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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
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.
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(Exact name of registrant as specified in its charter)
TEXAS 76-0566682
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11490 WESTHEIMER, SUITE 1000 77077
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
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 voting stock held by nonaffiliates of the
Registrant as of December 18, 1998 was $38,503,000.
The number of shares outstanding of the registrant's Common Stock
as of December 18, 1998: Common Stock, no par value -- 22,108,153
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 1999 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, 1998.
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ICO, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 12
Item 3. Legal Proceedings................................................................. 14
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....................................................... 17
Item 6. Selected Financial Data........................................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................................................... 34
Item 8. Financial Statements and Supplementary Data....................................... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 35
Item 11. Executive Compensation............................................................ 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................................. 35
Item 13. Certain Relationships and Related Transactions.................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................................... 36
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PART I
ITEM 1. BUSINESS
GENERAL
ICO, Inc. ("the Company"), provides specialized petrochemical
processing and oilfield services. In the petrochemical processing segment, the
Company provides grinding, air 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; 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. 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 both
size reduction services (grinding and related services such as blending and
screening) and compounding services (including manufacturing concentrates for
use in petrochemical products). 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 and
Southeast Asia. The Company's concentrate manufacturing operations are conducted
primarily through the Company's subsidiaries, Bayshore Industrial, Inc., which
operates in the United States, and Rotec Chemicals, Ltd. and Soreco S.A., both
of which operate in Europe.
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 objects made of plastic. Chemical
manufacturers generally produce petrochemical resins in pellet form. Various
manufacturing processes necessary 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
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Company's size reduction services involve the grinding or air 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 concentrates manufacturing operations involve the production of
additives which, when blended into resin, produce materials with desired
properties such as flame-retardancy, color, ultraviolet stabilization or
adhesion.
Size Reduction and Compounding Services. The Company's size reduction
services include ambient grinding, cryogenic grinding and air jet milling of
petrochemical pellets. Materials processed by the Company's size reduction
services 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 and Australia.
The majority of the Company's size reduction services involve ambient
grinding, a mechanical attrition milling process suitable for products which do
not require ultra fine particle size and are not highly heat sensitive. Using,
in general, Company-manufactured equipment, the Company grinds petrochemical
pellets into powders used in manufacturing household and automotive items (such
as household furniture, trash receptacles and plastic automobile parts),
agricultural products (such as fertilizer and water tanks), paint, 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 who
are rotational molding industry manufacturers or who supply that industry.
Rotational molding produces plastic products by melting pre-measured
plastic powder in molds which are heated in an oven while being rotated on both
the vertical and horizontal axes. 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.
The Company provides air jet milling for brittle products requiring
very fine particle size, such as additives for printing ink, adhesives, waxes
and cosmetics. Air 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 plastics), the Company also
provides cryogenic milling services, which use liquid nitrogen to chill pellets
to extremely low temperatures. Company-manufactured equipment is used to grind
the chilled pellets.
In addition, the Company offers its customers related polymer
processing services. These services include melt blending and mixing of plastics
and other additives, by way of extrusion, to form pellets (compounding); and
other processing, 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 ambient grinding equipment in the United
States and internationally.
The Company has six operating facilities in the United States, seven in
Europe, and two in Southeast Asia that provide size reduction services. The two
Southeast Asian facilities, which are located in New Zealand and Australia, were
acquired through the purchase of J.R. Courtenay (N.Z.) Ltd. (see
"Acquisitions"). The Company has over the last two fiscal years closed three of
its domestic size reduction facilities in order to reduce costs and capital
expenditure requirements.
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Until January 1998, the Company also owned 50% of WedTech, Inc.
("WedTech"), a Canadian company that provides size reduction services and
manufactures concentrates. See Item 3 - "Legal Proceedings."
Concentrates Manufacturing. The Company has three concentrates
manufacturing operations. Bayshore Industrial, Inc.'s facility, which is the
Company's primary operation, is in LaPorte, Texas. Two other operations were
acquired by the Company-Rotec Chemicals, Ltd., described below, whose Rushden,
England facility manufactures proprietary color concentrates, and of 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 which are then combined (by the Company or
by others) with petrochemical resins to produce materials having specifically
desired characteristics, such as flame-retardance, color, ultraviolet
stabilization 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. The Company is
often approved as the manufacturer of such concentrates following 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 (i.e., a lab sample) to as large as 4
million pounds.
Distribution. The Company also acts as a distributor of certain
specialty petrochemicals. In this distribution activity, the Company acquires
the petrochemical products for its own account from the petrochemical producer
for resale to third parties. In almost all cases, the Company processes the raw
material using Company owned facilities before reselling the improved material.
In the second quarter of fiscal 1997, the Company began to expand the
distribution component of its specialty petrochemical production services
business. The Company acquired, effective April 1, 1997, the micropowders
business of Exxon Chemical Belgium, a division of ESSO N.V./S.A.; executed
supply agreements ("Supply Agreements") with Borealis A.S. ("Borealis") and
Exxon Chemical Holland, B.V.; and acquired Rotec and Verplast (See
"Acquisitions"). Under the Supply Agreements, the Company purchases resin at
scheduled prices, and has the right to distribute specific products of Borealis
and Exxon Chemical Holland within the European Union. In addition, during fiscal
1998, the Company acquired the worldwide rights to process and distribute the
rotational molding grades of Borealis polypropylene, and acquired J.R. Courtenay
(N.Z.) Ltd. These developments, along with the fiscal 1997 acquisitions of Rotec
Chemicals Ltd. and Verplast S.P.A., will allow ICO to sell a variety of
petrochemical products in Europe under its own name and under the Rotec,
Courtenay and Verplast brand names. ICO has established trading companies (under
the name "ICO Polymers") in the Netherlands, the United Kingdom, France and
Sweden to engage in these activities. The Company believes this enhanced
distribution capacity will provide access to new customers and enable it to
expand its relationships with existing customers. The growth in the Company's
distribution business has expanded the portion of the Company's specialty
petrochemical processing business which is performed through product-based
pricing rather than on a tolling basis. While the Company considers this change
in business practice to be desirable, the change has required the Company to
modestly increase its working capital investment. The Company's distribution
arrangements are generally on a nonexclusive basis, and are generally subject to
termination upon short term notice by either party to the contract.
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
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and petrochemical production affiliates of major oil production companies) and
end users such as rotational molders. 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 10% of the Company's consolidated revenues
for the year ended September 30, 1998. 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 services to customers in both its size
reduction service and concentrates manufacturing businesses. Within the
concentrates manufacturing business, the Company generally purchases and takes
into inventory the raw materials necessary to manufacture concentrates, and
sells the manufactured products at a product price. This contrasts with its
pricing in its size reduction services which are often performed on a tolling
basis. The Company seeks to minimize the risk of price fluctuation in raw
materials and other supplies by maintaining relatively short order cycles. The
Company's expansion into the distribution business in Europe requires the
Company to purchase and take raw materials into inventory, exposing the Company
to increased risk of price fluctuations (see "Raw Materials and Backlog"). In
addition, the Company purchases raw materials for the manufacture and
distribution of compounded colored powder by the Company's Italian, New Zealand,
and Australian subsidiaries, as well as the concentrate manufacturing
operations.
Petrochemical Processing Sales and Marketing. The Company has
established a sales force of six full-time people dedicated to selling its size
reduction services in the United States. In addition, the Company's European
petrochemical processing operations have an established sales force in Europe
consisting of 14 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 five individuals.
Bayshore's concentrate sales force consists of four individuals who sell the
Company's concentrates and related services throughout the United States.
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
smaller and mid-sized companies which provide regional ambient grinding services
and larger companies which provide specialized services such as cryogenic
grinding and air jet milling. Several companies also maintain significant size
reduction facilities for their own use in connection with products produced by
rotational molding. The Company believes that it has been able to compete
effectively in its market 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 smaller and mid-sized regional companies. The
Company believes its technical expertise, 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 air milling require a more significant
investment and 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
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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 inspection, reconditioning and coating services for new
and used tubular goods and sucker rods include exploration services, production
services and corrosion control services. 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 which 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 which manufacture pipe, pipe
suppliers and end users, such as oil and gas exploration and production
companies, as a quality assurance and control measure to reduce the risk of
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 which provide (in contrast to field inspection)
a controlled environment which 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 fifteen major producers and processors of tubular goods (including two
customers added during fiscal 1998) thereby reducing transportation and handling
costs to the customer and provides mobile inspection services in the field.
During fiscal 1998, the Company added two mill processing customers, each with a
long-term contracts of 5 years. The Company also manufactures inspection and
quality control equipment which is sold or leased from time to time to steel
producers and processors.
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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, 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 Lite system, which the Company believes is capable of identifying and
visually displaying natural and man-made flaws that are not identifiable using
conventional EMI methods. The AGS Lite system also significantly reduces the
installation costs while still offering a vast improvement in functionality over
conventional methods. The Company also designed and uses a UT system, the ICO
Scan system, which identifies flaws which are virtually undetectable by other
means, employing high frequency sound waves, and is used to inspect pipe that is
thicker than pipe which EMI can effectively inspect or which contains alloys of
metals other than steel, such as titanium. The Company's proprietary ThruSpect
2000(TM) coil tubing unit operates at the customer's location and uses
electromagnetic inspection to identify flaws in coiled tubing. During the first
quarter of fiscal 1999, the Company received and will soon install a field
tested, high speed, full length ultrasonic inspection unit in the Company's
Houston, Texas pipe inspection facility.
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
(providing 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 nine Company facilities located in California, Mississippi, New Mexico, North
Dakota, Oklahoma, Texas and Wyoming.
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 which 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 also 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
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Company believes Wellhead Scanalog 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
patented processes.
The Company internally coats 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 four coating facilities located in Louisiana and
Texas.
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.
In late fiscal 1995, the Company introduced several new corrosion
control products, including powder coatings for drill pipe and high temperature
production tubing. These powder coatings have better mechanical and protective
capabilities as compared to liquid coatings without the environmental control
expenses normally associated with their liquid counterparts. These products have
gained market acceptance at the expense of competing products and have
contributed to the increase of corrosion control revenues.
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 revenues in fiscal 1996, 1997 or
1998. 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
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fixed prices, volume discounts and indemnification of customers for certain
liabilities.
Oilfield Services Sales and Marketing. The Company's oilfield services
are marketed by 26 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 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 which it maintains with
its customers, and its ability to add value through integration of services such
as tubular inspection, maintenance, storage and inventory control.
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. compete with each other and a number of smaller
companies in most domestic markets. Unlike the Company's corrosion control
business, capital and other requirements for entry into the 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 through the end of fiscal 1998, the
Company completed and integrated ten 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 nine additional acquisitions in the petrochemical processing industry.
The Company actively seeks strategic acquisitions. For additional information,
see the unaudited pro forma information regarding these acquisitions contained
in Note 2 of the Company's Consolidated Financial Statements. The acquisitions
below 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 June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly owned subsidiary for approximately $1,600,000 in cash and the assumption
of approximately $236,000 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 $14,124,000 in cash and the assumption of approximately $500,000 in debt.
JRC and CPPL are located in Auckland, New Zealand and Melbourne,
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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
$2,000,000 in cash and is subject to adjustment based upon future operating
revenues. Curley's provides drill pipe and casing inspection services from
locations in Texas and New Mexico.
During September 1997, the Company acquired the operating assets of
NSpection Systems, Inc. ("NSpection") for $600,000 in cash and future payments
based on sales. Nspection provides electromagnetic inspection and related
services for new and used tubing, casing and drill pipe utilizing two locations
in Houston, Texas.
During July 1997, the Company acquired Verplast S.p.A. ("Verplast"),
which included Tec-Ma Srl, a wholly-owned subsidiary of Verplast, for a total
consideration of approximately $35,100,000, consisting of approximately
$18,700,000 in cash and the effective assumption of $16,400,000 in total
liabilities. Verplast, located in northern Italy, is a supplier of petrochemical
processing services and value-added plastic materials for the rotational molding
market and for other plastic powder applications.
During May 1997, the Company acquired the remaining 50% ownership of
Micronyl-Wedco S.A. ("Micronyl") not already owned by the Company for a total
consideration of approximately $7,600,000, consisting of approximately
$2,600,000 in cash and the effective assumption of $5,000,000 in total
liabilities. Wedco France, as this entity is now known, operates two size
reduction facilities in France which perform services similar to those performed
by the Company's other petrochemical size reduction facilities.
During April 1997, the Company acquired Rotec Chemicals, Ltd. ("Rotec")
for a total consideration of approximately $7,800,000, consisting of
approximately $2,500,000 in cash, 427,353 shares of Company common stock valued
at approximately $2,100,000 and the effective assumption of $3,200,000 in total
liabilities. In addition, Rotec shareholders may be entitled to additional
consideration in cash and Company common stock based on future earnings of
Rotec. Rotec serves the United Kingdom, Ireland and Continental Europe markets
and is a producer of high quality concentrates for a variety of plastics
processes.
During April 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business"). The consideration
consisted of an initial payment of $500,000 and five additional payments of
Dutch Guilders ("Dfl") 674,000 ($358,000 at September 30, 1998 exchange rates)
payable for each of five years beginning one year after the acquisition date. As
of September 30, 1998, Dfl 2,698,000 ($1,432,000 at September 30, 1998 exchange
rates) remains outstanding. The Company also purchased inventory from Exxon
Chemical Belgium and entered into a supply agreement with Exxon Chemical Holland
to acquire inventories in the future at contracted prices.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") for a total consideration of approximately $18,500,000, consisting
of approximately $6,900,000 in cash, 1,285,012 shares of Company common stock
valued at approximately $5,900,000 and the effective assumption of $5,700,000 in
total liabilities. Bayshore is a provider of concentrates and compounds to resin
producers in the United States.
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During July 1996, the Company acquired Polymer Service, Inc. located in
Beaumont, Texas and Polymer Service of Indiana, Inc. located in East Chicago,
Indiana (collectively referred to as "Polymer Service"). The Company paid a
total consideration of approximately $5,800,000, consisting of approximately
$2,000,000 in cash, 431,826 shares of Company common stock valued at
approximately $1,700,000 and the effective assumption of $2,100,000 in total
liabilities. These companies provide size reduction, compounding and related
processing services for the petrochemical industry.
During April 1996, the Company acquired Wedco Technology, Inc.
("Wedco"). Wedco serves the petrochemical industry by providing plastics
grinding services and related machinery. The Company paid a total consideration
of approximately $84,200,000, consisting of approximately $4,600,000 in cash
(including transaction fees and expenses), 10,232,609 shares of Company common
stock valued at approximately $49,700,000 and the effective assumption of
$29,900,000 in total liabilities.
During March 1996, the Company acquired the operating assets, excluding
real estate, of Rainbow Inspection Company of Mississippi, Inc. ("Rainbow") for
a total consideration of approximately $328,000, consisting of approximately
$203,000 in cash and the effective assumption of $125,000 in total liabilities.
