Back to GetFilings.com
1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
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 other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
11490 WESTHEIMER, SUITE 1000
HOUSTON, TEXAS 77077
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER (281) 721-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, NO PAR VALUE
RIGHTS TO PURCHASE JUNIOR PARTICIPATING PREFERRED STOCK
PREFERRED STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common equity held by nonaffiliates of the
Registrant as of December 18, 2000 was $28,891,000.
The number of shares outstanding of the registrant's Common Stock
as of December 18, 2000: Common Stock, no par value -- 22,686,987
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 2000 Annual
Meeting of Shareholders are incorporated by reference in Part III of this Form
10-K. Such definitive proxy statement or the information to be so incorporated
will be filed with the Securities and Exchange Commission not later than 120
days subsequent to September 30, 2000.
2
ICO, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................... 1
Item 2. Properties.........................................................................................10
Item 3. Legal Proceedings..................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders (no response required).........................--
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters........................................................................13
Item 6. Selected Financial Data............................................................................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................17
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................................................................28
Item 8. Financial Statements and Supplementary Data........................................................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................................31
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................31
Item 11. Executive Compensation.............................................................................31
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................................................................31
Item 13. Certain Relationships and Related Transactions.....................................................31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................................................32
3
PART I
(in thousands, except share and per share data)
ITEM 1. BUSINESS
GENERAL
ICO, Inc. and its subsidiaries provide specialized petrochemical
processing and oilfield services. In the petrochemical processing segment, the
Company provides grinding, jet milling, and ancillary services for petrochemical
resins produced in pellet form (size reduction services); formulates and
manufactures concentrated products for blending with petrochemical resins to
give finished products desired characteristics, such as color or protection from
ultraviolet light; provides other compounding services; and provides related
distribution services. The Company's specialty petrochemical processing
customers include major chemical companies, petrochemical production affiliates
of major oil exploration and production companies, and manufacturers of plastic
products.
In the oilfield services segment, ICO is a leading provider of
inspection, reconditioning and coating services for new and used tubular goods
and sucker rods used in the oil and gas industries. The Company's oilfield
services segment reduces customers' drilling and production costs by preventing
faulty tubular goods from being placed downhole (exploration services), by
reclaiming and reconditioning used tubular goods and sucker rods (production
services), and by preventing the premature failure of tubular goods and sucker
rods from occurring due to the corrosive downhole drilling environment
(corrosion control services). Although comprehensive industry statistics are not
readily available, ICO believes it is one of the two largest providers of
inspection, reconditioning and coating services for tubular goods in the United
States and Canada. The Company's customers in the oilfield services segment
include many of the leading integrated oil companies and large independent oil
and gas exploration and production companies.
The Company was incorporated in 1978 under the laws of the state of
Texas. During fiscal 1998, the Company was reorganized into a holding company
structure with new ICO, Inc., a Texas corporation, serving as the holding
company. References to the "Company" include ICO, Inc., its subsidiaries and
predecessors unless the context requires otherwise.
PETROCHEMICAL PROCESSING SERVICES
The Company's petrochemical processing business segment provides size
reduction services (grinding and related services such as blending and
screening); compounding services (including manufacturing concentrates for use
in petrochemical products); and, in Europe and Southeast Asia, related
distribution services. Several of the size reduction operations also provide
compounding, blending, and mixing services. The Company conducts its size
reduction and compounding operations in the United States, Europe, Australia,
New Zealand, and Malaysia (the Australia, New Zealand, and Malaysia operations
are sometimes referred to collectively herein as the "Southeast Asian
operations"). The Company's concentrate manufacturing operations are conducted
in the United States through the Company's wholly-owned subsidiary, Bayshore
Industrial, Inc. In Europe, the Company manufactures concentrates in two
locations, one in France and another in England.
The Company's size reduction and related processing services and
compounding operations are an intermediate step between the production of
petrochemical resins and the manufacture of a wide variety of end products, such
as paint, garbage bags, plastic film or other polymers. Chemical manufacturers
generally produce petrochemical resins in pellet form. Various manufacturing
processes, such as rotational molding, used to produce finished plastic or other
petrochemical products require the pellets to be ground into smaller sizes, or
to be mixed with additives and recombined, before end products having the
desired characteristics are produced. The Company's size reduction services
involve the grinding or jet milling of pellets into smaller sizes and, in some
cases, the blending or compounding of petrochemical pellets with other additives
or fillers, such as colored pigments. The Company's concentrate manufacturing
operations involve the production of additives that, when blended into resin,
produce materials with desired properties such as anti-blocking (to prevent
plastic film or sheets from sticking together), flame-retardancy, color,
ultraviolet stabilization, impact and tear resistance, or adhesion.
1
4
During fiscal 2000, the Company completed its plan to restructure and
integrate the Company's European operations and progressed in growing domestic
revenues outside of the Company's traditional rotational molding- related
tolling services. The European restructuring and integration efforts began in
late fiscal 1999, and the Company believes a European management team is now in
place to meet the Company's goals and objectives for these markets. In addition,
while many of the European businesses were acquired separately via acquisition,
these operations have now been integrated in terms of sharing research and
development and technical expertise, and maximizing purchasing and marketing
efforts. The Company believes the results of these efforts will have a positive
effect on the Company's European operations in the future. Within the Company's
domestic operations, during fiscal 2000 the Company expanded capacity in the
areas of concentrate manufacturing and the production of fine powders using jet
milling.
Size Reduction. The Company's size reduction services include ambient
grinding, cryogenic grinding and jet milling to reduce various materials to a
powder. Materials processed by the Company include polyethylene, polyester,
polypropylene, nylon, fluorocarbons, cellulose acetate, vinyls, phenolics,
polyurethane, acrylics, epoxies, waxes and others. The Company is a leading
provider of size reduction services in the United States, Western Europe, New
Zealand, Australia and Malaysia.
The majority of the Company's size reduction services involve ambient
grinding, a mechanical attrition milling process suitable for products which do
not require ultrafine particle size and are not highly heat sensitive.
Typically, using Company-manufactured equipment, the Company grinds pellets of
various materials into powders used in manufacturing household items (such as
toys, household furniture, and trash receptacles) and automobile parts,
agricultural products (such as fertilizer and water tanks), paint, and metal and
fabric coatings. The powders are also used as raw material for additional
processing in which they are combined with additives or colors. Many of the
resulting final products are produced by rotational molding, and the Company
provides a substantial portion of its size reduction services to customers that
are either rotational molders or that supply the rotational molding industry.
Rotational molding produces plastic products by melting pre-measured
plastic powder in molds which are heated in an oven while being rotated. The
melting resin sticks to the hot mold and evenly coats the mold's surface. This
process offers design advantages over other molding processes, such as injection
molding, because assembly of multiple parts is unnecessary, consistent thickness
can be maintained, tooling is less expensive, and molds do not need to be
designed to withstand the high pressures inherent in injection molding. Examples
of end products which are rotationally molded include: agricultural tanks, toys
and small recreational watercraft.
The Company provides jet milling for products requiring very fine
particle size, such as additives for printing ink, adhesives, waxes and
cosmetics. Jet milling uses high velocity compressed air to reduce materials to
sizes between 0.5 and 50 microns. For materials with special thermal
characteristics (such as heat sensitive materials), the Company also provides
cryogenic milling services, which use liquid nitrogen to chill materials to
extremely low temperatures. Company-designed processing systems are typically
used to provide jet milling and cryogenic grinding services.
In addition, the Company offers its customers related polymer
processing services. These services include dry blending and mixing of plastics
and other additives, other various processing services, packaging, warehousing
and distribution services that are integrated with the Company's size reduction
services. From time to time, the Company also sells Company-manufactured
grinding and other equipment in the United States and internationally.
The Company has six operating facilities in the United States, seven in
Europe (located in the Netherlands, the UK, Italy, France and Sweden), and three
in Southeast Asia that provide size reduction services. Two Southeast Asian
facilities, which are located in New Zealand and Australia, were acquired
through the purchase of J.R. Courtenay (N.Z.) Ltd. Another facility in Malaysia
was acquired through the purchase of the operating assets of Sanko Manufacturer
(M) Sdn. Bhd. (see "Acquisitions").
2
5
Concentrate Manufacturing. The Company has three concentrate
manufacturing operations. Bayshore Industrial, Inc., the Company's primary
concentrate manufacturing operation, is located in LaPorte, Texas. Two other
operations were acquired by the Company - Impact Colours (formally the
concentrate manufacturing operations of Rotec Chemicals, Ltd.), located in
Rushden, England, manufactures proprietary color concentrates, and Soreco S.A.
located in Oyonnax, France, which provides high quality color matching and color
compounding services for engineering plastics. The Company's concentrate
manufacturing operations involve the formulation and production of highly
concentrated compounds of additives that are then combined (by the Company or by
others) with petrochemical resins to produce materials having specifically
desired characteristics, such as anti- blocking (to prevent plastic film or
sheets from sticking together), flame-retardance, color, ultraviolet
stabilization, impact and tear resistance, or adhesion. The Company's
concentrates are produced to the detailed specifications of customers. These
customers primarily consist of companies that produce the additive-filled resins
used by others in fabricating finished products, as well as those companies that
make the finished plastic products. The concentrate manufacturing process
requires the combination of up to 25 different additives or fillers in precise
proportions. To be approved as the manufacturer of such concentrates, the
Company must satisfy rigorous qualification procedures imposed by customers on a
product-by-product basis. The Company works closely with its concentrate
customers to research, develop and test the formulations necessary to create the
desired characteristics of the concentrates to be produced. Such concentrates
are produced in batches which may range from as little as five pounds for a lab
sample to as large as four million pounds.
Other Compounding Services. Other compounding services consist of
compounding services provided by the Company, excluding the manufacturing of
concentrates which is a specialized form of compounding. The process of
compounding generally consists of melt blending and mixing of plastics and other
additives, by way of extrusion to form pellets. Within a majority of the
Company's size reduction facilities, compounding services are also offered to
customers. Often times, the Company performs both size reduction and compounding
for a given lot of material. The Company's concentrate manufacturing facilities
often perform other compounding services which also typically involve combining
the manufacturing concentrates into other resins to produce materials having
specifically desired characteristics.
Distribution. In Europe and Southeast Asia, the Company is a leading
distributor of powders used in such applications as rotational molding,
carpet-backing, and powder coating. The Company also sells these powders in
Africa, South America, the Middle East, and Southeast Asia. The Company
generally procures the raw materials for its own account and adds value using
its own formulations and processes to produce the powders. Often, the Company
utilizes both size reduction and compounding technology to produce colored
powders that satisfy specific customer requirements. The Company also supplies
natural and dry-blended colored powders in many of its operating locations. The
Company has various supply agreements with resin producers which provide for
volume and/or limited pricing guarantees. These agreements are for varying
terms, generally are non- exclusive, and are subject to termination upon short
term notice by either party to the contract. As resin prices and, hence, the
Company's raw material costs, change within the various markets served by the
Company, sales prices charged to customers also change.
Petrochemical Processing Customers and Pricing. The primary customers
of the Company's petrochemical processing business segment are large producers
of petrochemicals (which include major chemical companies and petrochemical
production affiliates of major oil production companies), end users such as
rotational molders, and, in the case of the Company's domestic size reduction
business, polymer distributors. In size reduction services, the Company has many
customers, and no customer or particular type of customer is dominant. Worldwide
sales to one petrochemical processing customer (Dow Chemical Company and its
subsidiaries) accounted for 14%, 13% and 10% for fiscal years 2000, 1999 and
1998, respectively. The Company has long-term contract arrangements with many
petrochemical processing customers whereby it has agreed to process or
manufacture certain petrochemical products for a single or multi-year term at an
agreed-upon fee structure.
The Company provides value-added petrochemical processing services to
customers. Within the concentrate manufacturing business and in the European and
Southeast Asian size reduction businesses, the Company generally purchases and
takes into inventory the raw materials necessary to manufacture products
distributed to customers. The Company seeks to minimize the risk of price
fluctuation in raw materials and other supplies by maintaining relatively short
order cycles; however, the purchase of raw materials into inventory may expose
the Company to increased risk of price
3
6
fluctuations (see "Raw Materials and Backlog"). This contrasts with the
Company's domestic size reduction service sales, which are usually carried out
on a tolling basis and do not require the purchase of inventory.
Petrochemical Processing Sales and Marketing. The Company has
established a sales force of six full-time people dedicated to selling its size
reduction services and concentrate products in the United States. In addition,
the Company's European petrochemical processing operations have an established
sales force in Europe consisting of eighteen full-time individuals located in
The Netherlands, the United Kingdom, Italy, France, Belgium, Germany and
Scandinavia. The New Zealand and Australian operations have a combined sales
force of eight people.
Competition. The specialty petrochemical processing business is highly
competitive. Competition is based principally on price, quality of service,
manufacturing technology, proximity to markets, timely delivery and customer
service and support. The Company's size reduction competitors are generally
small and mid-sized companies which, overall, have fewer locations and a more
regional emphasis. Several companies also maintain significant size reduction
facilities for their own use. The Company believes that it has been able to
compete effectively in its markets based on competitive pricing, its network of
plants, its technical expertise and equipment manufacturing capabilities and its
range of services, such as flexible storage, packaging facilities, and product
development. The Company also believes that its knowledge of the rotational
molding industry, through activities such as participation in the Association of
Rotational Molders, enhances its competitive position with this key customer
group. The Company's competitors in the concentrates industry include a number
of large enterprises, as well as small and mid-sized regional companies. The
Company believes its technical expertise, processing efficiency, high quality
product, customer support and pricing have enabled it to compete successfully in
this market.
The ambient size reduction business lacks substantial barriers to
entry, but cryogenic grinding and jet milling require a more significant
investment and greater technical expertise. The compounding business, including
concentrates manufacturing, requires a substantial investment in equipment, as
well as extensive technical and mechanical expertise. In general, many of the
Company's customers could perform the special petrochemical processing services
provided by the Company for themselves if they chose to do so, and new
competitors may enter the market from time to time. A number of the Company's
competitors and potential competitors in this segment have substantially greater
financial and other resources than the Company. While there can be no assurance,
the Company believes that it will be able to continue to compete effectively in
the industry, based on the factors described above.
OILFIELD SERVICES
The Company's Oilfield Services segment includes exploration services,
production services, and corrosion control services for new and used tubular
goods and sucker rods. These services include a variety of processes designed to
reduce the customer's cost of drilling and production. The Company also sells
equipment and supplies used in the inspection, reconditioning and coating of
tubular goods and sucker rods.
Tubular goods include various forms of casing, tubing, drill pipe and
line pipe. Casing is used to seal off fluids and prevent collapse of the bore
holes of oil and natural gas wells. After production casing is set, a string of
tubing is suspended from the surface inside the casing to serve as a conduit for
the extraction of oil and natural gas. Drill pipe is heavy seamless pipe used to
rotate the drill bit and circulate drilling fluids. Line pipe is used for waste
disposal lines, flow lines, gathering systems and pipelines through which oil,
natural gas and liquid hydrocarbons are transported. Removal of casing or tubing
for repair or replacement is expensive and results in an interruption of
production and loss of revenues to the well owner. Sucker rods are steel rods
which are joined together in a "string" by couplings to form a mechanical link
from a downhole pump at the bottom of an oil well to the pumping unit on the
surface. Removal of a sucker rod string for repair or replacement of rods,
couplings or the downhole pump requires a well to be shut down and the entire
string of sucker rods to be removed, resulting in additional expenses and loss
of revenues to the well owner due to interruption of production.
Exploration Services. The Company provides inspection services designed
to identify new tubular goods that are defective or which do not meet American
Petroleum Institute ("API") standards or other specifications set by the
customer. The API standards require pipe to be inspected to meet specified
standards and are generally employed as a benchmark in the petroleum industry.
Customers, however, generally require pipe to meet more rigorous standards.
These inspection services are used by the mills that manufacture pipe, pipe
suppliers and end users, such as oil and gas exploration
4
7
and production companies, as a quality assurance and control measure to reduce
the costs associated with defective tubular goods and to reduce the risk of
downhole failure, especially when drilling deep oil and natural gas wells with
high downhole temperatures and pressures and when drilling in environmentally
sensitive areas such as offshore waters. The Company operates its own inspection
facilities for new tubular goods that provide (in contrast to field inspection)
a controlled environment that permits more efficient and consistent inspection
procedures, facilitates supervision of personnel and electronic equipment and
avoids problems associated with inclement weather. The Company also performs,
under long-term contracts, inspection services on site at the manufacturing
plants of several major producers and processors of tubular goods, thereby
reducing transportation and handling costs to the customer; and provides mobile
inspection services in the field. The Company also manufactures inspection and
quality control equipment which is sold or leased from time to time to domestic
and foreign customers.
The Company provides its customers a "Full-Service One-Stop Program" by
offering a complete range of tubular services, including electro-magnetic
inspection ("EMI"), ultrasonic inspection ("UT"), tubular maintenance and
storage, inventory management, and associated services such as hydrostatic
testing and threading (API specification and premium threading services are
offered within the Company's Houston facility by third parties). EMI is a
process which identifies flaws through magnetic flux leakage and is generally
used on pipe of less than 500 mil. in thickness. The Company designed and uses
an EMI system, the AGS System II, that the Company believes is capable of
identifying and visually displaying natural and man-made flaws that are not
identifiable using conventional EMI methods. The Company also designed and uses
a UT system, the ICO Scan system, that uses high frequency sound waves to
identify flaws that are virtually undetectable by other means. This system
employs high frequency sound waves and is used to inspect pipe that is thicker
than pipe which EMI can effectively inspect or that contains alloys of metals
other than steel, such as titanium. During fiscal 1999, the Company received and
installed a field-tested, high-speed, full length ultrasonic inspection unit in
the Company's Houston, Texas pipe inspection facility, thereby expanding the
Company's ultrasonic inspection capacity.
Production Services. The Company reconditions and inspects used tubular
goods and new and used sucker rods through the provision of a complete package
of inspection and maintenance services. These services include the testing,
cleaning, reconditioning and electronic inspection of tubular goods. These
services are performed in a controlled environment at the Company's facilities,
which provides many of the advantages previously described for in-plant
inspection of new tubular goods, as well as at the well site using mobile
equipment. Production services reduce the customer's well operating costs
because reconditioning used tubular goods is typically less expensive than
purchasing new tubular goods. Reconditioned tubular goods generally must meet
the same API or customer standards as new tubular goods. The Company performs
these services at ten Company facilities located in California, Mississippi, New
Mexico, North Dakota, Oklahoma, Texas (two locations), Wyoming and Canada (two
locations).
The Company reconditions and inspects new and used sucker rods. Using
the Company's patented computerized sucker rod inspection system, reconditioning
involves a number of steps designed to clean, straighten, inspect and apply
protective coating to sucker rods to guard against corrosion. This process
reduces the customer's well operating costs because reconditioning used sucker
rods is less expensive than purchasing new sucker rods. The Company also
inspects new sucker rods before they are placed in service to reduce the risk of
downhole failure, which requires expensive pulling services and results in loss
of production. The Company's sucker rod reconditioning and inspection services
are provided at seven Company facilities located in California, Oklahoma, Texas
(three locations), Wyoming and Canada.
The Company provides a service that allows customers to acquire
reconditioned tubular goods or sucker rods at a lower cost than new tubular
goods or sucker rods, decrease their inventory carrying cost, and enhance their
inventory management. With this program, the Company purchases used tubular
goods and sucker rods from certain customers, reconditions and grades the pipe
and sucker rods for varying degrees of usage and resells the pipe and sucker
rods in the marketplace.
The Company operates mobile inspection units utilizing a system known
as Wellhead Scanalog(TM). The Company acquired the rights to Wellhead Scanalog
for use in the United States pursuant to a non-exclusive, royalty-free license
acquired in 1992. Wellhead Scanalog units are designed to perform tubular
inspection while the tubing is being removed from the well without interfering
with the normal operation of the rig. The Company believes Wellhead Scanalog
5
8
inspection is unique because it is not affected by scale, mud, paraffin or
water, which can inhibit the operation of other systems.
Corrosion Control Services. The Company's corrosion control services
are designed to reduce well operating costs by extending the useful life of
downhole tubular goods and sucker rods and by improving the well's hydraulic
efficiency and pipe integrity. Corrosive conditions exist inside most wells.
Such conditions are particularly extreme in high temperature gas wells and in
oil producing regions where secondary and tertiary recovery techniques are
utilized. Secondary and tertiary recovery techniques are methods by which
natural forces in an oil reservoir are supplemented by means such as water
flooding to increase ultimate oil recovery. The Company offers a variety of
corrosion control services to its customers, using several of the Company's
proprietary and, in many cases, patented processes.
