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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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 OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11490 WESTHEIMER, SUITE 1000 77077
HOUSTON, TX (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:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, no par value NASDAQ Stock Market
Preferred Stock, no par value NASDAQ Stock Market
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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
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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. Yes No X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of December 15, 1997 was $121,849,000.
The number of shares outstanding of the registrant's Common Stock, as of
December 15, 1997: Common Stock, no par value -- 21,633,094
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement filed with the commission for its Annual
Meeting are incorporated in Parts I, II and III as specified.
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ICO, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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 . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk (no response required) . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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P A R T I
ITEM 1. BUSINESS
GENERAL
The Company is in the business of providing specialized oilfield and
petrochemical processing services. 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 utilized in the oil and gas industry. The
Company's oilfield services are designed to reduce the customers' cost of
drilling and production by preventing faulty tubular goods from being placed
downhole (exploration services), reclaiming and reconditioning used tubular
goods and sucker rods (production services), and preventing 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 major
independent oil and gas exploration and production companies. 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 ultraviolet resistance protection and provides
related distribution services. The Company's specialty petrochemical processing
customers include major chemical companies and petrochemical production
affiliates of major oil production companies.
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,
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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 pipes 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 contract, inspection services on site at
the manufacturing plants of thirteen major producers and processors of tubular
goods (reducing transportation and handling costs to the customer) and provides
mobile inspection services in the field. During fiscal 1997, the Company was
awarded a contract to provide inspection services in Italy for AGIP, the
Italian national oil company. ICO also manufactures inspection and quality
control equipment which is sold or leased from time to time to steel producers
and processors.
The Company provides its customers "one stop shopping" 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 threading and hydrostatic testing.
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 new 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. Ultrasonic inspection 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.
During fiscal 1997, the Company introduced its proprietary ThruSpect 2000(TM)
coil tubing unit which operates at the customer's location and identifies flaws
in coiled tubing. During the second quarter of fiscal 1998, the Company
expects to receive and install a proven, high speed, full length Ultrasonic
inspection unit in the Company's Houston, Texas new 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. Such
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.
These services reduce the customer's well operating costs because
reconditioning used tubular goods is less expensive than purchasing new tubular
goods. Reconditioned
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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 has a program in which it 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 to
customers in the marketplace. With this program, customers acquire
reconditioned tubular goods or sucker rods at a lower cost than new tubular
goods or sucker rods and decrease their inventory carrying cost.
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
assigned to it in connection with the acquisition of Baker Hughes Tubular
Services ("BHTS"). Wellhead Scanalog units are designed to perform tubular
inspection while the tubing is being removed from the well without interfering
with the normal operation of the rig. The Company believes Wellhead Scanalog
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. 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. Under highly corrosive conditions,
even a microscopic area of uncoated steel can result in a tubular or rod
failure or damage. To combat these conditions, the Company offers a variety of
corrosion control services to its customers, using several of the Company's
patented processes. 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.
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 that no bare spots or thin coverings exist. A similar process
is utilized for cleaning, priming and coating tubular couplings. The
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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.
ICO expanded its corrosion control services with the acquisition of Permian
Enterprises, Inc. ("Permian") in April 1994. Permian provides internal cement
lining for pipe ranging from small diameter tubing through 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.
Permian also applies an external fusion bonded tape which forms a tough
protective corrosion barrier for critical line pipe.
In late fiscal 1995, the Company introduced five 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. The five products
the Company introduced in fiscal 1995 were: IPC 100 -- a powdered, internal
protective coating for drill pipe, IPC 800 -- a high temperature powder coating
for production tubing, Nose-Gard(TM) -- a metalizing process for the end area
of tubing, Weld-Gard(TM) -- a metalizing process for the end area of line pipe,
and Fiber-Line(TM) -- an internal fiberglass lining for tubing. These products
have gained market acceptance and have been successful since their
introduction.
Oilfield Services Customers and Pricing. The Company's customers include
leading integrated oil companies, major 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 1995, 1996
or 1997. Sales are generally on an order-by-order basis or under short-term
contracts (i.e., one year or less). The Company does enter into contracts in
connection with the placement of Company owned equipment in tubular goods
manufacturing or processing facilities. These contracts are generally for three
or more years and in some instances provide for fixed prices, volume discounts
and indemnification of customers for certain liabilities.
Oilfield Services Sales and Marketing. The Company's oilfield services are
marketed by 31 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.
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Competition. The principal competitive factors in the Company's oilfield
services business are price, availability and quality of service. The
consolidation in the tubular inspection, reconditioning and coating industry
has resulted in the elimination of many of the Company's competitors.
Notwithstanding the industry's consolidation, the tubular inspecting,
reconditioning and coating industry continues to be highly competitive. 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 and the strong relationships which it maintains
with its customers.
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. 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.
PETROCHEMICAL PROCESSING
The Company's petrochemical processing business segment provides size
reduction services (grinding and related services such as blending and
screening) and compounding, including manufacturing concentrates for use in
petrochemical products. The Company conducts its size reduction operations in
the United States and Europe. The Company's concentrates manufacturing
operations are conducted primarily through Bayshore, which operates in the
United States and Rotec, which operates in Europe. The Company also performs,
to a lesser extent, compounding within the Wedco business unit (See
"Acquisitions").