Rainbow provides inspection and reclamation services for oil country tubular
goods in the Gulf Coast area.
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 law 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.
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INSURANCE AND RISK
Except for warranties implied by law, the Company does not generally
warrant the tubular goods or sucker rods it inspects or the specialty
petrochemical processing 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. The Company
believes it operates in substantial compliance with applicable laws and
government regulations and in accordance with safety standards which meet or
exceed industry standards.
RAW MATERIALS AND BACKLOG
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
other materials used in its operations are available from numerous sources and
are available to meet its needs. The Company believes that backlogs are not
meaningful to the Company's operations.
PATENTS AND LICENSES
The Company holds seven United States patents, one United Kingdom patent,
one Australia/New Zealand patent, and has eleven 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 these patents range from June 2000 to May 2016.
The Company has one patent application pending covering proprietary technology
utilized by its plastics compounding business in the petrochemical processing
operations. 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 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 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.
11
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EMPLOYEES
As of November 30, 1998, the Company had approximately 1,605 full-time
employees, and approximately 266 full-time contract employees. The Company's
employees working in the Netherlands, Italy, 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.
ITEM 2. PROPERTIES
The location and approximate acreage of the Company's operating
facilities at December 15, 1998, together with an indication of the services
performed at such facilities are set forth below.
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Oilfield Services
Bakersfield, California.................. Sucker rod reconditioning and inspecting 29 Owned
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 78 2001
Broussard, Louisiana..................... Drill pipe inspection 17 Owned
Brookhaven, Mississippi.................. Inspection of tubular goods 15 2001
Farmington, New Mexico................... Inspection of new and used tubular goods 14 2002
Williston, North Dakota.................. Used tubular goods services 2 1999
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........................... Corporate headquarters N/A 2001
Houston, Texas........................... Inspection of new tubular goods 192 Owned
Houston, Texas........................... Internal coating of tubular goods 49 Owned
Houston, Texas........................... Internal research and development 3 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
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 15 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 29 (3)
Edmonton, Alberta, Canada................ Inspection of new and used sucker rods
Sales and service of new and used oilwell engines 10 2005
PETROCHEMICAL PROCESSING SERVICES
Fontana, California...................... Size reduction 7 Owned
Maywood, Illinois........................ Idle facility 3 Owned
East Chicago, Indiana.................... Size reduction 4 Owned
Bloomsbury, New Jersey................... Size reduction 15 Owned
Grand Junction, Tennessee................ Size reduction 5 Owned
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Ownership
or Lease
LOCATION Services Acres Expiration
-------- -------- ----- ----------
China, Texas............................. Size reduction 13 Owned
LaPorte, Texas........................... Concentrate manufacturing and compounding
facility 39 Owned
Lovelady, Texas.......................... Size reduction 24 Owned
Melbourne, Australia..................... Size reduction, compounding and distributing 1 2004
Gainsborough, England.................... Size reduction 5 Owned
Rushden, England......................... Concentrate and compounding facility 1 2008
Beaucaire, France........................ Size reduction 1 Owned
Montereau, France........................ Size reduction 1 Owned
Oyonnax, France.......................... Compounding 1 Owned
Verdellino, Italy........................ Size reduction, compounding and distributing 1 2001
Verolanuova, Italy....................... Size reduction, compounding and distributing 2 (4)
Rotterdam, The Netherlands............... European headquarters N/A 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
(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; ten acres are leased through 2003; remaining
two acres are leased on a month-to-month basis.
(4) The facility is owned with the exception of one building which is
leased through 2000.
The Company's facilities and equipment, owned and leased, are
considered by ICO to be well maintained and adequate for the Company's
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 both the oilfield services and petrochemical processing
businesses, below full capacity. Most facilities are operating no more than one
shift per day and the Company considers its properties to be suitable for its
present needs.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in eight cases involving eight
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992;
August 24, 1994; June 29, 1995; June 29, 1995; August 15, 1995; and July 23,
1997). The Company is generally protected under worker's 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 cases is intentional tort, a stricter standard than the gross
negligence standard applicable to wrongful death cases. The Company currently
has no pending cases in which wrongful death is alleged. In fiscal 1993, the
Company settled two other suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605,000. 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. Also, 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.
The Company and its counsel cannot at this time predict with any reasonable
certainty the outcome of any of the remaining 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, Incorporated ("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 $318,000, with Baker
Hughes' total reimbursement obligation being limited to $2,000,000 (current BHTS
obligation is $1,650,000). 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
14
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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 $500,000 for each claim and a maximum contingent liability of $4,500,000 (net
of current accruals) in the aggregate, for all claims.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13 million 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 court subsequently entered a judgment for $15,750,000 in
the Company's favor, which includes prejudgment interest on the jury award. The
Company may also be entitled to post-judgment interest. The Wood Group is
currently appealing the judgment and has posted a bond for the entire amount of
the judgment. This award has not been reflected in the Company's balance sheet
or operating results. The Company was represented on a contingency fee basis,
and its attorneys will receive a portion of the amount awarded to the Company.
Wedco is a plaintiff and a counterclaim defendant and the Company is a
third party defendant in a lawsuit filed on February 16, 1996 by Wedco against
Polyvector Corporation ("Polyvector"), John Lefas ("Lefas"), the principal
shareholder of Polyvector, and Fred Feder ("Feder"), a former director of Wedco,
which is pending in the federal district court for the District of New Jersey.
Wedco alleges, among other things, that Lefas and Polyvector have breached
certain terms of the shareholders' agreement among Wedco and the defendants and
seeks damages for such breaches. Wedco also alleges, among other things, that
Feder has breached his fiduciary duty to Wedco. WedTech (which had been 50%
owned by each Wedco and Polyvector), Polyvector and Lefas have asserted various
counterclaims and third party claims against the Company allegedly arising out
of the Company's merger with Wedco and the conduct of WedTech's affairs under
the shareholders' agreement. The defendants are seeking, among other things,
reimbursement for alleged damages. On January 16, 1998, Polyvector finalized its
purchase of Wedco's 50% ownership interest in WedTech for CDN $20.8 million.
Discovery is scheduled to end in the New Jersey action in early March, 1999, and
a jury trial is expected in late spring, 1999. The outcome of this litigation
cannot be predicted, but the Company believes it has meritorious defenses to the
counterclaims and third party claims. A proceeding initiated on June 25, 1998
has been brought in the Ontario Court (General Division) by WedTech Inc. and
Polyvector against the Company and others for damages and other relief. The
proceeding is at a very early stage, but it would appear that the factual
complaints raised in the Canadian litigation duplicate the claims raised in the
New Jersey litigation. It is the intention of the Company to seek an order
staying the Canadian litigation.
Permian Enterprises, Inc. ("Permian"), a wholly-owned subsidiary of the
Company, was a defendant in a case filed on June 16, 1995 by Tidelands Oil
Production Company ("Tidelands") in the Superior Court of Los Angeles,
California (Long Beach division) which alleged that Permian was liable for
damages exceeding $1.1 million, plus interest, and other costs, suffered by
Tidelands and third parties resulting from the failure of an elbow fitting
allegedly lined by Permian. On September 24, 1998, following a jury trial on all
issues, the court entered a judgment in favor of Permian. The time period for
Tidelands to file a notice of intent to appeal has lapsed. Thus, the judgment in
favor of Permian is now final and this matter is at a conclusion. The Company is
seeking reimbursement for certain of its fees and expenses related to this
litigation.
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ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made with the
International Court of Arbitration of the International Chamber of Commerce on
August 7, 1998, by Oil Country Tubular Limited ("OCTL"), a company based in
India. OCTL alleges that its claim, which it has brought in the Court of
Arbitration of the International Chamber of Commerce, arises in connection with
a Foreign Collaboration Agreement entered into between it and BHTS, whose name
was changed to ICO Tubular Services, Inc. after acquisition by the Company in
1992. OCTL claims, among other items, that it did not receive technical
assistance, spare parts, and certain raw materials necessary for its oilfield
tubular services plant in India. OCTL seeks damages in excess of $96 million,
calculated in part based on lost profit projections over a number of years, from
ICO Tubular Services, Inc. and its co- respondent, Baker Hughes Incorporated.
The Company had only peripheral knowledge of the dispute between OCTL and Baker
Hughes Incorporated prior to the filing of OCTL's claim. The arbitration
proceeding, which is being conducted in London, England, is at an early stage,
with answers to OCTL's claim having been filed in November 1998. While the
outcome of this arbitration matter cannot be predicted, the Company plans to
contest the claims vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
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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 approximately 940 shareholders of record of the
Company's common stock at December 18, 1998.
During fiscal year 1997, the Company declared and paid a common dividend of
$.05 the first quarter and $.055 for the remaining three quarters for a total of
$.215 per share during the year. 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.
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 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
---- ---
1997 First Quarter 6 7/8 5 7/8
Second Quarter 6 9/16 5 7/16
Third Quarter 5 15/16 4 5/8
Fourth Quarter 7 13/16 4 15/16
1998 First Quarter 8 3/16 5 15/16
Second Quarter 6 1/8 4 9/16
Third Quarter 5 1/8 3 15/16
Fourth Quarter 4 7/16 2 5/16
During fiscal 1998, the Company issued the following unregistered common
shares which were exempt pursuant to Section 4(2) of the Securities Act of 1933:
Number of Shares
Date of Common Stock Transaction
---- --------------- -----------
October 27, 1997 180,000 Issued upon exercise of Series A Warrants
March 12, 1998 114,917 Issued in exchange for $562,000 of debt
which was payable upon demand
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ITEM 6. SELECTED FINANCIAL DATA (1)
The following table sets forth selected financial data of the Company which
has been derived from consolidated financial statements that have been audited
by PRICEWATERHOUSECOOPERS LLP, independent accountants. 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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- ----------
(In thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Net revenues ................................................ $ 281,343 $ 198,042 $ 108,350 $ 87,887 $ 75,970
Cost of sales and services .................................. 211,856 141,302 74,704 59,989 54,191
------------ ------------ ------------ ----------- ----------
Gross profit ................................................ 69,487 56,740 33,646 27,898 21,779
Selling, general and administrative expenses ................ 45,022 31,981 21,108 17,736 15,202
Depreciation and amortization ............................... 15,389 11,349 7,230 5,112 4,357
Impairment of long-term assets .............................. -- -- 5,025 -- --
Non-recurring compensation arrangements ..................... -- -- 1,812 -- --
Writedown of inventories .................................... -- -- 868 -- --
------------ ------------ ------------ ----------- ----------
Operating income (loss) ..................................... 9,076 13,410 (2,397) 5,050 2,220
Interest income ............................................. 3,771 2,001 1,277 1,424 902
Interest expense ............................................ 13,819 5,765 669 117 471
Gain on sale of equity investment ........................... 11,773 -- -- -- --
Other income (expense) ...................................... (20) 602 97 -- --
------------ ------------ ------------ ----------- ----------
Income (loss) before income taxes and extraordinary item .... 10,781 10,248 (1,692) 6,357 2,651
Income taxes (benefit) ...................................... 4,775 4,150 (632) 567 55
Extraordinary item -- loss on repayment of debt ............. -- -- -- -- 1,371
------------ ------------ ------------ ----------- ----------
Net income (loss) ........................................... 6,006 6,098 (1,060) 5,790 1,225
Preferred dividends ......................................... 2,176 2,176 2,178 2,176 1,826
------------ ------------ ------------ ----------- ----------
Net income (loss) available for Common Shareholders ......... $ 3,830 $ 3,922 $ (3,238) $ 3,614 $ (601)
============ ============ ============ =========== ==========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share before
extraordinary item ........................................ $ .18 $ .19 $ (.24) $ .41 $ .09
Basic earnings (loss) per share ............................. $ .18 $ .19 $ (.24) $ .41 $ (.07)
Diluted earnings (loss) per share before
extraordinary item ........................................ $ .17 $ .19 $ (.24) $ .41 $ .09
Diluted earnings (loss) per share ........................... $ .17 $ .19 $ (.24) $ .41 $ (.07)
Cash dividends declared on Common Stock ..................... $ .22 $ .22 $ .20 -- --
Weighted average shares outstanding (basic) ................. 21,877,000 20,918,000 13,328,000 8,709,000 8,300,000
Weighted average shares outstanding (diluted) ............... 22,004,000 21,144,000 13,493,000 8,770,000 8,576,000
OTHER FINANCIAL DATA:
EBITDA(2) ................................................... $ 24,465 $ 24,759 $ 12,538 $ 10,162 $ 6,577
Ratio of EBITDA to interest expense(3) ...................... 1.8x 4.3x 18.7x 86.9x 14.0x
Ratio of EBITDA to interest expense net of
interest income(3)(5) ..................................... 2.4x 6.6x -- -- --
Capital expenditures(4) ..................................... 26,143 15,747 8,712 5,838 4,782
Common stock dividends ...................................... 4,823 4,559 2,830 -- --
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AS OF SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
BALANCE SHEET DATA:
Cash and equivalents ............................. $ 51,135 $ 83,892 $ 13,414 $ 24,991 $ 24,763
Working capital .................................. 89,220 110,289 29,882 37,284 37,656
Property, plant & equipment, net ................. 117,299 97,779 72,585 29,824 27,513
Total assets ..................................... 328,677 321,753 162,172 88,183 78,969
Long-term debt, net of current portion ........... 132,631 133,034 15,422 1,047 456
Shareholders' equity ............................. 128,316 127,138 120,594 74,471 69,204
(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.
(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, 1995 and 1994 as the
Company incurred net interest income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's net revenues in recent years have increased due to a
variety of factors, including acquisitions and, in many cases, increased sales
volumes in both existing and acquired business lines.
The Company's revenue is classified within two operating segments:
oilfield services and petrochemical processing. Oilfield services revenues
include revenues derived from (i) exploration sales and services (new tubular
goods inspection), (ii) production sales and services (reclamation,
reconditioning and inspection of used tubular goods and sucker rods), (iii)
corrosion control services (coating of tubular goods and sucker rods), and (iv)
other sales and services (oilfield engine sales and services in Canada).
Petrochemical processing revenues include revenues derived from (i) grinding
petrochemicals into powders (size reduction), including other ancillary services
and the sale of grinding equipment manufactured by the Company, (ii) compounding
sales and services, which includes the manufacture and sale of concentrates, and
(iii) distributing plastic powders. Distribution revenues include the operating
results of the ICO Polymers companies and the distribution operations of Rotec
and Verplast, all of which are wholly-owned subsidiaries of the Company and
operate in Europe. Distribution revenues also include a majority of the revenues
generated by J.R. Courtenay (NZ) Ltd. which operates in New Zealand and
Australia and a small portion of the revenues generated by Wedco in the United
States. The Company's distribution operations utilize the Company's size
reduction and compounding facilities to process petrochemical products prior to
sale. Service revenues in both of the Company's business segments are recorded
as the services are performed or, in the case of product sales, upon shipment to
third parties.