The Company performs internal coating of new and used tubular goods
with a variety of powder and liquid coatings. In the coating process, tubular
goods are placed in large burnout ovens to remove foreign substances. The
tubular goods are then grit blasted, primed with phenolic, preheated, coated
internally and subjected to a final baking process. The tubular goods are then
inspected visually and electronically to make certain the coating uniformly
covers the entire interior of the pipe and meets the Company's quality assurance
specifications. A similar process is utilized for cleaning, priming and coating
tubular couplings. The selection of the proper coating for downhole tubular
goods requires specialized knowledge and considerable effort by the Company's
experienced coating managers and technicians. The key to the process is
gathering facts concerning the well, its environment, test procedures and
related conditions planned for the life of the well. The Company has five
coating facilities located in Louisiana, Texas (three locations) and Canada.
The Company's patented sucker rod coating process involves applying a
special formula stainless steel to the sucker rods and then coating them with a
phenolic primer and fusion bonded modified epoxy. Sucker rods used in less
corrosive conditions may be coated only with phenolic primer and fusion bonded
modified epoxy. The Company's sucker rod coating services are provided at its
facility in Odessa, Texas.
The Company also provides internal cement lining for pipe ranging in
size from small diameter tubing to 24-foot line pipe. Cement provides an
increased barrier between corrosive fluids and the tubular product which allows
the customer to use a larger portion of its used pipe with a welded connection
when weight and torsion strength are not a primary issue. For critical line
pipe, the Company also applies an external fusion bonded tape which forms a
tough protective corrosion barrier.
Oilfield Services Customers. The Company's customers include leading
integrated oil companies, large independent oil and gas exploration and
production companies, drilling contractors, steel producers and processors, and
oilfield supply companies. No single customer of the oilfield services business
segment accounted for over 10% of the Company's consolidated revenues in fiscal
1998, 1999 or 2000. Sales are generally on an order- by-order basis or under
short-term contracts (i.e., one year or less). The Company does enter into
contracts in connection with the placement of Company-owned equipment in tubular
goods manufacturing or processing facilities. These contracts are generally for
three or more years and in some instances provide for fixed prices, volume
discounts and indemnification of customers for certain liabilities.
Oilfield Services Sales and Marketing. The Company's oilfield services
are marketed by 27 individuals who are responsible for in-depth customer contact
and service knowledge. Oilfield service sales representatives are required to be
technically knowledgeable in reclamation, inspection and corrosion control
services, and to stay abreast of regional and industry-wide trends in oil and
gas exploration, completion and production.
Competition. The principal competitive factors in the Company's
oilfield services business are price, availability and quality of service.
Although the consolidation in the tubular inspection, reconditioning and coating
industry has resulted in the elimination of many of the Company's competitors,
the Company's ability to compete effectively is dependent upon timely, reliable
performance and quality of its services and personnel at competitive rates. The
Company believes that it has been able to compete effectively because of its
efficient and cost-effective processes, the strong relationships that it
maintains with its customers, and its ability to add value through integration
of services such as tubular inspection, coating, maintenance, transportation,
storage and inventory control.
6
9
The Company believes few competitors within the United States provide
as wide a variety of tubular services as those offered by the Company. The
Company and Tuboscope, Inc., a subsidiary of Varco International, Inc., compete
with each other and a number of smaller companies in most domestic markets.
Varco International, Inc. has greater financial resources than the Company.
Unlike the Company's corrosion control business, capital and other requirements
for entry into the used tubular inspection business are relatively low and new
competition may enter the market from time to time. Potential entrants may have
substantially greater financial or other resources than the Company. While there
can be no assurance, the Company believes it will be able to compete effectively
in the industry, based on the factors described above.
ACQUISITIONS
From the beginning of fiscal 1994 to present, the Company completed and
integrated eleven acquisitions in the oilfield services segment which increased
its market share and expanded its service capabilities. In April 1996 the
Company entered the petrochemical processing industry through the acquisition of
Wedco Technology, Inc. ("Wedco") to take advantage of opportunities in that
market. Since the Wedco acquisition, the Company has completed ten additional
acquisitions in the petrochemical processing industry. The acquisitions the
Company has completed during the last three fiscal years are discussed below and
were accounted for using the purchase method of accounting and, as such, the
results of operations of the acquired entities are included in the Company's
consolidated results of operations only from the date of each acquisition
forward.
During September 2000, the Company acquired the operating assets of
Sanko Manufacturer (M) ("Sanko") for $675, subject to adjustment. Sanko's
business is now conducted through Courtnay (Malaysia) Sdn. Bhd., a Malaysian
company that provides specialty powders and size reduction and compounding
services to the rotational molding, metal coating, textile, and injection
molding industries in Malaysia.
During February 1999, the Company acquired MilCorp Holdings, Inc. and
MilCorp Industries, Ltd. (collectively "MilCorp") for $7,653 in cash and the
assumption of approximately $3,744 of debt. MilCorp is a leading provider of
fully integrated services for oil country tubular goods, including trucking,
inventory management, inspection and internal coating. MilCorp has facilities
located on 160 acres near Edmonton, Alberta, in the energy-producing region of
Western Canada. MilCorp has been in business for more than 50 years and its
customers include many of Western Canada's large energy companies and drilling
contractors.
During June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly owned subsidiary for approximately $1,600 in cash and the assumption of
approximately $236 in debt. Soreco, which is strategically located in the French
"Plastics Valley", provides high-quality color matching and color compounding
services for engineering plastics. Soreco's customer base includes manufacturers
of consumer products such as appliances, electronics, cosmetics and other
products that require colors with high consistency. Soreco uses sophisticated
single pigment coloration techniques to provide rapid turnaround for color
matching and compounding services and has an extensive library of proprietary
color formulations.
During March 1998, the Company acquired J.R. Courtenay (N.Z.) Ltd.
("JRC") and its wholly owned subsidiary, Courtenay Polymers Pty. Ltd. ("CPPL"),
for $14,124 in cash and the assumption of approximately $500 in debt. JRC and
CPPL are located in Auckland, New Zealand and Melbourne, Australia,
respectively, and are leading providers of polymer powders to the rotational
molding and metal coating industries in New Zealand and Australia. These
companies sell an extensive line of materials using proprietary formulations
under the Cotene(TM) brand name and also provide a complete range of size
reduction and compounding services.
During December 1997, the Company acquired the operating assets of
Curley's Inspection Service, Inc. ("Curley's"). The consideration consisted of
$2,000 in cash and is subject to adjustment based upon future operating revenues
payable through December 31, 2002. Curley's provides drill pipe and casing
inspection services from locations in Texas and New Mexico.
7
10
ENVIRONMENTAL REGULATION
The Company is subject to numerous and changing local, state, federal
and foreign laws and regulations concerning the use, storage, treatment,
disposal and general handling of hazardous materials, some of which may be
considered to be hazardous wastes, and restrictions concerning the release of
pollutants and contaminants into the environment. These laws and regulations may
require the Company to obtain and maintain certain permits and other
authorizations mandating procedures under which the Company must operate and
restrict emissions. Many of these laws and regulations provide for strict joint
and several liability for the costs of cleaning up contamination resulting from
releases of regulated materials into the environment. Violation of mandatory
procedures under operating permits may result in fines, remedial actions or, in
more serious situations, shutdowns or revocation of permits or authorizations.
The Company believes that future compliance with existing laws and regulations
will not have a material adverse effect on the Company. The Company further
believes that future capital expenditures for environmental remediation will not
be material.
The Company regularly monitors and reviews its operations, procedures
and policies for compliance with environmental laws and regulations and the
Company's operating permits. The Company believes that its current procedures
and practices in its operations, including those for handling hazardous
materials, are substantially in compliance with all material environmental laws
and regulations and its material operating permits. There can be no assurance,
however, that a review of the Company's past, present or future operations by
courts or federal, state, local or foreign regulatory authorities will not
result in determinations that could have a material adverse effect on the
Company. In addition, the revocation of any of the Company's material operating
permits, the denial of any material permit application or the failure to renew
any interim permit, could have a material adverse effect on the Company. While
the Company cannot predict what environmental laws and regulations will be
enacted or adopted in the future or how such future laws or regulations will be
administered or interpreted, it believes the impact of any such laws or
regulations is not likely to be more burdensome to the Company than to other
similarly situated companies involved in oilfield services or petrochemical
processing. Compliance with more stringent environmental laws and regulations,
more vigorous enforcement policies, or stricter interpretations of current laws
and regulations, or the occurrence of an industrial accident, could have a
material adverse effect on the Company. Also, see discussion concerning
environmental issues included in "Item 3. Legal Proceedings."
INSURANCE AND RISK
Except for warranties implied by law, the Company does not generally
warrant the products and services it provides. Nonetheless, if the Company were
found to have been negligent, or to have breached its obligations to its
customers, the Company could be exposed to significant liabilities and its
reputation could be adversely affected. Likewise, the Company's activities as a
vendor of inspection equipment, a reseller of tubular goods and a manufacturer
of specialty petrochemical products, may result in liability on account of
defective products. The Company believes these risks of its business are
adequately covered by its insurance program. However, such coverage is subject
to applicable deductibles, exclusions, limitations on coverage and policy
limits. In addition, the occurrence of a significant adverse event, the risks of
which are not fully covered by insurance, could have a material adverse effect
on the Company's financial condition, results of operations or net cash flows.
Moreover, no assurance can be given that the Company will be able to maintain
adequate insurance in the future at rates it considers reasonable.
RAW MATERIALS
The Company purchases and takes into inventory the resins, additives
and other materials used in its concentrates manufacturing, distribution and a
portion of its specialty petrochemical distribution business. These materials
are subject to fluctuating availability and prices. The Company believes that
these and other materials used in its operations are available from numerous
sources and are available to meet its needs.
PATENTS AND LICENSES
The Company holds ten United States patents, three United Kingdom
patents, two Australia/New Zealand patents, and has nine patent applications
pending covering the proprietary technology utilized in its reconditioning,
inspecting, spraymetal and epoxy coating of sucker rods and its services for
used tubular goods. The expiration dates on
8
11
these patents range from January 2008 to October 2017. The Company's
petrochemical processing operations are not materially dependent upon any
patents or trademarks. The Company believes that its patents and licenses are
valid and that the duration of its existing patents is satisfactory. However, no
assurance can be given that one or more of the Company's competitors may not be
able to develop or produce a process or system of comparable or greater quality
to those covered by the Company's patents or licenses, that patents will issue
in respect to filed patent applications, that the Company's patents will not be
found to be invalid or that others will not claim that the Company's operations
infringe upon or use the intellectual property of others. In addition, issued
patents may be modified or revoked by the United States Patent and Trademark
Office or in legal proceedings. The Company does not believe any single patent
is essential to the overall successful operation of the Company's business.
In connection with the acquisition of Baker Hughes Tubular Services
during fiscal 1992, the Company acquired royalty-free non-exclusive licenses to
use Wellhead Scanalog(TM), PipeImage(TM) and other proprietary technology in the
United States. Pursuant to the terms of such licenses, the Company generally is
prohibited from using such proprietary technology in foreign markets.
EMPLOYEES
As of November 30, 2000, the Company had approximately 1,670 full-time
employees and approximately 529 independent full-time contract employees. The
Company's employees working in Italy, France, Holland, Sweden, New Zealand, and
Australia are parties to collective bargaining agreements. None of the other
employees are represented by a union. The Company has experienced no strikes or
work stoppages during the past fiscal year and considers its relations with its
employees to be satisfactory.
9
12
ITEM 2. PROPERTIES
The location and approximate acreage of the Company's operating
facilities at December 18, 2000, together with an indication of the services
performed at such facilities are set forth below.
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Houston, Texas........................... Corporate headquarters N/A 2001
PETROCHEMICAL PROCESSING SERVICES
Fontana, California...................... Size reduction 7 Owned
Ottawa, Illinois......................... Supplier and processor of filler, extender and
chemical processing minerals 3 2008
East Chicago, Indiana.................... Size reduction 4 Owned
Bloomsbury, New Jersey................... Size reduction 15 Owned
Grand Junction, Tennessee................ Size reduction 5 Owned
China, Texas............................. Size reduction 13 Owned
LaPorte, Texas........................... Concentrate manufacturing and compounding
facility 39 Owned
Lovelady, Texas.......................... Size reduction 1 2002
Lovelady, Texas.......................... Size reduction 24 Owned
Melbourne, Australia..................... Size reduction, compounding and distributing 1 2004
Gainsborough, England.................... Size reduction 8 Owned
Rushden, England......................... Concentrate and compounding facility 1 2008
Beaucaire, France........................ Size reduction 5 Owned
Montereau, France........................ Size reduction 4 Owned
Oyonnax, France.......................... Compounding 1 Owned
Verolanuova, Italy....................... Size reduction, compounding and distributing 5 Owned
Verdellino, Italy........................ Size reduction, compounding and distributing 1 2007
Batu Pahat, Malaysia..................... Size reduction, compounding 1 2001
's-Gravendeel, The Netherlands........... Size reduction 5 Owned
Auckland, New Zealand.................... Size reduction, compounding and distributing 1 2004
Stenungsund, Sweden...................... Size reduction 1 2007
OILFIELD SERVICES
Bakersfield, California.................. Sucker rod reconditioning and inspecting 29 Owned
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 61 2001
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 23 2003
Broussard, Louisiana..................... Drill pipe inspection 17 Owned
Brookhaven, Mississippi.................. Inspection of tubular goods 12 2001
Farmington, New Mexico................... Inspection of new and used tubular goods 14 2002
Farmington, New Mexico................... Storage and inspection of new and used tubular
goods 10 2004
Williston, North Dakota.................. Used tubular goods services 2 2002
Oklahoma City, Oklahoma.................. Sucker rod reconditioning and inspecting 8 Owned
Oklahoma City, Oklahoma.................. Inspection of new and used tubular goods 17 Owned
Corpus Christi, Texas.................... Inspection of new and used tubular goods 10 Owned
Denver City, Texas....................... Sucker rod reconditioning and inspecting 10 Owned
Houston, Texas........................... Inspection of new tubular goods 192 Owned
Houston, Texas........................... Internal coating of tubular goods 49 Owned
Houston, Texas........................... Internal research and development 5 2002
Lone Star, Texas......................... Inspection of new tubular goods 80 Owned
Lone Star, Texas......................... Inspection of new tubular goods N/A Mo.-to-mo.
Monahans, Texas.......................... Inspection of new and used tubular goods 17 2002
10
13
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Odessa, Texas............................ Sucker rod reconditioning and inspecting 13 (1)
Odessa, Texas............................ Sucker rod storage 7 Owned
Odessa, Texas............................ Spraymetal and epoxy coating of sucker rods 3 Owned
Odessa, Texas............................ Used tubular goods services 13 Owned
Odessa, Texas............................ Internal coating of tubular goods 10 Owned
Odessa, Texas............................ Trucking yard 14 Owned
Odessa, Texas............................ Used tubular goods services 22 Owned
Odessa, Texas............................ Storage facility 22 Owned
Odessa, Texas............................ Cement lining/external coating 20 (2)
Odessa, Texas............................ Equipment manufacturing and repair 9 Owned
Casper, Wyoming.......................... Sucker rod reconditioning and inspecting;
inspection of new and used tubular goods 40 (3)
Edmonton, Alberta, Canada................ Inspection of new and used sucker rods;
sales and service of new and used oilwell engines 10 2005
Nisku, Alberta, Canada................... Oilfield tubular goods - trucking, coating,
inspecting and inventory management 155 Owned
- ----------
(1) Three acres are leased on a month-to-month basis; the remaining ten
acres are owned by the Company.
(2) Eighteen acres are owned; the remaining two acres are leased on a
month-to-month basis.
(3) Seventeen acres are owned; twenty-one acres are leased through 2003;
remaining two acres are leased on a month-to- month basis.
The Company considers its facilities and equipment to be well
maintained and adequate for the Company's present operations. The Company also
leases various sales and administrative offices with various lease expiration
dates through 2002. Utilization of the Company's oilfield service facilities is
subject to fluctuations based in part on oil and gas exploration and production
levels. The Company is currently operating most of its facilities in the
oilfield services business below full capacity. Most oilfield facilities are
operating no more than 12 hours per day, while most of the petrochemical
facilities are operating 24 hours per day, 5 days per week.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in four cases involving four
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. The cases were initiated on May 13, 1991 (by Odilon
Martinez, et al., in Texas state court in Ector County); November 21, 1991 (by
Roberto Bustillos, et al., in Texas state court in Ector County); August 25,
1992 (by James Glidwell, et al., in Texas state court in Ector County); and
January 4, 2000 (by Pilar Oliver, et al., in Texas state court in Harris
County). For the most part, the Company is generally protected under workers'
compensation law from claims under these suits except to the extent a judgment
is awarded against the Company for intentional tort. The standard of liability
applicable to all of the Company's pending personal injury cases alleging
exposure to silica is intentional tort, a stricter standard than the gross
negligence standard applicable to wrongful death cases. One suit against the
Company, which was settled and came to an end in the fourth quarter of fiscal
2000, involved negligence claims that, in theory, could have circumvented the
Company's immunity protections under the workers' compensation law, although
even if such circumvention had occurred, the Company believed that this
litigation, referred to as the Roark litigation, would not have had a material
adverse effect on the financial condition or results of operations of the
Company. As described in more detail below, the Roark litigation named the
Company and Baker Hughes, Inc. ("Baker Hughes"), among others, as defendants and
fell within the provisions of an agreement between the Company and Baker Hughes
that limited the Company's obligations in the litigation. During the fourth
quarter of fiscal 2000, the Company, Baker Hughes and the plaintiff in the Roark
litigation entered into a settlement that brought an end to the Roark
litigation. The terms of the settlement did not have a material adverse effect
on the Company's financial condition or results of operations.
11
14
The Company currently has one pending silicosis-related suit in which
wrongful death is alleged. This case was filed on April 4, 2000 by Delma Orozco,
individually and as representative of the estate of Lazaro Orozco, et al., in
Texas state court in Ector County. In fiscal 1993, the Company settled two other
silicosis-related suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605. In 1994,
the Company was dismissed without liability from two suits alleging intentional
tort against the Company for silicosis-related disease. In 1996, the Company
obtained a non-suit in two other intentional tort cases and in early 1997 was
non-suited in an additional tort case. During the second quarter of fiscal 1998,
three cases involving alleged silicosis-related deaths were settled. The Company
was fully insured for all three cases and, as a result, did not incur any
settlement costs. During the second quarter of fiscal 1998, the Company was
non-suited in one intentional tort case, and during the fourth quarter of fiscal
1998, the Company was non-suited in two additional tort cases. During the second
quarter of fiscal 1999, the Company was non-suited in one intentional tort case,
and during the fourth quarter of fiscal 1999, the Company was non-suited in an
additional intentional tort case. During the third quarter of fiscal 2000, the
Company was non-suited in two additional intentional tort cases. The Company and
its counsel cannot at this time predict with any reasonable certainty the
outcome of any of the remaining silicosis-related suits or whether or in what
circumstances additional suits may be filed. Except as described below, the
Company does not believe, however, that such suits will have a material adverse
effect on its financial condition, results of operations or cash flows. The
Company has in effect, in some instances, general liability and employer's
liability insurance policies applicable to the referenced suits; however, the
extent and amount of coverage is limited and the Company has been advised by
certain insurance carriers of a reservation of rights with regard to policy
obligations pertaining to the suits because of various exclusions in the
policies. If an adverse judgment is obtained against the Company in any of the
referenced suits which is ultimately determined not to be covered by insurance,
the amount of such judgment could have a material adverse effect on the
financial condition, results of operations and/or cash flows of the Company.
The Company's agreement with Baker Hughes, pursuant to which Baker
Hughes Tubular Services ("BHTS") was acquired by the Company, provides that
Baker Hughes will reimburse the Company for 50% of the BHTS environmental
remediation costs in excess of $318, with Baker Hughes' total reimbursement
obligation being limited to $2,000 (current BHTS obligation is limited to
$1,650). BHTS is a responsible party at two hazardous waste disposal sites that
are currently undergoing remediation pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who
were responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas. Remediation of the French Limited site
has been completed, with only natural attenuation of contaminants in groundwater
occurring at this time. Remediation has not yet commenced at the Sheridan site.