Petrochemical resins are produced by chemical manufacturers, generally in
the form of pellets. A variety of the 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
Company's size reduction and related processing services and compounding
operations are an intermediate step between the primary production of
petrochemical resins and the final manufacture of a wide variety of end
products, such as paint, garbage bags, plastic film or other objects made of
plastic. The 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 retardency, color, ultraviolet
stabilization or adhesion.
Size Reduction 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, phenolic, polyurethane, acrylics, epoxies, waxes and others.
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The majority of size reduction services performed by the Company involve
ambient grinding, a mechanical attrition milling process. The Company generally
performs ambient grinding utilizing equipment manufactured by the Company.
Ambient grinding is suitable for products which do not require ultra fine
particle size and are not highly heat sensitive. The powders resulting from the
Company's ambient grinding services are used in the manufacture of household
and automotive items (such as household furniture, trash receptacles and
plastic automobile parts), agricultural products (such as fertilizer and water
tanks), paint and metal coatings, fabric coatings and as raw material for
additional processing involving the addition of additives or colors. Many of
these products are produced by rotational molding, and a substantial portion of
the Company's size reduction services are produced for customers manufacturing
in the rotational molding industry or supplying that industry. Late in fiscal
1997, the Company's blending process was validated under FDA conditions. This
registration will allow the Company to expand into new niches, such as
processing calciums or citric acids, within the custom toll processing markets.
The process of rotational molding produces plastic products by melting
pre-measured plastic powder in molds which are heated in an oven while being
slowly rotated on both the vertical and horizontal axis. The melting resin
sticks to the hot mold and coats the mold's surface evenly. 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 utilizes 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 uses liquid nitrogen to chill
pellets to extremely low temperatures while grinding using equipment similar to
that used in the Company's ambient grinding process.
The Company also offers its customers other related polymer processing
services, such as 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, which are integrated with the
size reduction services described above. From time to time, the Company also
sells the ambient grinding equipment manufactured by the Company in the United
States and Europe.
The Company provides size reduction services utilizing six operating
facilities in the United States and seven in Europe. The acquisition of Wedco
and PSI, resulted in the Company owning multiple size reduction facilities in
the same geographic area. Accordingly, in order to reduce operating costs and
capital expenditure requirements, the Company decided to discontinue
petrochemical size reduction services at three plants, in Houston, Texas, Long
Beach, California and Maywood, Illinois. The Houston and Long Beach facilities
were closed in fiscal 1997 and the Maywood facility was closed in early fiscal
1998.
The Company also owns 50% of WedTech, Inc. ("WedTech"), a Canadian company
which provides size reduction services and manufactures concentrates. See Item
3 -- "Legal Proceedings."
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Concentrates Manufacturing. The Company's concentrates manufacturing
operations are conducted primarily at Bayshore Industrial's facility and were
augmented by the Company's acquisition of Rotec Chemicals, Ltd., described
below, whose Rushden, England facility manufactures proprietary color
concentrates. ICO's concentrate manufacturing operations involve the
formulation and production of highly concentrated compounds of additives which
are then blended (by the Company or 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 and
require 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. The Company
operates a facility in LaPorte, Texas with a present capacity of up to 100
million pounds per annum, depending upon the density of the material produced,
and is constructing an additional production line at this location with a
capacity of up to 55 million pounds per annum. The additional production
capacity is expected to be operational in January 1998.
In the second quarter of fiscal 1997, the Company began to expand the
distribution component of its specialty petrochemical production services
business through the acquisition, effective April 1, 1997, of the micropowders
business of Exxon Chemical Belgium, the execution of the supply agreements with
Borealis and Exxon Chemical Holland and the acquisitions of Rotec and Verplast
(See "Acquisitions"). Under the supply agreements the Company has received
the distribution rights to specific rotational molding products of
Borealis A.S. and Exxon Chemical Holland within the European Union under
agreements providing for purchase of the products from the manufacturers at
scheduled prices. These actions will allow ICO to sell a variety of
petrochemical products in Europe under its own name and under the name of Rotec
and Verplast. ICO has established trading companies (under the name ICO
Polymers) in The Netherlands, the United Kingdom 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 by the creation of a vending relationship with the customer
in addition to existing service relationships. In this activity, the Company
will acquire the petrochemical products for its own account from the
petrochemical producer for resale to third parties, and will expand the portion
of the Company's specialty petrochemical processing business which is performed
through product-based pricing rather than on a tolling basis.
Petrochemical Processing Customers and Pricing. The primary customers of
the Company's petrochemical processing business segment are large producers of
petrochemicals, which include major chemical companies and petrochemical
production affiliates of major oil production companies. In size reduction
services, the number of customers is large and no customer or particular type
of customer is dominant. While the Company has a large number of concentrates
manufacturing customers, sales are focused on a limited number of large
chemical companies and affiliates of oil producers. Worldwide sales of one
petrochemical processing customer accounted for approximately 8% of
consolidated revenues of the Company for the year ended September 30, 1997.
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The Company's size reduction services are generally performed on a tolling
basis, whereby the customer delivers raw materials to the Company, which
processes them for a processing fee and returns the processed materials to the
customer for further processing or sale without the Company having any
ownership interest in the materials. The Company has long term contract
arrangements with several customers whereby it has agreed to process
petrochemical products for a multi- year term for an agreed fee structure.
While the Company emphasizes value-added services to customers in both its
size reduction services and its concentrates manufacturing, the Company
generally purchases and takes into inventory the raw materials necessary to
manufacture the concentrates and sells the resulting manufactured products at a
product price, which contrasts with its pricing in its size reduction services
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 recent expansion into the micropowders distribution
business in Europe also will require the Company to purchase and take raw
materials into inventory, exposing the Company to increased risk of price
fluctuations (see "Raw Materials and Backlog").