Many of the petrochemical acquisitions since fiscal 1996, particularly
the acquisition of Bayshore in December 1996, and the expansion of the Company's
distribution business within the petrochemical processing segment, had the
effect of reducing overall petrochemical processing margins as a percentage of
revenues. The gross margin percentages for the distribution business and
Bayshore's business are, generally, significantly lower than those generated by
the Company's size reduction services. Bayshore and several of the acquired
companies, as well as the Company's distribution operations, typically buy raw
materials, improve the material and then sell the finished product. The
distribution operations utilize the Company's processing facilities to improve
the raw materials. In contrast, many of the Company's size reduction operations
typically involve processing customer- owned material (referred to as "toll"
processing).
Cost of sales and services 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
Bayshore 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,
accounting, 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.
The demand for the Company's oilfield products services is dependent
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 very volatile over the past several years, due in large part 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
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and gas exploration and production activity, due in large part, to a strong
world economy. In fiscal 1998 oil prices declined significantly versus fiscal
1997 levels. Gas prices declined to a lesser extent during the period. Among
other reasons, these trends have been attributed to an excess worldwide oil
supply, lower domestic energy demand due to an unseasonably warm winter and
declining demand due to the economic downturn in Southeast Asia. As oil and, to
a lesser extent, natural gas prices have declined, demand for oilfield products
and services, including those provided by the Company, has softened. A
significant decline in oil and, to a lesser extent, gas prices has occurred
since the end of fiscal 1998, which has increased these effects. If the current
low level of oil and gas prices persists, the Company's oilfield service
revenues and income can be expected to be adversely impacted. Although the
Company is optimistic that market conditions will improve long-term, the timing
of such a recovery cannot be predicted with certainty.
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company:
1998 1997
-------------- -------------
Cash and cash equivalents $ 51,135,000 $ 83,892,000
Working capital 89,220,000 110,289,000
Current ratio 2.6 3.1
Debt-to-capitalization .53 to 1 .53 to 1
Year Ended September 30, 1998 compared to Year Ended September 30, 1997
Cash and cash equivalents decreased $32,757,000 during fiscal year 1998
due to the factors described below.
The Company's working capital decreased during fiscal year 1998 from
$110,289,000 at September 30, 1997 to $89,220,000 at September 30, 1998 as a
result of the factors described below.
For the fiscal year 1998, cash provided by operating activities
decreased to $181,000 compared to $13,805,000 for the year ended September 30,
1997. Despite comparable net income and increased depreciation and amortization
expenses, the decrease was primarily due to the gain on sale of the WedTech
equity investment (classified as an investing activity) and various changes in
working capital accounts (particularly changes in accounts receivable and
inventory).
Capital expenditures totaled $26,143,000 during fiscal 1998, of which
$7,752,000 related to the oilfield services segment and $18,018,000 related to
the petrochemical processing segment. The remaining $373,000 were general
corporate expenditures. Specifically, $4,214,000 of the expenditures incurred
during fiscal year 1998 were used to expand the Company's LaPorte, Texas
compounding facility which was completed in May 1998. Most of the capital
expenditures made during fiscal year 1998 were intended to expand or increase
the efficiency of the Company's existing base of operations, as opposed to
maintaining current operating facilities. The Company anticipates that fiscal
1999 capital expenditures will be significantly lower than fiscal 1998
expenditures. Fiscal 1999 capital expenditure requirements are expected to be
financed using existing cash and/or funds available under domestic and foreign
credit facilities. Also, see Item 7 - "Year 2000 Issue".
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24
Cash flows provided by (used for) financing activities declined to
$(4,992,000) during fiscal year 1998 compared to $100,909,000 during fiscal
1997. The decline was primarily due to the issuance in June 1997 of the
$120,000,000 10 3/8% Senior Notes. The debt matures June 1, 2007, without prior
principle amortization, and interest is payable on June 1 and December 1 of each
year beginning December 1, 1997.
During fiscal years 1995 through 1998, the Company acquired fifteen
businesses. During fiscal 1998, the Company used $17,492,000 of cash to acquire
three businesses. These 15 acquisitions were made primarily using available
cash, the issuance of the Company's Common Stock and the assumption of
outstanding debt of the acquired business. The Company anticipates it will
continue to seek acquisitions in the future.
As of November 30, 1998, the Company had approximately $24,000,000 of
additional borrowing capacity available under various credit arrangements.
$15,000,000 is available under the Company's domestic credit facility and the
remaining amount is available under various foreign facilities. Currently, the
Company has no outstanding indebtedness under the domestic credit facility.
The terms of the Company's domestic credit facility and the Senior
Notes limit the amount of liens and additional indebtedness incurred by the
Company. The domestic credit facility is secured by certain receivables and
inventories and requires maintenance of certain financial ratios including
minimum tangible net worth, profitability and maximum total debt to
capitalization. The Company's foreign facilities are generally secured by
various Company-owned assets and also carry various financial covenants.
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RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(IN THOUSANDS)
% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
--------- ----- -------- ----- -------- -----
NET REVENUES
Exploration sales and services........... $ 39,781 38 $ 37,557 38 $ 34,588 39
Production sales and services............ 35,810 35 33,136 34 31,130 35
Corrosion control services............... 24,985 24 23,210 24 21,589 24
Other sales and services................. 3,535 3 4,121 4 1,748 2
--------- ----- -------- ----- -------- -----
Total oilfield sales and services revenues 104,111 100 98,024 100 89,055 100
--------- -------- --------
Size reduction services and other sales and services 52,515 29 46,011 46 17,589 91
Compounding sales and services........... 52,666 30 36,566 37 1,706 9
Distribution of material................. 72,051 41 17,441 17 -- --
--------- ----- -------- ----- -------- -----
Total petrochemical processing........... 177,232 100 100,018 100 19,295 100
--------- -------- --------
Total............................... $ 281,343 $198,042 $108,350
========= ======== ========
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(IN THOUSANDS)
% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
--------- ----- -------- ----- -------- -----
OPERATING INCOME (LOSS)
Oilfield sales and services.............. $ 13,025 55 $ 14,447 64 $ 11,562 154
Petrochemical processing sales and services 10,526 45 8,180 36 (4,068) (54)
--------- ---- -------- ---- -------- ----
Total operations......................... 23,551 100 22,627 100 7,494 100
General corporate expenses............... (14,475) (9,217) (9,891)
--------- -------- --------
Total............................... $ 9,076 $ 13,410 $ (2,397)
========= ======== ========
- ---------------------------
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues. Consolidated revenues increased $83,301,000 (42%) during
fiscal 1998 compared to fiscal 1997. The revenue growth resulted primarily from
the business acquisitions made by the Company during fiscal 1997 and 1998 and,
to a lesser extent, internal growth within both of the Company's business
segments.
Oilfield service revenues increased $6,087,000 or 6% to $104,111,000
during fiscal 1998. The revenue growth was driven primarily by the fiscal 1998
oilfield service acquisitions and the increased demand for the Company's
services during the first half of fiscal 1998. During the third quarter, the
revenue growth rate declined, and revenues contracted during the fourth quarter
of fiscal 1998, compared to fiscal 1997. Exploration services revenues increased
$2,224,000 or 6% during fiscal 1998 compared to fiscal 1997, primarily a result
of the effects of an acquisition. The Company's Exploration services are driven,
in large part, by the domestic rig count which declined significantly over the
course of fiscal 1998; however, the average fiscal 1998 domestic rig count was
down only slightly versus the fiscal 1997 average. Exploration service revenues
were consistent with the change of the average rig count, down less than 0.5%,
absent the effect of an acquisition. Production service revenues increased
$2,674,000 (8%) during fiscal 1998 compared to 1997, mostly due to an
acquisition, rather than internal growth. Production service revenues are driven
by the level of production activity, which in turn, is dependent upon oil and
gas prices and the level of rig workover activity. During fiscal 1998, average
oil and gas prices and the workover rig count were down compared to fiscal 1997.
Despite this fact, production service
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26
revenues increased modestly during fiscal 1998, excluding the effect of the
Curley's acquisition. Corrosion control revenues improved $1,775,000 (8%) during
1998 compared to fiscal 1997. This revenue growth resulted from relatively
strong Gulf of Mexico activity compared to other oil and gas production and
exploration geographical areas. Other oilfield sales and services consist of the
Company's Canadian oilfield engine sales and reconditioning business. These
revenues declined primarily as a result of declining oil prices during fiscal
1998 compared to fiscal 1997.
Petrochemical processing revenues increased $77,214,000 or 77% during
fiscal 1998 compared to fiscal 1997. Of this growth, 85% resulted from the
fiscal 1998 and 1997 acquisitions, all of which were accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
results of each acquired entity is included in the Company's consolidated
results only from the date of the acquisition forward. Size reduction services
and other sales and services revenues improved to $52,515,000 during fiscal 1998
compared to $46,011,000 during fiscal 1997, representing an increase of
$6,504,000 (14%). In addition to the effect of the business acquisitions, these
revenues increased due to internal growth in the Company's domestic and European
operations. Compounding sales and services revenues increased $16,100,000 or 44%
almost entirely due to the fiscal 1997 and 1998 acquisitions, particularly the
acquisition of Bayshore. Distribution revenues rose $54,610,000 or 313%,
primarily due to the acquisitions and the growth of the Company's European
distribution operations. Worldwide revenues of one petrochemical processing
customer comprised approximately 10% of the Company's consolidated revenues.
Costs and Expenses. Gross margins (calculated as total revenues minus
total costs of sales and services), as a percentage of revenues in fiscal 1998
declined to 24.7% compared to 28.7% in fiscal 1997. The declines resulted
primarily from the revenue growth in the petrochemical business segment and,
particularly in the distribution business, which, in the aggregate, generates
lower gross margins as a percentage of revenues. Within the Company's oilfield
service business, gross margins as a percentage of revenues declined
approximately 1% to 30.1%. The decline resulted primarily from a change in the
relative mixture of various product sales and service revenues rather than a
significant change in average prices. Petrochemical processing gross margins
declined from 26.5%, of revenues in fiscal 1997 to 21.5% in fiscal 1998. The
decline is primarily due to the significant increases in lower margin
compounding and distribution revenues as a percentage of total petrochemical
processing revenues in fiscal 1998 compared to fiscal 1997. Generally, gross
margins as a percentage of revenues of the Company's size reduction operations,
performed on a toll basis, are higher than the gross margins of the oilfield
service operations. Conversely, the gross margins of the Company's concentrate
and ground petrochemical powder manufacturing and distribution businesses are
generally lower than oilfield service gross margins, as a percentage of
revenues, due to the higher raw material cost component included in these
revenues.
Selling, general and administrative expenses increased $13,041,000
(41%) from $31,981,000 during fiscal 1997 to $45,022,000 during fiscal 1998. The
increase resulted from the timing of the fiscal 1998 and 1997 acquisitions, and
an increase in corporate administration and oilfield service expenses. Corporate
expenses rose primarily due to an increase in legal and bonus expenses. A
majority of fiscal 1998 legal expenses related to legal matters discussed in
Item 3 - "Legal Proceedings" included in this Form 10-K. Two of the legal
matters, which comprised a significant portion of fiscal 1998 legal expenses,
have been concluded favorably. The bonus expense increase was due to bonuses of
$1,300,000 paid by the Company to over 300 employees during the first quarter of
fiscal 1998 and was classified as a general corporate expense. During the fourth
quarter of fiscal 1998, the Company began to reduce oilfield service selling,
general and administrative expenses based upon the reduced levels of activity in
this business and has continued to reduce such expenses. As a percentage of
revenues, selling, general and administrative expenses decreased slightly from
16.1% in fiscal 1997 to 16.0% in fiscal 1998. The change was primarily the
result of the increases in expenses, described above, offset by the
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27
effect of increased distribution and compounding revenues. Generally, the
Company's distribution and compounding operations incur lower selling, general
and administrative expenses, as a percentage of revenues, than the Company's
other sales and services.
Depreciation and amortization expense increased from $11,349,000 in
fiscal 1997 to $15,389,000 in fiscal 1998. The increase resulted from additions
of property, plant and equipment and goodwill primarily due to the acquisitions
made during fiscal 1998 and the timing of 1997 acquisitions, as well as
increased amortization of debt issuance costs related to the June 1997 Senior
Notes placement.
Operating Income. Operating income declined from $13,410,000 for fiscal
1997 to $9,076,000 for fiscal 1998. 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 $11,773,000 on the sale of the
Company's 50% equity ownership in WedTech Inc. The Company received cash of
$14,484,000 and recorded an after-tax gain of $6,799,000 on the sale.
Interest Income/Expense. Net interest expense was $10,048,000 during
fiscal 1998. For fiscal 1997, the Company incurred net interest expense of
$3,764,000. This change was primarily the result of the June 1997 issuance of
$120,000,000 10 3/8% Senior Notes and, to a lesser extent, debt assumed in
connection with the fiscal 1998 and 1997 acquisitions.
Income Taxes. The Company's effective income tax rate increased to 44%
during fiscal 1998, compared to 41% during fiscal 1997. The increase was
primarily the result of the sale of the Company's equity investment in WedTech
which created tax expense equal to 43% of the pre-tax gain, an increase in
permanent book to tax differences relative to pre-tax income, offset by the
effect of a decline in the Company's Italian operations' income tax rates. As
non-deductible goodwill amortization continues to increase, due to future
acquisitions, the Company would anticipate that future effective tax rates,
likewise, would increase. Additionally, the Company's overall tax rate varies
depending upon the mixture of pre-tax income generated by the Company's
operations in various taxing jurisdictions. See Note 17 - "Segment and Foreign
Operations Information" to the Company's Consolidated Financial Statements.
The Company has, for tax return purposes, $5,387,000 in net operating
loss carryforwards, which expire between 2000 and 2008, and $965,000 in
investment, alternative minimum and other tax credit carryforwards. All of the
tax credits are expected to expire unused, except for $248,000 in alternative
minimum tax credits, which have no expiration.
Net Income. For fiscal 1998, the Company had net income of $6,006,000,
as compared to net income of $6,098,000 for fiscal 1997, due to the factors
described above.
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28
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Dutch guilder, Swedish krona, British pound, Italian lira, Canadian
dollar, and the French franc have impacted the translation of revenues and
income of the Company's European petrochemical processing operations and
Canadian oilfield services operations over the past two years. The table below
summarizes the impact of the above currencies during the twelve months ended
September 30, 1998 compared to the exchange rates used to translate the twelve
months ended September 30, 1997.
Net revenues $(1,401,000)
Operating income (133,000)
Pre-tax income (120,000)
Net income (52,000)
Gains and losses from the translation of certain balance sheet accounts
are not included in determining net income, but are accumulated as a separate
component of shareholders' equity. As a result of the dollar's fluctuation
against applicable foreign currencies, shareholders' equity increased by $63,000
during fiscal 1998.