Current plans for cleanup of this site, as set forth in the federal Record of
Decision, call for on-site bioremediation of the soils in tanks and natural
attenuation of contaminants in the groundwater. However, treatability studies to
evaluate possible new remedies for the soils, such as in-place bioremediation,
are being conducted as part of a Remedial Technology Review Program. Based on
the completed status of the remediation at the French Limited site and BHTS's
minimal contribution of wastes at both of the sites, the Company believes that
its future liability under the agreement with Baker Hughes with respect to these
two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500 for each claim and a maximum contingent liability of $5,000 ($4,500 net
of payments the Company has made to date pursuant to the terms of the agreement)
in the aggregate, for all claims. This agreement governed the Company's
liability with respect to the Roark litigation, which involved occupational
health claims arising out of Roark's employment at BHTS.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13,000 in the
trial of its case against John Wood Group PLC relating to the 1994 contract
12
15
for the purchase of the operating assets of NDT Systems, Inc. and certain
related entities. The trial court subsequently entered a judgment for $15,750 in
the Company's favor, which includes pre-judgment interest on the jury award. The
Wood Group appealed the judgment. On March 9, 2000, the Court of Appeals for the
First District of Texas reversed the judgment entered by the trial court and, as
to all but one of ICO's claims, ordered that ICO have no recovery. As to that
remaining breach of contract claim seeking recovery of a contract payment of
$500, the Court of Appeals remanded the cause to the trial court for further
proceedings. On April 7, 2000, ICO filed with the Court of Appeals its motion
for rehearing and rehearing en banc. That motion was overruled on August 31,
2000. ICO filed its petition for review with the Texas Supreme Court on November
15, 2000. That petition is still pending. The Texas Supreme Court may ask for
further briefing and that Court has discretion in deciding whether to grant
ICO's petition and review the case. All expenses associated with this litigation
have been reflected as expenses in the Company's financial statements, and there
is no asset on the Company's balance sheet relating to the judgment in the
Company's favor.
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made on August 7, 1998,
by Oil Country Tubular Limited ("OCTL"), a company based in India. The claim
arises out of a transaction between OCTL and Baker Hughes Tubular Services, Inc.
(BHTS) whereby BHTS sold a plant in Canada to OCTL and entered into a separate
Foreign Collaboration Agreement (FCA) to provide certain practical and technical
assistance in setting up the plant and making it operational in India.
OCTL paid $2,400 for the FCA and $2,800 for the plant. In its claim
brought in the Court of Arbitration of the International Chamber of Commerce,
OCTL claims, among other items, it did not receive technical assistance, spare
parts, and certain raw materials that were necessary for its oil field tubular
services plant in India and that BHTS owed it under the FCA. The Company is
involved by virtue of its acquisition in 1992 of BHTS. The Company had only
peripheral knowledge of the dispute between OCTL and Baker Hughes Incorporated
prior to the filing of OCTL's claim. The Company objected to the jurisdiction of
the arbitration tribunal on the ground that the Company is not a party to the
FCA, the FCA having been assigned to Tuboscope Incorporated prior to ICO's
purchase of BHTS. After a hearing on that objection, the arbitral tribunal
entered a decision in March 2000, holding that it did have jurisdiction over the
Company. OCTL submitted an Amended Statement of Claim in November, 2000. While
the total amount of OCTL's claims remain unclear, it has alleged approximately
$8,700 in losses due to past contractual breaches, plus approximately $7,900 in
"liquidated damages" it claims to have paid to third parties because of
production losses that allegedly resulted from contractual breaches, and an
unspecified amount of damages from lost sales. While the outcome of this
arbitration matter cannot be predicted, the Company plans to contest the claims
vigorously. Regardless of the liability of facts, about which the Company has no
knowledge at this point, the Company believes the damage claim is exaggerated.
The Company, Baker Hughes, and Tuboscope have entered into a separate agreement
to arbitrate which entity would be responsible to pay any award the ICC arbitral
panel may enter.
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the
symbol ICOC. There were 403 shareholders of record of the Company's common stock
at December 10, 2000.
During fiscal year 1998, the Company declared and paid common
dividends of $.055 per share, per quarter for a total of $.22 per share during
the year. During the first quarter of fiscal year 1999, the Company declared a
$.055 per common share dividend. Since that time, the Company has not declared
or paid common stock dividends. The Company currently has no plans to reinstate
the common stock dividend.
13
16
The Company's agreement relating to the Senior Notes due 2007 restricts
the Company's ability to pay dividends on preferred and common stock. The terms
of the Senior Notes, however, do allow for dividend payments on currently
outstanding preferred stock, in accordance with the terms of the preferred
stock, and up to $.22 per share, per annum on common stock, in the absence of
any default or event of default on the Senior Notes. The above limitations may
not be decreased, but may be increased based upon the Company's results of
operations and other factors (see "Item 7. Management's discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 7 to the Company's Consolidated Financial Statements).
The following table sets forth the high and low sales prices for the
common stock as reported on the NASDAQ Stock Market.
HIGH LOW
---- ---
1999 First Quarter 3 1/2 1 15/16
Second Quarter 2 7/32 27/32
Third Quarter 1 5/8 1
Fourth Quarter 2 3/8 1 3/16
2000 First Quarter 2 3/16 1 1/16
Second Quarter 2 1/4 1 1/4
Third Quarter 1 7/8 1 3/16
Fourth Quarter 2 5/32 1 5/16
14
17
ITEM 6. SELECTED FINANCIAL DATA (1)
The following table sets forth selected financial data of the Company
that has been derived from consolidated financial statements that have been
audited. The selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this report.
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................................ $ 325,307 $ 262,373 $ 281,343
Cost of sales and services .......................................... 249,894 201,644 211,856
------------ ------------ ------------
Gross profit ........................................................ 75,413 60,729 69,487
Selling, general and administrative expenses ........................ 40,404 42,158 45,022
Depreciation and amortization ....................................... 16,332 17,074 15,389
Impairment of long-lived assets ..................................... -- 9,291 --
Write-off of fixed assets ........................................... -- 3,420 --
Severance expenses .................................................. 426 2,499 --
Non-recurring compensation arrangements ............................. -- -- --
Write-off of start-up costs ......................................... -- 867 --
------------ ------------ ------------
Operating income (loss) ............................................. 18,251 (14,580) 9,076
Interest income ..................................................... 2,306 1,921 3,771
Interest expense .................................................... (14,423) (13,831) (13,819)
Gain on sale of equity investment ................................... -- -- 11,773
Other income (expense) .............................................. -- (51) (20)
------------ ------------ ------------
Income (loss) before income taxes and extraordinary item ............ 6,134 (26,541) 10,781
Income taxes (benefit) .............................................. 3,633 (6,439) 4,775
------------ ------------ ------------
Income (loss) before extraordinary item ............................. 2,501 (20,102) 6,006
Extraordinary gain .................................................. -- 399 --
------------ ------------ ------------
Net income (loss) ................................................... 2,501 (19,703) 6,006
Preferred dividends ................................................. (2,176) (2,176) (2,176)
------------ ------------ ------------
Net income (loss) available for Common Shareholders ................. $ 325 $ (21,879) $ 3,830
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share before extraordinary item ........... $ .01 $ (1.01) $ .18
Basic earnings (loss) per share ..................................... $ .01 $ (.99) $ .18
Diluted earnings (loss) per share before extraordinary item ......... $ .01 $ (1.01) $ .17
Diluted earnings (loss) per share ................................... $ .01 $ (.99) $ .17
Cash dividends per share declared on Common Stock ................... -- $ .06 $ .22
Weighted average shares outstanding (basic) ......................... 22,407,248 22,113,000 21,877,000
Weighted average shares outstanding (diluted) ....................... 22,465,481 22,133,000 22,004,000
OTHER FINANCIAL DATA:
EBITDA (2) .......................................................... $ 35,009 $ 18,571 $ 24,465
Ratio of EBITDA to interest expense (3) ............................. 2.4x 1.3x 1.8x
Ratio of EBITDA to interest expense net of interest income (3)(5) ... 2.9x 1.6x 2.4x
Capital expenditures (4) ............................................ $ 10,801 $ 15,333 $ 26,143
Common stock dividends .............................................. -- $ 1,216 $ 4,823
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
(In thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................................ $ 198,042 $ 108,350
Cost of sales and services .......................................... 141,302 75,572
------------ ------------
Gross profit ........................................................ 56,740 32,778
Selling, general and administrative expenses ........................ 31,981 21,108
Depreciation and amortization ....................................... 11,349 7,230
Impairment of long-lived assets ..................................... -- 5,025
Write-off of fixed assets ........................................... -- --
Severance expenses .................................................. -- --
Non-recurring compensation arrangements ............................. -- 1,812
Write-off of start-up costs ......................................... -- --
------------ ------------
Operating income (loss) ............................................. 13,410 (2,397)
Interest income ..................................................... 2,001 1,277
Interest expense .................................................... (5,765) (669)
Gain on sale of equity investment ................................... -- --
Other income (expense) .............................................. 602 97
------------ ------------
Income (loss) before income taxes and extraordinary item ............ 10,248 (1,692)
Income taxes (benefit) .............................................. 4,150 (632)
------------ ------------
Income (loss) before extraordinary item ............................. 6,098 (1,060)
Extraordinary gain .................................................. -- --
------------ ------------
Net income (loss) ................................................... 6,098 (1,060)
Preferred dividends ................................................. (2,176) (2,178)
------------ ------------
Net income (loss) available for Common Shareholders ................. $ 3,922 $ (3,238)
============ ============
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share before extraordinary item ........... $ .19 $ (.24)
Basic earnings (loss) per share ..................................... $ .19 $ (.24)
Diluted earnings (loss) per share before extraordinary item ......... $ .19 $ (.24)
Diluted earnings (loss) per share ................................... $ .19 $ (.24)
Cash dividends per share declared on Common Stock ................... $ .22 $ .20
Weighted average shares outstanding (basic) ......................... 20,918,000 13,328,000
Weighted average shares outstanding (diluted) ....................... 21,144,000 13,493,000
OTHER FINANCIAL DATA:
EBITDA (2) .......................................................... $ 24,759 $ 12,538
Ratio of EBITDA to interest expense (3) ............................. 4.3x 18.7x
Ratio of EBITDA to interest expense net of interest income (3)(5) ... 6.6x --
Capital expenditures (4) ............................................ $ 15,747 $ 8,712
Common stock dividends .............................................. $ 4,559 $ 2,830
15
18
AS OF SEPTEMBER 30,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
BALANCE SHEET DATA:
Cash and equivalents ................................................ $ 38,955 $ 37,439 $ 51,135
Working capital ..................................................... 77,718 70,202 89,220
Property, plant & equipment, net .................................... 104,749 114,586 117,299
Total assets ........................................................ 299,177 305,194 328,677
Long-term debt, net of current portion .............................. 140,236 139,652 132,631
Shareholders' equity ................................................ 95,272 102,950 128,316
AS OF SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
(In thousands)
BALANCE SHEET DATA:
Cash and equivalents ................................................ $ 83,892 $ 13,414
Working capital ..................................................... 110,289 29,882
Property, plant & equipment, net .................................... 97,779 72,585
Total assets ........................................................ 321,753 162,172
Long-term debt, net of current portion .............................. 133,034 15,422
Shareholders' equity ................................................ 127,138 120,594
- ----------
(1) The Statement of Operations, Balance Sheet and Other Financial Data
include the results of operations and financial position of the Company
and each of the companies acquired since their respective dates of
acquisition. See discussion of fiscal year acquisitions in Item 1.
(2) "EBITDA" equals gross profit less selling, general and administrative
expenses and should not be considered as an alternative to net income
or any other generally accepted accounting principles measure of
performance as an indicator of the Company's operating performance or
as a measure of liquidity. The Company believes EBITDA is a widely
accepted financial indicator of a company's ability to service debt.
Because EBITDA excludes some, but not all items that affect net income,
such measure varies among companies and may not be comparable to EBITDA
as used by other companies.
(3) Ratios of EBITDA to interest expense and interest expense net of
interest income represent ratios which provide investors with
information as to the Company's current ability to meet its interest
costs. Because EBITDA excludes some, but not all items that affect net
income, such measure varies among companies and may not be comparable
to debt service ratios as used by other companies.
(4) Consists of cash used for capital expenditures, excluding property,
plant and equipment obtained in acquisitions.
(5) The ratio has not been presented for 1996 as the Company realized net
interest income.
16
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company has two operating segments: petrochemical processing and
oilfield services. Petrochemical processing revenues are derived from (1)
grinding petrochemicals into powders (size reduction) using a variety of
methods, including ambient grinding, cryogenic grinding and jet milling,
providing ancillary services and selling grinding and other equipment
manufactured by the Company, (2) compounding sales and services, which include
the manufacture and sale of concentrates, and (3) distributing plastic powders.
The Company's distribution operations typically utilize the Company's size
reduction and compounding facilities to process petrochemical products prior to
sale. Oilfield services revenues include revenues derived from (1) exploration
sales and services (new tubular goods inspection), (2) production sales and
services (reclamation, reconditioning and inspection of used tubular goods and
sucker rods), (3) corrosion control services (coating of tubular goods and
sucker rods), and (4) other sales and services (transportation services and
oilfield engine sales and services in Canada). Service revenues in both of the
Company's business segments are recognized as the services are performed or, in
the case of product sales, revenues are generally recognized upon shipment to
third parties.
Cost of sales and services for the petrochemical processing and
oilfield services segments is primarily comprised of compensation and benefits
to non-administrative employees, occupancy costs, repair and maintenance,
electricity and equipment costs and supplies, and, in the case of concentrate
manufacturing operations and the Company's distribution business, purchased raw
materials. Selling, general and administrative expenses consist primarily of
compensation and related benefits to the sales and marketing, executive
management, management information system support, 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.
Gross profits as a percentage of revenue for the distribution and
concentrate manufacturing businesses generally are significantly lower than
those generated by the Company's size reduction services. Several of the
Company's petrochemical processing subsidiaries, including the Company's
concentrate manufacturing and distribution operations, typically buy raw
materials, improve the material and then sell the finished product. In contrast,
many of the Company's size reduction operations, particularly the U.S.
locations, typically involve processing customer-owned material (referred to as
toll processing).
The demand for the Company's oilfield products and services depends
upon oil and natural gas prices and the level of oil and natural gas production
and exploration activity. In addition to changes in commodity prices,
exploration and production activities are affected by worldwide economic
conditions, supply and demand for oil and natural gas, seasonal trends and the
political stability of oil-producing countries. The oil and gas industry has
been highly volatile over the past several years, due primarily to the
volatility of oil and natural gas prices. During fiscal 1996 and 1997, the oil
and gas service industry generally experienced increased demand and improved
product and service pricing as a result of improved commodity prices and greater
levels of oil and gas exploration and production activity, due largely to a
strong world economy. In fiscal 1998, however, oil prices declined significantly
versus fiscal 1997 levels. While gas prices also declined during this period,
they declined to a lesser extent. These trends were attributed to, among other
factors, an excess worldwide oil supply, lower domestic energy demand resulting
from an unseasonably warm winter and a decline in demand due to the economic
downturn in Southeast Asia. As oil and, to a lesser extent, natural gas prices
declined during this period, demand for oilfield products and services,
including those provided by the Company, softened. Oil and gas prices continued
to fall sharply in the first half of fiscal 1999, with oil prices (as measured
by the spot market price for West Texas Intermediate Crude) reaching a low of
less than $11.00 per barrel and natural gas prices (as measured by the Henry Hub
spot market price) reaching a low of $1.65 per mcf during the first quarter of
fiscal 1999. This 25-year low, in real dollar terms, resulted in extremely
depressed levels of oilfield exploration and production activity with the U.S.
drilling rig count falling to an average of only 523 rigs during the third
quarter of fiscal 1999. The Company's oilfield service revenues and income were
adversely impacted by these factors. Over the course of fiscal 2000, oil and gas
prices generally increased. During the fourth quarter of fiscal 2000, the price
of oil rose to an average of $31.61 per barrel and natural gas prices rose
17
20
to an average of $4.42 per mcf. These trends have resulted in a strong recovery
in demand for oilfield services generally, including those provided by the
Company, with the U.S. rig count rising to an average of 980 during the fourth
quarter of fiscal 2000. Furthermore, the Company believes that many oil and gas
companies will increase their capital spending levels in calendar year 2001
compared to the year 2000. While the predicted increase in spending is not
assured, if correct, the demand for the Company's oilfield services should
continue to improve. The Company is also optimistic that, if oil and gas prices
remain at or near their present levels, market conditions will remain very
favorable for the Company's oilfield services.
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company:
2000 1999
---------- ----------
Cash and cash equivalents $ 38,955 $ 37,439
Working capital 77,718 70,202
Current ratio 2.4 2.3
Debt-to-capitalization .61 to 1 .59 to 1
Year Ended September 30, 2000 compared to Year Ended September 30, 1999
Fiscal 2000 cash provided by operating activities decreased to $8,889
from $10,185 for fiscal 1999. The decrease occurred despite higher net income
due to the various changes in working capital accounts (particularly changes of
accounts receivable, inventory, accounts payable, and accrued liabilities) and
net deferred income taxes. Many of the working capital changes were driven by
the revenue growth of the Petrochemical Processing and Oilfield Service business
segments.
Capital expenditures, excluding expenditures for business acquisitions,
totaled $10,801 during fiscal 2000, of which $2,341 related to the oilfield
services business, $8,132 related to the petrochemical processing business and
$328 related to general corporate expenditures. These expenditures were made
primarily to expand the Company's operating capacity. Business acquisition
expenditures, net of cash acquired, totaled $506 in fiscal 2000 down from $7,684
in fiscal 1999. The Company anticipates that available cash and/or existing
credit facilities will be sufficient to fund fiscal 2001 capital expenditure
requirements.
Cash flows provided by financing activities increased to $3,893 during
fiscal 2000 compared to uses of $1,126 during fiscal 1999. The increase was the
result of lower debt repayments, increased borrowings, lower preferred dividend
payments (although $2,176 of preferred dividends were declared in both fiscal
2000 and 1999), and lower common stock dividend payments (no common stock
dividends were paid during fiscal 2000 compared to $1,216 in fiscal 1999).
As of September 30, 2000, the Company had approximately $7,971 of
additional borrowing capacity available under various foreign credit
arrangements. Currently, the Company does not have a domestic credit facility.
The Company anticipates that existing cash balances and the additional borrowing
capacity provided by the foreign credit facilities will be an adequate source of
liquidity for fiscal 2001.
The terms of the Company's Senior Notes limit the amount of liens and
additional indebtedness incurred by the Company. The terms of the Senior Notes
indenture also restrict the Company's ability to pay dividends on preferred and
common stock; however, the terms of the Senior Notes do allow for dividend
payments on currently outstanding preferred stock, in accordance with the terms
of the preferred stock, and up to $.22 per share, per annum on common stock, in
the absence of any default or event of default on the Senior Notes. The above
limitations may not be decreased, but may be increased based upon the Company's
results of operations and other factors. The Company's foreign facilities are
generally secured by assets owned by subsidiaries of the Company and also carry
various financial covenants.
18
21
The indenture pursuant to which the Company's Senior Notes were issued
contains a number of covenants including: a prohibition on the incurrence of
indebtedness and the issuance of stock that is redeemable or is convertible or
exchangeable for debt, provided that the Company may incur additional
indebtedness if the consolidated interest coverage ratio, as defined in the
indenture, will be at least 2.0 to 1.0 after such indebtedness is incurred; a
prohibition on certain restricted payments, including, among others, the payment
of any dividends, the purchase or redemption of any capital stock or the early
retirement of any debt subordinate to the Senior Notes, subject to certain
exceptions; certain prohibitions on creating liens on the Company's assets
unless the Senior Notes are equally and ratably secured; prohibitions on
transactions with affiliates; a prohibition against restrictions on the ability
of the Company's subsidiaries to pay dividends or make certain distributions,
payments or advances to the Company, restrictions on the sale of assets of the
Company unless (i) the Company receives the fair market value of such properties
or assets, determined pursuant to the indenture, (ii) the Company receives 75%
of the purchase price for such assets in cash or cash equivalents and (iii) the
proceeds of such sale are applied pursuant to the indenture; 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 ("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, (iv) or a majority of the members of the
Board of Directors no longer being "continuing directors" ["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]); a prohibition of certain sale/leaseback transactions; and
restrictions on guarantees of certain indebtedness by the Company's restricted
subsidiaries. The indenture also restricts certain mergers, consolidations or
dispositions of all or substantially all of the Company's assets.