Petrochemical Processing Sales and Marketing. Prior to its acquisition by
the Company in April 1996, Wedco operated in the United States without a formal
sales and marketing group. As part of its integration of Wedco, the Company has
established a sales force of four full-time individuals 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 twelve full-time individuals located in The Netherlands,
the United Kingdom, Italy, France and Scandinavia. Bayshore's concentrate sales
force consists of two 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 and customer service and
support. The Company's competitors in providing size reduction services are
generally smaller and mid-sized companies providing ambient grinding services
from regional locations, as well as larger providers of 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 in the U.S. and Europe, its technical expertise and equipment
manufacturing capabilities and its range of services, such as flexible storage
and packaging facilities. 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 size reduction business lacks substantial barriers to entry. However,
the compounding business, including the concentrates manufacturing, requires
substantial investment in equipment, as well as technical expertise. In
general, many of the Company's customers could perform the special
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petrochemical processing services provided by the Company for themselves if
they chose to do so, and new competitors may enter the market from time to
time. A number of the Company's competitors and potential competitors in this
segment have substantially greater financial and other resources than the
Company. While there can be no assurance, the Company believes that it will be
able to continue to compete effectively in the industry, based on the factors
described above.
ACQUISITIONS
From the beginning of fiscal 1994 through the end of fiscal 1997, the
Company completed and integrated nine 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 to take advantage of opportunities in that
market. Since the Wedco acquisition, the Company has completed six additional
acquisitions in the petrochemical processing industry. The Company is actively
seeking strategic acquisitions, although the Company has not entered into any
agreement or arrangement for any such acquisition. For additional information,
see the unaudited pro forma information regarding these acquisitions contained
in Note 2 of the Company's Consolidated Financial Statements.
During September 1997, the Company acquired the operating assets of
Nspection Systems, Inc. for $600,000 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.
In 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 $35.2 million, consisting of approximately $18.8
million in cash and the effective assumption of $16.4 million 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.
In 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 $7.6 million, consisting of approximately $2.6
million in cash and the effective assumption of $5.0 million in total
liabilities Micronyl operates two size reduction facilities in France which
perform services similar to those performed by the Company's other
petrochemical size reduction facilities.
In April 1997, the Company acquired Rotec for a total consideration of
approximately $7.8 million, consisting of approximately $2.5 million in cash,
427,353 shares of Company common stock valued at approximately $2.1 million and
the effective assumption of $3.2 million 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 ($339,000 at September 30, 1997 exchange rates) payable for each of
five years beginning one year after the acquisition date. The Company also
9
<PAGE> 12
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 ("Bayshore")
for a total consideration of approximately $18.5 million, consisting of
approximately $6.9 million in cash, 1,285,012 shares of Company common stock
valued at approximately $5.9 million and the effective assumption of $5.7
million in total liabilities. Bayshore is a provider of concentrates and
compounds to resin producers in the United States.
In 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 $5.8 million, consisting of approximately
$2.0 million in cash, 431,826 shares of Company common stock valued at
approximately $1.7 million and the effective assumption of $2.1 million in
total liabilities. These companies provide size reduction, compounding and
related processing services for the petrochemical industry.
In April 1996, the Company acquired Wedco Technology, Inc. Wedco serves
the petrochemical industry by providing plastics grinding services and related
machinery. The Company paid a total consideration of approximately $84.2
million, consisting of approximately $4.6 million in cash (including
transaction fees and expenses), 10,232,609 shares of Company common stock
valued at approximately $49.7 million and the effective assumption of $29.9
million in total liabilities.
In 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.
In June 1995, the Company purchased all of the outstanding capital stock of
R.J. Dixon, Inc. (DBA "Spinco") for a total consideration of approximately $1.3
million, consisting of approximately $490,000 in cash, 94,884 shares of Company
common stock valued at approximately $510,000 and the effective assumption of
$304,000 in total liabilities. Spinco is a Louisiana corporation that provides
inspection and reclamation services for drill pipe and other oil country
tubular goods in the Gulf Coast area.
In March 1995, the Company acquired substantially all of the operating
assets, excluding real estate, of Kebco Pipe Services, Inc. ("Kebco"), which
provides testing, inspecting and reconditioning services for oil country
tubular goods in the West Texas area. Kebco was acquired for a total
consideration of approximately $671,000, consisting of approximately $629,000
cash and a $42,000 note.
In October 1994, the Company purchased all of the outstanding capital stock
of B&W Equipment Sales and Mfg., Inc. ("B&W") for a total consideration of
approximately $950,000 consisting of approximately $395,000 in cash, 66,666
shares of Company common stock valued at approximately $333,000 and the
effective assumption of $222,000 in total liabilities. B&W is a Texas
corporation that designs and manufactures parts and components for
nondestructive testing and inspection of equipment
10
<PAGE> 13
for use in the tubular market.
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 restricting releases of pollutants and contaminants
into the environment. These laws and regulations may require certain permits
and other authorizations mandating procedures under which the Company shall
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. 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 it is in
substantial compliance with these laws and regulations and continued compliance
with existing laws and regulations will not have a material adverse effect on
the Company. The Company further believes that estimated 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.
