<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-10068
ICO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1619554
----------------------------- ---------------------------
(State of incorporation) (IRS Employer Identification Number)
11490 Westheimer, Suite 1000, Houston, Texas 77077
- -------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(281) 721-4200
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Common stock, without par value: 21,462,007 shares
outstanding as of August 14, 1997
<PAGE> 2
ICO, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults upon Senior Securities (no response required) . . . . . . . . . . . . . . . . . . . . . -
Item 4. Submission of Matters to a Vote of Security Holders (no response required) . . . . . . . . . . . -
Item 5. Other Information (no response required) . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-2-
<PAGE> 3
ICO, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------------------- ---------------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and equivalents $ 102,278,000 $ 13,414,000
Trade receivables (less allowance for doubtful accounts of
$708,000 and $972,000, respectively) 39,283,000 25,279,000
Inventories 14,747,000 7,556,000
Income tax receivable -- 16,000
Deferred tax asset 3,924,000 4,052,000
Prepaid expenses and other 3,212,000 3,023,000
-------------- -------------
Total current assets 163,444,000 53,340,000
-------------- -------------
Property, plant and equipment, at cost 137,465,000 126,170,000
Less - accumulated depreciation and amortization (52,828,000) (53,585,000)
-------------- -------------
84,637,000 72,585,000
-------------- -------------
Other assets:
Goodwill (less accumulated amortization of
$4,726,000 and $4,039,000, respectively) 41,363,000 29,915,000
Investment in joint ventures 2,719,000 4,619,000
Other 8,498,000 2,932,000
-------------- -------------
$ 300,661,000 $ 163,391,000
============== =============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
- ---------------------------------------------------------------------
Current liabilities:
Short term borrowings and current portion of long-term debt $ 6,164,000 $ 3,880,000
Accounts payable 16,247,000 8,538,000
Accrued insurance 1,573,000 1,613,000
Accrued salaries and wages 1,607,000 2,001,000
Accrued litigation costs 2,065,000 2,071,000
Income taxes payable 275,000 --
Accrued expenses 7,693,000 5,355,000
-------------- -------------
Total current liabilities 35,624,000 23,458,000
Deferred income taxes 2,794,000 1,648,000
Long-term liabilities 3,236,000 2,269,000
Long-term debt, net of current portion 131,003,000 15,422,000
-------------- -------------
Total liabilities 172,657,000 42,797,000
-------------- -------------
Stockholders' equity:
Preferred stock, without par value - 500,000 shares authorized;
322,500 shares issued and outstanding with a liquidation
preference of $32,250,000 13,000 13,000
Common stock, without par value - 50,000,000 shares authorized;
21,443,477 and 19,682,494 shares issued and outstanding,
respectively 36,090,000 35,822,000
Additional paid-in capital 110,452,000 102,429,000
Cumulative translation adjustment (1,050,000) 32,000
Accumulated deficit (17,501,000) (17,702,000)
-------------- -------------
128,004,000 120,594,000
-------------- -------------
Commitments and contingencies -- --
-------------- -------------
$ 300,661,000 $ 163,391,000
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------- -------------------------------
1997 1996 1997 1996
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Oilfield sales and services $ 25,768,000 $22,896,000 $ 72,110,000 $ 66,726,000
Petrochemical processing sales and services 29,486,000 6,744,000 64,935,000 6,744,000
------------- ----------- ------------ -------------
Total net revenues 55,254,000 29,640,000 137,045,000 73,470,000
------------- ----------- ------------ -------------
Cost and expenses:
Cost of sales and services 39,851,000 20,382,000 96,662,000 51,051,000
Selling, general and administrative 8,591,000 5,276,000 22,182,000 13,050,000
Depreciation 2,646,000 2,017,000 7,325,000 4,638,000
Goodwill amortization 257,000 132,000 687,000 188,000
------------- ----------- ------------ -------------
51,345,000 27,807,000 126,856,000 68,927,000
------------- ----------- ------------ -------------
Operating income 3,909,000 1,833,000 10,189,000 4,543,000
------------- ----------- ------------ -------------
Other income and expense:
Interest income 380,000 298,000 616,000 1,046,000
Interest expense (1,382,000) (251,000) (2,148,000) (294,000)
Equity in income of joint ventures -- 43,000 14,000 43,000
Gain on sale of fixed assets 62,000 18,000 85,000 61,000
Other 1,000 -- 19,000 --
------------- ----------- ------------ -------------
(939,000) 108,000 (1,414,000) 856,000
------------- ----------- ------------ -------------
Income before taxes 2,970,000 1,941,000 8,775,000 5,399,000
Provision for income taxes 1,341,000 513,000 3,568,000 697,000
------------- ----------- ------------ -------------
Net income 1,629,000 1,428,000 5,207,000 4,702,000
------------- ----------- ------------ -------------
Preferred Dividends 544,000 544,000 1,632,000 1,633,000
------------- ----------- ------------ -------------
Net Income applicable to common stock $ 1,085,000 $ 844,000 $ 3,575,000 $ 3,069,000
============ =========== ============ =============
Earnings applicable to common and
common equivalent shares $ .05 $ .06 $ .17 $ .27
============ =========== ============ =============
Weighted average common and common
equivalent shares outstanding 21,307,288 15,912,563 20,911,797 11,241,031
============ =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,207,000 $ 4,702,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,012,000 4,826,000
Gain on disposition of property, plant, and equipment (85,000) (61,000)
Non-cash interest expenses 67,000 --
Equity in income of joint ventures (14,000) (43,000)
Changes in assets and liabilities, net of the effects
of business acquisitions:
Receivables (4,678,000) 1,143,000
Inventories (3,581,000) (1,341,000)
Prepaid expenses and other 438,000 (379,000)
Income taxes payable 384,000 (1,140,000)
Deferred taxes 2,342,000 (243,000)
Accounts payable 3,028,000 2,000,000
Accrued expenses (3,969,000) (1,988,000)
------------- ------------
Total adjustments 1,944,000 (2,774,000)
------------- ------------
Net cash provided by operating activities 7,151,000 7,476,000
------------- ------------
Cash flows from investing activities:
Capital expenditures (9,832,000) (7,136,000)
Acquisitions, net of cash acquired (10,377,000) (4,518,000)
Dispositions of property, plant and equipment 332,000 70,000
------------- ------------
Net cash provided by investing activities (19,877,000) (11,584,000)
------------- ------------
Cash flows from financing activities:
Net proceeds from sale of stock 251,000 361,000
Proceeds from pre-acquisition exercise of stock options -- 1,182,000
Payment of dividend on preferred stock (1,632,000) (1,633,000)
Payment of dividend on common stock (3,375,000) (1,866,000)
Additional debt 121,702,000 945,000
Reductions of debt (15,356,000) (2,054,000)