19
22
RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
% OF % OF % OF
2000 TOTAL 1999 TOTAL 1998 TOTAL
-------- -------- -------- -------- -------- --------
NET REVENUES
Distribution of material ................................ $ 90,081 41 $ 81,964 43 $ 76,360 43
Size reduction services and other sales and services .... 47,711 22 48,093 26 52,515 30
Compounding sales and services .......................... 82,144 37 57,420 31 48,357 27
-------- -------- -------- -------- -------- --------
Total petrochemical processing revenue .................. 219,936 100 187,477 100 177,232 100
-------- -------- --------
Exploration sales and services .......................... 36,163 34 25,203 34 39,781 38
Production sales and services ........................... 36,461 35 28,766 38 35,810 35
Corrosion control services .............................. 22,760 22 17,219 23 24,985 24
Other sales and services ................................ 9,987 9 3,708 5 3,535 3
-------- -------- -------- -------- -------- --------
Total oilfield sales and services revenues .............. 105,371 100 74,896 100 104,111 100
-------- -------- --------
Total .............................................. $325,307 $262,373 $281,343
======== ======== ========
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
% OF % OF % OF
2000 TOTAL 1999 TOTAL 1998 TOTAL
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)
Oilfield sales and services ............................. $ 13,450 49 $ (376) 16 $ 13,025 55
Petrochemical processing sales and services ............. 13,850 51 (1,967) 84 10,526 45
-------- -------- -------- -------- -------- --------
Total operations ........................................ 27,300 100 (2,343) 100 23,551 100
General corporate expenses .............................. (9,049) (12,237) (14,475)
-------- -------- --------
Total .............................................. $ 18,251 $(14,580) $ 9,076
======== ======== ========
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
% OF % OF % OF
2000 TOTAL 1999 TOTAL 1998 TOTAL
-------- -------- -------- -------- -------- --------
REVENUES BY GEOGRAPHICAL AREA
United States ........................................... $189,140 58 $145,052 55 $167,523 60
Foreign ................................................. 136,167 42 117,321 45 113,820 40
-------- -------- -------- -------- -------- --------
$325,307 100 $262,373 100 $281,343 100
======== ======== ======== ======== ======== ========
- ----------
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
Revenues. Consolidated revenues increased $62,934 (24%) during fiscal
2000, compared to fiscal 1999. The increases were due to revenue improvements in
both the Petrochemical Processing and Oilfield Service business segments.
Petrochemical Processing revenues increased from $187,477 during fiscal
1999 to $219,936 for fiscal 2000. This increase of 17% was mostly the result of
an increase in compounding revenues and, to a lesser extent, an increase in
distribution revenues, offset in part by the effect of the strength of the U.S.
Dollar compared to the Euro, the British Pound, the Australian Dollar, and the
New Zealand Dollar.
Distribution revenues rose $8,117 (10%) during fiscal 2000 compared to
fiscal 1999. Distribution revenues rose due to higher average resin prices and
an increase in volumes sold in the Company's European and Southeast Asian
markets. Although revenues in Europe have increased during fiscal 2000, this
increase has been largely offset by the depreciation of the Euro against the
U.S. Dollar (approximately a 12% decline). Size reduction services and other
sales and services revenues declined $382 (1%) to $47,711 during fiscal 2000,
compared to fiscal 1999. This small decrease was the result of greater domestic
size reduction revenues more than offset by lower European revenues, largely
caused by the depreciation of the Euro and the British Pound versus the U.S.
Dollar. Compounding revenues rose dramatically from
20
23
$57,420 during fiscal 1999 to $82,144 during fiscal 2000. This increase of
$24,724 (43%) during fiscal 2000 was primarily the result of the fiscal 1999
capacity expansion at the Company's Bayshore Industrial concentrate
manufacturing facility in LaPorte, Texas. In addition, demand for the Company's
compounding products and services in Europe increased in fiscal 2000 compared to
fiscal 1999.
Oilfield Service revenues increased $30,475 (41%) to $105,371 during
fiscal 2000 compared to fiscal 1999. Of this $30,475 increase, $7,300 is
attributable to the February 1999 acquisition of MilCorp (increased production
sales and services, corrosion control services and other sales and services).
The remaining increase is due to a strong rebound within all the Company's
oilfield service product lines due to increased volumes resulting from greater
customer demand. The recovery is being driven by higher oil and gas prices which
rose from an average of $16.31 per barrel and $2.09 per mcf during fiscal 1999
to $28.48 per barrel and $3.25 per mcf during fiscal 2000. As a result of these
higher commodity prices, the North American rig count has risen from an average
of 602 during fiscal 1999 compared to an average of 842 during fiscal 2000. If
oil and gas prices remain at or near current levels, the Company anticipates
that oilfield service activity will generally continue to remain strong and,
hence, the demand for the Company's oilfield services will be strong. The
duration of the favorable market environment, however, cannot be predicted with
any certainty.
Cost and Expenses. Consolidated gross margins (calculated as the
difference between net revenues and total costs of sales and services divided by
revenues), increased slightly from 23.1% during fiscal 1999 to 23.2% during
fiscal 2000. The slight increase was caused by the effect of higher Oilfield
Service gross margins partially offset by lower Petrochemical Processing
margins.
Petrochemical Processing gross margins were 20.3% during fiscal 2000
compared to 22.1% during fiscal 1999. This decline resulted primarily from a
change in revenue mix. During fiscal 2000, compounding and distribution revenues
in total, which generate lower gross margins than size reduction services,
became a larger percentage of overall Petrochemical Processing revenues. This
trend caused overall Petrochemical Processing gross margins to decline.
Additionally, international petrochemical gross margins softened during fiscal
2000, due to higher production costs which adversely affected overall
Petrochemical gross margins.
Oilfield Service gross margins increased to 29.3% during fiscal 2000
compared to 23.3% during fiscal 1999. Higher volumes, due to strengthening
market conditions, resulted in increased capacity utilization and, in turn,
improved gross margins.
Selling, general and administrative costs decreased $1,754 (4%) during
fiscal 2000 compared to fiscal 1999. The decline was primarily due to lower
litigation-related expenses and cost controls at the corporate level, partially
offset by an increase in expenses resulting from the February 1999 acquisition
of MilCorp in Canada. As a percentage of revenues sales, general and
administrative expenses improved from 16.1% in fiscal 1999 to 12.4% in fiscal
2000. The improvement was the result of revenues increasing, while sales,
general and administrative expenses declined.
During the fourth quarter of fiscal 2000, the Company recognized
severance expenses of $426 relating to terminated employees in Europe.
Depreciation and amortization expenses decreased from $17,074 during
fiscal 1999 to $16,332 during fiscal 2000. This decline was the result of the
effects of the 1999 charges relating to fixed assets and goodwill, offset, in
part, by the impact of capital expenditures and the acquisition of MilCorp.
FISCAL 1999 CHARGES
During fiscal 1999, the Company recognized a $9,291 non-cash charge for
the impairment of long-lived assets. $748 of this charge relates to the oilfield
services business, of which $310 of the write-down related to the impairment of
21
24
goodwill and the remaining to machinery and equipment. $8,543 of the total
charge relates to the petrochemical business and reflects the impairment of four
underperforming facilities. $4,812 of the petrochemical charge includes the
impairment of goodwill and $3,489 consists of machinery and equipment
impairment. The amount of the machinery and equipment impairments were
determined by comparing fair values with the corresponding carrying values of
the assets evaluated. Fair value was determined as the estimated current market
value of the assets evaluated.
During fiscal 1999, the Company reduced the carrying value of property,
plant and equipment primarily due to assets which are obsolete or are not in
working order and will not be used in the future. Of the $3,420 write-down,
$2,779 related to the petrochemical business and $641 related to the oilfield
service segment.
During fiscal 1999, the Company recognized severance expenses of $2,499
relating to terminated employees. Of this charge $1,500 related to management
changes within the Company's European Petrochemical Processing operations.
The fiscal 1999 write-off of start-up costs of $867 primarily relates
to the closure, during the second quarter of fiscal 1999, of an operation which
had capitalized start-up costs. This operation had an immaterial impact on the
Company's financial results prior to the write-off of capitalized start-up
costs.
Operating Income. Operating income (loss) increased from a loss of
$(14,580) during fiscal 1999 to $18,251 for fiscal 2000. The increase was due to
the changes in revenues and costs and expenses discussed above.
Net Interest Expense. Net interest expense was $12,117 during fiscal
2000. For fiscal 1999, the Company had net interest expense of $11,910. This
change was primarily due to higher average debt levels partially offset by
increased rates of return on cash investments.
Income Taxes. The Company's effective income tax rate increased to 59%
during fiscal 2000 compared to 24% during fiscal 1999. This tax rate increase
was the result of an increase in the amount of permanent differences (including
the goodwill impairment charges recognized in fiscal 1999 and non-deductible
goodwill amortization from acquisitions), relative to book pre-tax income or
loss, as well as a change in the mix of pre-tax income or loss generated by the
Company's operations in various taxing jurisdictions.
The Company has, for tax purposes, $21,649 in net operating loss
carryforwards ("NOLs") which expire between 2001 and 2019, and $519 in
investment, alternative minimum and other tax credit carryforwards which, if
utilized, will result in a cash savings. Net operating loss carryforwards in the
amount of $2,311 and $307 of the tax credits are expected to expire unused. A
change in ownership under the Internal Revenue Code has occurred which limits
the utilization of $5,019 of the Company's NOLs and credits to approximately
$677 each year through their expiration.
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Euro, Swedish krona, British pound, Canadian dollar, 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 between fiscal
2000 and 1999.
Net revenues $ (11,875)
Earnings before interest, taxes,
depreciation, and amortization (1,304)
Operating income (691)
Pre-tax income (499)
Net income (330)
22
25
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues. Consolidated revenues decreased $18,970 (7%) during fiscal
1999, as compared to fiscal 1998. The decline is attributable to an oilfield
service revenue decline partially offset by a petrochemical processing revenue
increase.
Petrochemical processing revenues increased from $177,232 during fiscal
1998 to $187,477 for fiscal 1999. This increase of 6% was due to the
acquisitions of J.R. Courtenay (N.Z.) in March 1998, and Soreco in June 1998 and
an increase of domestic compounding revenues, offset, in part, by lower domestic
grinding revenues and lower overall European revenues.
Distribution revenues were $81,964 for fiscal year 1999, an increase of
$5,604 (7%) for fiscal 1999. The increase primarily resulted from the effect of
the Courtenay acquisition during March 1998, partially offset by a decline in
European distribution revenues. Size reduction services and other sales and
service revenues declined $4,422 (8%) during fiscal 1999 to $48,093, compared to
fiscal 1998. The decline resulted primarily from a decrease in demand for the
Company's products and services domestically and in Europe. Compounding sales
and service revenues increased $9,063 (19%) to $57,420 for fiscal 1999. This
increase is mostly due to greater domestic compounding revenues, due in large
part to a mid-fiscal 1998 domestic compounding capacity expansion and the
acquisition of Soreco made in June 1998.
Oilfield Service revenues declined from $104,111 for fiscal 1998 to
$74,896 for fiscal 1999. This result represents a decline of $29,215 (28%). The
revenue decline was broad-based, across all Oilfield Service product lines and
was the result of declining demand for the Company's oilfield products and
services. Management responded to the lower fiscal 1999 revenues with
significant cost reductions, particularly personnel reductions as described
below. Declining demand was the result of depressed average oil prices and, to a
lesser extent, gas prices during much of fiscal 1999, which has resulted in
significantly lower average rig counts in both the United States and Canada
during fiscal 1999, compared to fiscal 1998. The revenue decrease was partially
offset by the effect of the MilCorp acquisition in February 1999. During the
year ended September 30, 1999, the domestic drilling rig count averaged 602, a
33% decline from the average of approximately 905 during fiscal 1998. West Texas
intermediate crude prices improved from an average price of $16.20 during fiscal
1998 to $16.31 during fiscal 1999. During most of fiscal 1999, oil prices rose;
however, drilling activity in North America during fiscal 1999 was less than
1998 levels. In fact, the U.S. drilling rig count declined to only 488 rigs on
April 30, 1999 and rose very slowly throughout fiscal 1999. The decline in
exploration activity is detrimental to the Company's oilfield service business,
not only from a revenue perspective, but also because this trend has the effect
of lowering overall margins, since the Company's exploration services sales
usually generate higher gross margins relative to other oilfield products and
services. Fortunately, production activity improved in the second half of fiscal
1999, as evidenced by a 9% improvement of the Company's production services
revenue in the fourth quarter of fiscal 1999, over the third quarter of fiscal
1999.
Costs and Expenses. Consolidated gross margins (calculated as the
difference between net revenues and total costs of sales and services divided by
revenues), decreased from 24.7% during fiscal 1998 to 23.1% during fiscal 1999.
Gross margins declined during the year due to a decrease in Oilfield Service
gross margins, partially offset by an increase in Petrochemical gross margins.
Petrochemical gross margins were 22.1% during fiscal 1999 compared to
21.5% during fiscal 1998. The improvement was primarily the result of an
increase in domestic and European gross margins. Domestic gross margin gains
resulted from cost cutting efforts, production efficiency improvements and an
increase in domestic compounding volumes (due in large part to the mid-year
fiscal 1998 capacity expansion). European improvements resulted from a favorable
revenue mix, along with the benefits of rising resin prices during the last half
of fiscal 1999.
Oilfield Service gross margins declined to 23.3% for fiscal 1999 from
30.1% in fiscal 1998. The decline was driven by lower volumes (as costs were
spread over less revenues), weaker pricing, due to very poor market conditions
and a less favorable revenue mix. Additionally, during the second quarter, the
Company wrote down $1,203 of oilfield service
23
26
inventory to estimated market selling prices, thereby increasing cost of sales
expenses. The Company reacted to poor market conditions by rationalizing the
cost structure of the Oilfield Service business to reflect the lower activity
levels. These cost reductions included a significant headcount reduction of the
Oilfield Service workforce during the past year and a reduction of contract
labor expenses. Additionally, during fiscal 1999, most oilfield service salaried
and hourly employees accepted a 10% pay reduction. The Company's Chairman/CFO
and CEO/President also voluntarily accepted a 10% pay cut. In August 1999, 50%
of the pay reduction was reestablished and, in December 1999, the remaining
portion was reinstated.
Selling, general and administrative costs decreased $2,864 (6%) during
fiscal 1999, compared to fiscal 1998. The decrease resulted from significant
cost reductions within the Oilfield Service and Domestic Petrochemical
businesses and lower corporate management compensation expenses. These declines
were partially offset by an increase of selling, general and administrative
expenses due to the acquisitions of J.R. Courtenay, Soreco and MilCorp and an
increase in workers' compensation expenses. The decline in Oilfield Service and
domestic Petrochemical Processing selling, general and administrative expenses
were driven largely by staffing reductions. As a percentage of revenues selling,
general and administrative expenses increased to 16.1% in fiscal 1999 from 16.0%
in 1998. The increase is mostly due to the drastic decline in oilfield service
revenues, offset partially by the expense reductions discussed above.
Depreciation and amortization expenses increased from $15,389 in fiscal
1998 to $17,074 in fiscal 1999. This increase was mostly the result of capital
expenditures and business acquisitions during 1998 and 1999.
During fiscal 1999, the Company recognized charges relating to the
impairment of long-lived assets, the write-off of property, plant and equipment,
severance expenses and write-off of capitalized start-up costs. The charges are
described in more detail within the "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" comparing the year
ended September 30, 2000 to the year ended September 30, 1999.
Operating Income. Operating income decreased from $9,076 during fiscal
1998 to a loss of $(14,580) during fiscal 1999. The decrease was due to the
changes in revenues and costs and expenses discussed above.
Gain on sale of Equity Investment. During the first quarter of fiscal
1998, the Company recognized a pre- tax gain of $11,773 on the sale of an equity
investment. The Company received cash of $14,484 and recorded an after-tax gain
of approximately $6,799 on the sale.
Interest Income/Expense. Net interest expense was $11,910 during fiscal
1999 compared to $10,048 during fiscal 1998. This change was primarily the
result of lower cash balances due to acquisitions and internal capital
expenditures.
Income Taxes. The Company's effective income tax rate decreased to 24%
during fiscal 1999 compared to 44% during fiscal 1998. The effective income tax
rate decrease was caused by a change of the mixture of pre-tax income generated
in different tax jurisdictions, a significant increase of permanent differences
between taxable and book income (primarily due to fiscal 1999 write-down of
impaired goodwill) and the fact that the Company's fiscal 1998 sale of an equity
investment generated tax expense equal to 42% of the pre-tax gain.
Extraordinary Gain. During fiscal 1999 the Company repurchased Senior
Notes with a face value of $2,000, at a discount, recognizing a pre-tax gain of
$614 and an after-tax gain of $399.
Foreign Currency Translation. The fluctuations of the U.S. Dollar
against the Dutch Guilder, Swedish Krona, British Pound, Italian Lira, Canadian
Dollar, the French Franc, the Australian Dollar and the New Zealand Dollar did
not materially impact the translation of revenues and income of the Company's
international operations during fiscal 1999.
24
27
CONVERSION TO THE EURO CURRENCY
The Company has a substantial portion of its operations within
countries that adopted the Euro currency on January 1, 1999. The Company has
begun invoicing and receiving payments denominated in Euros whenever possible.
The cost of achieving this has not been material. The adoption of the Euro by
the European Economic and Monetary Union is ultimately expected, from a
competitive viewpoint, to benefit the Company to some extent as price
transparency becomes a reality. At this time, the Company continues to believe
that the impact of adopting the Euro with regard to currency exchange and
taxation implications will not have a material impact on the results of
operations or the financial condition of the Company.
25
28
FORWARD-LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, timing of new services or facilities, ability to compete, future
capital expenditures, effects of compliance with laws, effects of the Euro
adoption, matters relating to operating facilities, effect and cost of
litigation and remediation, future liquidity, future capital expenditures,
future acquisitions, future market conditions, reductions in expenses,
derivative transactions, net operating losses and tax credits, demand for the
Company's products and services, future growth plans, financial results and any
other statements which are not historical facts are forward-looking statements
within the meaning of section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve substantial risks and
uncertainties. When words such as "anticipate", "believe", "estimate", "intend",
"expect", "plan" and similar expressions are used, they are intended to identify
the statements as forward- looking. Actual results, performance or achievements
can differ materially from results suggested by these forward-looking statements
due to a number of factors, including results of operations, the Company's
financial condition, results of litigation, capital expenditures and other
spending requirements, demand for the Company's products and services and those
described below and elsewhere in this document and those described in the
Company's other filings with the SEC.
The significant indebtedness incurred in June 1997 as a result of the
placement of the Senior Notes due 2007 has several important implications for
the Company, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations must be dedicated to service
the Company's indebtedness and will not be available for other purposes, (ii)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions or for other purposes may be
restricted, (iii) the Company's flexibility to expand, make capital expenditures
or acquisitions or for other purposes may be impaired (future acquisitions may
require the Company to alter its capitalization significantly, which changes may
significantly alter the leverage of the Company), (iv) the indenture relating to
the Senior Notes contains, and future agreements relating to the Company's
indebtedness may contain, certain restrictive covenants, including, among other
things, limitations on the ability of the Company to incur additional
indebtedness, to create liens and other encumbrances, to make certain payments
and investments, to sell or otherwise dispose of assets or to merge or
consolidate with another entity (failure to comply with these provisions may
result in an event of default, which, if not cured or waived, could have a
material adverse effect on the Company), and (v) the ability of the Company to
satisfy its obligations pursuant to such indebtedness will be dependent upon the
Company's future performance which, in turn, will be subject to general economic
conditions and management, financial, business, regulatory and other factors
affecting the business and operations of the Company, some of which are not in
the Company's control. To the extent that the Company is unable to repay the
principal amount of the Notes out of cash on hand, it may (i) seek to repay the
Notes with the proceeds of an equity offering, (ii) seek refinancing, or (iii)
sell significant assets. There can be no assurance that any of the forgoing
alternatives will be available to the Company at all or on terms that are
favorable to the Company. If the Company cannot satisfy its obligations related
to such indebtedness, substantially all of the Company's long-term debt could be
in default and could be declared immediately due and payable which would have a
material adverse effect on the Company.
The oil and gas industry in which the Company participates through its
oilfield services business has experienced significant volatility. Demand for
the Company's oilfield services depends principally upon the level of domestic
oil and gas drilling and workover activity, which, in turn, depends upon factors
such as the level of oil and gas prices, expectations about future oil and gas
prices, the cost of exploring for and producing oil and gas, worldwide weather
conditions, international political, military, regulatory and economic
conditions and the ability of oil and gas companies to raise capital. Oil prices
and, to a lesser extent, gas prices declined significantly during 1998, which
resulted in decreases in oil and gas exploration and production activities. Oil
and gas prices rebounded during 1999 and 2000, and this improvement resulted in
an increase in demand for the Company's oilfield services. No assurance can be
given that the current market conditions will continue and, therefore, whether
or not the demand for the Company's oilfield services will decline in the
future. Industry conditions will continue to be influenced by numerous factors
over which the Company will have no control. A decline in oil or gas prices or
domestic oilfield activity could have a material adverse effect on the Company's
oilfield
26
29
service business, results of operations and prospects. Furthermore, the oilfield
services business is substantially seasonal, reflecting the pattern of oilfield
drilling and workovers, with the first and fourth quarters of the fiscal years
having generally higher levels of activity. Drilling and workover activity can
fluctuate significantly in a short period of time, particularly in the United
States and Canada.