During April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that companies expense as incurred costs of
start-up activities and organization costs. The Company is required to adopt SOP
98-5 in its financial statements for the fiscal year ending September 30, 2000.
Upon adoption, the Company will be required to expense approximately $460,000 of
organization costs and will account for the adoption of SOP 98-5 as the
cumulative effect of an accounting change under APB Opinion No. 20, "Accounting
Changes."
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. Consolidated revenues increased $89,692,000 or 83% during
fiscal 1997 compared to fiscal 1996. This increase resulted from an increase in
both oilfield services revenues and petrochemical processing revenues.
Oilfield service revenues increased $8,969,000 or 10.1% during fiscal
1997 versus 1996. Revenues improved within all oilfield service business lines
and such growth, rather than being due to acquisitions, was primarily driven
internally. As a result of an increasing domestic rig count which increased
demand for the Company's services, exploration sales and services revenues
increased $2,969,000 or 8.6% in fiscal 1997 compared to 1996. A majority of this
increase resulted from an increase in revenues for the Company's Houston, Texas
facility, which benefitted from increased drilling activity in the Gulf of
Mexico. Production sales and services revenues increased $2,006,000, or 6.4%,
driven by modestly higher average oil and gas prices in fiscal 1997 versus 1996.
Much of these revenue gains were due to increased demand for the Company's
services in the West Texas and Canadian markets. Corrosion control sales and
services revenues increased $1,621,000 or 7.5% in fiscal 1997 compared to 1996.
This improvement resulted from increased drilling activity, the success of the
Company's new product lines and, to a lesser extent, higher average sales
prices. Other sales and services consisted of revenues generated by the
Company's Canadian subsidiary, Shearer, relating to the reconditioning and
selling of engines used in connection with oil well pumping equipment.
Petrochemical processing sales and services revenues increased
$80,723,000 or 418% in fiscal 1997 compared to 1996. This increase was almost
entirely due to the timing of the fiscal 1996 and 1997 petrochemical processing
acquisitions. Since all of these acquisitions were accounted for using the
purchase method of accounting, the Company included, in its consolidated
statement of operations the acquired companies' results of operations only from
the date of acquisition. During the year ended September 30, 1997,
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29
sales to a single customer within the petrochemical processing segment accounted
for approximately 8% of the Company's consolidated revenues.
Costs and Expenses. Gross profit (calculated as total revenues minus
total costs of sales and services), as a percentage of revenues in fiscal 1997
declined to 28.7% from 31.1% in 1996. Within the oilfield service business,
gross profits as a percentage of revenues improved 1.2% due to increased sales
volumes (which resulted in increased utilization of operating facilities) and,
to a lesser extent, modest average price improvements within some of the
Company's oilfield services markets, without a proportionate increase in costs
and expenses. The overall decline in gross profits, as a percentage of revenues,
in fiscal 1997 as compared to 1996 was attributable to the increase in
compounding sales and distribution of material revenues which generate lower
gross profits as a percentage of revenues. Generally, gross profits as a
percentage of revenues are higher within the Company's size reduction
operations, which are typically performed on a toll basis, as compared to the
Company's oilfield service operations. Conversely, the gross profits as a
percentage of sales of the Company's concentrate manufacturing (included in
compounding sales and services revenues) and distribution of material revenues
tend to be significantly lower, due to the significant raw material cost
component included in these revenues.
Selling, general and administrative costs increased $10,873,000, from
$21,108,000 in fiscal 1996 to $31,981,000 in fiscal 1997. The increase was due
to the timing of the fiscal 1996 and 1997 acquisitions and to a lesser extent,
higher legal expenses and higher corporate administrative expenses, offset by
lower bonus expenses and lower litigation settlement charges. Also, fiscal 1997
selling, general and administrative expenses included capital-based state
franchise taxes which were not included in fiscal 1996. Selling, general and
administrative costs as a percentage of revenues improved to 16.1% in fiscal
1997 compared to 19.5% in fiscal 1996. This decrease was also the result of the
fiscal 1996 and 1997 acquisitions and the increase in distribution revenues
resulting from the establishment of the ICO Polymers companies in Europe. These
factors have resulted in the Company's corporate expenses being spread across a
greater revenue base.
Depreciation and amortization expense increased to $11,349,000 in
fiscal 1997 from $7,230,000 in fiscal 1996. The increase resulted from additions
of property, plant and equipment and goodwill due primarily to the acquisitions
made during fiscal 1996 and 1997.
Operating Income. Operating income improved to $13,410,000 in fiscal
1997 from an operating loss of $2,397,000 in fiscal 1996. Oilfield services
operating income increased $2,885,000 or 25.0% in fiscal 1997 compared to fiscal
1996. Improvement within the oilfield service business was driven by the
increase in revenues and gross profit margins and the $868,000 charge for
inventory writedowns in fiscal 1996. A similar inventory charge was not required
in fiscal 1997. Petrochemical processing sales and services operating income
improved to $8,180,000 in fiscal 1997 from a loss of $4,068,000 in 1996. This
increase in petrochemical processing operating income resulted from the timing
of the fiscal 1996 and 1997 petrochemical processing acquisitions, the 1996
charges relating to SFAS 121 impairment ($5,025,000) and non-recurring
compensation arrangements ($1,567,000) which were unnecessary in fiscal 1997.
General corporate expenses declined from $9,891,000 in fiscal 1996 to
$9,217,000 in fiscal 1997. The decline resulted primarily from non-recurring and
other litigation charges ($1,572,000) and non-recurring compensation
arrangements ($245,000) in fiscal 1996, neither of which was required in fiscal
1997. Additionally, legal expenses and corporate administrative expenses were
higher and bonus expenses were lower in fiscal 1997 compared to fiscal 1996.
Interest Income/Expense. Net interest expense was $3,764,000 in fiscal
1997 compared to net interest income of $608,000 in fiscal 1996. The change was
due to the issuance of the $120,000,000 Senior Notes, the
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30
utilization of cash balances and the assumption of debt in connection with the
fiscal 1996 and 1997 acquisitions.
Income Taxes. The Company's effective tax rate increased to 40.5%
during fiscal 1997 compared to 37.4% in fiscal 1996. This change was the result
of an increase in non-deductible goodwill amortization which, unlike fiscal
1996, was not offset by a reversal of the Company's valuation allowance against
net deferred tax assets. The Company's effective tax rate also varied as a
result of the mixture of domestic and foreign pre-tax income since, during
fiscal 1997, the Company's domestic effective tax rate is higher than the
average effective tax rate of foreign operations.
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Dutch guilder, Swedish krona, British pound, Italian lira, Canadian
dollar, and the French franc have impacted the translation of revenues and
income of the Company's European petrochemical processing operations and
Canadian oilfield services operations over the past two years. The table below
summarizes the impact of the above currencies during the twelve months ended
September 30, 1997 compared to the exchange rates used to translate the five
months ended September 30, 1996.
Net revenues (1,113,000)
Operating income (141,000)
Pre-tax income (128,000)
Net income (88,000)
Gains and losses from the translation of certain balance sheet accounts
are not included in determining net income, but are accumulated as a separate
component of shareholders' equity. As a result of the dollar's fluctuation
against applicable foreign currencies, shareholders' equity decreased by
$1,985,000 in fiscal 1997.
Seasonality. The oilfield services business is substantially seasonal,
reflecting the pattern of oil field drilling and workovers, with the first and
fourth quarters of the fiscal years having generally higher levels of activity.
Seasonal trends, however, may be masked by other market forces such as a decline
in oil and gas prices.
YEAR 2000 ISSUE
The Securities and Exchange Commission has published guidance regarding
the effect of "Year 2000" issues on companies. The Year 2000 problem arose
because some computer programs use only the last two digits of a year as a
reference date, causing the program to improperly recognize a year that does not
begin with "19".
The Company has been working toward Year 2000 readiness since 1997 and
is proceeding on schedule. Completion of the project is scheduled for the fourth
fiscal quarter of 1999. To improve access to business information through
common, integrated computing systems within business operations, the Company has
begun a business systems replacement project. The new systems ("Business
Replacement Systems"), which are expected to make the Company's business
computer systems Year 2000 compliant, are scheduled for completion by September
1999. Implementation of these programs is approximately 40 percent complete. The
Company has developed a contingency plan to make the programs that are scheduled
to be replaced by these systems Year 2000 compliant. A decision to implement the
contingency plan will be made by the end of the fourth fiscal quarter of 1999.
Remaining business software programs, including those supplied by vendors, are
expected to be made Year 2000 compliant through the Year 2000 project or they
will be retired.
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Overview. The Company's Project is divided into four sections:
Corporate and Facility Infrastructure, Applications Software, Inspection and
Processing Equipment, and Third-Party Suppliers. Each section consists of four
phases: Year 2000 readiness analysis and assessment; retiring, replacing, or
upgrading items that are not Year 2000 ready; remediation testing of upgraded
and replacement hardware and software; and contingency planning.
Applications Software. The Application Software section includes the
conversion of software which is not Year 2000 compliant or, where available from
the supplier, the replacement of such software. Application Software consists of
all software not used directly in conjunction with the operation of the
Company's manufacturing and service facilities. The Company estimates that the
software conversion phase was more than 30 percent complete at September 30,
1998, and that the remaining conversions are on schedule to be completed by the
end of the fourth fiscal quarter 1999. The testing phase is conducted as the
software is replaced and is scheduled to be completed in the Company's third
fiscal quarter of 1999. Contingency planning for this section is scheduled to
begin in the second fiscal quarter of 1999 and completed by the end of the third
fiscal quarter of 1999.
Corporate Infrastructure. The Corporate Infrastructure section consists
of mainframe and desktop computing hard-ware, software, and connectivity. The
Company believes its North American infrastructure is year 2000 compliant, and
the Company will test this infrastructure in the second fiscal quarter of 1999
to confirm such compliance. The Company's European infrastructure is being
replaced, and the completion of the replacement process is scheduled for the end
of the first fiscal quarter of 1999. The Company's Australian and New Zealand
corporate infrastructures are 90 percent complete and are expected to be Year
2000 compliant by the end of the second fiscal quarter of 1999.
Facility Infrastructure. The Facility Infrastructure section consists
of hardware and systems software, which is used in the operation of the
Company's facilities. The Company has developed a plan detailing the tasks and
resources required for this section. The assessment of the Year 2000 readiness
of Facility Infrastructure was begun during the first fiscal quarter of 1999.
The testing and repair of Facility Infrastructure is scheduled for completion
during the third fiscal quarter of 1999 for the Company's North American
operations and during the second fiscal quarter of 1999 for the Company's
European, Australian, and New Zealand operations. Contingency planning for this
section is scheduled to begin in the second fiscal quarter of 1999 and to be
completed by mid-1999.
Inspection and Processing Equipment. The Company's oilfield services
sector uses inspection and processing equipment, which the Company believes to
be currently Year 2000 compliant. The equipment is scheduled to be tested and
repaired, if necessary, during the quarter ended December 31, 1999. The Company
does not foresee the need for any contingency planning in this area.
Third Party Suppliers. The Company has begun identifying critical Third
Party Suppliers. The Company will begin communicating with suppliers of the
Company's operations in North America, Europe, and New Zealand, during the first
quarter of fiscal 1999, about, and evaluating their state of, Year 2000
preparedness. Ninety percent of the suppliers to the Company's Australian
operations have been verified for compliance. The Company-wide evaluation
process is scheduled for completion by the end of the second fiscal quarter
1999. These evaluations will be followed by the development of contingency
plans, which are scheduled for completion by mid-fiscal 1999.
Costs. The total cost associated with required software and hardware
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position or results of operations. The estimated total
cost of the Year 2000 project is approximately $450,000. The total amount
expended on the
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project through September 30, 1998 was $145,000. The estimated future cost of
completing the Year 2000 project is estimated to be approximately $305,000. The
cost to implement the Business Replacement Systems is not included in these
estimates. Costs related to the Year 2000 project will be accounted for in
accordance with the Company's existing policies. Other than purchases of new
hardware and software, Year 2000 project expenditures will be expensed as
incurred.
Risks. A Year 2000 failure could result in a business disruption that
adversely affects the Company's business, financial condition or results of
operations. For example, if a Year 2000 failure causes insufficient rail and
freight service to be available to the Company, the receipt of raw materials and
the shipment of finished products by the Company's petrochemical operations
could be curtailed. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company cannot determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition. The Company believes that, with
the implementation of new business systems and completion of the Year 2000
Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
CONVERSION TO THE EURO CURRENCY
The Company has a substantial portion of its operations within
countries adopting the Euro currency beginning January 1, 1999. As of January 1,
1999, the Company expects to invoice and receive payments denominated in Euros
whenever possible. The cost of achieving this is not expected to be material.
The adoption of the Euro by the European Economic and Monetary Union is
expected, from a competitive viewpoint, to benefit the Company to some extent as
price transparency becomes a reality. The benefit will, however, be somewhat
limited as transportation costs are an important consideration for the Company's
customers. At this time, the Company anticipates that the impact of the adopting
of 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. Additionally, material contractual agreements of the Company are
expected to continue without disruption.
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, effect
of enhanced distribution capability, 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, effects of the Year
2000 issue, 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 those described elsewhere in this document in the
Company's other filings with the SEC and those described below.
The significant indebtedness incurred as a result of the placement of
the Senior Notes due 2007 in June 1997 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
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33
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, numerous financial and other 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 industry historically 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 have declined significantly
during 1998, which has resulted in decreases and could result in further
decreases in oil and gas exploration and production activities. No assurance can
be given that current low levels of domestic oil and gas exploration activities
will improve or that the demand for the Company's oilfield services will not
continue to decline reflecting the generally low level of activity in the
industry. Industry conditions will continue to be influenced by numerous factors
over which the Company will have no control. A continued decline or lack of
improvement in oil or gas prices or domestic industry activity could have a
material adverse effect on the Company's oilfield 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.
The business cycles of the Company's petrochemical processing services
segment are subject to 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 and prices in the petroleum
industry, which also affect the Company's oilfield services business segment 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
31
34
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.
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 business with the
acquisitions of PSI and Bayshore in July 1996 and December 1996, respectively,
the Rotec and Micropowders Business acquisitions in April 1997, the Micronyl
acquisition in May 1997, the Verplast acquisition in July 1997, the J.R.
Courtenay (N.Z.) Ltd. ("JRC") and Soreco acquisitions in March and June,
respectively, of fiscal year 1998. The success of the Company will depend, in
part, on the Company's ability to integrate the operations of these specialty
petrochemical processing companies 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 recent growth of the Company will 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 the
acquisition of the Micropowders Business, the execution of supply agreements
with Borealis and Exxon Chemical Holland and the acquisitions of Rotec,
Verplast, and JRC. Each of these operations, as well as the Bayshore operation,
requires the Company to buy and manage inventories of supplies and products in
the specialty petrochemical processing business. The Company's entry into the
distribution portion of this business requires the Company 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.