------------- ------------
Net cash provided by (used for) financing activities 101,590,000 (3,065,000)
------------- ------------
Net increase (decrease) in cash and equivalents 88,864,000 (7,173,000)
Cash and equivalents at beginning of period 13,414,000 24,991,000
------------- ------------
Cash and equivalents at end of period $ 102,278,000 $ 17,818,000
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
------------------------------
1997 1996
----- -----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash received (paid) during the period for:
Interest, net (786,000) 628,000
Income taxes paid (1,320,000) (2,207,000)
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
Following is a schedule of assets acquired, reduction in investment in joint
venture, liabilities assumed or incurred, and common stock issued in
conjunction with the acquisitions of Bayshore Industrial, Inc., the
Micropowders Business, Rotec Chemicals, Ltd. and Micronyl-Wedco, S.A. (See Note
2):
Trade receivables $ 8,606,000
Related party receivables 705,000
Inventories 3,728,000
Prepaid expenses and other assets 1,718,000
Deferred tax asset 50,000
Property, plant and equipment 11,926,000
Goodwill 9,961,000
Investment in joint venture - Micronyl (1,689,000)
Accounts payable (4,687,000)
Accrued liabilities (3,735,000)
Deferred tax liability (851,000)
Long term debt (7,315,000)
Common stock issued (8,040,000)
-----------
Cash paid, net of cash acquired $10,377,000
===========
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements," and accordingly do not include all information and footnotes
required under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Annual Report on Form
10-K for the year ended September 30, 1996 for ICO, Inc. (the "Company"). In
the opinion of management, these interim financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position as of June 30, 1997, the
results of its operations for the three and nine months ended June 30, 1997 and
1996 and the changes in its cash position for the nine months ended June 30,
1997 and 1996. Results of operations for the three-month and nine-month period
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1997. For additional information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1996.
Certain reclassifications have been made to prior year amounts in order to
conform to current year classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS' EQUITY
Earnings per share is based on earnings applicable to common shareholders and
is calculated using the weighted average number of common shares outstanding.
At June 30, 1997 and 1996, outstanding options and warrants did not have a
materially dilutive effect.
NOTE 3. ACQUISITIONS
During fiscal 1996, the Company acquired Rainbow Inspection Company of
Mississippi, Inc. ("Rainbow", in March 1996), Wedco Technology, Inc. ("Wedco",
in April 1996), and Polymer Service, Inc. and Polymer Service of Indiana, Inc.
(collectively referred to as "PSI", in July 1996). The fiscal 1996
acquisitions were accounted for under the purchase method of accounting.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") located in LaPorte, Texas for approximately $6,900,000 in cash and
1,285,012 shares of ICO common stock and the effective assumption of $2,616,000
in debt. Bayshore is a provider of concentrates and compounds to resin
producers in the United States. The Company accounted for this acquisition
under the purchase method of accounting.
Effective April 1, 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business") for an initial payment of
Dutch Guilders ("NLG") 843,000 ($500,000) and five additional payments of NLG
674,000 (approximately $340,000 at June 30, 1997 exchange rates) payable for
each of five years beginning one year after the acquisition date. In addition
to the above consideration, the Company purchased beginning inventory from
Exxon Chemical Belgium and executed a supply agreement to acquire inventories
in the future at scheduled prices, based upon published market prices. The
acquisition of this business complements the Company's existing European
operations by allowing for the distribution, through the Company's ICO Polymers
subsidiaries, of polyethylene powders throughout Europe, using the "Escorene"
brand name.
Effective April 30, 1997 the Company acquired Rotec Chemicals Ltd. ("Rotec")
for $2,500,000 cash and 427,351 common shares of ICO, Inc. stock. The Rotec
shareholders may also be entitled to additional consideration in cash and ICO
common stock based on the 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.
On May 5, 1997 the Company acquired the 50% interest of Micronyl-Wedco, S.A.
("Micronyl") not previously owned by the Company. The consideration consisted
of 15,000,000 French Francs ($2,610,000) and the assumption of Micronyl's total
outstanding debt as of the acquisition date equal to $1,539,000. Micronyl
provides size-reduction and custom compounding services in France.
-7-
<PAGE> 8
The following unaudited pro forma information assumes the following material
acquisitions: Wedco, PSI, Bayshore, Rotec, and Micronyl occurred as of the
beginning of the periods presented.
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
1997 1996 1997 1996
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $57,178,000 $45,118,000 $156,004,000 $131,587,000
Net income 1,702,000 535,000 5,245,000 2,197,000
Net income per common and
common equivalent share .05 .00 .17 .03
Weighted average shares
outstanding 21,443,475 21,385,825 21,612,008 21,343,916
</TABLE>
NOTE 4. SUBSEQUENT EVENTS
On July 21, 1997 the Company acquired Verplast S.p.A. ("Verplast") for
$18,293,000 in cash and the assumption of $7,100,000 in debt. The Company used
a portion of the proceeds of the recently issued Senior Notes due 2007 to
acquire Verplast and will account for the acquisition using the purchase method
of accounting. 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.
The following unaudited pro forma information assumes the following material
acquisitions: Wedco, PSI, Bayshore, Rotec, Micronyl and Verplast occurred as of
the beginning of the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
1997 1996 1997 1996
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Revenues $67,301,000 $53,664,000 $182,629,000 $153,543,000
Net income 2,066,000 673,000 5,864,000 2,608,000
Net income per common and
common equivalent share .07 .01 .20 .05
Weighted average shares
outstanding 21,443,475 21,385,825 21,612,008 21,343,916
</TABLE>
NOTE 5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, 1997 September 30, 1996
--------------- --------------------
<S> <C> <C>
Finished Goods $ 5,290,000 $ 3,633,000
Raw Materials 5,870,000 826,000
Work in Progress 865,000 722,000
Supplies 2,722,000 2,375,000
------------- ------------
$14,747,000 $ 7,556,000
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This material contains "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, due to a
number of factors including those discussed in Exhibit 99, can differ
materially from results suggested by these forward-looking statements.