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. ICO believes the 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
11
<PAGE> 14
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. ICO 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's specialty petrochemical business uses resins which are
generally supplied to it and owned by its customers in size reduction
operations. The Company purchases and takes into inventory the resins,
additives and other materials used in its concentrates manufacturing and
distribution business, which 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 and has seven 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'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 or, because patent applications are confidential,
that competitors may not have previously filed patent application for the same
inventions covered by the Company's pending applications. 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 BHTS, the Company acquired
royalty-free exclusive licenses to use Wellhead Scanalog, PipeImage(TM) and
other proprietary technology in the United States. Pursuant to the terms of
such licenses, the Company generally is prohibited from using such proprietary
technology in foreign markets.
EMPLOYEES
As of December 15, 1997, the Company had approximately 1,555 full-time
employees, and approximately 315 full-time contract employees. The Company's
employees working at the facilities located in Gravendeel and Verplast 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 and considers its relations with its employees to be satisfactory,
and provides many of its employees with stock options and year-end bonuses.
12
<PAGE> 15
YEAR 2000 ISSUE
The Company anticipates that costs to enable its computer systems to
function properly in the year 2000 will not have a material adverse effect on
the Company's financial condition, results of operations or net cash flows.
ITEM 2. PROPERTIES
The location and approximate acreage of the Company's operating facilities
at December 15, 1997, together with an indication of the services performed at
such facilities are set forth below.
<TABLE>
<CAPTION>
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
<S> <C> <C> <C>
OILFIELD SERVICES
Bakersfield, California . . . . . . Sucker rod reconditioning and inspecting 30 Owned
Amelia, Louisiana . . . . . . . . . Internal coating and inspection of new and
used tubular goods 73 1998
Broussard, Louisiana . . . . . . . Drill pipe inspection 22 Owned
Brookhaven, Mississippi . . . . . . Inspection of tubular goods 12 2001
Farmington, New Mexico . . . . . . Inspection of new and used tubular goods 14 1997
Williston, North Dakota . . . . . . Used tubular goods services 2 1997
Oklahoma City, Oklahoma . . . . . . Sucker rod reconditioning and inspecting 8 Owned
Oklahoma City, Oklahoma . . . . . . Inspection of new and used tubular goods 22 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 199 Owned
Houston, Texas . . . . . . . . . . Internal coating of tubular goods 49 Owned
Houston, Texas . . . . . . . . . . Internal research and development N/A 2003
Lone Star, Texas . . . . . . . . . Inspection of new tubular goods 80 Owned
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 10 2005
engines
PETROCHEMICAL PROCESSING SERVICES
Fontana, California . . . . . . . . Size reduction 7 Owned
Maywood, Illinois . . . . . . . . . Idle facility 3 Owned
East Chicago, Indiana . . . . . . . Size reduction 4 1999
Bloomsbury, New Jersey . . . . . . Size reduction 15 Owned
Grand Junction, Tennessee . . . . . Size reduction 5 Owned
China, Texas . . . . . . . . . . . Size reduction 12 Owned
Houston, Texas . . . . . . . . . . Idle facility 22 Owned
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
<S> <C> <C> <C>
LaPorte, Texas . . . . . . . . . . Concentrate manufacturing and compounding
facility 37 Owned
Lovelady, Texas . . . . . . . . . . Size reduction 12 Owned
Gainsborough, England . . . . . . . Size reduction 5 Owned
Rotterdam, The Netherlands . . . . European headquarters N/A 2001
's-Gravendeel, The Netherlands . . Size reduction 5 Owned
Stenungsund, Sweden . . . . . . . . Size reduction N/A 2000
Verolanuova, Italy . . . . . . . . Size reduction, compounding and distributing 2 (4)
Verdellino, Italy . . . . . . . . . Size reduction, compounding and distributing 1 2001
Rushden, England . . . . . . . . . Concentrate and compounding facility 1 2008
Beaucaire, France . . . . . . . . . Size reduction 1 Owned
Montereau, France . . . . . . . . . Size reduction 1 Owned
</TABLE>
(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 1997;
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. The Company does not presently intend to close any of its
significant operating facilities and considers its properties to be suitable
for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in 14 cases involving 14 plaintiffs,
for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. 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. 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 of 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, 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
14
<PAGE> 17
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 $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 as set forth in the
federal Record of Decision, for cleanup of the site 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, 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 has yet to enter a
judgment. 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 by Wedco against Polyvector
Corporation ("Polyvector") and John Lefas ("Lefas"), the current president of
WedTech, Inc. and principal shareholder of Polyvector, which is pending in the
15
<PAGE> 18
federal district court for the District of New Jersey. An action regarding the
same facts and circumstances is pending in the Ontario Court, General Division.
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 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. On December 15, 1997, Wedco received a check from
Polyvector in the amount of CDN $5.8 million (USD $4.4 million at current
exchange rates) in connection with Polyvector's exercise of its option to
purchase Wedco's 50% ownership interest in WedTech for CDN $20.8 million (USD
$14.6 million at current exchange rates). Wedco expects to receive the balance
of the purchase price upon consummation of the sale in January 1998. Both the
New Jersey and Canadian actions are stayed pending the sale. Thereafter, the
Company expects litigation between the parties to continue. 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. ("Permian") a wholly-owned subsidiary of the
Company, 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, plus interest, 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, cash flows or results of
operations.
16
<PAGE> 19
P A R T I I
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 943 shareholders of record of the
Company's common stock at December 15, 1997.