The business cycles of the Company's petrochemical processing services
segment are affected by changes in the level of economic activity in the various
regions in which the Company operates and changes in the cost of the
petrochemicals produced by the major chemical companies. These costs are outside
of the Company's control and the business cycles are generally volatile and
relatively unpredictable. In addition, such business cycles may reflect cycles
in the petroleum industry and oil and gas price changes, which affect both of
the Company's business segments and may make the Company, as a whole, vulnerable
to the effect of changes in the petroleum industry.
The operations of the Company's oilfield services and specialty
petrochemical processing businesses are dependent to a certain degree upon
proprietary technology, know-how and trade secrets either developed by the
Company or licensed to it by third parties. In many cases, these or equivalent
processes or technologies are available to the Company's competitors, customers
and others. In addition, there can be no assurance that such persons will not
develop substantially equivalent or superior proprietary processes and
technologies. The availability to, or development by others of equivalent or
superior information, processes or technologies could have a material adverse
effect on the Company.
Over the past several years, the Company has made many acquisitions,
and management expects that other businesses will be acquired in the future.
There can be no assurance that the Company will be able to identify or reach
mutually agreeable terms with acquisition candidates and their owners, or that
the Company will be able to profitably manage additional businesses or
successfully integrate such additional businesses into the Company at all, or
without substantial costs, delays or other problems. There can be no assurance
that businesses acquired will achieve sales and profitability that justify the
investment made by the Company. Any inability on the part of the Company to
control these risks effectively and integrate and manage acquired businesses
could have a material adverse effect on the Company. The Company may, to the
extent allowed by agreements, incur indebtedness to finance future acquisitions.
There can be no assurance that the Company will be able to obtain any such
financing or that, if available, such financing will be on terms acceptable to
the Company. Acquisitions may result in increased depreciation and amortization
expense, increased interest expense, increased financial leverage or decreased
operating income, any of which could have a material adverse effect on the
Company's operating results.
The Company entered the specialty petrochemical processing industry
with its acquisition of Wedco in April 1996, and had no experience in the
industry prior to the acquisition. Since the acquisition of Wedco, the Company
has expanded its specialty petrochemical processing operations by making
numerous business acquisitions. The success of the Company will depend, in part,
on the Company's ability to continue the integration of acquired specialty
chemical operations by, among other things, centralizing certain functions to
achieve cost savings and developing programs and processes that will promote
cooperation among the businesses and the sharing of resources. In addition, the
growth of the Company has and will continue to place significant demands on the
Company's management, internal systems and networks. There can be no assurance
that the Company will be able to effectively manage or implement its plans for
these operations or that, if implemented, such plans will be successful. In
addition, in fiscal year 1997, the Company began to expand the distribution
aspects of its specialty petrochemical production services business through
acquisitions of the existing businesses and the execution of supply agreements
with certain resin suppliers. These distribution operations, as well as the
Bayshore operation, require the Company to buy and manage inventories of
supplies and products and, in turn, to maintain greater levels of working
capital than it has historically and to manage the risk of ownership of
commodity inventories having fluctuating market values. The maintenance of
excessive inventories in these businesses could expose the Company to losses
from drops in market prices for its products while maintenance of insufficient
inventories may result in lost sales to the Company.
27
30
A portion of the Company's current operations is conducted in
international markets, particularly the Company's European and Southeast Asian
specialty petrochemical processing services business. The Company expects to
continue to seek to expand its international operations primarily through
internal growth and, to a lesser extent, acquisitions. The Company's
international operations are subject to certain political, economic and other
uncertainties normally associated with international operations, including,
among others, risks of government policies regarding private property, taxation
policies, foreign exchange restrictions and currency fluctuations and other
restrictions arising out of foreign governmental sovereignty over areas in which
the Company conducts business that may limit or disrupt markets, restrict the
movement of funds or result in the deprivation of contract rights, and,
possibly, civil disturbance or other forms of conflict. Losses from the factors
above could be material in those countries where the Company now has or may in
the future have a concentration of assets.
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. These risks include equipment or product failures or work related
accidents which could also result in personal injury, property damages,
pollution and other environmental risks. The Company may not be fully insured
against possible losses pursuant to such risks. Such losses could have a
material adverse impact on the Company. In addition, from time to time, the
Company is involved in various litigation matters arising in the ordinary course
of its business and is currently involved in numerous legal proceedings in
connection with its operations and those of its acquired companies. There can be
no assurance that the Company will not incur substantial liability as a result
of these or other proceedings. The Company is subject to numerous and changing
local, state, federal and foreign laws and regulations concerning the use,
storage, treatment, disposal and general handling of hazardous materials, some
of which may be considered to be hazardous wastes, and restricting releases of
pollutants and contaminants into the environment. These laws and regulations may
require the Company to obtain and maintain certain permits and other
authorizations mandating procedures under which the Company will operate and
restricting emissions. Many of these laws and regulations provide for strict
joint and several liability for the costs of cleaning up contamination resulting
from releases of regulated materials into the environment. Violations of
mandatory procedures under operating permits may result in fines, remedial
actions or, in more serious instances, shutdowns or revocation of permits or
authorizations. There can be no assurance that a review of the Company's past,
present or future operations by courts or federal, state, local or foreign
regulatory authorities will not result in determinations that could have a
material adverse effect on the Company's financial condition or results of
operations. In addition, the revocation of any of the Company's material
operating permits, the denial of any material permit application or the failure
to renew any material interim permit could have a material adverse effect on the
Company. The Company cannot predict what environmental laws and regulations will
be enacted or adopted in the future or how such future law or regulation will be
administered or interpreted. To date, the Company has incurred compliance and
clean-up costs in connection with environmental laws and regulations and there
can be no assurance as to future costs. In particular, compliance with more
stringent environmental laws and regulations, more vigorous enforcement
policies, or stricter interpretations of current laws and regulations, or the
occurrence of an industrial accident, could have a material adverse effect on
the Company.
Each of the industries in which the Company participates is highly
competitive. Some competitors or potential competitors of the Company have
substantially greater financial or other resources than the Company. The
inability of the Company to effectively compete in its markets would have a
material adverse effect on the Company.
The Company is party to various arbitration and litigation proceedings.
The results of such matters are uncertain. There can be no assurance that
adverse results in such matters will not have a material adverse effect on the
Company. See "Item 3. Legal Proceedings."
ITEM 7A. 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.
The Company's strategy has typically been to finance only working
capital with variable interest rate debt and to fix interest rates for the
financing of long-term assets. Forward currency contracts are used by the
Company as a method
28
31
to establish a fixed functional currency cost for certain raw material purchases
denominated in non-functional currency (usually 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 SEPTEMBER 30, 2000
- -------------------------------------- ----------------------------------------------------------------------
US$ EQUIVALENT WEIGHTED AVERAGE
Variable interest rate debt: IN THOUSANDS YEAR-END INTEREST RATE EXPECTED MATURITY
-------------- ---------------------- -----------------
CURRENCY DENOMINATION
- ---------------------
Dutch Guilders $ 725 5.81% less than one year
British Pounds Sterling 1,769 7.25% less than one year
French Francs 29 5.69% less than one year
Italian Lira 4,846 5.09% less than one year
New Zealand Dollar 74 7.76% less than one year
29
32
SEPTEMBER 30, 1999
----------------------------------------------------------------------
WEIGHTED AVERAGE
Variable interest rate debt: US$ EQUIVALENT YEAR-END INTEREST RATE EXPECTED MATURITY
-------------- ---------------------- -----------------
CURRENCY DENOMINATION
- ---------------------
Dutch Guilders $1,444 4.00% less than one year
British Pounds Sterling 650 6.50% less than one year
French Francs 69 3.74% various through 2001
Italian Lira 4,730 3.55% less than one year
Canadian Dollar 3,454 7.48% various through 2004
ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
Forward Exchange Agreements (000s) outstanding on September 30, 2000:
RECEIVE US$/PAY NZ$:
Contract Amount US$1,219
Average Contractual Exchange Rate (US$/NZ$) .4651
Expected Maturity Dates October 2000 through January 2001
RECEIVE US$/PAY AUSTRALIAN $:
Contract Amount US$2,050
Average Contractual Exchange Rate (US$/A$) .5858
Expected Maturity Dates October 2000 through January 2001
RECEIVE US$/PAY DUTCH GUILDER
Contract Amount US$91
Average Contractual Exchange Rate (US$/NLG) .4099
Expected Maturity Date November 2000
Forward Exchange Agreements (000s) outstanding on September 30, 1999:
RECEIVE US$/PAY NEW ZEALAND $:
Contract Amounts US$ 879
Average Contractual Exchange Rate (US$/NZ$) .5465
Expected Maturity Dates October 1999 through January 2000
RECEIVE US$/PAY AUSTRALIAN $:
Contract Amounts US$ 1,282
Average Contractual Exchange Rate (US$/A$) .6555
Expected Maturity Dates October 1999 through January 2000
RECEIVE DEM/PAY GBP:
Contract Amounts DEM 95
Average Contractual Exchange Rate (GBP/DEM) .3307
Expected Maturity Dates October 1999 through December 1999
30
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this
report. See index to this information on Page F-1 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 - Election of Directors" and to the
information under the caption "Section 16(a) Reporting Delinquencies" in the
Company's definitive Proxy Statement (the "2001 Proxy Statement") for its annual
meeting of shareholders. The 2001 Proxy Statement or the information to be so
incorporated will be filed with the Securities and Exchange Commission (the
"Commission") not later than 120 days subsequent to September 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION.
The information required by this item is incorporated herein by
reference to the 2001 Proxy Statement.
31
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The response to this portion of Item 14 is submitted as a separate
section of this report on page F-1.
(b) There were no reports on Form 8-K during the Company's fiscal fourth
quarter.
(c) Exhibits required by Item 601 of S-K:
The following instruments and documents are included as Exhibits to
this Form 10-K. Exhibits incorporated by reference are so indicated by
parenthetical information.
EXHIBIT NO. EXHIBIT
- ----------- -------
2.1 -- Plan of Merger of ICO Merger Sub, Inc. with and into ICO,
Inc. (filed as Exhibit 2.4 to Form 10- Q dated August 13,
1998)
3.1 -- Articles of Incorporation of the Company dated March 20,
1998 (filed as Exhibit 3.1 to Form 10- Q dated August 13,
1998)
3.2 -- Statement of Resolution of $6.75 Convertible Exchangeable
Preferred Stock dated March 30, 1998 (filed as Exhibit 3.2
to Form 10-K dated December 23, 1998)
3.3 -- Certificate of Designation of Junior Participating Preferred
Stock of ICO Holdings, Inc. dated March 30, 1998 (filed as
Exhibit 3.3 to Form 10-K dated December 23, 1998)
3.4 -- Amended and Restated By-Laws of the Company dated May 12,
1999 (filed as Exhibit 3.4 to Form 10-Q dated May 14, 1999).
4.1 -- Indenture dated as of June 9, 1997 between the Company, as
issuer, and Fleet National Bank, as trustee, relating to
Senior Notes due 2007 (filed as Exhibit 4.1 to Form S-4
dated June 17, 1997)
4.2 -- First Supplemental Indenture and Amendment dated April
1,1998 between the Company, as issuer, and State Street and
Trust Company (formerly Fleet National Bank), as trustee,
relating to Senior Notes due 2007 (filed as Exhibit 4.2 to
Form 10-Q dated May 15, 1998)
4.3 -- Second Supplemental Indenture and Amendment dated April 1,
1998 between ICO P&O, Inc., a wholly owned subsidiary of the
Registrant, and State Street and Trust Company (formerly
Fleet National Bank), as trustee, relating to Senior Notes
due 2007 (filed as Exhibit 4.3 to Form 10-Q dated May 15,
1998)
4.4 -- Warrant Agreement -- Series A, dated as of September 1,
1992, between the Registrant and Society National Bank
(filed as Exhibit 4 to the Registrant's Annual Report on
Form 10-K for 1992)
4.5 -- Stock Registration Rights Agreement dated April 30, 1996 by
and between the Company, a subsidiary of the Company and the
Wedco Shareholders Group, as defined (filed as Exhibit 4.4
to Form S-4 dated March 15, 1996)
4.6 -- Shareholder Rights Agreement dated April 1, 1998 by and
between the Registrant and Harris Trust and Savings Bank, as
rights agent (filed as Exhibit 4.7 to Form 10-Q for the
quarter ended March 31, 1998)
10.1 -- ICO, Inc. 1985 Stock Option Plan, as amended (filed as
Exhibit B to the Registrant's Definitive Proxy Statement
dated April 27, 1987 for the Annual Meeting of Shareholders)
32
35
EXHIBIT NO. EXHIBIT
- ----------- -------
10.2 -- Second Amended and Restated 1993 Stock Option Plan for
Non-Employee Directors of ICO, Inc. (filed as Exhibit A to
the Registrant's Definitive Proxy Statement dated January
26, 1999 for the Annual Meeting of Shareholders)
10.3 -- 1994 Stock Option Plan of ICO, Inc. (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated June 24, 1994
for the Annual Meeting of Shareholders)
10.4 -- ICO, Inc. 1995 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated August 10,
1995 for the Annual Meeting of Shareholders)
10.5 -- ICO, Inc. 1996 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated August 29,
1996 for the Annual Meeting of Shareholders)
10.6 -- ICO, Inc. 1998 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated January 23,
1998 for the Annual Meeting of Shareholders)
10.7 -- Willoughby International Stockholders Agreement dated April
30, 1996 (filed as Exhibit 10.9 to Form S-4 dated March 15,
1996)
10.8 -- Consulting Agreement-- William E. Willoughby (filed as
Exhibit 10.13 to Form S-4 dated March 15, 1996)
10.9 -- Salary Continuation Agreement-- William E. Willoughby (filed
as Exhibit 10.14 to Form S-4 dated March 15, 1996)
10.10 -- Addendum to Salary Continuation Agreement-- William E.
Willoughby (filed as Exhibit 10.15 to form S-4 dated March
15, 1996)
10.11 -- Non-Competition Covenant William E. Willoughby (filed as
Exhibit 10.11 to Form S-4 dated March 15, 1996)
10.12 -- Stockholders Agreement respecting voting of shares of
certain former Wedco common shareholders (filed as Exhibit
10.21 to Form S-4 dated March 15, 1996)
10.13 -- Stockholders Agreement respecting voting of shares of
certain ICO common shareholders (filed as Exhibit 10.22 to
Form S-4 dated March 15, 1996)
10.14 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Asher O. Pacholder and amendments thereto
(filed as Exhibit 10.16 to Form 10-K dated December 29,
1997)
10.15 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Sylvia A. Pacholder and amendments thereto
(filed as Exhibit 10.17 to Form 10-K dated December 29,
1997).
10.16 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Jon C. Biro (filed as Exhibit 10.20 to
Form 10-K dated December 23, 1998)
10.17 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Isaac H. Joseph (filed as Exhibit 10.21
to Form 10-K dated December 23, 1998)
10.18 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Robin E. Pacholder (filed as Exhibit
10.18 to Form 10-K dated December 17, 1999)
10.19 -- Employment Agreement dated August 5, 1999 by and between the
Registrant and David M. Gerst (filed as Exhibit 10.19 to
Form 10-K dated December 17, 1999)
33
36
EXHIBIT NO. EXHIBIT
- ----------- -------
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- ----------
** Filed herewith
34
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Sylvia A. Pacholder
-----------------------------------------
Sylvia A. Pacholder, President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 19, 2000
Pursuant to the requirements of the securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Sylvia A. Pacholder Chief Executive Officer, President, December 19, 2000
--------------------------- Secretary & Director
Sylvia A. Pacholder (Principal Executive Officer)
/s/ Asher O. Pacholder Chairman of the Board, Chief December 19, 2000
--------------------------- Financial Officer & Director
Asher O. Pacholder (Principal Financial Officer)
/s/ Robin E. Pacholder President, Wedco-North America & December 19, 2000
--------------------------- Director
Robin E. Pacholder
/s/ Jon C. Biro Senior Vice President, Chief December 19, 2000
--------------------------- Accounting Officer and Treasurer
Jon C. Biro (Principal Accounting Officer)
/s/ William E. Cornelius Director December 19, 2000
---------------------------
William E. Cornelius
/s/ James E. Gibson Director December 19, 2000
---------------------------
James E. Gibson
/s/ Walter L. Leib Director December 19, 2000
---------------------------
Walter L. Leib
/s/ William J. Morgan Director December 19, 2000
---------------------------
William J. Morgan
/s/ George S. Sirusas Director December 19, 2000
---------------------------
George S. Sirusas
/s/ John F. Williamson Director December 19, 2000
---------------------------
John F. Williamson
/s/ William E. Willoughby Director December 19, 2000
---------------------------
William E. Willoughby
35
38
ICO, INC. AND SUBSIDIARIES
FORM 10-K
INDEX OF FINANCIAL STATEMENTS
The following financial statements of ICO, Inc. and subsidiaries are required to
be included by Item 14(a):
FINANCIAL STATEMENTS: PAGE
----
Report of Independent Accountants..............................................................................F-2
Consolidated Balance Sheet at September 30, 2000 and 1999......................................................F-3
Consolidated Statement of Operations for the three years
ended September 30, 2000.......................................................................................F-4
Consolidated Statement of Cash Flows for the three years
ended September 30, 2000.......................................................................................F-5
Consolidated Statement of Stockholders' Equity and
Accumulated Other Comprehensive Income (Loss)
for the three years ended September 30, 2000...................................................................F-6
Notes to Consolidated Financial Statements.....................................................................F-7
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedule..............................................S-1
Financial Statement Schedule II - Valuation and Qualifying Accounts............................................S-2
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or related
notes.