-8-
<PAGE> 9
INTRODUCTION
The Company's net revenues in recent years have increased due to a variety of
factors, including acquisitions and increased sales volumes in both existing
and acquired business lines.
The April 1996 Wedco acquisition occurred during a cyclical downturn in the
plastics industry and followed a period during which the domestic management of
Wedco was focused upon the sale of Wedco and related matters. The Company
believes as a result of these factors, Wedco experienced declines in the
utilization of machinery and equipment which resulted in the underabsorption of
certain overhead costs in several of Wedco's domestic facilities.
Consequently, during its fiscal year ended March 31, 1996, Wedco experienced a
decline of both revenues and gross margins in comparison to its historical
performance. As part of the strategy initiated with the Wedco acquisition, the
Company acquired PSI (which solidified the Company's domestic petrochemical
size reduction market share and added management expertise), continued to
emphasize its European petrochemical processing business, through acquisition
and expansion of the Company's distribution business, and established a
domestic sales force. The Company has also implemented a plan of consolidation
involving the closure of three domestic petrochemical processing plants. Two
plants have already been closed (in Houston, Texas and Long Beach, California)
and the third will be closed during fiscal 1997. Due to this timing, the
benefits of the Houston and Long Beach closures were not reflected in the
results of the first quarter and a portion of the second quarter. The Company
believes the closures will reduce operating costs and capital expenditures
requirements. As a result of the above initiatives and the reduction of
expenses, overall operating results of the Company's size reduction businesses
have improved as compared to the combined results of Wedco and PSI for the year
earlier periods, prior to these companies being acquired by the Company.
The acquisition of Bayshore in December of 1996 had the effect of reducing
overall petrochemical processing margins as a percentage of revenues. The
gross margin percentage for Bayshore's business is generally significantly
lower than those generated by the Company's size reduction services because
Bayshore typically buys raw materials, improves the material and then sells the
finished product. In contrast, the Company's size reduction services typically
involve processing customer-owned material. The expansion of the Company's
distribution business within the petrochemical processing segment also will
have the effect of reducing the percentage of consolidated gross margins to
revenues.
The Company's revenue is classified within two categories: 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 grinding petrochemicals into
powders (size reduction), including other ancillary services and grinding
equipment manufacturing, compounding sales and services, which includes the
manufacture and sale of concentrates, and distributing plastic powders.
Revenues are recorded as the services are performed or the equipment is shipped
to third parties.
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.
-9-
<PAGE> 10
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------------- --------------------------------------
% of % of % of % of
NET REVENUES (000'S) 1997 Total 1996 Total 1997 Total 1996 Total
---------------------------------- --------------------------------------
<S> <C> <C>
Exploration Sales and Services $ 9,886 38 $ 9,186 40 $ 27,621 38 $ 25,872 39
Production Sales and Services 8,570 33 7,877 34 24,440 34 22,758 34
Corrosion Control Sales and 6,472 25 5,346 23 17,270 24 16,288 24
Services
Other Sales and Services 840 4 487 3 2,779 4 1,808 3
------- --- ------- --- -------- --- -------- ---
Total Oilfield Services Revenues 25,768 100 22,896 100 72,110 100 66,726 100
------- ------- -------- --------
Grinding Services and Other
Sales and Services 11,674 40 6,109 91 33,014 51 6,109 91
Compounding Sales and Services 12,920 44 635 9 25,765 40 635 9
Distribution 4,892 16 -- -- 6,156 9 -- --
------- --- ------- --- -------- --- -------- ---
Total Petrochemical Processing 29,486 100 6,744 100 64,935 100 6,744 100
------- ----- ------ -----
$55,254 $29,640 $137,045 $ 73,470
======= ======= ======== ========
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------------- --------------------------------------
% of % of % of % of
OPERATING PROFIT (000'S) 1997 Total 1996 Total 1997 Total 1996 Total
---------------------------------- --------------------------------------
Oilfield Services $ 4,210 66 $ 3,585 85 $ 11,356 68 $ 8,998 93
Petrochemical Processing 2,154 34 641 15 5,414 32 641 7
------- --- ------- --- -------- --- -------- ---
Total Operations 6,364 100 4,226 100 16,770 100 9,639 100
General Corporate Expenses (2,455) (2,393) (6,581) (5,096)
------ ------ ------ ------
$ 3,909 $ 1,833 $ 10,189 $ 4,543
======= ======= ======== ========
</TABLE>
Nine and Three Months Ended June 30, 1997 Compared to Nine and Three Months
Ended June 30, 1996
REVENUES. Consolidated revenues increased $63,575,000 or 86.5% and $25,614,000
or 86.4% during the nine and three months ended June 30, 1997, respectively, as
compared to the same periods last year. These improvements are primarily due
to the acquisitions of Wedco, PSI, Bayshore, the Micropowders Business, Rotec,
Micronyl and growth in the Company's oilfield service business.
Oilfield service revenues increased $5,384,000 or 8.1% and $2,872,000 or 12.5%
during the nine and three months ended June 30, 1997, respectively, compared to
the same periods in fiscal 1996. Revenues from exploration services increased
$1,749,000 or 6.8% and $700,000 or 7.6% from the nine and three months ended
June 30, 1996, respectively, compared to the same periods of fiscal 1997.
These increases were driven primarily by increased sales volumes and modest
pricing improvements of the Company's Houston, Texas tubular service facility.
Demand for the Company's exploration services is driven, in part, by the
average domestic rig count which has increased during the nine and three months
ended June 30, 1997, versus the comparable periods in fiscal 1996. Revenues
from production services increased $1,682,000 or 7.4% and $693,000 or 8.8% for
the nine and three months ended June 30, 1997, respectively, compared to the
same periods in fiscal 1996. The demand for these services has been favorably
impacted by generally higher oil prices in fiscal 1997 versus fiscal 1996.