During fiscal year 1996, the Company declared quarterly dividends of $.05
per common share for a total of $.20 per share. During fiscal year 1997, the
Company declared 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 the first quarter of fiscal year 1998, 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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
1996 First Quarter 5 3/4 4 1/2
Second Quarter 5 7/8 4 7/8
Third Quarter 7 5/8 5 1/8
Fourth Quarter 6 1/4 4 7/8
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 (1) 8 3/16 5 15/16
</TABLE>
__________________________________
(1) Reflects trading activity through December 15, 1997.
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . $197,846 $108,663 $87,883 $75,970 $60,217
Cost of sales and services . . . . . . . . 141,302 74,704 59,885 54,191 42,862
---------- ---------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . 56,544 33,959 27,998 21,779 17,355
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . 31,981 19,996 17,736 15,202 12,730
Depreciation and amortization . . . . . . 11,349 7,230 5,112 4,357 3,669
(Gain) loss on sale of fixed assets . . . (196) 313 (4) -- --
Impairment of long-term assets . . . . . . -- 5,025 -- -- --
Non-recurring compensation arrangements . -- 1,812 -- -- --
Non-recurring litigation charges . . . . . -- 1,112 -- -- 605
Writedown of inventories . . . . . . . . . -- 868 104 -- --
---------- ---------- --------- --------- ---------
Operating income (loss) . . . . . . . . . 13,410 (2,397) 5,050 2,220 351
Interest (income) expense, net . . . . . . 3,764 (608) (1,307) (431) 2,352
Other (income) expense . . . . . . . . . . (602) (97) -- -- --
---------- ---------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item . . . . . . . . . . . . 10,248 (1,692) 6,357 2,651 (2,001)
Income taxes (benefit) . . . . . . . . . . 4,150 (632) 567 55 --
Extraordinary item -- loss on repayment of
debt . . . . . . . . . . . . . . . . . . . -- -- -- (1,371) --
---------- ---------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . . 6,098 (1,060) 5,790 1,225 (2,001)
---------- ---------- --------- --------- ---------
Preferred dividends . . . . . . . . . . . 2,176 2,178 2,176 1,826 --
---------- ---------- --------- --------- ---------
Net income (loss) available for Common
shareholders . . . . . . . . . . . . . . . $3,922 $(3,238) $3,614 $(601) $(2,001)
========== ========== ========= ========= =========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARES:
Income (loss) before extraordinary items . $.19 $(.24) $.41 $.09 $(.49)
Net income (loss) . . . . . . . . . . . . $.19 $(.24) $.41 $(.07) $(.49)
========== ========== ========= ========= =========
Cash dividends declared on Common Stock . $.22 $.20 -- -- --
Weighted average shares outstanding . . . 20,918,000 13,328,000 8,709,000 8,300,000 4,052,000
OTHER FINANCIAL DATA:
Capital expenditures (2) . . . . . . . . . $15,747 $8,712 $5,838 $4,782 $2,252
Common stock dividends . . . . . . . . . . 4,559 2,830 -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents . . . . . . . . . . . $83,892 $13,414 $24,991 $24,763 $9,450
Working capital . . . . . . . . . . . . . 110,289 29,882 37,284 37,656 17,787
Property, plant & equipment, net . . . . . 97,779 72,585 29,824 27,513 24,431
Total assets . . . . . . . . . . . . . . . 321,753 162,172 88,183 78,969 51,353
Long-term debt, net of current portion . . 133,034 15,422 1,047 456 10,676
Stockholders' equity . . . . . . . . . . . 127,138 120,594 74,471 69,204 32,293
</TABLE>
_________________________________________
(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) Consists of cash used for capital expenditures, excluding property,
plant and equipment obtained in acquisitions.
18
<PAGE> 21
ITEM 7. 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.
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 in 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 also implemented a plan of consolidation
involving the closure of three domestic petrochemical processing plants. The
Houston, Texas and Long Beach, California plants were closed during the second
quarter of fiscal 1997 and the Maywood, Illinois plant was closed during the
first quarter of fiscal 1998. 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 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 (i) grinding petrochemicals
into powders (size reduction), including other ancillary services and grinding
equipment manufacturing, (ii) compounding sales and services, which includes
the manufacture and sale of concentrates, and (iii) distributing plastic
powders. Distribution revenues primarily 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. These operations utilize the Company's size reduction and compounding
facilities to process petrochemical products prior to sale. Revenues are
recorded as the services are performed or, in the case of product sales, upon
shipment 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, equipment costs, supplies and purchased raw materials. Selling,
general and administrative expenses consist primarily of compensation and
related benefits to the sales
19
<PAGE> 22
and marketing, executive management, accounting, management information
systems, 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.
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company as of September 30:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 83,892,000 $13,414,000
Working capital 110,289,000 29,882,000
Current Ratio 3.1 2.3
Debt-to-capitalization .53 to 1 .14 to 1
</TABLE>
Cash and cash equivalents increased $70,478,000 during fiscal year 1997,
primarily the result of the June 1997 issuance of the $120,000,000 10 3/8%
Senior Notes, due 2007 ("Senior Notes") and cash generated by operating
activities. These cash inflows were partially offset by cash used for
investing activities, including acquisitions made during the year, and
dividends on the Company's common and preferred stock.