F-1
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ICO, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of ICO, Inc. and its subsidiaries at September 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
November 30, 2000
F-2
40
ICO, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
--------------------------
2000 1999
---------- ----------
ASSETS (In thousands, except share data)
Current assets:
Cash and cash equivalents $ 38,955 $ 37,439
Trade receivables (less allowance for doubtful accounts of $1,995 and
$1,884, respectively) 59,349 53,421
Inventories 29,412 26,592
Deferred tax asset 2,936 3,062
Prepaid expenses and other 4,320 3,524
---------- ----------
Total current assets 134,972 124,038
---------- ----------
Property, plant and equipment, net 104,749 114,586
Goodwill (less accumulated amortization of $9,563 and $8,185, respectively) 50,293 54,859
Deferred tax asset 3,417 5,359
Debt offering costs 3,178 3,643
Other 2,568 2,709
---------- ----------
Total Assets $ 299,177 $ 305,194
========== ==========
LIABILITIES, STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 10,339 $ 10,009
Accounts payable 25,307 22,860
Accrued interest 4,129 4,185
Accrued salaries and wages 3,070 3,818
Income taxes payable 2,809 574
Other accrued expenses 11,600 12,390
---------- ----------
Total current liabilities 57,254 53,836
Deferred income taxes 5,143 7,085
Long-term liabilities 1,272 1,671
Long-term debt, net of current portion 140,236 139,652
---------- ----------
Total Liabilities 203,905 202,244
---------- ----------
Commitments and contingencies (see Note 14) -- --
Stockholders' equity (see Note 10):
Preferred stock, without par value - 500,000 shares authorized; 322,500
shares issued and outstanding with a liquidation preference
of $32,250 13 13
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;
22,678,107 and 22,406,506 shares issued and outstanding, respectively 40,236 39,693
Additional paid-in capital 105,333 105,333
Accumulated other comprehensive loss (13,230) (4,684)
Accumulated deficit (37,080) (37,405)
---------- ----------
Total Stockholders' Equity 95,272 102,950
---------- ----------
Total Liabilities, Stockholders' Equity and
Accumulated Other Comprehensive Loss $ 299,177 $ 305,194
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
41
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands, except share data)
Revenues:
Sales $ 196,190 $ 158,022 $ 149,088
Services 129,117 104,351 132,255
------------ ------------ ------------
Total revenues 325,307 262,373 281,343
------------ ------------ ------------
Costs and expenses:
Cost of sales 162,360 133,027 127,256
Cost of services 87,534 68,617 84,600
Selling, general and administrative 40,404 42,158 45,022
Depreciation 13,903 14,316 12,532
Amortization of intangibles 2,429 2,758 2,857
Impairment of long-lived assets -- 9,291 --
Write-off of fixed assets -- 3,420 --
Severance expenses 426 2,499 --
Write-off of start-up costs -- 867 --
------------ ------------ ------------
Total costs and expenses 307,056 276,953 272,267
------------ ------------ ------------
Operating income (loss) 18,251 (14,580) 9,076
------------ ------------ ------------
Other income (expense):
Gain on sale of equity investment -- -- 11,773
Interest income 2,306 1,921 3,771
Interest expense (14,423) (13,831) (13,819)
Other -- (51) (20)
------------ ------------ ------------
Income (loss) before taxes and extraordinary item 6,134 (26,541) 10,781
Provision (benefit) for income taxes 3,633 (6,439) 4,775
------------ ------------ ------------
Income (loss) before extraordinary item 2,501 (20,102) 6,006
Extraordinary gain (see Note 3) -- 399 --
------------ ------------ ------------
Net income (loss) 2,501 (19,703) 6,006
Preferred dividends (2,176) (2,176) (2,176)
------------ ------------ ------------
Net income (loss) applicable to common stock $ 325 $ (21,879) $ 3,830
============ ============ ============
Weighted average shares outstanding (basic) 22,407,000 22,113,000 21,877,000
Weighted average shares outstanding (diluted) 22,465,000 22,133,000 22,004,000
Basic earnings (loss) per share before
extraordinary item $ .01 $ (1.01) $ .18
Extraordinary item -- .02 --
------------ ------------ ------------
Basic earnings (loss) per share $ .01 $ (.99) $ .18
============ ============ ============
Diluted earnings (loss) per share before
extraordinary item $ .01 $ (1.01) $ .17
Extraordinary item -- .02 --
------------ ------------ ------------
Diluted earnings (loss) per share $ .01 $ (.99) $ .17
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
42
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 2,501 $ (19,703) $ 6,006
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 16,332 17,074 15,389
Gain on sale of equity investment -- -- (11,773)
Write-off of fixed assets -- 3,420 --
Impairment of long-lived assets -- 9,291 --
Write-off of start-up costs -- 867 --
Changes in assets and liabilities, net of the effects
of business acquisitions:
Receivables (9,949) 3,885 (3,271)
Inventories (5,687) 3,031 (5,771)
Prepaid expenses and other assets (1,612) 242 (92)
Income taxes payable 2,283 166 (1,235)
Deferred taxes 954 (8,402) 2,365
Accounts payable 5,035 (1,212) (633)
Accrued interest (56) (210) 276
Accrued expenses (912) 1,736 (1,111)
------------ ------------ ------------
Total adjustments 6,388 29,888 (5,856)
------------ ------------ ------------
Net cash provided by operating activities 8,889 10,185 150
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (10,801) (15,333) (26,143)
Acquisitions, net of cash acquired (506) (7,684) (17,492)
Disposition of property, plant and equipment 460 423 2,010
Disposition of equity investment, net of expenses -- -- 13,679
------------ ------------ ------------
Net cash used for investing activities (10,847) (22,594) (27,946)
------------ ------------ ------------
Cash flows from financing activities:
Activity under stock option plans -- -- 1,546
Payment of dividend on preferred stock (1,632) (2,176) (2,176)
Payment of dividend on common stock -- (1,216) (4,823)
Proceeds from issuance of debt 11,689 9,066 3,084
Payment of debt offering costs -- -- (145)
Debt repayments (6,164) (6,800) (2,478)
------------ ------------ ------------
Net cash provided by (used for) financing activities 3,893 (1,126) (4,992)
------------ ------------ ------------
Effect of currency exchange rates on cash (419) (161) 31
Net increase (decrease) in cash and cash equivalents 1,516 (13,696) (32,757)
Cash and cash equivalents at beginning of year 37,439 51,135 83,892
------------ ------------ ------------
Cash and cash equivalents at end of year $ 38,955 $ 37,439 $ 51,135
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash received (paid) during the period for:
Interest received $ 2,306 $ 1,924 $ 3,747
Interest paid (14,423) (13,901) (12,359)
Income taxes paid (813) (1,318) (3,333)
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
43
ICO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Common Common Additional
Preferred Stock Stock Paid-In
Stock Shares Amount Capital
------------ ------------ ------------ ------------
(In thousands, except share data)
Balance at September 30, 1997 $ 13 21,598,658 $ 36,966 $ 109,814
Issuance of shares in connection with
Exercise of employee stock options -- 35,636 142 --
Employee benefit plans -- 178,942 504 --
Exercise of warrants -- 180,000 996 (96)
Debt conversion -- 114,917 562 --
Convertible exchangeable preferred stock dividend (See Note 10) -- -- -- --
Common stock dividend (See Note 10) -- -- -- (993)
Translation adjustment -- -- -- --
Net income -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1998 13 22,108,153 39,170 108,725
------------ ------------ ------------ ------------
Issuance of shares in connection with
employee benefit plans -- 298,353 523 --
Convertible exchangeable preferred stock dividend (See Note 10) -- -- -- (2,176)
Common stock dividend (See Note 10) -- -- -- (1,216)
Translation adjustment -- -- -- --
Net income (loss) -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1999 13 22,406,506 39,693 105,333
------------ ------------ ------------ ------------
Issuance of shares in connection with
employee benefit plans -- 271,601 543 --
Convertible exchangeable preferred stock dividend (See Note 10) -- -- -- --
Translation adjustment -- -- -- --
Net income -- -- -- --
Comprehensive income (loss) -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 2000 $ 13 22,678,107 $ 40,236 $ 105,333
============ ============ ============ ============
Compre- Accumulated
hensive Other Accumu-
Income Comprehensive lated
(Loss) Income (Loss) Deficit Total
------------ ------------- ------------ ------------
(In thousands, except share data)
Balance at September 30, 1997 $ (1,953) $ (17,702) $ 127,138
Issuance of shares in connection with
Exercise of employee stock options -- -- 142
Employee benefit plans -- -- 504
Exercise of warrants -- -- 900
Debt conversion -- -- 562
Convertible exchangeable preferred stock dividend (See Note 10) -- (2,176) (2,176)
Common stock dividend (See Note 10) -- (3,830) (4,823)
Translation adjustment $ 63 63 -- 63
Net income 6,006 -- 6,006 6,006
------------
Comprehensive income (loss) $ 6,069 -- -- --
------------ ------------ ------------
Balance at September 30, 1998 (1,890) (17,702) 128,316
------------ ------------ ------------
Issuance of shares in connection with
employee benefit plans -- -- 523
Convertible exchangeable preferred stock dividend (See Note 10) -- -- (2,176)
Common stock dividend (See Note 10) -- -- (1,216)
Translation adjustment $ (2,794) (2,794) -- (2,794)
Net income (loss) (19,703) -- (19,703) (19,703)
------------
Comprehensive income (loss) $ (22,497) -- -- --
------------ ------------ ------------
Balance at September 30, 1999 (4,684) (37,405) 102,950
------------ ------------ ------------
Issuance of shares in connection with
employee benefit plans -- -- 543
Convertible exchangeable preferred stock dividend (See Note 10) -- (2,176) (2,176)
Translation adjustment $ (8,546) (8,546) -- (8,546)
Net income 2,501 2,501 2,501
------------
Comprehensive income (loss) $ (6,045) -- -- --
------------ ------------ ------------
Balance at September 30, 2000 $ (13,230) $ (37,080) $ 95,272
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of ICO, Inc. and its wholly-owned subsidiaries
("ICO" or the "Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
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, and fair value of financial
instruments. Actual results could differ from these estimates. Management
believes that its estimates are reasonable.
SEGMENT INFORMATION - The Company operates in two industry segments.
The Company serves the petrochemical industry by providing customers with
size-reduction, compounding, and other related services for heat sensitive
thermo-plastic and other materials, producing concentrates and manufacturing
certain machinery used for those services and by serving as a distributor of
specialty petrochemicals processed by the Company. The Company operates in the
petrochemical industry in the United States, Europe, Australia, New Zealand, and
Malaysia. The Company also serves the energy and steel industries by providing
oilfield tubular and sucker rod inspection, reconditioning, and coating services
and equipment, operating in many of the significant oil and gas producing
regions and active exploration areas of the Continental United States and
Canada. See Note 16 - "Segment and Foreign Operations Information."
JOINT VENTURES - Included in the Company's financial results for the
year ended September 30, 1998 is a joint venture referred to as WedTech, Inc., a
size-reduction and custom compounding company headquartered in Canada that was
50% owned by the Company until the early part of fiscal 1998. The Company
acquired a 50% interest in WedTech in connection with the April 1996 Wedco
acquisition. During fiscal year 1998, the Company accounted for the WedTech
investment using the equity method until December 1997, at which time the
Company sold its 50% interest in WedTech to the Company's joint venture partner.
Under the equity method, investments are recorded at cost and adjusted by the
Company's share of undistributed earnings or losses and distribution of earnings
and dividends. The Company had no joint venture investments during fiscal 1999
and 2000.
REVENUE AND RELATED COST RECOGNITION - Within each of the Company's two
business segments, the Company recognizes revenue from services upon completion
of the services and related expenses are recognized as incurred. For product and
machinery sales, within both of the Company's business segments, revenues and
related expenses are recognized when title is transferred, which occurs when the
products are shipped.
INVENTORIES - Inventories are stated at the lower of cost or market,
cost being determined by the first-in, first-out method.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
debt securities with a maturity of three months or less when purchased to be
cash equivalents. Those securities are readily convertible to known amounts of
cash, and bear insignificant risk of changes in value due to their short
maturity period.
PROPERTY, PLANT AND EQUIPMENT - The costs of property, plant and
equipment, including renewals and improvements which extend the life of existing
properties, are capitalized and depreciated using the straight-line method over
the estimated useful lives of the various classes of assets as follows:
CLASSIFICATION YEARS
-------------- -----
Site improvements......................................... 2-25
Buildings................................................. 15-25
Machinery and equipment................................... 1-20
Transportation equipment.................................. 3-10
F-7
45
Leasehold improvements are amortized on a straight-line basis over the
lesser of the economic life of the asset or the lease term. Expenditures for
maintenance and repairs are expensed as incurred. The cost of property, plant
and equipment sold or otherwise retired and the related accumulated depreciation
are removed from the accounts and any resultant gain or loss is included in
operating results.
IMPAIRMENT OF LONG-LIVED ASSETS - SFAS No. 121 prescribes that an
impairment loss is recognized in the event facts and circumstances indicate that
the carrying amount of an asset may not be recoverable, and an estimate of
future undiscounted cash flows is less than the carrying amount of the asset.
Impairment is recorded based on a determination of fair market value as compared
to carrying value.
GOODWILL - The excess purchase price over fair value of net tangible
assets (i.e. goodwill and identifiable tangible assets), is being amortized on a
straight-line basis over 40 years. Goodwill is reviewed for impairment in
accordance with SFAS No. 121.
PATENTS AND LICENSES - The cost of patents, patent rights and license
agreements is generally amortized over the remaining legal lives of the patents
or agreements on a straight-line basis, averaging approximately ten years.
CURRENCY TRANSLATION - Amounts in foreign currencies are translated
into U.S. dollars using the translation procedures specified in SFAS No. 52,
"Foreign Currency Translation." 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 generally recognized in earnings. Net foreign currency
transaction gains or losses are not material in any of the periods presented.
The fluctuations of the U.S. dollar against the Euro, Swedish krona,
British pound, Canadian dollar, 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 between fiscal 2000 and 1999.
Net revenues $ (11,875)
Earnings before interest, taxes,
depreciation, and amortization (1,304)
Operating income (691)
Pre-tax income (499)
Net income (330)
ENVIRONMENTAL - Environmental expenditures that relate to current
operations are expensed as incurred. Expenditures that relate to an existing
condition caused by past operations and which do not contribute to current or
future revenue generation, are also expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable and the costs can
be reasonably estimated. Generally, the timing of these accruals coincides with
the earlier of completion of a feasibility study or the Company's commitment to
a formal plan of action. Also, see "Note 14 - Commitments and Contingencies."
STOCK-BASED COMPENSATION - The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" (See Note 11).
F-8
46
CONCENTRATION OF CREDIT RISK - The market for the Company's services is the
petrochemical and oil and gas industries. Within the petrochemical processing
segment, the Company's primary customers include manufacturers of plastic
products and large producers of petrochemicals, which include major chemical
companies and petrochemical production affiliates of major oil production
companies. The Company's customers within the oilfield service business include
several of the leading integrated oil companies, large independent oil and gas
exploration and production companies, drilling contractors, steel producers and
processors, and supply companies. Worldwide sales to one petrochemical customer
accounted for approximately 14%, 13% and 10% of consolidated fiscal years 2000,
1999 and 1998 revenues, respectively.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables. The
Company provides allowances for potential credit losses when necessary.
Accordingly, management considers such credit risk to be limited.
INCOME TAXES - The provision for income taxes includes federal, state, and
foreign income taxes currently payable and deferred based on currently enacted
tax laws. Deferred income taxes are provided for the tax consequences of
differences between the financial statement and tax bases of assets and
liabilities.
The Company does not provide for U.S. income taxes on foreign subsidiaries'
undistributed earnings intended to be permanently reinvested in foreign
operations.
EARNINGS (LOSS) PER COMMON SHARE - The Company calculates earnings per
share ("EPS") in accordance with Statement of Financial Accounting Standard No.
128 ("SFAS 128"), "Earnings Per Share." SFAS 128 requires the presentation of
both basic and diluted EPS amounts. The requirements for calculating basic EPS
excludes the dilutive effect of securities. Diluted EPS assumes the conversion
of all dilutive securities. The weighted average shares outstanding for the
years ended September 30, 2000, 1999 and 1998 were increased by 58,233,000,
19,445,000, and 127,082,000 shares, respectively, to reflect the conversion of
all potentially dilutive securities. The total amount of anti-dilutive
securities for the years ended September 30, 2000, 1999, and 1998 were
5,640,000, 5,702,000, and 5,621,000 shares, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
long-term debt and foreign currency derivative contracts. The carrying amounts
of cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value due to the highly liquid nature of these short-term
instruments. Except for the Senior Notes indebtedness, the aggregate fair value
of the Company's long-term debt, as determined using interest rates currently
available to the Company for borrowings with similar terms, approximates the
aggregate carrying amount as of September 30, 2000. The Senior Notes long-term
debt, with a face value of $118,000 had a fair market value of approximately
$113,870 at September 2000 and $100,300 at September 1999. The Company attempts
to mitigate its exposure to foreign currency exchange risks by matching the
local currency component of its contracts to the amount of operating costs
transacted in the local currency. As of September 30, 2000 and 1999, the Company
had approximately $3,360 (fair market value at September 30, 2000 was $3,049)
and $2,206 (fair market value at September 30, 1999 was $2,126), respectively,
in forward exchange contracts to buy foreign currency to hedge anticipated
expenses. The value of the contracts, upon ultimate settlement, is dependent
upon actual currency exchange rates at the various maturity dates.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts in order to conform to the current year classifications.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires that companies recognize all
derivative instruments as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Due to the Company's limited use of
derivative instruments, the impact of adopting SFAS No. 133 will not be material
to the Company's financial statements. The Company was required to adopt SFAS
No. 133 in its financial statements for the fiscal year ending September 30,
2000. However, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," deferred
the implementation of SFAS 133 until the fiscal year ending September 30, 2001.
The Company implemented SFAS 133 effective October 1, 2000.
F-9
47
NOTE 2 - ACQUISITIONS
The Company entered into the following business combinations during fiscal
years 2000, 1999 and 1998. All such transactions were accounted for using the
purchase method of accounting under APB No. 16, "Accounting for Business
Combinations." Accordingly, operating results of the acquired companies are
included with the Company's consolidated results of operations from the
respective acquisition dates.
2000 ACQUISITION
During September 2000, the Company acquired the operating assets of Sanko
Manufacturer (M) Sdn. Bhd. ("Sanko") for $675 in cash. Sanko's business is now
conducted through Courtnay (Malaysia) Sdn. Bhd., a Malaysian company that
provides specialty powders, and size reduction and compounding services to the
rotational molding, metal coating, textile and injection molding industries in
Malaysia.
1999 ACQUISITION
During February 1999, the Company acquired MilCorp Holdings, Inc. and
MilCorp Industries, Ltd. (collectively "MilCorp") for $7,653 in cash and the
assumption of approximately $3,744 of debt. MilCorp is a leading provider of
fully integrated services for oil country tubular goods, including trucking,
inventory management, inspection and internal coating. MilCorp has facilities
located on 160 acres near Edmonton, Alberta, in the energy-producing region of
Western Canada. MilCorp has been in business for more than 50 years and its
customers include many of Western Canada's large energy companies and drilling
contractors.
1998 ACQUISITIONS
During June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly-owned subsidiary for approximately $1,600 in cash and the assumption of
approximately $236 in debt. Soreco, which is strategically located in the French
"Plastics Valley", provides high quality color matching and color compounding
services for engineering plastics. Soreco's customer base includes manufacturers
of consumer products such as appliances, electronics, cosmetics and other
products which require colors with high consistency. Soreco uses sophisticated
single pigment coloration techniques to provide rapid turnaround for color
matching and compounding services and has an extensive library of proprietary
color formulations.
During March 1998, the Company acquired J.R. Courtenay (N.Z.) Ltd.
("JRC") and its wholly-owned subsidiary, Courtenay Polymers Pty. Ltd. ("CPPL"),
for $14,124 in cash and the assumption of approximately $500 in debt. JRC and
CPPL are located in Auckland, New Zealand and Melbourne, Australia,
respectively, and are leading providers of polymer powders to the rotational
molding and metal coating industries in New Zealand and Australia. These
companies sell an extensive line of materials using proprietary formulations
under the Cotene(TM) brand name and also provide a complete range of size
reduction and compounding services.
During December 1997, the Company acquired the operating assets of
Curley's Inspection Service, Inc. ("Curley's"). The consideration consisted of
$2,000 in cash and is subject to adjustment based upon future operating revenues
payable through December 31, 2002. Curley's provides drill pipe and casing
inspection services from locations in Texas and New Mexico.
NOTE 3 - EXTRAORDINARY ITEM
During fiscal 1999 the Company repurchased Senior Notes with a face
value of $2,000, at a discount, recognizing a pre-tax gain of $614 and an
after-tax gain of $399.
F-10
48
NOTE 4 - SPECIAL ITEMS
During fiscal 1999, the Company recognized a non-cash $9,291 charge for
the impairment of long-lived assets. $748 of this charge relates to the oilfield
services business, of which $310 related to the impairment of goodwill and the
remaining to machinery and equipment. $8,543 of the total charge relates to the
petrochemical business and reflects the impairment of four underperforming
facilities. $4,812 of the petrochemical charge includes the impairment of
goodwill and $3,489 consists of machinery and equipment impairment. The amount
of goodwill impairment was determined by comparing estimated future cash flows,
on a discounted basis, to the carrying value of the facility evaluated including
the amount of goodwill originally allocated to the facility at the time of
acquisition. The amount of the machinery and equipment impairments was
determined by comparing fair values with the corresponding carrying values of
the assets evaluated. Fair value was determined as the estimated current market
value of the assets evaluated.
During fiscal 1999, the Company reduced the carrying value of property,
plant and equipment primarily due to assets that are obsolete or are not in
working order and will not be used in the future. Of the non-cash $3,420
write-off, $2,779 related to the petrochemical business and $641 related to the
oilfield service segment.
The Company, during fiscal 1999, recorded a write-down of $1,507
(included in cost of sales) to reduce inventory values to estimated market
selling prices (primarily within the oilfield service business) to reflect
current market conditions.
Severance expenses of $426 and $2,499 relating to terminated employees
were recognized during fiscal 2000 and 1999, respectively, in large part due to
European management changes during the fourth quarter of fiscal year 2000 and
the third quarter of fiscal 1999.
During fiscal 1999, the Company wrote-off $867 of start-up costs
primarily relating to the closure, during the second quarter of fiscal 1999, of
an operation that had capitalized start-up costs.
During the first quarter of fiscal 1998, management provided a $1,200
accrual for certain legal matters that management felt would result in a charge
to income and could be reasonably estimated (included in selling, general and
administrative expenses). Subsequent to the first quarter of fiscal 1998, these
matters were settled and the total expenses incurred by the Company were
reasonably consistent with the previously recognized litigation charge.
NOTE 5 - INVENTORIES
Inventories at September 30 consisted of the following:
2000 1999
---------- ----------
Finished goods $ 13,073 $ 10,947
Raw materials 11,668 11,353
Work in progress 1,230 933
Supplies 3,441 3,359
---------- ----------
$ 29,412 $ 26,592
========== ==========
F-11
49
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
September 30:
2000 1999
---------- ----------
Land and site improvements $ 23,754 $ 24,496
Buildings 35,590 35,041
Machinery and equipment 118,997 115,085
Transportation equipment 3,558 3,411
Leasehold improvements 2,193 2,118
Construction in progress 4,435 8,195
---------- ----------
188,527 188,346
Accumulated depreciation (83,778) (73,760)
---------- ----------
$ 104,749 $ 114,586
========== ==========
F-12
50
NOTE 7 - LONG-TERM DEBT
Long-term debt at September 30, 2000 and 1999 consists of the
following. Obligations denominated in a foreign currency have been translated
using year-end exchange rates.