The increases in production services revenues were due in large part to
increased oil and gas production activity in Western Canada and increased sales
volumes in West Texas. Corrosion control revenues increased $982,000 or 6.0%
and $1,126,000 or 21.1% during the nine and three months ended June 30, 1997,
respectively, compared to the same periods of fiscal 1996. These changes were
primarily due to 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 consist of revenues generated by the Company's Canadian
subsidiary relating to the reconditioning and selling of engines used in
connection with oil well pumping units. These revenues increased due to the
increased production activity in Western Canada during fiscal 1997 versus the
comparable periods in fiscal 1996.
-10-
<PAGE> 11
Petrochemical Processing sales and services included only the operations of
Wedco in the fiscal 1996 periods, which was acquired on April 30, 1996.
Petrochemical revenues have increased due to the timing of the Wedco
acquisition, the purchase of PSI in the fourth quarter of fiscal 1996 and the
acquisitions made in fiscal 1997. See the unaudited pro forma information
presented in Notes 3 and 4. During the quarter ended June 30, 1997, sales to
Dow Chemical Company and its affiliates accounted for approximately 11% of the
Company's consolidated revenues.
COSTS AND EXPENSES. Gross profit (calculated as revenues minus cost of sales)
as a percentage of revenues were 29.5% and 27.9% during the nine and three
months ended June 30, 1997, respectively, versus 30.5% and 31.2% for the nine
and three months ended June 30, 1996, respectively. Within the oilfield
services business, gross profits as a percentage of revenues increased 1.2%
during the nine months ended June 30, 1997 compared to the year earlier period
and increased 2.4% during the quarter ended June 30, 1997 compared to the
quarter ended June 30, 1996. These improvements are due to an overall increase
in sales volumes and modest average price improvements (in part due to a change
in customer and product mix), within some of the Company's oilfield services
markets without a proportionate increase in costs and expenses. The overall
decline in gross profits in fiscal 1997 versus the comparable 1996 periods
resulted from the increase in Bayshore revenues (acquired December 1996) and
distribution revenues, which generate lower gross profits as a percentage of
revenues. Gross profits as a percentage of revenues of the Company's size
reduction operations are generally higher than the gross profits of the
oilfield service operations. Conversely, the gross profits, as a percentage of
sales, of the Company's concentrate manufacturing and distribution businesses
are generally significantly lower due to the raw material cost component
included in these revenues as compared to the Company's other petrochemical
services, which are performed on a toll basis. The Company anticipates that as
the concentrate and distribution businesses expand, consolidated gross profits,
as a percentage of sales, will decline.
Selling, general and administrative costs increased $9,132,000 and $3,315,000
during the nine and three months ended June 30, 1997, respectively, versus the
same periods of fiscal 1996. Selling, general and administrative costs as a
percentage of sales decreased to 16.2% and 15.6% during the nine and three
months ended June 30, 1997, respectively, from 17.7% and 17.8% for the nine and
three months ended June 30, 1996, resulting primarily from the acquisitions
made in the latter part of fiscal 1996 and during fiscal 1997. The overall
increase in selling, general and administrative costs during the nine months
ended June 30, 1997 compared to the nine months ended June 30, 1996 is also due
to the late fiscal 1996 and fiscal 1997 acquisitions and to a lesser extent (in
order of magnitude): higher employee compensation expenses and higher legal
costs offset by lower costs relating to the Company's workers' compensation
insurance program. The increase during the third quarter of fiscal 1997 versus
the year earlier quarter is due to the same factors described above for the
year-to-date change, with the exception of legal expenses which were fairly
consistent in the third quarter of fiscal 1997 versus the same quarter of
fiscal 1996.
Depreciation and amortization expense increased to $8,012,000 and $2,903,000
for the nine and three months ended June 30, 1997, respectively, from
$4,826,000 and $2,149,000 for the nine and three months ended June 30, 1996,
respectively. The increase resulted from additions of property, plant and
equipment and goodwill primarily due to the acquisitions made during fiscal
1996 and 1997.
OPERATING INCOME. Operating income increased to $10,189,000 and $3,909,000 for
the nine and three months ended June 30, 1997, respectively, from $4,543,000
and $1,833,000 for the same periods of fiscal 1996. The increases are due to
the changes in revenues and costs and expenses discussed above. Particularly
significant were lower insurance costs relating to workers' compensation within
the oilfield service operations.
INTEREST INCOME/EXPENSE. Net interest expense was $1,532,000 and $1,002,000
during the nine and three months ended June 30, 1997, respectively. For the
nine and three months ended June 30, 1996, the Company had net interest income
of $752,000 and $47,000, respectively. These changes are due to the June 1997
issuance of the $120,000,000 Senior Notes due 2007, bearing an interest rate of
10 3/8% ("Senior Notes"), the 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 40.7% and 45.2%
during the nine and three months of fiscal 1997, respectively, compared to
12.9% and 26.4% during the same periods of fiscal 1996. This change is due to
the Company decreasing its valuation allowance through the provision for income
taxes to reflect its ability to benefit from temporary differences during
fiscal 1996. In connection with the April 1996 acquisition of Wedco, the
Company reversed the remaining valuation allowance against net tax assets
expected to be realized, resulting in a decrease of acquired goodwill. As a
result of the reversal of the valuation allowance in April 1996 and increased
goodwill amortization, which is not tax deductible, provisions for income taxes
for periods subsequent to the Wedco acquisition will be higher as a percentage
of pre-tax income than reported in fiscal 1996. The Company's effective tax
rate will also vary as a result of the mix of domestic and foreign pre-tax
income since, currently, the Company's domestic effective tax rate is higher
than the effective tax rate of foreign operations.
-11-
<PAGE> 12
NET INCOME. For the nine and three months ended June 30, 1997, the Company had
net income of $5,207,000 and $1,629,000, respectively, as compared to net
income of $4,702,000 and $1,428,000 for the same periods of fiscal 1996, due to
the factors described above.
FOREIGN CURRENCY TRANSLATION. The fluctuation of the dollar against the Dutch
Guilder, the British Pound, the French Franc and the Swedish Krona, has
immaterially impacted the translation of revenues and income of Wedco's
European operations into U.S. dollars for the nine months ended June 30, 1997.
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 stockholders' equity. These unrealized gains and losses are subject to
deferred income taxes. As a result of the dollar's fluctuation against these
currencies and changes in the net assets of foreign subsidiaries, stockholders'
equity decreased net of deferred income taxes by $1,082,000 during the nine
months ended June 30, 1997. This change was due primarily to fluctuations of
the Dutch Guilder to the US Dollar exchange rate.