The Company's working capital and current ratio has increased from
$29,882,000 and 2.3, respectively, at September 30, 1996 to $110,289,000 and
3.1, respectively, at September 30, 1997. These improvements are primarily due
to the issuance of the Senior Notes which also resulted in an increase of the
Company's debt-to-capitalization ratio from .14 to 1 to .53 to 1.
The Company issued the Senior Notes on June 9, 1997 and received proceeds,
net of offering costs, of approximately $114,942,000. The debt matures June 1,
2007 and interest is payable on June 1 and December 1 of each year commencing
December 1, 1997. During fiscal 1997, the Company used a portion of the
proceeds to retire approximately $16,700,000 of existing indebtedness and used
$18,729,000 in connection with the Verplast acquisition.
Capital expenditures totaled $15,747,000 during fiscal 1997. Of these
capital expenditures, $4,548,000 related to the oilfield services business
segment and $10,954,000 related to the petrochemical processing segment. The
remaining $245,000 were general corporate expenditures. Petrochemical
processing expenditures totaling $2,870,000 related to the capacity expansion
of the Company's LaPorte, Texas compounding facility (See Item 1 -- "Business
- -- Petrochemical Processing"). The Company believes that the remaining
proceeds of the Senior Notes offering, cash flow from operations, and borrowing
under the Company's credit facility will be sufficient to fund its anticipated
capital expenditure requirements.
Cash flows from financing activities increased to sources of $100,909,000
during fiscal 1997 from uses of $8,221,000 in fiscal 1996. The increase is
primarily due to the issuance of the Senior Notes, offset by an increase in
debt repayments and common stock dividends.
During the three years ended September 30, 1997, the Company acquired
sixteen businesses. 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 September 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.
20
<PAGE> 23
As of November 30, 1997, the Company had approximately $23,741,000 in
additional borrowing capacity available under various credit arrangements. Of
this amount, $15,000,000 is available under the Company's domestic credit
facility and the remainder is available under various foreign facilities.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(in thousands)
% of % of % of
1997 Total 1996 Total 1995 Total
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES (000'S)
Exploration sales and services . . . $37,558 38 $34,545 39 $34,953 40
Production sales and services . . . . 33,097 34 31,087 35 28,745 33
Corrosion control services . . . . . 23,210 24 21,591 24 20,562 23
Other sales and services . . . . . . 4,192 4 2,167 2 3,623 4
-------- --- -------- --- ------- ---
Total oilfield sales and services 98,057 100 89,390 100 87,883 100
-------- -------- -------
revenues . . . . . . . . . . . . . .
Size reduction services and other sales 45,782 46 17,567 91 -- --
and services 36,566 37 1,706 9 -- --
Compounding sales and services . . . 17,441 17 -- -- -- --
-------- --- -------- --- ------- ---
Distribution of material . . . . . .
Total petrochemical processing . . . 99,789 100 19,273 100 -- --
-------- -------- -------
Total . . . . . . . . . . . . . . . . $197,846 $108,663 $87,883
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
% of % of % of
1997 Total 1996 Total 1995 Total
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME (LOSS) (000'S)
Oilfield sales and services . . . . . 14,447 64 $11,562 154 $12,085 100
Petrochemical processing sales and 8,180 36 (4,068) (54) -- --
------- --- ------- --- ------- ---
services . . . . . . . . . . . . . .
Total operations . . . . . . . . . . 22,627 100 7,494 100 12,085 100
General corporate expenses . . . . . (9.217) (9,891) (7,035)
------- -------- -------
Total . . . . . . . . . . . . . . . . $13,410 $(2,397) $ 5,050
======= ======= =======
</TABLE>
- ---------------------------
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. Consolidated revenues increased $89,183,000 or 82% 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 $8,667,000 or 9.7% 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 $3,013,000 or 8.7% 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 $2,010,000 or 6.5%
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 $1,619,000 or 7.5% in fiscal 1997
compared to 1996. This improvement resulted from increased drilling activity,
the
21
<PAGE> 24
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, Shearer, relating to the reconditioning
and selling of engines used in connection with oil well pumping equipment.
Petrochemical processing sales and services revenues increased
$80,516,000 or 418% in fiscal 1997 compared to 1996. This increase is 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 the consolidated
statement of operations, the acquired companies' results of operations only
from the date of acquisition. See Note 2 to the Company's Consolidated
Financial Statements which includes unaudited pro forma financial information.
During the year ended September 30, 1997, 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 28.6% from 31.3% in 1996. Within the oilfield service business,
gross profits as a percentage of revenues improved 1.3% due to increased sales
volumes (which resulted from 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 is 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 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 $11,985,000, from
$19,996,000 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. 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 16.2% in fiscal 1997 compared to 18.4% 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
22
<PAGE> 25
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 is due to the issuance of the $120,000,000 Senior Notes, the utilization
of cash balances and the assumption of debt in connection with the fiscal 1996
and 1997 acquisitions. The Company's interest expense in fiscal 1998 and
future years will be significantly higher than in fiscal 1997, due to the June
1997 issuance of Senior Notes.
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. As non-deductible goodwill amortization continues to
increase, resulting from future acquisitions, the Company would anticipate that
future effective tax rates, likewise, would increase. 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 average effective tax rate of foreign operations. See Note 17 -
"Segment and Foreign Operations Information" to the Company's Consolidated
Financial Statements.
The Company has for tax return purposes $5,696,000 and $1,078,000 in
net operating and capital loss carryforwards, respectively, which expire
between 2000 and 2008, and $1,023,000 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.