A portion of the Company's current operations are conducted in
international markets, particularly the Company's Western European and Southeast
Asian specialty petrochemical processing services business. The Company expects
to continue to seek to expand its international operations through internal
growth and 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.
Since the beginning of fiscal 1994, the Company has made several
acquisitions, and management expects to acquire other businesses 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
32
35
expense, increased financial leverage or decreased operating income, any of
which could have a material adverse effect on the Company's operating results.
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include short-term debt
obligations carrying variable interest rates, and forward currency contracts
intended to hedge accounts payable obligations denominated in currencies other
than a given operation's functional currency.
The Company's strategy has 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
to establish a fixed functional currency cost for raw material purchases
denominated in non- functional currency (typically the U.S. dollar).
The following table summarizes the Company's market sensitive financial
instruments. These transactions are considered non-trading activities.
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS SEPTEMBER 30, 1998
WEIGHTED AVERAGE
Variable interest rate debt: US$ EQUIVALENT IN THOUSANDS YEAR-END INTEREST RATE EXPECTED MATURITY
--------------------------- ---------------------- -----------------
CURRENCY DENOMINATION
- ---------------------
Dutch Guilders $1,379 4.75% less than one year
British Pounds Sterling 1,287 8.83% less than one year
French Francs 112 4.43% various through 2001
Italian Lira 6,129 5.26% less than one year
New Zealand Dollar 811 9.47% 1999
Australian Dollar 1,050 6.79% various through 1999
ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
Forward Exchange Agreements (000s):
RECEIVE US$/PAY NZ$:
Contract Amounts US$ 910
Average Contractual Exchange Rate
(NZ$/US$) .5005
Expected Maturity Dates October 1998 through January 1999
RECEIVE US$/PAY AUSTRALIAN $:
Contract Amounts US$ 860
Average Contractual Exchange Rate
(A$/US$) .6069
Expected Maturity Dates October 1998 through December 1998
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.
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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 "1999 Proxy Statement") for its annual
meeting of shareholders. The 1999 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, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 1999 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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the 1999 Proxy Statement.
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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 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the Registrant (filed as Exhibit 99.2 to
Form 8-K dated May 12, 1997)
2.2 -- Framework Agreement and Stock Sale & Purchase Agreements dated July 21, 1997 among ICO, Inc.,
Wedco Italy, S.p.A. (a wholly owned subsidiary of the Company), DARAC's S.p.A., Mr. Francesco
Panzini, and Mr. Massimo Viviani (filed as Exhibit 2 to Form 8-K dated August 5, 1997)
2.3 -- Agreement for sale & purchase of all the share capital of J.R. Courtenay (N.Z.) Ltd. dated March 20,
1998 among ICO, Inc., ICO Technology, Inc. (a wholly owned subsidiary of the Company), Mr. J. R.
Courtenay, Mr. Dario Masutti and Mr. R. Narev and Mr. J. R. Courtenay, together as trustees (Filed as
Exhibit 2 to Form 8-K dated April 15, 1998)
2.4 -- 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 Designation of $6.75 Convertible Exchangeable Preferred Stock dated March 30, 1998
3.3** -- Certificate of Designation of Junior Participating Preferred Stock of ICO Holdings, Inc. dated March
30, 1998
4.0 -- By-Laws of the Company dated March 20, 1998. (filed as Exhibit 3.2 to Form 10-Q dated August 13,
1998)
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 of 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
May 15, 1996)
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39
EXHIBIT NO. EXHIBIT
- ----------- -------
4.6 -- Shareholders' Rights Agreement dated November 20, 1997 by and between the Company and Harris
Trust and Savings Bank, as rights agent (filed as Exhibit 1 to Form 8-A dated December 22, 1997)
4.7 -- 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 -- Amended and Restated Business Loan Agreement dated February 21, 1997 between the Registrant and
Bank of America, Texas, N.A. (filed as Exhibit 10 to Form 10-Q dated May 14, 1997)
10.2 -- Substituted First Amendment to Amended and Restated Business Loan Agreement by and between the
Company and Bank of America Texas, N.A. dated June 6, 1997 (filed as Exhibit 10 to Form 10-Q dated
August 14, 1997)
10.3 -- Second Amendment to Amended and Restated Business Loan Agreement between the Registrant and
Bank of America, Texas, N.A. dated August 29, 1997 (filed as Exhibit 10.3 to Form S-4 dated October
3, 1997)
10.4 -- Third Amendment to Amended and Restated Business Loan Agreement between the Registrant and
Bank of America, Texas, N.A. dated July 17, 1998. (filed as Exhibit 10.4 to form 10-Q dated August 13,
1998)
10.5 -- 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)
10.6 -- 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed as Exhibit 99 to the
Registrant's Form S-8 dated September 13, 1993)
10.7 -- 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)
10.8 -- 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)
10.9 -- 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)
10.10 -- 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)
10.11 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to Form
S-4 dated May 15, 1996)
10.12 -- Consulting Agreement-- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15,
1996)
10.13 -- Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.14 to Form S-4 dated
May 15, 1996)
10.14 -- Addendum to Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.15 to form
S-4 dated May 15, 1996)
10.15 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May 15, 1996)
10.16 -- Stockholders Agreement respecting voting of shares of certain former Wedco common
shareholders (filed as Exhibit 10.21 to Form S-4 dated May 15, 1996)
10.17 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders
(filed as Exhibit 10.22 to Form S-4 dated May 15, 1996)
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40
EXHIBIT NO. EXHIBIT
- ----------- -------
10.18 -- 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)
10.19 -- 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).
10.20** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Jon C. Biro
10.21** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Isaac H. Joseph
10.22** -- Employment Agreement dated June 18, 1984 by and between a wholly-owned subsidiary of the
Registrant and Theo J.M.L. Verhoeff
11.0** -- Statement Regarding Computation of Per Share Earnings
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- -----------------
** Filed herewith
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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 23, 1998
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 23, 1998
- ---------------------------------------------- Secretary & Director
Sylvia A. Pacholder (Principal Executive Officer)
/s/ Asher O. Pacholder Chairman of the Board, Chief December 23, 1998
- ---------------------------------------------- Financial Officer & Director
Asher O. Pacholder (Principal Financial Officer)
/s/ Robin E. Pacholder President, Wedco-North America & December 23, 1998
- ---------------------------------------------- Director
Robin E. Pacholder
/s/ Jon C. Biro Senior Vice President and Treasurer December 23, 1998
- ---------------------------------------------- (Principal Accounting Officer)
Jon C. Biro
/s/ William E. Cornelius Director December 23, 1998
- ----------------------------------------------
William E. Cornelius
/s/ James E. Gibson Director December 23, 1998
- ----------------------------------------------
James E. Gibson
/s/ Walter L. Leib Director December 23, 1998
- ----------------------------------------------
Walter L. Leib
/s/ William J. Morgan Director December 23, 1998
- ----------------------------------------------
William J. Morgan
/s/ George S. Sirusas Director December 23, 1998
- ----------------------------------------------
George S. Sirusas
/s/ John F. Williamson Director December 23, 1998
- ----------------------------------------------
John F. Williamson
/s/ William E. Willoughby Director December 23, 1998
- ----------------------------------------------
William E. Willoughby
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42
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, 1998 and 1997.................................................... F-3
Consolidated Statement of Operations for the three years
ended September 30, 1998..................................................................................... F-4
Consolidated Statement of Cash Flows for the three years
ended September 30, 1998..................................................................................... F-5
Consolidated Statement of Stockholders' Equity for the
three years ended September 30, 1998......................................................................... F-6
Notes to Consolidated Financial Statements................................................................... F-7
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
43
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 10, 1998
F-2
44
ICO, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
-------------------------
ASSETS 1998 1997
---------- ----------
(In thousands, except share data)
Current assets:
Cash and cash equivalents $ 51,135 $ 83,892
Trade receivables (less allowance for doubtful accounts of
$1,690 and $967, respectively) 56,868 49,963
Inventories 29,963 20,709
Deferred tax asset 3,154 3,812
Prepaid expenses and other 4,320 4,382
---------- ----------
Total current assets 145,440 162,758
---------- ----------
Property, plant and equipment, at cost 184,683 152,440
Less - accumulated depreciation and amortization (67,384) (54,661)
---------- ----------
117,299 97,779
---------- ----------
Other assets:
Goodwill (less accumulated amortization of
$6,592 and $5,056, respectively) 57,304 49,761
Investment in joint ventures -- 1,871
Debt offering costs 4,180 4,790
Other 4,454 4,794
---------- ----------
$ 328,677 $ 321,753
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current portion of long-term debt $ 12,836 $ 10,719
Accounts payable 24,220 21,923
Accrued interest 4,395 4,033
Accrued insurance 1,790 2,095
Accrued salaries and wages 2,372 2,204
Income taxes payable 43 1,092
Other accrued expenses 10,564 10,403
---------- ----------
Total current liabilities 56,220 52,469
Deferred income taxes 9,454 7,463
Long-term liabilities 2,056 1,649
Long-term debt, net of current portion 132,631 133,034
---------- ----------
Total liabilities 200,361 194,615
---------- ----------
Commitments and contingencies (See Note 15) -- --
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;
22,108,153 and 21,598,658 shares issued and outstanding, respectively 39,170 36,966
Additional paid-in capital 108,725 109,814
Cumulative translation adjustment (1,890) (1,953)
Accumulated deficit (17,702) (17,702)
---------- ----------
128,316 127,138
---------- ----------
$ 328,677 $ 321,753
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
45
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In thousands, except share data)
Revenues:
Sales $ 149,088 $ 75,709 $ 18,933
Services 132,255 122,333 89,417
------------ ------------ ------------
Total revenues 281,343 198,042 108,350
------------ ------------ ------------
Costs and expenses:
Cost of sales 127,256 65,252 16,061
Cost of services 84,600 76,050 58,643
Selling, general and administrative 45,022 31,981 21,108
Depreciation 12,532 10,050 6,634
Amortization of intangibles 2,857 1,299 596
Impairment of long-term assets -- -- 5,025
Non-recurring compensation arrangements -- -- 1,812
Writedown of inventories -- -- 868
------------ ------------ ------------
Total costs and expenses 272,267 184,632 110,747
------------ ------------ ------------
Operating income (loss) 9,076 13,410 (2,397)
------------ ------------ ------------
Other income and (expense):
Gain on sale of equity investment 11,773 -- --
Interest income 3,771 2,001 1,277
Interest expense (13,819) (5,765) (669)
Equity in income of joint ventures -- 385 80
Other (20) 217 17
------------ ------------ ------------
Income (loss) before taxes 10,781 10,248 (1,692)
Provision (benefit) for income taxes 4,775 4,150 (632)
------------ ------------ ------------
Net income (loss) 6,006 6,098 (1,060)
Preferred Dividends 2,176 2,176 2,178
------------ ------------ ------------
Net income (loss) applicable to common stock $ 3,830 $ 3,922 $ (3,238)
============ ============ ============
Basic earnings (loss) per common share $ .18 $ .19 $ (.24)
============ ============ ============
Diluted earnings (loss) per common share $ .17 $ .19 $ (.24)
============ ============ ============
Basic weighted average shares outstanding 21,877,000 20,918,000 13,328,000
============ ============ ============
Diluted weighted average shares outstanding 22,004,000 21,144,000 13,493,000
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
46
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities: (In thousands)
Net income (loss) $ 6,006 $ 6,098 $ (1,060)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 15,389 11,349 7,230
Gain on sale of equity investment (11,773) -- --
Writedown for impairment of long-term assets -- -- 5,025
Writedown of inventories -- -- 868
Equity in income of joint ventures -- (385) (80)
Changes in assets and liabilities, net of
the effects of business acquisitions:
Receivables (3,240) (3,586) (179)
Inventories (5,771) (7,312) (2,062)
Prepaid expenses and other assets (92) 47 1,917
Income taxes payable (1,235) 772 (1,560)
Deferred taxes 2,365 3,243 (1,661)
Accounts payable (633) 3,839 953
Accrued interest 276 3,870 161
Accrued expenses (1,111) (4,130) 1,558
--------- --------- ---------
Total adjustments (5,825) 7,707 12,170
--------- --------- ---------
Net cash provided by operating activities 181 13,805 11,110
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (26,143) (15,747) (8,712)
Acquisitions, net of cash acquired (17,492) (29,396) (5,953)
Dispositions of property, plant and equipment 2,010 907 199
Disposition of equity investment, net of expenses 13,679 -- --
--------- --------- ---------
Net cash used for investing activities (27,946) (44,236) (14,466)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of stock 1,546 794 474
Payment of dividend on preferred stock (2,176) (2,176) (2,178)
Payment of dividend on common stock (4,823) (4,559) (2,830)
Proceeds from issuance of debt 3,084 124,928 491
Payment of debt offering costs (145) (5,058) --
Debt repayments (2,478) (13,020) (4,178)
--------- --------- ---------
Net cash provided by (used for) financing activities (4,992) 100,909 (8,221)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (32,757) 70,478 (11,577)
Cash and cash equivalents at beginning of year 83,892 13,414 24,991
--------- --------- ---------
Cash and cash equivalents at end of year $ 51,135 $ 83,892 $ 13,414
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash received (paid) during the period for:
Interest received $ 3,747 $ 1,981 $ 1,278
Interest paid $ (12,359) $ (1,857) $ (688)
Income taxes paid $ (3,333) $ (1,269) $ (2,709)
The accompanying notes are an integral part of these financial statements.