Liquidity and Capital Resources
The following are considered by management as key measures of liquidity
applicable to the Company:
<TABLE>
<CAPTION>
June 30,1997 September 30, 1996
------------ ------------------
<S> <C> <C>
Cash and cash equivalents $102,278,000 $13,414,000
Working capital 127,820,000 29,882,000
Current ratio 4.6 2.3
Debt-to-capitalization .52 to 1 .14 to 1
</TABLE>
Cash and cash equivalents increased $88,864,000 during the nine months ended
June 30, 1997, primarily as a result of the June 1997 Senior Notes offering,
and cash generated by operating activities offset by cash used for investing
activities.
The Company's working capital and current ratio has increased from $13,414,000
and 2.3, respectively, at September 30, 1996 to $127,820,000 and 4.6,
respectively, at June 30, 1997. These changes are primarily the result of the
June 1997 issuance of $120,000,000 of Senior Notes. The issuance of the Senior
Notes also explains the increase in the Company's debt-to-capitalization ratio
from .14 to 1 to .52 to 1.
On June 9, 1997 the Company issued $120,000,000 Senior Notes which bear an
interest rate of 10 3/8%. The Company received proceeds, net of offering
costs, of approximately $115,000,000. The debt matures June 1, 2007 and
interest is payable on June 1 and December 1 of each year, commencing December
1, 1997. During the quarter ended June 30, 1997 the Company used a portion of
the proceeds to repay approximately $16,700,000 of existing indebtedness. As
discussed in Note 2, subsequent to June 30, 1997 the company used $18,293,000
of the proceeds to acquire Verplast. The remaining proceeds will be used for
general corporate purposes including capital expenditures and acquisitions.
Pending the use of the remaining net proceeds, the Company intends to invest
the net proceeds of the offering in high-quality, short- term, interest-bearing
securities, as permitted under the terms of the notes. Also, see "Item 2.
Changes in Securities".
For the nine months ended June 30, 1997 cash provided by operating activities
decreased to $7,151,000 compared to $7,476,000 for the nine months ended June
30, 1996. The decrease was the result of higher net income and an increase in
depreciation and amortization expense offset by the various changes in working
capital accounts, particularly changes in accounts receivable, inventory and
accrued expenses.
Capital expenditures totaled $9,832,000 during the nine months ended June 30,
1997. Of the capital expenditures, $3,161,000 related to the oilfield services
segment and the remaining related to the petrochemical processing business.
The expenditures were primarily incurred to enhance and expand existing
facilities. For the remainder of fiscal 1997, capital expenditures are
expected to be approximately $3,100,000 and are expected to be financed
through cash generated from operations and existing cash.
Cash flows from financing activities increased to $101,590,000 during the first
nine months of fiscal year 1997 compared to cash uses of $3,065,000 during the
first nine months of fiscal 1996. The increase is due to the June 1997
issuance of Senior Notes, offset by an increase in common stock dividends
resulting from the increase in the number of common shares outstanding and
increased debt repayments.
During the period commencing on October 1, 1995 and ended on June 30, 1997, the
Company has acquired seven businesses, six within the specialty petrochemical
processing businesses. Since June 30, 1997, the Company has acquired an
additional business.
-12-
<PAGE> 13
These acquisitions required significant investment by the Company in cash,
Company common stock issued to the former owners of the acquired businesses and
indebtedness effectively assumed by the Company. Many of the changes of the
June 30, 1997 balance sheet from September 30, 1996 are a result of these
acquisitions. The Company anticipates it will continue to seek acquisitions in
the future.
As of June 30, 1997, the Company had approximately $20,145,000 in additional
borrowing capacity available under various credit arrangements. $15,000,000 of
this amount is available under the Company's domestic credit facility and the
remaining is available under various foreign facilities.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a named defendant in 13 cases involving 13 plaintiffs, filed
since June 1990, for personal injury claims alleging exposure to silica
resulting in silicosis-related disease. The Company is generally protected
under workers' compensation law from claims under these suits except to the
extent a judgment is awarded against the Company for intentional tort. In
1994, the Company was dismissed without liability from two suits alleging
intentional tort against the Company for silicosis-related disease. 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 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. Three
of the pending personal injury cases involve three alleged silicosis-related
deaths, which are premised upon allegations of gross negligence. The standard
liability applicable to the remainder of the pending cases is intentional tort,
a stricter standard than the gross negligence standard applicable to the
wrongful death 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 or results of
operations. The Company has in effect general liability and employer's
liability insurance policies applicable to the referenced suits; however, the
extent and the 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 or results of operations 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 $1,000,000. 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 the site call, as set forth in the
federal Record of Decision, for bioremediation of the soils and natural
attenuation of contaminants in the groundwater. 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 of 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.
Wedco is a plaintiff and a counterclaim defendant and the Company is a third
party defendant in a lawsuit filed by Wedco against Polyvector Corporation
("Polyvector") and John Lefas ("Lefas"), the current president of WedTech and
principal shareholder of Polyvector, which is pending in the federal district
court for the District of New Jersey. Wedco alleges, among other things, that
the various defendants have breached the terms of the shareholders' agreement
among Wedco and the defendants and seeks performance of the terms of such
agreement. WedTech, Polyvector and Lefas have asserted various counterclaims
and third party claims against
-13-
<PAGE> 14
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, injunctive relief, recission of the transfer
of WedTech shares in the merger between Wedco and the Company and reimbursement
for alleged damages. The case is in the preliminary discovery stage. The
outcome of this litigation cannot be predicted, but the Company believes it has
meritorious defenses to the counterclaims and third party claims.
Permian Enterprises, Inc., a wholly owned subsidiary of the Company
("Permian"), is a defendant in a case filed by Tidelands Oil Production Company
("Tidelands") pending in the Superior Court of Los Angeles County, California
(Long Beach division) alleging Permian is liable for damages exceeding $1.1
million suffered by Tidelands and third parties resulting from the failure of a
pipe owned by Tidelands and which was allegedly lined by Permian. Discovery in
this case is ongoing, and a jury trial in the case is currently scheduled for
1998. The outcome of this litigation cannot be predicted, but the Company
believes Permian has meritorious defenses in this matter.
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 or results of operations.