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 over the
past two years. The table below summarizes the impact of guilder, pound and
krona currency fluctuations (i.e. material fiscal 1996 currency exposures)
during the twelve months ended September 30, 1997 compared to the exchange
rates used to translate the five months ended September 30, 1996.
<TABLE>
<S> <C>
Net revenues (1,113,000)
Operating income (141,000)
Pre-tax income (128,000)
Net income (88,000)
</TABLE>
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. As a result of the dollar's
fluctuation against applicable foreign currencies, stockholders' equity
decreased by $1,985,000 in fiscal 1997.
23
<PAGE> 26
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues. Revenues increased $20,780,000, or 23.6%, in the fiscal year
ended September 30, 1996 from the same period in fiscal 1995. The increase was
primarily the result of the Company's entry into the specialty petrochemical
processing business via the acquisitions of Wedco (April 1996) and PSI (July
1996).
Exploration revenues decreased $408,000, or 1.2%, in fiscal 1996
compared to fiscal 1995. The decrease was primarily due to a shift in the
classification of the services provided to customers within the Company's Lone
Star, Texas facility. Historically, the Lone Star facility provided mostly new
pipe inspection. During late fiscal 1995, the Company began providing mostly
used tubular goods inspection at this facility. Accordingly, in fiscal 1996,
Lone Star revenues were classified as production services revenues versus
fiscal 1995, when these revenues were included in exploration services
revenues. After eliminating the effect of this reclassification, fiscal 1996
revenues increased $1,280,000 or 3.7% as compared to fiscal 1995. Demand for
exploration services is affected by domestic drilling activity. The domestic
rig count averaged 762 for the fiscal year ended September 30, 1996 as compared
to 738 during fiscal 1995, an increase of 3.3%. In addition, the Company's
exploration revenues increase in fiscal 1996 was due in part to the full-year
effect of the acquisition of Spinco in June 1995.
Production revenues increased $2,342,000, or 8.1%, in fiscal 1996 from
fiscal 1995, primarily due to the reclassification of Lone Star, Texas revenues
discussed above. After eliminating the effect of the reclassification of Lone
Star revenues, production services revenues increased $654,000 or 2.3%. The
increase resulted from generally high oil prices in fiscal 1996 which increased
the demand for production services. Oil prices ranged from a high of $25 per
barrel to a low of $17 per barrel during fiscal 1996 compared to a high of $21
per barrel and a low of $17 per barrel during fiscal 1995.
Revenues from corrosion control services increased $1,029,000, or
5.0%, in fiscal 1996 as compared to fiscal 1995. The increase resulted
primarily from greater demand for the Company's services in the Louisiana and
West Texas corrosion control markets.
Revenues from other services decreased $1,456,000, or 40.2%, from
fiscal 1995 as compared to fiscal 1996 as a result of a decline in oilfield
engine sales and reconditioning revenues in Canada, due to a slowdown in
oilfield activity in Western Canada. The remaining decrease was the result of
an equipment sale recognized in fiscal 1995, with no comparable sale in fiscal
1996.
Costs and Expenses. Cost of sales and services as a percentage of net
revenues increased to 68.7% during fiscal 1996 versus 68.1% for the same period
in fiscal 1995. Such costs exclude sales, general and administrative expenses,
depreciation and amortization, interest costs and expenses, other income and
expense and the following fiscal 1996 operating expenses: non-recurring
compensation arrangements, non-recurring litigation and writedown of
inventories. Within the oilfield service business, costs of sales and services
increased to 70.3% (calculated as costs of sales and services divided by
revenues) in fiscal 1996 as compared to 68.1% in fiscal 1995. The gross margin
decline within the oilfield services segment was due to (in order of
magnitude): a softening of prices in the Houston inspection and West Texas
coating markets, the recognition of $2.1 million in product sales during fiscal
1995 which carried gross margins greater than the Company's traditional
oilfield sales and services, and the reclassification of certain employee
expenses to cost of sales during fiscal 1996 which had been recognized as
selling, general and administrative expenses during fiscal 1995. The
reclassification of the employee expenses was based upon the applicable
employees' job functions. The effects of lower margins in the Company's
oilfield service business were partially offset by the higher margins generated
by the specialty
24
<PAGE> 27
petrochemical processing business. This business which, in fiscal 1996,
primarily provided size reduction and compounding services on a toll basis,
generally generates higher gross margins as a percentage of net revenues than
the Company's oilfield services business.
Selling, general and administrative (SG&A) expenses increased from
$17,736,000 during fiscal 1995 to $19,996,000 during fiscal 1996. Selling,
general and administrative expenses as a percentage of revenues decreased to
18.4% in fiscal 1996 as compared to 20.2% in fiscal 1995. These changes are
primarily due to the Wedco and PSI acquisitions which increased both revenues
and selling, general and administrative expenses, but had the effect of
lowering these costs as a percentage of revenues. The Company also experienced
decreases in the following SG&A categories for fiscal 1996 versus fiscal 1995
(in order of magnitude): insurance costs, moving expenses (primarily related to
several employee relocations in 1995) and payroll costs due to the
reclassification of certain employee costs explained above. These lower costs
were offset by $490,000 in expenses relating to litigation costs incurred in
the fourth quarter of fiscal 1996 in relation to certain Baker Hughes
litigation (see Item 3 - "Legal Proceedings").
Depreciation and amortization increased from $5,112,000 for the year
ended September 30, 1995 to $7,230,000 for the year ended September 30, 1996.