F-5
47
ICO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE
PREFERRED ------------------------ PAID-IN TRANSLATION ACCUMULATED
STOCK SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT
---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except share data)
Balance at September 30, 1995 $ 13 8,883,911 $ 35,042 $ 56,106 $ (48) $ (16,642)
Issuance of shares in connection with:
Acquisitions -- 10,664,435 107 51,331 -- --
Exercise of warrants -- 20,000 100 -- -- --
Exercise of employee stock options -- 79,499 374 -- -- --
Employee Stock Ownership Plans -- 34,649 199 -- -- --
Convertible Exchangeable
Preferred Stock Dividend (See Note 10) -- -- -- (2,178) -- --
Common Stock Dividend (See Note 10) -- -- -- (2,830) -- --
Translation adjustment -- -- -- -- 80 --
Net loss -- -- -- -- -- (1,060)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996 13 19,682,494 35,822 102,429 32 (17,702)
---------- ---------- ---------- ---------- ---------- ----------
Issuance of shares in connection with:
Acquisitions -- 1,712,365 17 8,022 -- --
Exercise of employee stock options -- 156,368 794 -- -- --
Employee Stock Ownership Plans -- 47,431 333 -- -- --
Convertible Exchangeable
Preferred Stock Dividend -- -- -- -- -- (2,176)
Common Stock Dividend (See Note 10) -- -- -- (637) -- (3,922)
Translation adjustment -- -- -- -- (1,985) --
Net income -- -- -- -- -- 6,098
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997 13 21,598,658 36,966 109,814 (1,953) (17,702)
---------- ---------- ---------- ---------- ---------- ----------
Issuance of shares in connection with:
Exercise of employee stock options -- 35,636 142 -- -- --
Employee Stock Ownership Plans -- 178,942 504 -- -- --
Exercise of Warrants -- 180,000 996 (96) -- --
Debt Conversion -- 114,917 562 -- -- --
Convertible Exchangeable
Preferred Stock Dividend -- -- -- -- -- (2,176)
Common Stock Dividend (See Note 10) -- -- -- (993) -- (3,830)
Translation adjustment -- -- -- -- 63 --
Net income -- -- -- -- -- 6,006
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 $ 13 22,108,153 $ 39,170 $ 108,725 $ (1,890) $ (17,702)
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - ICO, Inc. and its subsidiaries (the "Company")
serve the global energy, petrochemical and steel industries, providing high
technology equipment manufacturing and services for inspection, reclamation,
corrosion control, and plastics processing.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of ICO, Inc. and its wholly-owned subsidiaries.
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.
JOINT VENTURES - Joint ventures included in the Company's financial
results for the years ended September 30, 1998, 1997 and 1996 are:
Micronyl-Wedco S.A., a size-reduction and custom compounding company with
locations in Beaucaire and Montereau, France, 50% owned by the Company until
April 1997; and WedTech, Inc., a size-reduction and custom compounding company
headquartered in Canada which was 50% owned by the Company until January 1998.
The Company acquired its 50% interest in WedTech in connection with the April
1996 Wedco acquisition. This investment was accounted for using the cost method
of accounting throughout 1996 and up through May 1, 1997, at which time the
Company resolved certain legal issues surrounding its ability to exercise
significant influence over WedTech (See Note 9); from that point forward until
disposition, the Company accounted for WedTech using the equity method of
accounting, and prior period operating results were immaterial for restatement
from cost to equity method accounting. During fiscal year 1997, the Company
accounted for Micronyl-Wedco S.A. using the equity method until April of 1997,
at which time the remaining 50% interest was acquired by the Company. During
December of 1997, 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.
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 materials, produces concentrates and manufactures 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 and Southeast Asia. The
Company also serves the energy and steel industries by providing testing,
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 17 - "Segment and
Foreign Operations Information".
REVENUE AND RELATED COST RECOGNITION - The Company generally recognizes
revenue from services upon completion of the services and related expenses are
generally recognized as incurred. For product and machinery sales, revenues and
related expenses are recognized when title is transferred, generally when the
products are shipped
F-7
49
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
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
normal 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 - In 1996, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (See Note 4). 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), 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 Shareholders'
Equity. 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.
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
F-8
50
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.
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." In 1997, the Company adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" (See Note 11). Accordingly,
no compensation cost was recorded for employee-based compensation plans in the
accompanying financial statements.
CONCENTRATION OF CREDIT RISK - The market for the Company's services is the
petrochemical and oil and gas industries. Within the petrochemical processing
segment, 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, major 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 10% of consolidated fiscal year 1998 revenues.
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 Company accounts for income taxes under SFAS No. 109,
"Accounting for 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 adopted Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share," during
the first quarter of fiscal 1998. SFAS 128 requires the presentation of both
basic and diluted earnings per share ("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, 1998, 1997 and 1996 were increased
by 127,082, 225,461 and 165,555 shares, respectively, to reflect the conversion
of all potentially dilutive securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable, and
long-term debt. 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, 1998. The Senior Notes long-term debt, with a face value of
$120,000 had a fair market value of approximately $109,000 at December 15, 1998.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts in order to conform to the current year classifications.
F-9
51
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -SFAS No. 130, "Reporting
Comprehensive Income" is effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. The Company intends to adopt
the requirements of this pronouncement in its financial statements for the year
ended September 30, 1999. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all components
of comprehensive income shall be reported in the financial statements in the
period in which they are recognized. Furthermore, a total amount for
comprehensive income shall be displayed in the financial statement where the
components of other comprehensive income are reported. The Company was not
previously required to present comprehensive income or the components thereof in
its financial statements under generally accepted accounting principles.
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.
The Company is required to adopt SFAS No. 133 in its financial statements for
the fiscal year ending September 30, 2000. Due to the Company's limited use of
derivative instruments, the impact of adopting SFAS No. 133 is not expected to
be material to the Company's financial statements.
During April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities", which requires that companies expense as incurred costs of start-up
activities and organization costs. The Company is required to adopt SOP 98-5 in
its financial statements for the fiscal year ending September 30, 2000. Upon
adoption, the Company will be required to expense approximately $460 of
organization costs and will account for the adoption of SOP 98-5 as the
cumulative effect of an accounting change under APB Opinion No. 20, "Accounting
Changes."
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure
About Segments of an Enterprise and Related Information" is effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it operates.
The Company intends to adopt the requirements of this pronouncement in financial
statements for the year ended September 30, 1999, as required by the Statement.
The Company does not believe that the implementation of SFAS No. 131 will have a
material impact on its financial statements.
F-10
52
NOTE 2 - ACQUISITIONS
The Company entered into the following business combinations during fiscal
years 1998, 1997 and 1996. 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.
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. Curley's provides drill pipe and casing inspection services from
locations in Texas and New Mexico.
1997 ACQUISITIONS
During September 1997, the Company acquired the operating assets of
NSpection Systems, Inc. for $600 in cash and future royalty payments based on
sales. NSpection provides electromagnetic inspection and related services for
new and used tubing, casing and drill pipe utilizing two locations in Houston,
Texas.
During July 1997, the Company acquired Verplast S.p.A. ("Verplast"),
which included Tec-Ma Srl, a wholly-owned subsidiary of Verplast, for a total
consideration of approximately $35,100, consisting of approximately $18,700 in
cash and the effective assumption of $16,400 in total liabilities. Verplast,
located in northern Italy, is a supplier of petrochemical processing services
and value-added plastic materials for the rotational molding market and for
other plastic powder applications.
During May 1997, the Company acquired the remaining 50% ownership of
Micronyl-Wedco S.A. not already owned by the Company for a total consideration
of approximately $7,600, consisting of approximately $2,600 in cash and the
effective assumption of $5,000 in total liabilities. Wedco France, as this
entity is now known, operates two size reduction facilities in France which
perform services similar to those performed by the Company's other petrochemical
size reduction facilities.
F-11
53
During April 1997, the Company acquired Rotec for a total consideration
of approximately $7,800, consisting of approximately $2,500 in cash, 427,353
shares of Company common stock valued at approximately $2,100 and the effective
assumption of $3,200 in total liabilities. In addition, Rotec shareholders may
be entitled to additional consideration in cash and Company common stock based
on future earnings of Rotec. Rotec serves the United Kingdom, Ireland and
Continental Europe markets and is a producer of high quality concentrates for a
variety of plastics processes.
During April 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business"). The consideration
consisted of an initial payment of $500 and five additional payments of 674
Dutch Guilders ("Dfl") ($358 at September 30, 1998 exchange rates) payable for
each of five years beginning one year after the acquisition date. As of
September 30, 1998, Dfl 2,698 ($1,432 at September 30, 1998 exchange rates)
remains outstanding. The Company also purchased inventory from Exxon Chemical
Belgium and entered into a supply agreement with Exxon Chemical Holland to
acquire inventories in the future at contracted prices.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") for a total consideration of approximately $18,500, consisting of
approximately $6,900 in cash, 1,285,012 shares of Company common stock valued at
approximately $5,900 and the effective assumption of $5,700 in total
liabilities. Bayshore is a provider of concentrates and compounds to resin
producers in the United States.
1996 ACQUISITIONS
During July 1996, the Company acquired Polymer Service, Inc. located in
Beaumont, Texas and Polymer Service of Indiana, Inc. located in East Chicago,
Indiana (collectively referred to as "Polymer Service"). The Company paid a
total consideration of approximately $5,800, consisting of approximately $2,000
in cash, 431,826 shares of Company common stock valued at approximately $1,700
and the effective assumption of $2,100 in total liabilities. These companies
provide size reduction, compounding and related processing services for the
petrochemical industry.
During April 1996, the Company acquired Wedco Technology, Inc.
("Wedco"). Wedco serves the petrochemical industry by providing plastics
grinding services and related machinery. The Company paid a total consideration
of approximately $84,200, consisting of approximately $4,600 in cash (including
transaction fees and expenses), 10,232,609 shares of Company common stock valued
at approximately $49,700 and the effective assumption of $29,900 in total
liabilities. As part of the transaction, the Company and Wedco's former
Chairman, President and Chief Executive Officer entered into a consulting
agreement, and top management of Wedco executed non-competition agreements. The
acquisition also had an effect on the Company's valuation allowance against net
deferred tax assets (See Note 12 - Income Taxes).
During March 1996, the Company acquired the operating assets, excluding
real estate, of Rainbow Inspection Company of Mississippi, Inc. ("Rainbow") for
a total consideration of approximately $328, consisting of approximately $203 in
cash and the effective assumption of $125 in total liabilities. Rainbow provides
inspection and reclamation services for oil country tubular goods in the Gulf
Coast area.
F-12
54
UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information includes each acquisition for
the period in which the transaction occurred and all preceding periods
presented. All material acquisitions made during the three years ended September
30, 1998 are included.
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
------------ ------------ ------------
(unaudited)
Revenues $ 291,790 $ 269,801 $ 238,125
Net income (loss) 6,179 8,275 (689)
Basic earnings (loss) per share 0.18 0.28 (0.13)
Diluted earnings (loss) per share 0.18 0.28 (0.13)
NOTE 3 - SPECIAL ITEMS
During the first quarter of fiscal 1998, management provided a $1,200
accrual for certain legal matters which management felt would result in a charge
to income and could be reasonably estimated. 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.
In fiscal 1996, the Company recognized $1,812 in expense related to
severance and consulting fee obligations resulting from the Wedco acquisition,
which, during the fourth quarter of fiscal 1996, management determined would not
benefit the Company in the future.
During fiscal 1996, the Company recognized unusual charges of $868 due to
obsolescence of inventory within the oilfield service operations.
During the fourth quarter of fiscal 1996 and subsequent to September 30,
1996, management determined that it was probable that certain legal matters of
the Company would result in a charge to income and that these charges could be
reasonably estimated. Accordingly, the Company recorded a $1,112 reserve for
non-recurring litigation charges in the fourth quarter of fiscal 1996. Over 85%
of the charge relates to the settlement of the litigation of a dispute
concerning the assumption of certain liabilities in connection with the
acquisition of Baker Hughes Tubular Services in September 1992 (See Note 15 --
Commitments and Contingencies).
NOTE 4 - ADOPTION OF SFAS NO. 121
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 established "accounting standards for
the impairment of the long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of." The statement requires
the value of long-lived assets, certain identifiable intangibles, and goodwill
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If this
change in circumstances or other initial indication has occurred, the next step
in determining whether an asset has been impaired is to compare the expected
future undiscounted cash flows of assets, grouped at the lowest level for which
there are identifiable cash flows, to the carrying value of those assets. If the
undiscounted cash flow value is less than the net carrying value, the amount of
F-13
55
impairment is then measured by comparing fair values (using a discounted cash
flows model) with the corresponding carrying values of the assets evaluated. The
Company's previous policy was to evaluate the realizability of long-term assets
on an aggregate basis based on undiscounted cash flows. The current policy is to
accumulate cash flow information at the lowest asset grouping levels for which
there were identifiable cash flows, represented by separate operating locations.
During the fourth quarter of fiscal 1996, management determined that three
petrochemical processing facilities should be closed. The decision to
consolidate was driven by the redundancy of other Company facilities performing
identical services in the same area, in part due to the acquisition of Polymer
Service in July 1996. As a result of this decision and in accordance with SFAS
121, management accumulated cash flow information and based upon the data, the
Company's adoption of SFAS No. 121 during fiscal year 1996 resulted in a
write-down of long-lived assets of $5,025. Approximately $3,400 of the writedown
is associated with impairment of goodwill with the remaining portion applicable
to machinery and equipment of the three locations.
NOTE 5 - INVENTORIES
Inventories at September 30 consisted of the following:
1998 1997
------------ ------------
Finished goods $ 14,292 $ 7,958
Raw materials 10,302 9,023
Work in progress 1,491 835
Supplies 3,878 2,893
------------ ------------
$ 29,963 $ 20,709
============ ============
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
September 30:
1998 1997
------------ ------------
Land and site improvements $ 23,023 $ 23,343
Buildings 32,505 27,930
Machinery and equipment 112,884 84,890
Transportation equipment 4,741 4,322
Leasehold improvements 1,695 1,530
Construction in progress 9,835 10,425
------------ ------------
184,683 152,440
Accumulated depreciation (67,384) (54,661)
------------ ------------
$ 117,299 $ 97,779
============ ============
Depreciation expense was $12,532, $10,050, and $6,634 for the three fiscal years
ended September 30, 1998, 1997 and 1996, respectively.
F-14
56
NOTE 7 - LONG-TERM DEBT
Long-term debt at September 30, 1998 and 1997 consists of the
following. Obligations denominated in a foreign currency have been translated
using year-end exchange rates.
1998 1997
----------------- -------------------
103/8% Series A Senior Notes, interest payable semi-annually, principal due
2007. $120,000 $120,000
Term loan of the Company's Italian subsidiary collateralized by property with
a book value of L1,963,082 ($1,188). Balloon principal payment is due May
2000. Interest paid quarterly at 5.9%. 1,817 1,738
Mortgage loan payable of one of the Company's Dutch subsidiaries,
collateralized by mortgages on certain fixed assets of the subsidiary up to Dfl
4,000 ($2,123) which have a net book value of Dfl 1,599 ($849), as well as a
keepwell letter signed by the Company. Principal payments on the loan are
payable in quarterly installments of Dfl 101 ($54). Interest is payable in
quarterly installments at a fixed rate of 7.20%. 1,671 1,786
Mortgage loan payable of one of the Company's British subsidiaries,
collateralized by a mortgage on the assets of that subsidiary as well as a
keepwell letter signed by the Company. Principal payment on the loan
amounts to (BP)8 ($13) and is payable in monthly installments through October
2007. The interest rate was fixed at 8.33% in October 1997 and interest is
payable monthly. 1,544 1,612
Interest-free term loan of one of the Company's Dutch subsidiaries. Principal
payable annually, in equal installments, over 5 years beginning April 1997. 1,432 1,695
Mortgage loan payable of one of the Company's British subsidiaries,
collateralized by a mortgage on all of the assets of that subsidiary as well as a
keepwell letter signed by the Company. Principal payment on the loan
amounts to(BP)8 ($13) and is payable in monthly installments through June
2006. Interest is payable monthly at a fixed rate of 8.90%. 1,317 1,410
Term loan of one of the Company's British subsidiaries, collateralized by
current assets of the subsidiary up to(BP)750 ($1,207) and a(BP)1,000 guarantee
from the Company. Payment will be due seven years from final drawdown,
and interest is payable quarterly at 8.50% 1,275 484
Mortgage loans payable of one of the Company's Dutch subsidiaries,
collateralized by mortgages on certain fixed assets of the subsidiary up to Dfl
2,350 ($1,247) which have a net book value of Dfl 6,305 ($3,346) as well as a
keepwell letter duly signed by the Company. Principal payments on these
loans are Dfl 150 ($80) and are payable in semi-annual and annual
installments. Interest is payable in quarterly installments at a fixed rate of
6.80%. 1,274 1,432
Mortgage loan carrying a 9.2% fixed rate with monthly payments of principal
and interest of $18 through October 1, 2006. Loan is collateralized by a
mortgage on certain domestic property with a net book value of $1,132 at
September 30, 1998. 1,230 1,328
F-15
57
1998 1997
----------------- -------------------
Various secured loan agreements collateralized by certain assets of the Company.