ITEM 2. CHANGES IN SECURITIES
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- Reference is hereby made to the exhibit index which appears on
page 16.
(b) On August 5, 1997 the Company filed a Form 8-K Current Report regarding the
acquisition of Verplast, S.p.A.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ICO, Inc.
---------------------------------
(Registrant)
/s/ Asher O. Pacholder
---------------------------------
August 14, 1997 Asher O. Pacholder
Chairman and Chief Financial Officer
(Principal Financial Officer)
/s/ Jon C. Biro
----------------------------------
Jon C. Biro
Senior Vice President and Treasurer
(Principal Accounting Officer)
-15-
<PAGE> 16
INDEX TO EXHIBITS
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- ---------------------------------------------------------------------------------
<S> <C>
Exhibit 10 Substituted First Amendment to Amended and Restated Business Loan Agreement between Registrant
and Bank of America, Texas, N.A.
Exhibit 27 Financial Data Schedule
Exhibit 99 Safe Harbor Disclosure
The following exhibits are incorporated by reference:
2(a) Merger Agreement dated December 8, 1995, as amended, among ICO, Inc., W Acquisition Corp. and
Wedco Technology, Inc. (Annex A of Registrant's Form S-4 dated March 15, 1996)
2(b) Merger Agreement dated March 21, 1997, among ICO, Inc., Rotec Chemicals, Ltd. and the former
shareholders of Rotec Chemicals, Ltd. (Exhibit 99.2 to Registrant's Form 8-K filed May 12,
1997)
2(c) 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), DARC's S.p.A., Mr. Francesco
Panzini, and Mr. Massimo Viviani.(Exhibit 2 to Registrant's Form 8-K dated August 5, 1997
3(i) Articles of Incorporation of Registrant, as amended. (Exhibit 4 to Registrant's Form S-3 dated
September 13, 1993)
3(ii) Bylaws of Registrant, as amended (incorporated by reference to Registrant's 10-Q for the
quarter ended June 30, 1996)
4(a) Indenture dated as of June 9, 1997 between the Company, as issuer, and Fleet National Bank, as
trustee (Exhibit 4.1 to Registrant's Form S-4 dated June 17, 1997)
4(b) Registration Rights Agreement dated June 9, 1997 by and between the Company and Bear, Stearns &
Co. Inc. (Exhibit 4.2 to Registrant's Form S-4 dated June 17, 1997)
4(c) Warrant Agreement -- Series A, dated as of September 1, 1992, between the Registrant and
Society National Bank (incorporated by reference to Exhibit 4 of the Registrant's Annual Report
on Form 10-K for 1992)
4(d) Warrant Agreement Series B, dated as of September 1, 1992, between the Registrant and Society
National Bank (incorporated by reference to Exhibit 4 of the Registrant's Annual Report on Form
10-K for 1992)
4(e) 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 (incorporated by
reference to Exhibit 4.4 to Form S-4 dated May 15, 1996)
10(a) Amended and Restated Business Loan Agreement dated February 21, 1997 between the Registrant's
and Bank of America, Texas, N.A. (filed as Exhibit 10 to Form 10-Q dated May 14, 1997)
10(b) ICO, Inc. Tax Credit Employee Stock Ownership Plan, as amended (incorporated by reference to
Exhibit 10(a) of the Registrant's Annual Report on Form 10-K for 1993)
</TABLE>
-16-
<PAGE> 17
<TABLE>
<S> <C>
10(c) ICO, Inc. 1985 Stock Option Plan, as amended (incorporated by reference to Exhibit B to the
Registrant's Definitive Proxy Statement dated April 27, 1987 for the Annual Meeting of
Shareholders)
10(d) 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (incorporated by reference to
Exhibit 99 to the Registrant's Form S-8 dated September 13, 1993)
10(e) ICO, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit A to Registrant's
Definitive Proxy Statement dated June 24, 1994 for the Annual Meeting of Shareholders)
10(f) ICO, Inc. 1995 Stock Option Plan (incorporated by reference to Exhibit A to Registrant's
Definitive Proxy Statement dated August 10, 1995 for the Annual Meeting of Shareholders)
10(g) ICO, Inc. 1996 Stock Option Plan (Exhibit A to Registrant's Definitive Proxy Statement dated
August 29, 1996 for the annual Meeting of Shareholders)
10(h) Willoughby International Stockholders Agreement dated April 30, 1996 (incorporated by reference
to Exhibit 10.9 to Form S-4 dated May 15, 1996)
10(i) Consulting Agreement -- William E. Willoughby (incorporated by reference to Exhibit 10.13 to
Form S-4 dated May 15, 1996)
10(j) Salary Continuation Agreement -- William E. Willoughby (incorporated by reference to Exhibit
10.14 to Form S-4 dated May 15, 1996)
10(k) Addendum to Salary Continuation Agreement -- William E. Willoughby (incorporated by reference
to Exhibit 10.15 to Form S-4 dated May 15, 1996)
10(l) Non-Competition Covenant William E. Willoughby (incorporated by reference to Exhibit 10.11 to
Form S-4 dated May 15, 1996)
10(m) Stockholders Agreement (respecting voting of shares of certain former Wedco common shareholders
-- incorporated by reference to Exhibit 10.21 to Form S-4 dated May 15, 1996)
10(n) Stockholders Agreement (respecting voting of shares of certain ICO common shareholders --
incorporated by reference to Exhibit 10.22 to Form S-4 dated May 15, 1996)
</TABLE>
-17-
<PAGE> 1
[BANK OF AMERICA LOGO]
EXHIBIT 10
AMENDMENT TO DOCUMENTS
===============================================================================
SUBSTITUTED FIRST AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
(RECEIVABLES AND INVENTORY)
This Substituted First Amendment to Amended and Restated Business Loan
Agreement (Receivables and Inventory) ("First Amendment") is entered into as of
_______________, 1997, between Bank of America Texas, N.A. ("Bank") and ICO,
INC. ("Borrower") and is intended to replace in all respects, the First
Amendment to Amended and Restated Business Loan Agreement executed as of June
2, 1997..
RECITALS
A. WHEREAS, Bank and Borrower have entered into that certain Amended and
Restated Business Loan Agreement (Receivables and Inventory) (the "Agreement"),
dated February 21, 1997.