2000 1999
------------ ------------
10 3/8% Series B Senior Notes, interest payable semi-annually, principal due 2007. $ 118,000 $ 118,000
Term loan of the Company's Italian subsidiary collateralized by certain
property, plant and equipment of the subsidiary. Principal and interest paid
quarterly with a fixed interest rate of 5.9% through June 2009. 6,326 6,538
Term loans of the Company's Canadian subsidiaries with various maturities
collateralized by accounts receivable, inventory, and machinery and equipment of
the subsidiaries. Interest and principal is paid monthly with fixed interest
rates of 8.5%. The loans are subject to annual review by the bank and carry
various maturities from July 2004 through July 2015. 4,582 3,870
Term loan of Company's Australian subsidiary, collateralized by a mortgage over
the subsidiary's assets. Principal payments on the loan are payable in quarterly
installments. Interest is payable in quarterly installments at a floating rate
of 7.8% adjusted quarterly and limited to a maximum rate of 9.8% through July 2005. 3,379 --
Term loan of the Company's Italian subsidiary collateralized by land and
buildings of the subsidiary. Increasing principal payments are made quarterly
beginning May 2000 through April 2005. Interest paid quarterly at a fixed rate
of 5.9%. 1,115 1,649
Term loans of one of the Company's British subsidiaries, collateralized by
current assets of the subsidiary. Payment is due in 2004 and interest is payable
semi-annually at rates fixed through 2002 between 7.7% and 8.4%. 1,109 1,234
Mortgage loan payable by one of the Company's British subsidiaries,
collateralized by a mortgage on the assets of the subsidiary. Principal payments
on the loan are due in monthly installments through October 2007. Interest is
payable monthly at a fixed rate of 8.3%. 1,047 1,330
Mortgage loan carrying a 9.2% fixed rate with monthly payments of principal and
interest through October 1, 2006. Loan is collateralized by a mortgage on
certain domestic property. 1,005 1,121
Term loan of the Company's French subsidiary. Principal payments on the loan are
payable in monthly installments. Interest is payable monthly at a fixed rate of
5.5% through January 2010. 964 --
Mortgage loan payable by one of the Company's Dutch subsidiaries, collateralized
by mortgages on certain buildings of the subsidiary. Principal payments on the
loan are payable in quarterly installments and interest is payable at a fixed
rate of 7.2% through June 2006. 937 1,373
Mortgage loan payable by one of the Company's British subsidiaries,
collateralized by a mortgage over the assets of the subsidiary. Principal
payment on the loan is payable in monthly installments through June 2006
Interest is payable monthly at a fixed rate of 8.9%. 850 1,111
Mortgage loans payable by one of the Company's Dutch subsidiaries,
collateralized by mortgages on certain land and buildings of the subsidiary
Principal payments on these loans are payable in semi-annual installments
Interest is payable in semi-annual installments at a fixed rate of 6.80% through
April 2006. 662 1,014
Interest-free term loan of one of the Company's Dutch subsidiaries. Principal
payable annually, in equal annual installments, over 5 years ending April 2002. 541 978
F-13
51
2000 1999
------------ ------------
Various secured loan agreements of the Company's French subsidiaries
collateralized by certain buildings and equipment of the subsidiaries. The loan
agreements carry various maturities between 2001 and 2007 and interest rates
range from 3.7% to 7.3%. Interest and principal is paid either monthly or
quarterly. 366 618
Various other 2,287 3,653
------------ ------------
Total 143,170 142,489
Less current maturities (2,934) (2,837)
------------ ------------
Long-term debt less current maturities $ 140,236 $ 139,652
============ ============
In June 1997, the Company issued the Series A Senior Notes at $120,000
face value and received proceeds of $114,797 net of offering costs of $5,203.
Offering costs are amortized over the term of the Senior Notes and, as of
September 30, 2000, accumulated amortization of debt offering costs totaled
$2,025. Beginning in June of 2002, the Company may, at its option, redeem the
Senior Notes at various premiums depending upon the redemption date. The terms
of the Senior Notes limit the amount of additional indebtedness incurred by the
Company and its subsidiaries and restrict certain payments, specifically
dividends on preferred and common stock. The terms, however, do allow for
dividend payments on currently outstanding preferred stock in accordance with
the terms of the preferred stock and up to $.22 per share per annum on common
stock in the absence of any default or event of default on the Senior Notes. The
above dividend limitations may not be decreased, but may be increased, based
upon the Company's results of operations and other factors. In November 1997,
the Company completed an exchange of 100% of the unregistered Series A Notes for
registered 10 3/8% Series B Notes due 2007, with essentially equivalent terms.
Maturities of the Company's debt are as follows:
YEARS ENDED
SEPTEMBER 30, AMOUNTS
------------- -------
2001 $ 2,934
2002 2,685
2003 2,773
2004 3,956
2005 2,800
Thereafter 128,022
F-14
52
NOTE 8 - CREDIT ARRANGEMENTS
The Company maintains several foreign lines of credit through its
wholly-owned subsidiaries. These facilities totaled $15,376 at September 30,
2000. The facilities are collateralized by certain assets of the foreign
subsidiaries. Borrowings under these agreements, classified as short term
borrowings on the consolidated balance sheet, totaled $7,405 at September 30,
2000.
The weighted average interest rate charged on short-term borrowings
under the Company's various credit facilities at September 30, 2000 and 1999 was
5.6% and 4.1%, respectively.
NOTE 9 - INVESTMENT IN JOINT VENTURES
During the first quarter of fiscal 1998, the Company sold its
investment in WedTech for $14,484 in cash and recognized a pre-tax gain of
$11,773.
NOTE 10 - STOCKHOLDERS' EQUITY
During November 1993, the Company completed an offering of Convertible
Exchangeable Preferred Stock ("Preferred Stock"). The shares of Preferred Stock
are evidenced by Depositary Shares, each representing one-quarter of a share of
Preferred Stock. A total of 1,290,000 Depositary Shares were sold at a price of
$25 per share. Each Preferred Share is convertible into 10.96 common shares
(equivalent to 2.74 common shares per Depositary Share) at a conversion price of
$9.125 per common share subject to adjustment upon the occurrence of certain
events. The Board of Directors approved the recording of the Preferred Stock
offering by allocating $.01 per Depositary Share to Preferred Stock and the
remainder to additional paid-in capital. Preferred Stock dividends of $1.6875
per depositary share are paid annually.
Cash dividends paid during the fiscal years ended September 30, 2000,
1999 and 1998 equaled $2,176 during each year on the Company's Preferred Stock.
Cumulative liquidating dividends on the Company's Preferred Stock paid out of
Additional Paid-in Capital through September 30, 2000 totaled $4,955.
Cash dividends paid during the fiscal years ended September 30, 1999
and 1998 equaled $1,216 and $4,823, respectively, on the Company's common stock,
of which $1,216 and $993, respectively, represented liquidating dividends paid
from Additional Paid-in Capital. There were no dividends paid on the Company's
Common Stock during fiscal year ended September 30, 2000. Cumulative liquidating
dividends on the Company's common stock paid out of Additional Paid-in Capital
through September 30, 2000 totaled $5,676.
In connection with the Company's 1992 debt restructuring, 801,750
Common Stock Purchase Warrants (expiring July 2002) were issued at an exercise
price of $5.00. During the year ended September 30, 1998, 180,000 of these
warrants were exercised and the Company received proceeds of $900.
On October 31, 1997, the Board of Directors adopted a Shareholders'
Rights Plan (the "Rights Plan") and declared a dividend of one Junior
Participating Preferred Share purchase right with respect to each share of
common stock outstanding at the close of business on November 21, 1997. On April
1, 1998 a successor Rights Plan was adopted by the Board of Directors with
essentially identical terms and conditions. The rights are designed to assure
that all Shareholders receive fair and equal treatment in the event of any
proposed takeover of the Company and to encourage a potential acquirer to
negotiate with the Board of Directors prior to attempting a takeover. It
includes safeguards against partial or two-tiered tender offers, squeeze-out
mergers and other abusive takeover tactics to gain control of ICO without paying
all Shareholders a control premium. Each right entitles the holder to purchase
one-thousandth of a share of a newly authorized series of the Company's
preferred stock at a purchase price of $30. Each one-thousandth of a share of
such preferred stock is intended to be the economic and voting equivalent of one
share of common stock. The rights are not presently exercisable, and are
currently evidenced by the Company's common stock certificates and trade
automatically with the common stock.
In the event any person or group commences a tender or exchange offer
that, if consummated, would result in
F-15
53
such person or group becoming the beneficial owner of 15% or more of ICO's
common stock, then after a specified period, separate rights certificates will
be distributed and each right will entitle its holder to purchase one-thousandth
of a share of such preferred stock at a purchase price of $30.
In the event a person or group acquires beneficial ownership of 15% or
more of the Company's common stock, then, after a specified period, each right
(other than rights beneficially owned by such person or group, which become
void) will entitle its holder to purchase, at the purchase price, shares of the
Company's common stock, (or, at the option of the Board, such preferred stock)
having a market value equal to twice the purchase price. Additionally, if after
any such person or group acquires beneficial ownership of 15% or more of ICO's
common stock, the Company is acquired in a merger or other business combination
or 50% or more of its consolidated assets or earning power are sold, each right
(other than rights beneficially owned by such person or group, which will have
become void) will entitle its holder to purchase, at the purchase price, shares
of common stock of the person or group with whom the Company engaged in such
transaction having a market value equal to twice the purchase price.
Under certain circumstances, the Company may, at its option, exchange
for each outstanding right (other than voided rights) one share of common stock
or one-thousandth of a share of such preferred stock. The Company may also, at
its option, redeem the rights at a price of $.01 per right at any time prior to
a specified period of time after a person or group has become the beneficial
owner of 15% or more of its common stock.
The rights will expire on November 20, 2007, unless earlier redeemed.
F-16
54
NOTE 11 - STOCK OPTION PLANS AND COMMON STOCK WARRANTS
The table below summarizes the Company's six stock option plans. The
number of options indicates the number of common shares underlying the options
authorized by the Company's Board of Directors and shareholders. All the plans
allow grants for 10 years from each plan's effective date. All options granted
to date are currently vested, however, future options granted may carry vesting
schedules at the discretion of a committee of the Board of Directors.
PLAN NUMBER OF OPTIONS EFFECTIVE DATE OF PLAN
---- ----------------- ----------------------
1998 Stock Option Plan 600,000 January 12, 1998
1996 Stock Option Plan 800,000 August 29, 1996
1995 Stock Option Plan 400,000 August 15, 1995
1994 Stock Option Plan 400,000 July 1, 1994
1993 Restated Non-Employee Director
Stock Option Plan 310,000 June 16, 1993
1985 Stock Option Plan 310,000 January 2, 1985
For all of the above plans, shares of common stock are reserved for
grant to certain officers, key employees and non-employee directors at a price
not less than 100% of the fair market value of the stock at the date of grant.
There were 711,250, 709,050, and 538,700, shares available for grant at
September 30, 2000, 1999, and 1998, respectively. The following is a summary of
stock option activity for the three years ended September 30:
2000 1999 1998
---------------------------- --------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
FIXED OPTIONS (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
------------- ---------- -------------- ---------- -------------- ---------- --------------
Outstanding at beginning
of year ........................... 1,567 $ 5.10 1,591 $ 5.68 1,407 $ 5.80
Granted ............................ 614 1.75 226 1.25 322 4.99
Exercised .......................... -- -- -- -- (36) 4.89
Forfeited .......................... (626) 5.82 (250) 5.33 (102) 5.68
---------- ---------- ----------
Outstanding at end of year ......... 1,555 $ 4.07 1,567 $ 5.10 1,591 $ 5.68
========== ========== ==========
Options exercisable at year end .... 1,555 $ 4.07 1,567 $ 5.10 1,591 $ 5.68
========== ========== ==========
2000 1999 1998
---------------------------- --------------------------- ----------------------------
Weighted average fair value of
options granted during year
($/share) .......................... $ 1.06 $ 0.81 $ 1.46
F-17
55
The following table summarizes information about fixed stock options outstanding
at September 30, 2000:
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT 9/30/00 (000'S) REMAINING CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ------------------ -------------------------- --------------
$0.00 - $2.99 824 9 years $ 1.61
$3.00 - $5.25 342 5 years $ 4.76
$5.31 - $7.19 357 5 years $ 6.19
$7.22 - $9.75 32 6 years $ 7.84
-------
1,555
=======
As discussed in Note 1, the Company has elected to continue to account
for stock-based compensation in accordance with APB 25. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated in the table below:
2000 1999 1998
------------------------- -------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ---------- ----------- ----------
Net income (loss) $ 2,501 $ 1,849 $ (19,703) $ (19,885) $ 6,006 $ 5,555
Basic EPS .01 (.01) (0.99) (1.00) $ 0.18 $ 0.15
Diluted EPS .01 (.01) (0.99) (1.00) $ 0.17 $ 0.15
The fair value of each option grant is estimated on the date of the
grant using the Noreen-Wolfson option- pricing model, which is the Black-Scholes
model adjusted for the dilutive impact which the conversion of the options will
have on the Company's stock price, with the following assumptions:
2000 1999 1998
---------- ---------- ----------
Expected life of options 7.5 years 7.4 years 7.5 years
Expected dividend yield over life of options 0% 0% 3.57%
Expected stock price volatility 47.75% 50.40% 31.00%
Risk-free interest rate 6.63% 5.60% 5.60%
F-18
56
NOTE 12 - INCOME TAXES
The amounts of income (loss) before income taxes attributable to
domestic and foreign operations are as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Domestic $ 2,162 $ (28,025) $ 5,884
Foreign 3,972 1,484 4,897
---------- ---------- ----------
$ 6,134 $ (26,541) $ 10,781
========== ========== ==========
The provision for income taxes consists of the following:
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Current:
Federal $ (147) $ (370) $ --
State 132 -- 892
Foreign 2,906 1,789 2,146
---------- ---------- ----------
2,891 1,419 3,038
---------- ---------- ----------
Deferred:
Federal 1,482 (7,491) 2,704
State 152 -- 434
Foreign (892) (367) (1,401)
---------- ---------- ----------
742 (7,858) 1,737
---------- ---------- ----------
Total:
Federal 1,335 (7,861) 2,704
State 284 -- 1,326
Foreign 2,014 1,422 745
---------- ---------- ----------
$ 3,633 $ (6,439) $ 4,775
========== ========== ==========
A reconciliation of the income tax expense (benefit) at the federal
statutory rate (35%) to the Company's effective rate is as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Tax expense (benefit) at statutory rate $ 2,147 $ (9,289) $ 3,773
Change in the deferred tax assets valuation allowance (453) (61) (110)
Non-deductible expenses and other, net 896 2 806
Foreign tax rate differential 624 903 (968)
Goodwill amortization and write-downs 181 2,006 259
State taxes, net of federal benefit 238 -- 1,015
---------- ---------- ----------
$ 3,633 $ (6,439) $ 4,775
========== ========== ==========
Deferred tax assets (liabilities) result from the cumulative effect of
temporary differences in the recognition of expenses (revenues) between tax
returns and financial statements. The significant components of the balances are
as follows:
F-19
57
SEPTEMBER 30,
------------------------------
2000 1999
---------- ----------
Deferred tax assets:
Net operating and capital loss carryforwards $ 7,577 $ 8,637
Tax credit carryforward 1,025 654
Insurance accruals 1,034 915
Other accruals 61 98
Bad debt allowance 459 421
Compensation accruals 722 792
Legal accruals 189 310
Depreciation 859 731
Inventory 184 388
Other 651 1,055
---------- ----------
12,761 14,001
---------- ----------
Deferred tax liabilities:
Depreciation and land (9,753) (10,235)
Deferred revenue (568) (637)
Other (114) (224)
---------- ----------
(10,435) (11,096)
---------- ----------
Valuation allowance on deferred tax assets (1,116) (1,569)
---------- ----------
Net deferred tax assets $ 1,210 $ 1,336
========== ==========
The Company reduced the valuation allowance during 1999 and 2000 to
reflect the expiration of certain federal tax credits. The Company further
reduced the valuation allowance in 1999 and 2000 to reflect the utilization and
expiration of capital losses. A valuation allowance is established when it is
more likely than not that some or all of the deferred tax asset will not be
realized.
The Company has for tax purposes $21,649 in net operating loss
carryforwards ("NOLs"), which expire between 2001 and 2019, and $519 in
investment and other tax credit carryforwards which, if utilized, will result in
a cash savings. Net operating loss carryforwards in the amount of $2,311 and
$307 of the tax credits are expected to expire unused. A change in ownership
under the Internal Revenue Code has occurred, which limits the utilization of
$5,019 of the Company's NOLs and credits to approximately $677 each year through
their expiration.
The Company does not provide for U.S. income taxes on foreign
subsidiaries' undistributed earnings intended to be permanently reinvested in
foreign operations. It is not practicable to estimate the amount of additional
tax that might be payable should the earnings be remitted or deemed remitted or
should the Company sell its stock in the subsidiaries.
F-20
58
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains several defined contribution benefit plans that
cover domestic and foreign employees that meet certain eligibility requirements
related to age and service time with the Company. The plan in which each
employee is eligible to participate depends upon the subsidiary that employs the
employee. All plans have a salary deferral feature that enables employees to
contribute up to a certain percentage of their earnings, subject to governmental
regulations. Many of the plans require the Company to match employees'
contributions with ICO stock or a monetary contribution. Domestic employees'
interests in the Company's contributions and earnings are vested over five years
of service, while foreign employees are generally vested immediately.
The Company maintains a defined benefit plan, for employees of one of
the Company's Dutch subsidiaries. Participants contribute a range of 1.5% to 4%
of the cost associated with their individual pension basis. The Company
contributes an annual amount based on an actuarial calculation. The plan
provides retirement benefits at the normal retirement age of 65. This subsidiary
also maintains a pre-pension plan for all employees who are eligible for the
basic pension plan. Under this plan, an employee may choose between the ages of
60-62 to retire early. These employees will remain under the pre-pension plan
until the age of 65 at which time they will be eligible for the basic pension
plan. During the early retirement period, eligible employees opting for early
retirement will receive 50% to 75% of their salaries on the date of retirement.
Annually, employees contribute 1.4% of their salaries towards their
pre-pensions. The Company will contribute the difference between what has been
accumulated by means of annual premiums and what is necessary to be paid out
during the early retirement period.
Total expense for all employee benefit plans included in consolidated
results of operations for the years ended September 30, 2000, 1999 and 1998 was
$1,338, $1,397, and $1,084, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company leases certain transportation equipment, office space and
other machinery and equipment under operating leases that expire at various
dates through fiscal 2002. Rental expense was approximately $5,382 in 2000,
$5,790 in 1999, and $6,168 in 1998. Future minimum rental payments as of
September 30, 2000 are due as follows:
2001 $ 5,182
2002 4,332
2003 3,412
2004 2,303
2005 1,631
Thereafter 3,609
The Company is a named defendant in four cases involving four
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. The cases were initiated on May 13, 1991 (by Odilon
Martinez, et al., in Texas state court in Ector County); November 21, 1991 (by
Roberto Bustillos, et al., in Texas state court in Ector County); August 25,
1992 (by James Glidwell, et al., in Texas state court in Ector County); and
January 4, 2000 (by Pilar Oliver, et al., in Texas state court in Harris
County). For the most part, the Company is generally protected under workers'
compensation law from claims under these suits except to the extent a judgment
is awarded against the Company for intentional tort. The standard of liability
applicable to all of the Company's pending personal injury cases alleging
exposure to silica is intentional tort, a stricter standard
than the gross negligence standard applicable to wrongful death cases. One suit
against the Company, which was settled and came to an end in the fourth quarter
of fiscal 2000, involved negligence claims that, in theory, could have
circumvented the Company's immunity protections under the workers' compensation
law, although even if such circumvention had occurred, the Company believed that
this litigation, referred to as the Roark litigation, would not have had a
material adverse effect on the financial condition or results of operations of
the Company. As described in more detail below, the Roark litigation named the
Company and Baker Hughes, Inc. ("Baker Hughes"), among others, as defendants and
fell within the provisions of an agreement between the Company and Baker Hughes
that limited the Company's obligations in the litigation. During the fourth
quarter of fiscal 2000, the Company, Baker Hughes
F-21
59
and the plaintiff in the Roark litigation entered into a settlement that brought
an end to the Roark litigation. The terms of the settlement did not have a
material adverse effect on the Company's financial condition or results of
operations.
