
of all or substantially all of the assets of the Company and its restricted
subsidiaries, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) any person or group becoming the beneficial
owner of more than 50% of the total voting power of the voting stock of the
Company or (iv) a majority of the members of the Board of Directors no longer
being "continuing directors" where "continuing directors" means the members of
the Board of Directors on the date of the indenture and members that were
nominated for election or elected to the Board of Directors with the affirmative
vote of a majority of the "continuing directors" who were members of the Board
at the time of such nomination or election. The interpretation of the phrase
"all or substantially all" as used in the Senior Notes indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which governs the indenture) and
is subject to judicial interpretation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In March 2003, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging
-19-
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement will be effective for contracts entered into, modified or designated
as hedges after June 30, 2003. The Company will adopt this standard as of July
1, 2003 and does not expect it to have a material impact on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities in statements of financial position.
This statement will be effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company will adopt this
standard as of July 1, 2003 and does not expect it to have a material impact on
the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." The interpretation requires disclosure
about the nature and terms of obligations under certain guarantees that
Company's have issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing a guarantee. The initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation were effective upon issuance of the
interpretation. The implementation of this interpretation did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, An Interpretation of Accounting
Research Bulletin No. 51." The primary objectives of FIN 46 are to provide
guidance on how to identify entities for which control is achieved through means
other than through voting rights (variable interest entities ("VIE")) and how to
determine when and which business enterprise should consolidate the VIE. This
new model for consolidation applies to an entity in which either (1) the equity
investors do not have a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. This
statement will be effective no later than the beginning of the first interim or
annual reporting period that starts after June 15, 2003. The Company will adopt
this standard as of July 1, 2003 and does not expect it to have a material
impact on the Company's financial statements.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include debt obligations
carrying variable interest rates, and forward purchase contracts intended to
hedge accounts payable obligations denominated in currencies other than a given
operation's functional currency. Forward currency contracts are used by the
Company as a method to establish a fixed functional currency cost for certain
raw material purchases denominated in non-functional currency (typically the
U.S. Dollar).
The following table summarizes the Company's market-sensitive financial
instruments. These transactions are considered non-trading activities.
ON-BALANCE SHEET FINANCIAL INSTRUMENTS
- -----------------------------------------
VARIABLE INTEREST RATE DEBT: WEIGHTED
US$ EQUIVALENT AVERAGE INTEREST RATE
------------------------- -------------------------
JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
CURRENCY DENOMINATION 2003 2002 2003 2002
- --------------------- --------- -------------- --------- --------------
British Pounds Sterling (1) $ 2,022 $ 2,815 5.75% 5.75%
U.S. Dollar (1) 6,187 -- 4.03% --
New Zealand Dollar (1) 1,244 521 7.23% 6.61%
Euro (1) 3,117 715 5.12% 5.73%
Swedish Krona (1) 705 446 5.45% 4.90%
Malaysian Ringett (1) 41 71 8.15% 8.75%
(1) Maturity dates are expected to be less than one year.
The Company does not have any financial instruments classified as
off-balance sheet as of June 30, 2003 and September 30, 2002.
FORWARD PURCHASE CONTRACTS: JUNE 30, 2003 SEPTEMBER 30, 2002
- --------------------------------- ------------------------------ ------------------------------------
RECEIVE US$/PAY NZ$:
- --------------------
Contract Amount US $236 None
Average Contractual Exchange Rate (US$/NZ$) .5775
Expected Maturity Dates July 2003
RECEIVE US$/PAY AUSTRALIAN $:
- -----------------------------
Contract Amount US $2,352 US $770
Average Contractual Exchange Rate US$/A$) .6232 (US$/A$) .5421
Expected Maturity Dates July 2003 through October 2003 October 2002 through November 2002
ITEM 4. CONTROLS AND PROCEDURES
The Company's principal executive and financial officer carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the third quarter. Based
upon that evaluation, the Company's principal executive and financial officer
concluded that the Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and that the Company's disclosure controls and
procedures are effective to ensure that information is accumulated and
communicated to the Company's management to allow timely decisions regarding
required disclosure. In connection with the evaluation, no significant changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) were identified
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
-21-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of the Company's legal proceedings, see Note 9 to the
Consolidated Financial Statements included in Part I, Item 1, of this quarterly
report on Form 10-Q and Part I, Item 3 of the Company's Form 10-K filed December
20, 2002.
ITEM 5. OTHER INFORMATION
On June 21, 2003, the Company entered into a new employment contract
(attached herewith as Exhibit 10.4) with Christopher N. O'Sullivan, pursuant to
which he continues to serve as the Company's President and Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Reference is hereby made to the exhibit index which appears
below.
The following instruments and documents are included as Exhibits to this
Form 10-Q. Exhibits incorporated by reference are so indicated by parenthetical
information.
EXHIBIT NO. EXHIBIT
- ------------ -------
10.1* - Supplemental Agreement between ICO, Inc. and Timothy J. Gollin dated June 19, 2003.
10.2* - Amendment to Supplemental Agreement between ICO, Inc. and Timothy J. Gollin, dated
July 14, 2003
10.3* - Agreement between ICO, Inc. and Timothy J. Gollin dated July 18, 2003
10.4* - Employment Agreement between ICO, Inc. and Christopher N. O'Sullivan, dated June 21, 2003
10.5* - Amendment to Employment Agreement, between ICO, Inc. and Christopher N. O'Sullivan, dated July 23, 2003
31.1* - Certification of Chief Executive Officer and ICO, Inc. pursuant to 15 U.S.C. Section 7241
31.2* - Certification of Chief Financial Officer and ICO, Inc. pursuant to 15 U.S.C. Section 7241
32.1* - Certification of Chief Executive Officer of ICO, Inc. pursuant to 18 U.S.C. Section 1350
32.2* - Certification of Chief Financial Officer of ICO, Inc. pursuant to 18 U.S.C. Section 1350
*Filed herewith
(b) Reports on Form 8-K
On May 9, 2003, the Company filed a Current Report on Form 8-K reporting on
its financial results for the quarter ended March 31, 2003.
-22-
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.
ICO, Inc.
-----------------------------------------
(Registrant)
August 14, 2003
/s/ Jon C. Biro
-----------------------------------------
Jon C. Biro
Chief Financial Officer and
(interim) Chief Executive Officer
/s/ Bradley T. Leuschner
-----------------------------------------
Bradley T. Leuschner
Chief Accounting Officer and
(interim) Treasurer
-23-