B. WHEREAS, Borrower has requested that Bank amend the Agreement to (1) allow
Borrower to issue up to $120,000,000 of unsecured, senior notes; (2) release
existing guarantors; (3) modify the leverage covenant contained in the
Agreement to allow for the issuance of the senior notes; and (4) to extend the
Availability Period to April 17, 1999; and
C. WHEREAS, Bank has agreed to the amendments requested on the terms and
conditions stated below.
CONDITIONS
THIS FIRST AMENDMENT WILL BECOME EFFECTIVE, IF AND ONLY IF, THE OFFERING OF
$120,000,000 OF SENIOR, UNSECURED NOTES CONTEMPLATED BY THE PRELIMINARY
OFFERING MEMORANDUM DESCRIBED BELOW CLOSES ON OR BEFORE JUNE 30, 1997. IF FOR
ANY REASON, THE OFFERING IS NOT CLOSED BY JUNE 30, 1997, THE LOAN AGREEMENT
DATED AS OF FEBRUARY 21, 1997 AND ALL ASSOCIATED LOAN DOCUMENTS, INCLUDING BUT
NOT LIMITED TO THE BUSINESS LOAN CONTINUING GUARANTIES DATED AS OF FEBRUARY 21,
1997, WILL REMAIN IN FULL FORCE AND EFFECT , AS IF THIS FIRST AMENDMENT HAD
NEVER BEEN EXECUTED.
AGREED
NOW, THEREFORE, in consideration of the foregoing recitals and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Bank and Borrower mutually agree to amend said Agreement as follows:
1. Paragraph 1.2(a) of the Agreement is amended and restated to read as
follows:
1.2(a) The account has resulted from the sale of goods or the
performance of services by the Borrower, or any subsidiary or
affiliate of Borrower which has executed security documents
acceptable to Bank ("Pledging Subsidiary"), in the ordinary
course of business.
2. The term Pledging Subsidiary, defined above, will be substituted for the
term Pledging Guarantor and the term subsidiary will be substituted for
the term guarantor throughout the Agreement.
3. In Paragraph 2.2 (Availability Period) of the Agreement, the date "April
17, 1999" is substituted for the date "April 17, 1998".
-18-
<PAGE> 2
4. In Paragraph 2.4 (Repayment Terms), subparagraph (b) of the Agreement, the
date "April 17, 1999" is substituted for the date "April 17, 1998".
5. The Business Loan Continuing Guaranties executed by each of Bayshore
Industrial, Inc., B&W Equipment Sales & Mfg., Inc., ICO Tubular Services,
Inc., ICO International, Inc., Permian Enterprises, Inc., FIS Acquisition
Corp., Polymer Service, Inc., Polymer Service of Indiana, Inc. and RJD
Acquisition Corp. are hereby released. The Bank has not granted or
conveyed to any other person any rights or benefits under any of such
Business Loan Continuing Guaranties and such Business Loan Continuing
Guaranties constitute the only guaranties executed by subsidiaries of the
Borrower in connection with the Agreement still in effect on the date of
execution of this First Amendment. The text of Paragraph 7.1 (e)
(Guaranties) of the Agreement is deleted in its entirety and the sentence
"This paragraph has been intentionally deleted." is substituted for the
deleted text.
6. New Paragraph 9.2 (f) (Financial Information) is added to the Agreement to
read as follows:
(f) Within 45 days of each quarter end, to provide a listing of
all credit available or outstanding to the Borrower or any of Borrower's
subsidiaries guaranteed by the Borrower.
7. In Paragraph 9.4 (Total Liabilities to Tangible New Worth Ratio) of the
Agreement is deleted and new paragraph 9.4 is added to the Agreement to
read as follows:
9.4 TOTAL DEBT TO CAPITALIZATION RATIO. To maintain, on a
consolidated basis, a ratio of all obligations and liabilities of Borrower
and its subsidiaries, including: (i) liabilities for money borrowed
evidenced by bills, notes, acceptances, letters of credit , bonds or
similar evidence of debt which are actually funded (or issued in the
case of acceptances or letters of credit) , (ii) all obligations in
respect of any guaranty or contingent liability which is due or has
matured, and (iii) all obligations in respect of any capital lease ("Total
Debt"), to Total Debt plus net worth (as determined in accordance with
GAAP ) of less than or equal to 55%.
8. A new Paragraph 9.6(f) is added to the Agreement to read as follows:
(f) The issuance by Borrower of up to $120,000,000 of senior,
unsecured notes bearing interest at no more than 11% per
annum, provided that any terms of issuance and repayment of
the senior notes which differ in any material respect from
those outlined in the Preliminary Offering Memorandum provided
by Borrower to Bank, date stamped May 16, 1997, are approved
by Bank and provided that no discretionary payments nor
optional redemption payments to the holders of the senior
notes may be made, nor liens fixed on Borrower's or any
Pledging Subsidiary's assets including subordinate liens fixed
on collateral owned by Borrower or any Pledging Subsidiary
securing Borrower's obligations to Bank, without the written
consent of the Bank.
9. Paragraph 9.7 of the Agreement is amended and restated to read as follows:
9.7 OTHER LIENS. That neither the Borrower nor any subsidiary shall
create, assume, or allow any security interest or lien (including judicial
liens) on property the Borrower or any subsidiary now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due on Borrower's property other than the
Personal Property Collateral.
(c) Additional liens which secure obligations in a total principal
amount not exceeding One Million and No/100 Dollars
($1,000,000.00) on Borrower's property other than the Personal
Property Collateral.
(d) Liens in existence prior to the date of this Agreement on
Borrower's property other than the Personal Property Collateral.
(e) Statutory liens of mechanics, materialmen. landlords, employees,
carriers, shippers and warehousemen for services or materials for
which payment is not yet due on Borrower's property other than the
Personal Property Collateral.
(f) Liens incurred or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment
insurance and other types of social security on Borrower's
property other than the Personal Property Collateral.
-19-
<PAGE> 3
10. Paragraph 9.17(e) of the Agreement is amended and restated to read as
follows;
(e) acquire or purchase a business or its assets whether by
acquisition or merger, unless (a) the entity being acquired is
in a similar business; (b) the acquisition is not considered
hostile; (c) no event of default exists prior to or as a result
of the the acquisition; and (d) Borrower's acquisitions in
combination with those of any of Borrower's subsidiaries for any
single calendar year do not entail cash consideration
exceeding 25% of the Borrower's net worth and any single
acquisition does not entail cash consideration exceeding
10% of Borrower's net worth.