The Company currently has one pending silicosis-related suit in which
wrongful death is alleged. This case was filed on April 4, 2000 by Delma Orozco,
individually and as representative of the estate of Lazaro Orozco, et al., in
Texas state court in Ector County. In fiscal 1993, the Company settled two other
silicosis-related suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605. In 1994,
the Company was dismissed without liability from two suits alleging intentional
tort against the Company for silicosis-related disease. In 1996, the Company
obtained a non-suit in two other intentional tort cases and in early 1997 was
non-suited in an additional tort case. During the second quarter of fiscal 1998,
three cases involving alleged silicosis-related deaths were settled. The Company
was fully insured for all three cases and, as a result, did not incur any
settlement costs. During the second quarter of fiscal 1998, the Company was
non-suited in one intentional tort case, and during the fourth quarter of fiscal
1998, the Company was non-suited in two additional tort cases. During the second
quarter of fiscal 1999, the Company was non-suited in one intentional tort case,
and during the fourth quarter of fiscal 1999, the Company was non-suited in an
additional intentional tort case. During the third quarter of fiscal 2000, the
Company was non-suited in two additional intentional tort cases. The Company and
its counsel cannot at this time predict with any reasonable certainty the
outcome of any of the remaining silicosis-related suits or whether or in what
circumstances additional suits may be filed. Except as described below, the
Company does not believe, however, that such suits will have a material adverse
effect on its financial condition, results of operations or cash flows. The
Company has in effect, in some instances, general liability and employer's
liability insurance policies applicable to the referenced suits; however, the
extent and amount of coverage is limited and the Company has been advised by
certain insurance carriers of a reservation of rights with regard to policy
obligations pertaining to the suits because of various exclusions in the
policies. If an adverse judgment is obtained against the Company in any of the
referenced suits which is ultimately determined not to be covered by insurance,
the amount of such judgment could have a material adverse effect on the
financial condition, results of operations and/or cash flows of the Company.
The Company's agreement with Baker Hughes, pursuant to which Baker
Hughes Tubular Services ("BHTS") was acquired by the Company, provides that
Baker Hughes will reimburse the Company for 50% of the BHTS environmental
remediation costs in excess of $318, with Baker Hughes' total reimbursement
obligation being limited to $2,000 (current BHTS obligation is limited to
$1,650). BHTS is a responsible party at two hazardous waste disposal sites that
are currently undergoing remediation pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who
were responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas. Remediation of the French Limited site
has been completed, with only natural attenuation of contaminants in groundwater
occurring at this time. Remediation has not yet commenced at the Sheridan site.
Current plans for cleanup of this site, as set forth in the federal Record of
Decision, call for on-site bioremediation of the soils in tanks and natural
attenuation of contaminants in the groundwater. However, treatability studies to
evaluate possible new remedies for the soils, such as in-place bioremediation,
are being conducted as part of a Remedial Technology Review Program. Based on
the completed status of the remediation at the French Limited site and BHTS's
minimal contribution of wastes at both of the sites, the Company believes that
its future liability under the agreement with Baker Hughes with respect to these
two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500 for each claim and a maximum contingent liability of $5,000 ($4,500 net
of payments the Company has made to date pursuant to the terms of the agreement)
in the aggregate, for all claims. This agreement governed the Company's
liability with respect to the Roark litigation, which involved occupational
health claims arising out of Roark's employment at BHTS.
F-22
60
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13,000 in the
trial of its case against John Wood Group PLC relating to the 1994 contract for
the purchase of the operating assets of NDT Systems, Inc. and certain related
entities. The trial court subsequently entered a judgment for $15,750 in the
Company's favor, which includes pre-judgment interest on the jury award. The
Wood Group appealed the judgment. On March 9, 2000, the Court of Appeals for the
First District of Texas reversed the judgment entered by the trial court and, as
to all but one of ICO's claims, ordered that ICO have no recovery. As to that
remaining breach of contract claim seeking recovery of a contract payment of
$500, the Court of Appeals remanded the cause to the trial court for further
proceedings. On April 7, 2000, ICO filed with the Court of Appeals its motion
for rehearing and rehearing en banc. That motion was overruled on August 31,
2000. ICO filed its petition for review with the Texas Supreme Court on November
15, 2000. That petition is still pending. The Texas Supreme Court may ask for
further briefing and that Court has discretion in deciding whether to grant
ICO's petition and review the case. All expenses associated with this litigation
have been reflected as expenses in the Company's financial statements, and there
is no asset on the Company's balance sheet relating to the judgment in the
Company's favor.
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made on August 7, 1998,
by Oil Country Tubular Limited ("OCTL"), a company based in India. The claim
arises out of a transaction between OCTL and Baker Hughes Tubular Services, Inc.
(BHTS) whereby BHTS sold a plant in Canada to OCTL and entered into a separate
Foreign Collaboration Agreement (FCA) to provide certain practical and technical
assistance in setting up the plant and making it operational in India.
OCTL paid $2,400 for the FCA and $2,800 for the plant. In its claim
brought in the Court of Arbitration of the International Chamber of Commerce,
OCTL claims, among other items, it did not receive technical assistance, spare
parts, and certain raw materials that were necessary for its oil field tubular
services plant in India and that BHTS owed it under the FCA. The Company is
involved by virtue of its acquisition in 1992 of BHTS. The Company had only
peripheral knowledge of the dispute between OCTL and Baker Hughes Incorporated
prior to the filing of OCTL's claim. The Company objected to the jurisdiction of
the arbitration tribunal on the ground that the Company is not a party to the
FCA, the FCA having been assigned to Tuboscope Incorporated prior to ICO's
purchase of BHTS. After a hearing on that objection, the arbitral tribunal
entered a decision in March 2000, holding that it did have jurisdiction over the
Company. OCTL submitted an Amended Statement of Claim in November, 2000. While
the total amount of OCTL's claims remain unclear, it has alleged approximately
$8,700 in losses due to past contractual breaches, plus approximately $7,900 in
"liquidated damages" it claims to have paid to third parties because of
production losses that allegedly resulted from contractual breaches, and an
unspecified amount of damages from lost sales. While the outcome of this
arbitration matter cannot be predicted, the Company plans to contest the claims
vigorously. Regardless of the liability of facts, about which the Company has no
knowledge at this point, the Company believes the damage claim is exaggerated.
The Company, Baker Hughes, and Tuboscope have entered into a separate agreement
to arbitrate which entity would be responsible to pay any award the ICC arbitral
panel may enter.
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 15 - SUPPLEMENTAL CASH FLOW INFORMATION
As discussed in Note 2, the following is a schedule of assets acquired,
liabilities assumed, and common stock issued in conjunction with the
acquisitions in 2000, 1999, and 1998:
F-23
61
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Trade receivables $ 185 $ 1,524 $ 3,916
Related party receivables (90) -- --
Inventories 71 27 3,620
Prepaid expenses and other assets 4 81 629
Property, plant and equipment 210 7,216 6,399
Goodwill 363 4,921 8,020
Investment in joint ventures -- -- --
Deferred tax asset -- -- 197
Accounts payable (84) (648) (2,572)
Accrued liabilities (4) (140) (1,588)
Deferred tax liability -- (1,203) (982)
Income taxes payable -- (325) --
Long-term debt (148) (3,769) (147)
Common stock issued (1) -- --
---------- ---------- ----------
Cash paid, net of cash acquired $ 506 $ 7,684 $ 17,492
========== ========== ==========
During 2000, the Company accrued preferred dividends of $544 which were
declared, but unpaid, on September 30, 2000.
During 1998, the Company exchanged $562 of debt for 114,917 shares of
common stock.
During fiscal years 2000, 1999, and 1998, the Company issued to
employees $543, $523, and $504 worth of common stock, respectively, in
connection with the Company's domestic benefit plans. See Note 13 - "Employee
Benefit Plans".
F-24
62
NOTE 16 - SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company's two reportable segments consist of the primary products
and services provided by the Company to customers: Petrochemical Processing
Services and Oilfield Services.
The Petrochemical Processing segment provides size reduction,
compounding, concentrates manufacturing, distribution and related services. The
primary customers of the Petrochemical Processing segment include large
producers of petrochemicals, end users, such as rotational molders, and polymer
distributors. Worldwide sales to one petrochemical processing customer accounted
for 14%, 13% and 10% of the Company's consolidated revenues in fiscal 2000, 1999
and 1998, respectively.
The Oilfield Service business segment provides oilfield tubular and
sucker rod inspection, reconditioning and coating services and also sells
equipment to customers. This segment's customers includes leading integrated oil
companies, large independent oil and gas exploration and production companies,
drilling contractors, steel producers and processors and oilfield supply
companies. No single Oilfield Service customer accounted for more than 10% of
the Company's consolidated revenues.
The accounting policies of the reportable segments are the same as
those described in the Summary of Significant Accounting Policies (see Note 1).
There are no material inter-segment revenues. The Company evaluates the
performance of its segments based upon revenues and operating income.
Summarized financial information of the Company's reportable segments
for the years ended September 30, 2000, 1999 and 1998 is shown in the following
table.
PETROCHEMICAL OTHER
PROCESSING OILFIELD RECONCILING
SERVICES SERVICES ITEMS * TOTAL
-------------- -------------- -------------- --------------
FISCAL YEAR 2000
- ------------------------------------
Sales Revenues $ 176,256 $ 19,934 $ -- $ 196,190
Service Revenues 43,680 85,437 -- 129,117
-------------- -------------- -------------- --------------
Total 219,936 105,371 -- 325,307
Operating Income (Loss) 13,850 13,450 (9,049) 18,251
Total Assets 174,757 75,694 48,726 299,177
Depreciation and Amortization
Expense 9,807 5,561 964 16,332
Expenditures for Additions to
Long-lived Assets 8,132 2,341 328 10,801
FISCAL YEAR 1999
- ------------------------------------
Sales Revenues $ 142,279 $ 15,743 $ -- $ 158,022
Service Revenues 45,198 59,153 -- 104,351
-------------- -------------- -------------- --------------
Total 187,477 74,896 -- 262,373
Operating Income (Loss) (1,967) (376) (12,237) (14,580)
Total Assets 180,582 74,829 49,783 305,194
Depreciation and Amortization
Expense 10,692 5,381 1,001 17,074
Expenditures for additions to
long-lived assets 10,028 5,156 149 15,333
F-25
63
PETROCHEMICAL OTHER
PROCESSING OILFIELD RECONCILING
SERVICES SERVICES ITEMS * TOTAL
-------------- -------------- -------------- --------------
FISCAL YEAR 1998
- ------------------------------------
Sales Revenues $ 125,420 $ 23,668 $ -- $ 149,088
Service Revenues 51,812 80,443 -- 132,255
-------------- -------------- -------------- --------------
Total 177,232 104,111 -- 281,343
Operating Income (Loss) 10,526 13,025 (14,475) 9,076
Total Assets 200,718 69,491 58,468 328,677
Depreciation and Amortization
Expense 9,524 4,845 1,020 15,389
Expenditures for additions to
long-lived assets 18,018 7,752 373 26,143
*Consists primarily of corporate overhead expenses and unallocated
corporate assets. Unallocated corporate assets consist of cash,
deferred tax assets, unamortized bond offering expenses, and corporate
fixed assets.
A reconciliation of total segment operating income to consolidated
income before taxes and extraordinary items is as follows:
2000 1999 1998
------------ ------------ ------------
Total operating income (loss) for reportable segments $ 18,251 $ (14,580) $ 9,076
Gain on sale of equity investment -- -- 11,773
Interest income 2,306 1,921 3,771
Interest expense (14,423) (13,831) (13,819)
Equity in income of joint ventures -- -- --
Other -- (51) (20)
------------ ------------ ------------
Consolidated income (loss) before taxes and
extraordinary item $ 6,134 $ (26,541) $ 10,781
============ ============ ============
The following is revenue and long-lived asset information by geographic
area for years ended September 30:
REVENUES LONG-LIVED ASSETS
---------------------------------------- ----------------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
United States $ 189,140 $ 145,052 $ 167,523 $ 102,788 $ 105,543 $ 113,353
Foreign 136,167 117,321 113,820 61,417 75,613 70,951
---------- ---------- ---------- ---------- ---------- ----------
$ 325,307 $ 262,373 $ 281,343 $ 164,205 $ 181,156 $ 184,304
========== ========== ========== ========== ========== ==========
Foreign revenue is based on the country in which the legal subsidiary
is domiciled. Revenue from no single foreign country was material to the
consolidated revenues of the Company. Long-lived assets include net property,
plant and equipment, goodwill, debt offering costs, deferred tax assets, patents
and other long-term assets.
F-26
64
NOTE 17 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected financial information for each
quarter in the fiscal years ended September 30, 2000 and September 30, 1999,
respectively.
THREE MONTHS ENDED
---------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 2000 2000 2000
------------ ------------ ------------ -------------
Revenues $ 74,021 $ 81,620 $ 85,353 $ 84,313
Gross profit 17,862 19,105 19,155 19,291
Operating income (loss) 3,425 4,460 4,961 5,405
Net income 21 565 994 921
Basic earnings (loss) per share $ (0.02) $ 0.00 $ 0.02 $ 0.02
Diluted earnings (loss) per share $ (0.02) $ 0.00 $ 0.02 $ 0.02
Basic weighted average shares outstanding 22,407,000 22,407,000 22,407,000 22,409,000
Diluted weighted average shares outstanding 22,429,000 22,449,000 22,459,000 22,505,000
THREE MONTHS ENDED
---------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 (1) 1999 1999
------------ ------------ ------------ -------------
Revenues $ 62,791 $ 63,546 $ 65,495 $ 70,541
Gross profit 14,798 12,113 16,392 17,426
Operating income (loss) 81 (18,800) 188 3,951
Net income (loss) before extraordinary item (2,414) (15,856) (2,307) 475
Net income (loss) (2,414) (15,457) (2,307) 475
Basic earnings (loss) per share before extraordinary item $ (0.13) $ (0.74) $ (0.13) $ 0.00
Diluted earnings (loss) per share before extraordinary item $ (0.13) $ (0.74) $ (0.13) $ 0.00
Basic earnings (loss) per share after extraordinary item $ (0.13) $ (0.72) $ (0.13) $ 0.00
Diluted earnings (loss) per share after extraordinary item $ (0.13) $ (0.72) $ (0.13) $ 0.00
Basic weighted average shares outstanding 22,108,000 22,113,000 22,114,000 22,117,000
Diluted weighted average shares outstanding 22,108,000 22,115,000 22,132,000 22,176,000
(1) During the second quarter, the Company recognized an extraordinary
gain on the repurchase of debt (see Note 3) and charges for several
special items (see Note 4).
F-27
65
To the Board of Directors
of ICO, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated November 30, 2000 appearing elsewhere in this Form 10-K also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 30, 2000
S-1
66
ICO, Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
BALANCE
BEGINNING CHARGED TO BALANCE AT
TRADE RECEIVABLES OF YEAR EXPENSES DEDUCTIONS(1) END OF YEAR
---------- ---------- ------------- ----------
Year ended September 30, 2000:
Allowance for uncollectible accounts -
trade receivables ................. $ 1,884 $ 369 $ (258) $ 1,995
========== ========== ========== ==========
Year ended September 30, 1999:
Allowance for uncollectible accounts -
trade receivables ................. $ 1,690 $ 1,256 $ (1,062) $ 1,884
========== ========== ========== ==========
Year ended September 30, 1998:
Allowance for uncollectible accounts -
trade receivables ................. $ 967 $ 604 $ 119 $ 1,690
========== ========== ========== ==========
(1) Due to write-offs and/or foreign currency translation differences.
S-2
67
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 -- Plan of Merger of ICO Merger Sub, Inc. with and into ICO,
Inc. (filed as Exhibit 2.4 to Form 10- Q dated August 13,
1998)
3.1 -- Articles of Incorporation of the Company dated March 20,
1998 (filed as Exhibit 3.1 to Form 10- Q dated August 13,
1998)
3.2 -- Statement of Resolution of $6.75 Convertible Exchangeable
Preferred Stock dated March 30, 1998 (filed as Exhibit 3.2
to Form 10-K dated December 23, 1998)
3.3 -- Certificate of Designation of Junior Participating Preferred
Stock of ICO Holdings, Inc. dated March 30, 1998 (filed as
Exhibit 3.3 to Form 10-K dated December 23, 1998)
3.4 -- Amended and Restated By-Laws of the Company dated May 12,
1999 (filed as Exhibit 3.4 to Form 10-Q dated May 14, 1999).
4.1 -- Indenture dated as of June 9, 1997 between the Company, as
issuer, and Fleet National Bank, as trustee, relating to
Senior Notes due 2007 (filed as Exhibit 4.1 to Form S-4
dated June 17, 1997)
4.2 -- First Supplemental Indenture and Amendment dated April
1,1998 between the Company, as issuer, and State Street and
Trust Company (formerly Fleet National Bank), as trustee,
relating to Senior Notes due 2007 (filed as Exhibit 4.2 to
Form 10-Q dated May 15, 1998)
4.3 -- Second Supplemental Indenture and Amendment dated April 1,
1998 between ICO P&O, Inc., a wholly owned subsidiary of the
Registrant, and State Street and Trust Company (formerly
Fleet National Bank), as trustee, relating to Senior Notes
due 2007 (filed as Exhibit 4.3 to Form 10-Q dated May 15,
1998)
4.4 -- Warrant Agreement -- Series A, dated as of September 1,
1992, between the Registrant and Society National Bank
(filed as Exhibit 4 to the Registrant's Annual Report on
Form 10-K for 1992)
4.5 -- Stock Registration Rights Agreement dated April 30, 1996 by
and between the Company, a subsidiary of the Company and the
Wedco Shareholders Group, as defined (filed as Exhibit 4.4
to Form S-4 dated March 15, 1996)
4.6 -- Shareholder Rights Agreement dated April 1, 1998 by and
between the Registrant and Harris Trust and Savings Bank, as
rights agent (filed as Exhibit 4.7 to Form 10-Q for the
quarter ended March 31, 1998)
10.1 -- ICO, Inc. 1985 Stock Option Plan, as amended (filed as
Exhibit B to the Registrant's Definitive Proxy Statement
dated April 27, 1987 for the Annual Meeting of Shareholders)
68
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.2 -- Second Amended and Restated 1993 Stock Option Plan for
Non-Employee Directors of ICO, Inc. (filed as Exhibit A to
the Registrant's Definitive Proxy Statement dated January
26, 1999 for the Annual Meeting of Shareholders)
10.3 -- 1994 Stock Option Plan of ICO, Inc. (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated June 24, 1994
for the Annual Meeting of Shareholders)
10.4 -- ICO, Inc. 1995 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated August 10,
1995 for the Annual Meeting of Shareholders)
10.5 -- ICO, Inc. 1996 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated August 29,
1996 for the Annual Meeting of Shareholders)
10.6 -- ICO, Inc. 1998 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated January 23,
1998 for the Annual Meeting of Shareholders)
10.7 -- Willoughby International Stockholders Agreement dated April
30, 1996 (filed as Exhibit 10.9 to Form S-4 dated March 15,
1996)
10.8 -- Consulting Agreement-- William E. Willoughby (filed as
Exhibit 10.13 to Form S-4 dated March 15, 1996)
10.9 -- Salary Continuation Agreement-- William E. Willoughby (filed
as Exhibit 10.14 to Form S-4 dated March 15, 1996)
10.10 -- Addendum to Salary Continuation Agreement-- William E.
Willoughby (filed as Exhibit 10.15 to form S-4 dated March
15, 1996)
10.11 -- Non-Competition Covenant William E. Willoughby (filed as
Exhibit 10.11 to Form S-4 dated March 15, 1996)
10.12 -- Stockholders Agreement respecting voting of shares of
certain former Wedco common shareholders (filed as Exhibit
10.21 to Form S-4 dated March 15, 1996)
10.13 -- Stockholders Agreement respecting voting of shares of
certain ICO common shareholders (filed as Exhibit 10.22 to
Form S-4 dated March 15, 1996)
10.14 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Asher O. Pacholder and amendments thereto
(filed as Exhibit 10.16 to Form 10-K dated December 29,
1997)
10.15 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Sylvia A. Pacholder and amendments thereto
(filed as Exhibit 10.17 to Form 10-K dated December 29,
1997).
10.16 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Jon C. Biro (filed as Exhibit 10.20 to
Form 10-K dated December 23, 1998)
10.17 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Isaac H. Joseph (filed as Exhibit 10.21
to Form 10-K dated December 23, 1998)
10.18 -- Employment Agreement dated September 4, 1998 by and between
the Registrant and Robin E. Pacholder (filed as Exhibit
10.18 to Form 10-K dated December 17, 1999)
10.19 -- Employment Agreement dated August 5, 1999 by and between the
Registrant and David M. Gerst (filed as Exhibit 10.19 to
Form 10-K dated December 17, 1999)
69
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- ----------
** Filed herewith