The loan agreements carry various maturities and interest rates ranging from
7.0% to 12.5%. Interest and principal paid monthly or
quarterly. 1,140 1,922
Various secured loan agreements of the Company's French subsidiaries
collateralized by certain assets of the subsidiary. The loan agreements carry
various maturities and interest rates ranging from 4.37% to 10.45%. Interest
and principal paid monthly or quarterly. 918 785
Various other 1,127 1,395
----------------- -------------------
Total 134,745 135,587
Less current maturities 2,114 2,553
----------------- -------------------
Long-term debt less current maturities $ 132,631 $ 133,034
================= ===================
In June of 1997, the Company issued the Series A Senior Notes at 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,
1998, accumulated amortization of debt offering costs totaled $1,023. Pursuant
to the note indenture, 35% of the outstanding Senior Notes may be redeemed
through June of 2000 using proceeds of a public equity offering. 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 of 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
-------------- -------
1999 $ 2,114
2000 1,753
2001 1,819
2002 1,783
2003 1,420
Thereafter 125,856
NOTE 8 - CREDIT ARRANGEMENTS
F-16
58
In April 1996, the Company established a domestic $15 million revolving
line of credit to be repaid on or before the facility's expiration date of April
17, 2000. The credit facility is secured by certain domestic accounts receivable
and inventory and requires an unused line fee of .25% per annum. As of September
30, 1998, 1997 and 1996, there were no borrowings under this agreement.
The Company maintains several foreign lines of credit through its
wholly-owned subsidiaries. These facilities totaled $18,628 at September 30,
1998. 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 $10,722 at September 30,
1998.
The weighted average interest rates charged on short-term borrowings under
the Company's various credit facilities at September 30, 1998, 1997 and 1996
were 6.47%, 6.43% and 6.61%, respectively.
NOTE 9 - INVESTMENT IN JOINT VENTURES
During February 1996, Wedco commenced legal action against WedTech, Inc., a
Canadian corporation ("WedTech"), which was, at that time, owned 50% by Wedco
and 50% by Polyvector Corporation, a Canadian corporation, which is also a
defendant in the action. Such litigation was assumed by the Company in
connection with its April 1996 acquisition of Wedco. As successor to such
claims, the Company alleged, among other things, that the various defendants
breached the terms of the shareholders' agreement among Wedco and the
defendants. The defendants also filed counterclaims in the action alleging that
ICO and Wedco breached the shareholders' agreement. Due to these circumstances,
including the ongoing litigation, the Company did not have the ability to
exercise significant influence over WedTech for the five-month period ended
September 30, 1996 and for the first seven months of fiscal year 1997, and thus
the cost method of accounting was applied to this investment during those
periods. In April 1997, as a result of a court order, the Company's designated
board member and officer of WedTech were appointed, and management of the
Company considers significant influence to have existed from that point forward,
as defined by accounting authoritative guidance. As a result of the change in
circumstances, the Company began accounting for its investment in WedTech using
the equity method of accounting in May 1997; operating results for periods prior
thereto were immaterial for restatement from cost to equity method accounting.
During the first quarter of fiscal 1998, the Company sold its investment in
WedTech to Polyvector for $14,484 and recognized a pre-tax gain of $11,773.
NOTE 10 - SHAREHOLDERS' 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, 1998 and
1997 equaled $2,176 during both years 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, 1998 totaled $2,779.
F-17
59
Cash dividends paid during the fiscal years ended September 30, 1998 and
1997 equaled $4,823 and $4,559, respectively, on the Company's common stock, of
which $993 and $637, respectively, represented a liquidating dividend paid from
Additional Paid-in Capital. Cumulative liquidating dividends on the Company's
common stock paid out of Additional Paid-in Capital through September 30, 1998
totaled $4,460.
In connection with the Company's 1992 debt restructuring, 801,750
Common Stock Purchase Warrants (expiring July 2002) were issued and are
outstanding and currently exercisable at $5.00 as of September 30, 1997. 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. 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 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-18
60
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 160,000 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 538,700, 174,000, and 55,400 shares available for grant at September
30, 1998, 1997 and 1996, respectively. The following is a summary of stock
option activity for the three years ended September 30:
1998 1997 1996
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
FIXED OPTIONS SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding at beginning
of year .................................... 1,407 $ 5.80 810 $ 5.18 487 $ 5.12
Granted ..................................... 322 4.99 770 6.26 470 5.19
Exercised ................................... (36) 4.89 (156) 4.96 (80) 4.68
Forfeited ................................... (102) 5.68 (17) 5.09 (67) 5.46
---------- ---------- ----------
Outstanding at end of year .................. 1,591 $ 5.68 1,407 $ 5.80 810 $ 5.18
========== ========== ==========
Options exercisable at year end ............. 1,591 $ 5.68 1,407 $ 5.80 810 $ 5.18
========== ========== ==========
Weighted average fair value of
options granted during year
($/share) ................................... $ 1.46 $ 2.15 $ 1.83
F-19
61
The following table summarizes information about fixed stock options
outstanding at September 30, 1998:
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT 9/30/98 (000's) REMAINING CONTRACTUAL LIFE EXERCISE PRICE
- -------------------------- ------------------ --------------------------- --------------
$3.00 - $5.25 705 8 years $ 4.77
$5.31 - $7.19 808 8 years $ 6.28
$7.22 - $9.75 78 9 years $ 7.66
-------
1,591
=======
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, which established financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages companies to
adopt a fair value based method of accounting for such plans, but continues to
allow the use of the intrinsic value method prescribed by APB 25. 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:
1998 1997 1996
----------------------- ----------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net income (loss) $ 6,006 $ 5,555 $ 6,098 $ 4,439 $ (1,060) $ (1,922)
Basic EPS $ 0.18 $ 0.15 $ 0.19 $ 0.11 $ (0.24) $ (0.31)
Diluted EPS $ 0.17 $ 0.15 $ 0.19 $ 0.11 $ (0.24) $ (0.30)
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:
1998 1997 1996
------ ------ -----
Expected life of options 7.5 years 7.3 years 7.3 years
Expected dividend yield over life of options 3.57% 3.50% 3.50%
Expected stock price volatility 31.00% 37.10% 40.20%
Risk-free interest rate 5.60% 6.40% 6.00%
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,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
Domestic $ 5,884 $ 5,492 $ (4,592)
Foreign 4,897 4,756 2,900
---------- ---------- ----------
$ 10,781 $ 10,248 $ (1,692)
========== ========== ==========
F-20
62
The provision for income taxes consists of the following:
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Current:
Federal $ -- $ 44 $ 161
State 892 149 165
Foreign 2,146 2,024 839
------------ ------------ ------------
3,038 2,217 1,165
------------ ------------ ------------
Deferred:
Federal 2,704 1,707 (1,479)
State 434 353 (318)
Foreign (1,401) (127) --
------------ ------------ ------------
1,737 1,933 (1,797)
------------ ------------ ------------
Total:
Federal 2,704 1,751 (1,318)
State 1,326 502 (153)
Foreign 745 1,897 839
------------ ------------ ------------
$ 4,775 $ 4,150 $ (632)
============ ============ ============
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,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Tax expense (benefit) at statutory rate $ 3,773 $ 3,586 $ (592)
Change in the deferred tax assets valuation allowance (110) -- (1,365)
Non-deductible expenses and other, net 806 (387) 398
Foreign tax rate differential (968) 233 (192)
Goodwill amortization and write-downs 259 268 1,328
State taxes, net 1,015 450 (209)
------------ ------------ ------------
$ 4,775 $ 4,150 $ (632)
============ ============ ============
F-21
63
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:
SEPTEMBER 30,
-----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Net operating and capital loss carryforwards $ 1,831 $ 2,373
Tax credit carryforward 965 1,023
Insurance accruals 724 801
Other accruals 405 174
Bad debt allowance 278 249
Compensation accruals 539 799
Legal accruals 236 572
Joint Venture accruals -- 698
Inventory 306 282
Other 564 33
------------ ------------
5,848 7,004
------------ ------------
Deferred tax liabilities:
Depreciation and land (10,238) (8,192)
Deferred revenue (281) (306)
------------ ------------
(10,519) (8,498)
------------ ------------
Valuation allowance on deferred tax assets (1,629) (2,157)
------------ ------------
Net deferred tax assets (liabilities) $ (6,300) $ (3,651)
============ ============
Effective with the fiscal 1996 acquisition of Wedco, the Company
changed its assessment of the valuation allowance to only reserve against
capital losses, expiring NOLs, and expiring credit carryforwards, all of which
are not expected to be utilized. The Company reduced the valuation allowance
during 1997 and 1998 to reflect the expiration of certain federal tax credits.
The Company further reduced the valuation allowance in 1998 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 return purposes $5,387 in net operating loss
carryforwards, which expire between 2000 and 2008, and $965 in investment,
alternative minimum and other tax credit carryforwards which if utilized will
result in a cash savings. The tax credits are expected to expire unused except
$248 in alternative minimum tax credits, which have no expiration.
A change in ownership under the Internal Revenue Code has occurred
which limits the utilization of a majority 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 it stock in the subsidiaries.
F-22
64
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains several benefit plans which cover all domestic
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 the employee is employed by. All plans
have a salary deferral feature which allow employees to contribute up to a
certain percentage of their earnings, subject to governmental regulations. The
Company matches the employee's contribution with ICO stock or a monetary
contribution. An employee's interest in the Company's contributions and earnings
is vested over service dates ranging from one year of service to seven years of
service, depending on the plan.
Wedco Holland B.V. maintains a contributory defined benefit pension
plan, in which all employees of Wedco Holland B.V. who are at least 25 years of
age and have completed one year of service are eligible to participate.
Participants contribute 2.5% to 4% of the cost associated with their individual
pension basis. The Company contributes an annual amount based on an actuarial
calculation according to Dutch accounting principles. The plan provides
retirement benefits at the normal retirement age of 65 in an annual amount equal
to the difference between the employees' average salaries and their governmental
franchise benefits, multiplied by 1.75% for each year of credited service.
Wedco Holland B.V. also maintains a pre-pension plan for all employees
who are eligible for the basic pension plan. Under this plan, an employee may
opt between the ages of 60-62 for early retirement. 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 at date of retirement. Annually, employees contribute 1.43% of their
salaries towards their pre-pensions. The Company will contribute the difference
between what has been built up by means of annual premiums and what is necessary
to be paid out during the early retirement period. Note that the current
pre-pension accrual is only for the amount which will have to be paid to those
employees who may opt to go with early retirement within the term of the current
plan. Another part of the pre-pension is an individual pension feature. Under
this feature, employees who are at least 25 years of age and have at least one
year of service (excluding management) may contribute during their employment
periods to build additional pension rights. If employees contribute, the Company
will, in turn, contribute annually towards the employees' pre-pension benefit up
to a maximum of Dfl 500 ($250 using September 30, 1998 exchange rates).
Wedco UK maintains a Group Personal Pension Scheme, in which all
employees of Wedco UK that have completed six months of service are eligible to
participate. Under the provisions of the plan, the Company contributes 5% of
eligible earnings for all eligible employees. In addition, each eligible
employee may contribute any amount as a percentage of earnings up to the legal
maximum for Approved Personal Pension Plans which will be matched by the Company
up to 5% of eligible earnings.
J.R. Courtenay Ltd. and Courtenay Polymers Pty. Ltd., in New Zealand
and Australia respectively, maintain superannuation plans. These plan are
defined contribution plans and are required by law. They require the Company to
contribute 5% to 10% of the employees' ordinary salary depending upon the length
of employment. There are no waiting periods before being eligible to join the
plan.
Total expense for all employee benefit plans included in consolidated
results of operations for the years ended September 30, 1998, 1997 and 1996 was
$1,084, $990, and $419, respectively.
F-23
65
NOTE 14 - RELATED PARTY TRANSACTIONS
During 1989, Wedco sold certain assets of its former subsidiary,
Tri-Delta Technology, Inc., for $750, of which $369 is outstanding as of
September 30, 1998, from TDT, Inc. (TDT). TDT is an affiliate of William E.
Willoughby, who is currently a director of ICO. Interest is charged monthly at a
rate equivalent to the U.S. prime rate plus 1% (8.49% at September 30, 1998).
TDT is required to make monthly payments of principal and interest in the amount
of $11 through December 2001, at which time any remaining principal and interest
is due; TDT is current on all payments. All amounts owed to the Company by TDT
are personally guaranteed by William E. Willoughby and are collateralized by
88,000 shares of ICO common stock.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company leases certain transportation equipment, office space and
other machinery and equipment under operating leases which expire at various
dates through fiscal 2002. Rental expense was approximately $6,168 in 1998,
$4,782 in 1997, and $2,951 in 1996. Future minimum rental payments as of
September 30, 1998 are due as follows:
1999 $4,529
2000 4,092
2001 3,062
2002 2,052
2003 1,289
Thereafter 5,254
The Company is a named defendant in eight cases involving eight
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992;
August 24, 1994; June 29, 1995; June 29, 1995; August 15, 1995; and July 23,
1997). The Company is generally protected under worker's 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 cases is intentional tort, a stricter standard than the gross
negligence standard applicable to wrongful death cases. The Company currently
has no pending cases in which wrongful death is alleged. In fiscal 1993, the
Company settled two other suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605,000. 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. Also, 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.