11. A new paragraph 11.13 ( Change of Control) is added to read as follows:
11.13 CHANGE OF CONTROL. The occurrence of any of the following:
(a) the sale, lease, transfer, conveyance or other disposition, in one or a
series of related transactions, directly or indirectly, of all or substantially
all of the assets of Borrower or the Pledging Subsidiaries to any Person (as
defined in the Preliminary Offering Memorandum) or group( as such term is
defined in Sections 13(d) and 14(d) of the Securities and Exchange Act of
1934, as amended, or as supplemented by rules promulgated pursuant thereto ["
Exchange Act"]), (b) the adoption of a plan relating to the liquidation or
dissolution of Borrower or any of the Pledging Subsidiaries, (c) any Person or
group is or becomes the "beneficial owner" ( as defined in Rules 13d-3 and
13d-5 of the Exchange Act, except that a Person will be deemed to have
beneficial ownership of all shares that any such Person has the right to
acquire, whether the right is exercisable immediately or after the passage of
time), directly or indirectly, of more than 50% of the total voting power of
any class of the stock of the Borrower entitled to vote, including by way of
merger, consolidation or otherwise, or (d) the first day on which a majority
of the members of the Board of Directors, as that term is defined in the
Preliminary Offering Memorandum, of the Borrower are not Continuing Directors,
as that term is defined in the Preliminary Offering Memorandum.
This First Amendment will become effective as of the date first written above,
provided that each of the following conditions precedent have been satisfied in
a manner satisfactory to Bank:
The Bank has received from the Borrower a duly executed original of
this First Amendment.
Except as provided in this First Amendment, all of the terms and provisions of
the Agreement and the documents executed in connection therewith shall remain
in full force and effect. All references in such other documents to the
Agreement shall hereafter be deemed to be references to the Agreement as
amended hereby.
THIS WRITTEN FIRST AMENDMENT AND THE DOCUMENTS EXECUTED IN CONNECTION HEREWITH
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
IN WITNESS WHEREOF, this First Amendment has been executed by the parties
hereto as of the date first written above.
BANK OF AMERICA TEXAS, N.A. ICO, INC.
By: /s/ Victor N. Tekell By: /s/ Jon C. Biro
--------------------------- ---------------------------
Victor N. Tekell, Vice President Jon C. Biro, Senior Vice President and
Treasurer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly filing on Form 10-Q for the period ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 102,278,000
<SECURITIES> 0
<RECEIVABLES> 39,991,000
<ALLOWANCES> (708,000)
<INVENTORY> 14,747,000
<CURRENT-ASSETS> 163,444,000
<PP&E> 137,465,000
<DEPRECIATION> (52,828,000)
<TOTAL-ASSETS> 300,661,000
<CURRENT-LIABILITIES> 35,624,000
<BONDS> 0
0
13,000
<COMMON> 36,090,000
<OTHER-SE> 91,901,000
<TOTAL-LIABILITY-AND-EQUITY> 300,661,000
<SALES> 137,045,000
<TOTAL-REVENUES> 137,045,000
<CGS> 96,662,000
<TOTAL-COSTS> 126,856,000
<OTHER-EXPENSES> (118,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,532,000
<INCOME-PRETAX> 8,775,000
<INCOME-TAX> 3,775,000
<INCOME-CONTINUING> 5,207,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,207,000
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<PAGE> 1
ICO, INC.
EXHIBIT 99 - SAFE HARBOR DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
from civil litigation in many instances for forward-looking statements. In
order to take advantage of the Act, such statements must be accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those that might be projected.
This exhibit to the Registrant's Form 10-Q is being filed in order to allow the
Registrant to take advantage of the new provisions of this Act by providing the
following cautionary statements.
Risk Factors Affecting ICO
ICO's business operations are subject to a number of uncertainties and risks
which could adversely affect its performance in the future. Among these are
the following factors:
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 indebtedness, (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, acquisitions or for other
purposes may be impaired, (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 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. 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.
Demand for the Company's oilfield services principally depends upon the level
of domestic oil and gas drilling 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. No
assurance can be given that current levels of domestic oil and gas exploration
activities will continue or that the demand for the Company's services will
continue to reflect the level of activity in the industry generally. Industry
conditions will continue to be influenced by numerous factors over which the
Company will have no control. Over the last several years, drilling activity
has increased due to technological advances, royalty relief in deep offshore
waters and relatively stable oil and gas prices. A material decline 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.
The operations of the Company's oilfield services and specialty petrochemical
processing businesses are dependent to a certain degree upon proprietary
technology, know-how and trade secrets either developed by the Company or
licensed to it by third parties. In many cases, these or equivalent processes
or technologies are available to the Company's competitors, customers and
others. In addition, there can be no assurance that such persons will not
develop substantially equivalent or superior proprietary processes and
technologies. The development by others of equivalent or superior information,
processes or technologies could have a material adverse effect on the Company.
The Company recently 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, and the Verplast acquisition in July 1997, and the
success of the Company will depend, in part, on the company's ability to
integrate the operations of these specialty petrochemical processing companies,
including centralizing certain functions to achieve cost savings, successfully
implementing the Company's announced plan to discontinue petrochemical size
reduction services at plants in Houston, Texas and Long Beach, California
(which have been closed) and Maywood, Illinois (which is expected to be closed
during fiscal 1997) and developing programs and processes that will promote
cooperation among the businesses and the sharing of resources. In addition,
the recent
-1-
<PAGE> 2
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 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 and Verplast. Each of
these operations, as well as the Bayshore operation, will require 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 may require 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.
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; as a result, the cycles are relatively unpredictable. In
addition, these 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.
A portion of the Company's current operations are conducted in international
markets, particularly the Company's Western European specialty petrochemical
processing services business. The Company expects to continue to seek to
expand its international operations, particularly in Europe, through internal
growth and acquisitions. The Company's international operations are subject to
certain political, economic and other uncertainties, 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, and, possibly, civil disturbance or other forms of conflict.
The Company has not historically hedged against the risks inherent in currency
fluctuations, and there is no assurance the Company will be able to effectively
hedge against such risks. 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 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 is operations in compliance with 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. 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.
-2-