The Company and its counsel cannot at this time predict with any reasonable
certainty the outcome of any of the remaining 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
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66
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, Incorporated ("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 $318,000, with Baker
Hughes' total reimbursement obligation being limited to $2,000,000 (current BHTS
obligation is $1,650,000). 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 $500,000 for each claim and a maximum contingent liability of $4,500,000 (net
of current accruals) in the aggregate, for all claims.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13 million 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 court subsequently entered a judgment for $15,750,000 in
the Company's favor, which includes prejudgment interest on the jury award. The
Company may also be entitled to post-judgment interest. The Wood Group is
currently appealing the judgment and has posted a bond for the entire amount of
the judgment. This award has not been reflected in the Company's balance sheet
or operating results. The Company was represented on a contingency fee basis,
and its attorneys will receive a portion of the amount awarded to the Company.
Wedco is a plaintiff and a counterclaim defendant and the Company is a
third party defendant in a lawsuit filed on February 16, 1996 by Wedco against
Polyvector Corporation ("Polyvector"), John Lefas ("Lefas"), the principal
shareholder of Polyvector, and Fred Feder ("Feder"), a former director of Wedco,
which is pending in the federal district court for the District of New Jersey.
Wedco alleges, among other things, that Lefas and Polyvector have breached
certain terms of the shareholders' agreement among Wedco and the defendants and
seeks damages for such breaches. Wedco also alleges, among other things, that
Feder has breached his fiduciary duty to Wedco. WedTech (which had been 50%
owned by each Wedco and Polyvector), Polyvector and Lefas have asserted various
counterclaims and third party claims against the Company allegedly
F-25
67
arising out of the Company's merger with Wedco and the conduct of WedTech's
affairs under the shareholders' agreement. The defendants are seeking, among
other things, reimbursement for alleged damages. On January 16, 1998, Polyvector
finalized its purchase of Wedco's 50% ownership interest in WedTech for CDN
$20.8 million. Discovery is scheduled to end in the New Jersey action in early
March, 1999, and a jury trial is expected in late spring, 1999. The outcome of
this litigation cannot be predicted, but the Company believes it has meritorious
defenses to the counterclaims and third party claims. A proceeding initiated on
June 25, 1998 has been brought in the Ontario Court (General Division) by
WedTech Inc. and Polyvector against the Company and others for damages and other
relief. The proceeding is at a very early stage, but it would appear that the
factual complaints raised in the Canadian litigation duplicate the claims raised
in the New Jersey litigation. It is the intention of the Company to seek an
order staying the Canadian litigation.
Permian Enterprises, Inc. ("Permian"), a wholly-owned subsidiary of the
Company, was a defendant in a case filed on June 16, 1995 by Tidelands Oil
Production Company ("Tidelands") in the Superior Court of Los Angeles,
California (Long Beach division) which alleged that Permian was liable for
damages exceeding $1.1 million, plus interest, and other costs, suffered by
Tidelands and third parties resulting from the failure of an elbow fitting
allegedly lined by Permian. On September 24, 1998, following a jury trial on all
issues, the court entered a judgment in favor of Permian. The time period for
Tidelands to file a notice of intent to appeal has lapsed. Thus, the judgment in
favor of Permian is now final and this matter is at a conclusion. The Company is
seeking reimbursement for certain of its fees and expenses related to this
litigation.
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made with the
International Court of Arbitration of the International Chamber of Commerce on
August 7, 1998, by Oil Country Tubular Limited ("OCTL"), a company based in
India. OCTL alleges that its claim, which it has brought in the Court of
Arbitration of the International Chamber of Commerce, arises in connection with
a Foreign Collaboration Agreement entered into between it and BHTS, whose name
was changed to ICO Tubular Services, Inc. after acquisition by the Company in
1992. OCTL claims, among other items, that it did not receive technical
assistance, spare parts, and certain raw materials necessary for its oilfield
tubular services plant in India. OCTL seeks damages in excess of $96 million,
calculated in part based on lost profit projections over a number of years, from
ICO Tubular Services, Inc. and its co- respondent, Baker Hughes Incorporated.
The Company had only peripheral knowledge of the dispute between OCTL and Baker
Hughes Incorporated prior to the filing of OCTL's claim. The arbitration
proceeding, which is being conducted in London, England, is at an early stage,
with answers to OCTL's claim having been filed in November 1998. While the
outcome of this arbitration matter cannot be predicted, the Company plans to
contest the claims vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
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68
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
As more fully discussed in Note 2, the following is a schedule of assets
acquired, liabilities assumed, and common stock issued in conjunction with all
acquisitions in 1998, 1997 and 1996:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Trade receivables $ 3,916 $ 21,248 $ 7,011
Related party receivables -- 703 645
Inventories 3,620 6,751 1,353
Prepaid expenses and other assets 629 2,887 2,727
Property, plant and equipment 6,399 21,851 42,797
Goodwill 8,020 20,666 29,307
Investment in joint ventures -- (1,689) 4,538
Deferred tax asset 197 1,232 156
Accounts payable (2,572) (9,696) (1,962)
Accrued liabilities (1,588) (9,164) (6,889)
Deferred tax liability (982) (3,993) (1,055)
Long-term debt (147) (13,360) (21,239)
Common stock issued -- (8,040) (51,436)
------------ ------------ ------------
Cash paid, net of cash acquired $ 17,492 $ 29,396 $ 5,953
============ ============ ============
During 1998, the Company exchanged $562 of debt for 114,917 shares of
common stock.
In 1996 the Company purchased real estate by issuing debt of $80.
During fiscal years 1998, 1997 and 1996, the Company issued to
employees $504, $333, and $199 worth of common stock, respectively, in
connection with the Company's domestic benefit plans. See Note 13 "Employee
Benefit Plans".
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NOTE 17 - SEGMENT AND FOREIGN OPERATIONS INFORMATION
The Company operates in two industry segments. In the petrochemical
processing segment, the Company provides grinding, air milling, compounding and
ancillary services for petrochemical resins produced in pellet form, formulates
and manufactures concentrated products for blending with petrochemical resins to
give finished products desired characteristics such as color or ultraviolet
resistance protection and provides related distribution services. In the
oilfield services segment, the Company serves the energy and steel industries by
providing testing, inspection, reconditioning, and coating services and
equipment. Transactions between the two business segments do not materially
affect the information presented below.
PETROCHEMICAL
PROCESSING SALES OILFIELD SALES TOTAL GENERAL
AND SERVICE AND SERVICES OPERATIONS CORPORATE CONSOLIDATED
------------ ------------ ------------ ---------- ------------
NET REVENUES
YEARS ENDED SEPT. 30,
1998 $ 177,232 $ 104,111 $ 281,343 $ -- $ 281,343
1997 100,018 98,024 198,042 -- 198,042
1996 19,295 89,055 108,350 -- 108,350
DEPRECIATION AND
AMORTIZATION
YEARS ENDED SEPT. 30,
1998 $ 9,524 $ 5,622 $ 15,146 $ 243 $ 15,389
1997 6,124 4,996 11,120 229 11,349
1996 1,846 5,078 6,924 306 7,230
OPERATING INCOME (LOSS)
YEARS ENDED SEPT. 30,
1998 $ 10,526 $ 13,025 $ 23,551 $ (14,475) $ 9,076
1997 8,180 14,447 22,627 (9,217) 13,410
1996 (4,068) 11,562 7,494 (9,891) (2,397)
CAPITAL EXPENDITURES
YEARS ENDED SEPT. 30,
1998 $ 18,018 $ 7,752 $ 25,770 $ 373 $ 26,143
1997 10,954 4,548 15,502 245 15,747
1996 1,533 6,637 8,170 542 8,712
IDENTIFIABLE ASSETS
AT SEPT. 30,
1998 $ 200,718 $ 69,491 $ 270,209 $ 58,468 $ 328,677
1997 163,882 65,377 229,259 92,494 321,753
1996 82,498 62,191 144,689 17,483 162,172
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Information regarding the Company's operations in different
geographical areas is presented below. The European Operations consist mostly of
petrochemical sales and services of the Company's various European subsidiaries.
UNITED TOTAL GENERAL
STATES EUROPE OTHER OPERATIONS CORPORATE CONSOLIDATED
------ ------ ----- ---------- --------- ------------
NET REVENUES
YEARS ENDED SEPT. 30,
1998 $ 167,523 $ 95,898 $ 17,922 $ 281,343 $ -- $ 281,343
1997 144,528 43,684 9,830 198,042 -- 198,042
1996 91,764 9,934 6,652 108,350 -- 108,350
OPERATING INCOME (LOSS)
YEARS ENDED SEPT. 30,
1998 $ 15,259 $ 7,349 $ 943 $ 23,551 $ (14,475) $ 9,076
1997 15,599 5,111 1,917 22,627 (9,217) 13,410
1996 4,560 2,098 836 7,494 (9,891) (2,397)
IDENTIFIABLE ASSETS
AT SEPT. 30,
1998 $ 149,329 $ 96,607 $ 24,273 $ 270,209 $ 58,468 $ 328,677
1997 136,920 85,317 7,022 229,259 92,494 321,753
1996 111,776 30,306 2,607 144,689 17,483 162,172
Operating income reflected above includes net revenues, less costs and
expenses of operations, including special items discussed more fully in Note 3 -
Special Items. In computing operating income, other income (expenses), including
interest, and income taxes on the Consolidated Statements of Operations have
been excluded. Corporate expenses include general corporate expense including
the cost of corporate officers and all domestic legal expenses. Corporate
identifiable assets consist of cash, cash equivalents, deferred tax assets,
unamortized bond offering costs, and total income taxes payable or receivable.
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NOTE 18 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected financial information for each
quarter in the fiscal years ended September 30, 1998 and September 30, 1997,
respectively.
THREE MONTHS ENDED
-------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 (1) 1998 1998 1998
------------ ------------ ------------ ------------
Net sales $ 65,565 $ 71,002 $ 73,184 $ 71,592
Gross profit $ 16,407 $ 18,103 $ 17,766 $ 17,211
Operating income $ (1,892) $ 4,296 $ 3,820 $ 2,852
Net income $ 3,680 $ 1,094 $ 667 $ 565
Basic earnings per common share $ 0.14 $ 0.03 $ 0.01 $ 0.00
Diluted earnings per common share $ 0.14 $ 0.03 $ 0.01 $ 0.00
Basic weighted average shares outstanding 21,760,000 21,840,000 21,944,000 21,963,000
Diluted weighted average shares outstanding 22,160,000 21,916,000 21,964,000 21,975,000
(1) During the first quarter of fiscal 1998, the Company sold its
equity investment in WedTech for $14,484 and recognized an pre-tax gain
of $11,773.
THREE MONTHS ENDED
------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
------------ ------------ ------------ ------------
Net sales $ 36,520 $ 45,293 $ 55,316 $ 60,913
Gross profit $ 12,282 $ 12,721 $ 15,465 $ 16,272
Operating income $ 2,909 $ 3,395 $ 3,970 $ 3,136
Net income $ 1,847 $ 1,732 $ 1,628 $ 891
Basic earnings per common share $ 0.06 $ 0.06 $ 0.05 $ 0.02
Diluted earnings per common share $ 0.06 $ 0.06 $ 0.05 $ 0.02
Basic weighted average shares outstanding 19,977,000 20,909,000 21,307,000 21,483,000
Diluted weighted average shares outstanding 20,145,000 21,177,000 21,394,000 21,730,000
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
2.1 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the Registrant (filed as Exhibit 99.2 to
Form 8-K dated May 12, 1997)
2.2 -- Framework Agreement and Stock Sale & Purchase Agreements dated July 21, 1997 among ICO, Inc.,
Wedco Italy, S.p.A. (a wholly owned subsidiary of the Company), DARAC's S.p.A., Mr. Francesco
Panzini, and Mr. Massimo Viviani (filed as Exhibit 2 to Form 8-K dated August 5, 1997)
2.3 -- Agreement for sale & purchase of all the share capital of J.R. Courtenay (N.Z.) Ltd. dated March 20,
1998 among ICO, Inc., ICO Technology, Inc. (a wholly owned subsidiary of the Company), Mr. J. R.
Courtenay, Mr. Dario Masutti and Mr. R. Narev and Mr. J. R. Courtenay, together as trustees (Filed as
Exhibit 2 to Form 8-K dated April 15, 1998)
2.4 -- 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 Designation of $6.75 Convertible Exchangeable Preferred Stock dated March 30, 1998
3.3** -- Certificate of Designation of Junior Participating Preferred Stock of ICO Holdings, Inc. dated March
30, 1998
4.0 -- By-Laws of the Company dated March 20, 1998. (filed as Exhibit 3.2 to Form 10-Q dated August 13,
1998)
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 of 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
May 15, 1996)
73
EXHIBIT NO. EXHIBIT
- ----------- -------
4.6 -- Shareholders' Rights Agreement dated November 20, 1997 by and between the Company and Harris
Trust and Savings Bank, as rights agent (filed as Exhibit 1 to Form 8-A dated December 22, 1997)
4.7 -- 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 -- Amended and Restated Business Loan Agreement dated February 21, 1997 between the Registrant and
Bank of America, Texas, N.A. (filed as Exhibit 10 to Form 10-Q dated May 14, 1997)
10.2 -- Substituted First Amendment to Amended and Restated Business Loan Agreement by and between the
Company and Bank of America Texas, N.A. dated June 6, 1997 (filed as Exhibit 10 to Form 10-Q dated
August 14, 1997)
10.3 -- Second Amendment to Amended and Restated Business Loan Agreement between the Registrant and
Bank of America, Texas, N.A. dated August 29, 1997 (filed as Exhibit 10.3 to Form S-4 dated October
3, 1997)
10.4 -- Third Amendment to Amended and Restated Business Loan Agreement between the Registrant and
Bank of America, Texas, N.A. dated July 17, 1998. (filed as Exhibit 10.4 to form 10-Q dated August 13,
1998)
10.5 -- 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)
10.6 -- 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed as Exhibit 99 to the
Registrant's Form S-8 dated September 13, 1993)
10.7 -- 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)
10.8 -- 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)
10.9 -- 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)
10.10 -- 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)
10.11 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to Form
S-4 dated May 15, 1996)
10.12 -- Consulting Agreement-- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15,
1996)
10.13 -- Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.14 to Form S-4 dated
May 15, 1996)
10.14 -- Addendum to Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.15 to form
S-4 dated May 15, 1996)
10.15 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May 15, 1996)
10.16 -- Stockholders Agreement respecting voting of shares of certain former Wedco common
shareholders (filed as Exhibit 10.21 to Form S-4 dated May 15, 1996)
10.17 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders
(filed as Exhibit 10.22 to Form S-4 dated May 15, 1996)
74
EXHIBIT NO. EXHIBIT
- ----------- -------
10.18 -- 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)
10.19 -- 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).
10.20** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Jon C. Biro
10.21** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Isaac H. Joseph
10.22** -- Employment Agreement dated June 18, 1984 by and between a wholly-owned subsidiary of the
Registrant and Theo J.M.L. Verhoeff
11.0** -- Statement Regarding Computation of Per Share Earnings
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- -----------------
** Filed herewith