The increase was primarily due to increases in property, plant and equipment
and goodwill due to the Wedco acquisition as well as capital expenditures made
during the year.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of), which the Company adopted
in the first quarter of fiscal 1996. SFAS No. 121 established "accounting
standards for the impairment of 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
new 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
performed using the expected future undiscounted cash flows of assets, grouped
at the lowest level for which there are identifiable cash flows, compared to
the carrying value of those assets. If the undiscounted cash flow value is less
than the net carrying value, the amount of impairment is then measured by
comparing the discounted cash flows 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 Company accumulated cash flow information at the lowest asset
grouping levels for which there were identifiable cash flows. These levels were
represented by separate operating locations. In the fourth quarter of fiscal
1996, based on the consolidation plans, the Company was required to consider
impairment which resulted in a write-down of long-lived assets of $5,025,000.
The SFAS No. 121 write-down related entirely to the Wedco facilities which,
during the fourth quarter of fiscal 1996, the Company decided to close in
fiscal 1997. More than two-thirds of the write-down reduced the carrying value
of goodwill created by the April 1996 acquisition of Wedco. The remaining
charge related to machinery and equipment within the facilities to be closed.
See "Business -- Petrochemical Processing -- Size Reduction Services" and Note
4 to the Consolidated Financial Statements of the Company.
Non-recurring compensation charges of $1,812,000 in fiscal 1996
related to previous acquisitions made by the Company. Most of the expense
consists of severance and consulting fee obligations resulting from the Wedco
acquisition. During the fourth quarter of fiscal 1996, the Company determined
these expenses would
25
<PAGE> 28
not benefit the Company in the future. Inventory writedowns of $868,000 in
fiscal 1996 consisted of a reduction in the carrying value of inventory, within
the oilfield service operations, which partially related to the acquisition of
Baker Hughes Tubular Services, Inc. ("BHTS") in September 1992.
In fiscal 1996, the Company incurred $1,112,000 in non-recurring
litigation charges. During the fourth quarter and subsequent to year-end, the
Company 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. Eight-five percent (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 BHTS in September 1992. Of
the remaining charges, $150,000 related to a personal injury claim made against
the Company. See "Business -- Legal Proceedings."
Operating Income. Operating Income decreased from operating income of
$5,050,000 for the year ended September 30, 1995 to an operating loss of
$2,397,000 for the year ended September 30, 1996. The decrease is due to the
changes in revenues, selling, general and administrative, depreciation and
amortization and unusual items during fiscal 1996 versus fiscal 1995 as
explained above.
Net interest income decreased from $1,307,000 in fiscal 1995 to $608
during fiscal 1996. This change resulted from the debt assumed in connection
with the Wedco acquisition, a lower average cash balance and lower yields on
the Company's high-quality commercial paper portfolio.
Provision (Benefit) for Income Taxes. The Company decreased its
valuation allowance through the fiscal 1996 provision to reflect its ability to
benefit from temporary differences. In connection with the purchase price
accounting for the Wedco acquisition, the Company reversed the remaining
valuation allowance against net tax assets expected to be realized, resulting
in a decrease in acquired goodwill.
Net Income. For the year ended September 30, 1996, the Company had a
net loss of $1,060,000 as compared to net income of $5,790,000 for the year
ended September 30, 1995 due to the factors described above.
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.
26
<PAGE> 29
P A R T I I I
Items 10, 11, 12 and 13 of Part III are incorporated by reference into the
Registrant's Proxy Statement for its 1998 Annual Shareholders' Meeting to be
filed with the Commission pursuant to Regulation 14A.
P A R T I V
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) Reports on Form 8-K: On August 5, 1997 the Company filed a Form 8-K Current
Report regarding the acquisition of Verplast SpA. On October 2, 1997 the
Company filed a Form 8-KA relating to the same transaction.
(c) Exhibits Required by Item 601 of S-K:
The following instruments and documents are included as Exhibits to
this Registration Statement. Exhibits incorporated by reference are so
indicated by parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>
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)
3.1 -- Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 4 to Form S-3
dated September 13, 1993)
3.2 -- By-Laws of the Company (filed as Exhibit 3(ii) to Form 10-Q for the quarter ended June 30,
1996)
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 -- Registration Rights Agreement dated June 9, 1997 by and between the Company and Bear, Stearns &
Co., Inc., relating to Senior Notes due 2007 (filed as Exhibit 4.2 to Form S-4 dated June 17,
1997)
4.3 -- Warrant Agreement -- Series A, dated as of September 1, 1992, between the Registration and
Society National Bank (filed as Exhibit 4 of the Registrant's Annual Report on Form 10-K for
1992)
4.4 -- 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)
4.5 -- 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 __,
1997.)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>
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 -- 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)
10.5 -- 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed as Exhibit 99 to the
Registrant's Form S-8 dated September 1,3 1993)
10.6 -- 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)
10.7 -- 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)
10.8 -- 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)
10.9 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to
Form S-4 dated May 15, 1996)
10.10 -- Consulting Agreement -- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15,
1996)
10.11 -- Salary Continuation Agreement -- William E. Willoughby (filed as Exhibit 10.14 to Form S-4
dated May 15, 1996)
10.12 -- Addendum to Salary Continuation Agreement -- William E. Willoughby (filed as Exhibit 10.15 to
form S-4 dated May 15, 1996)
10.13 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May
15, 1996)
10.14 -- 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)
10.15 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders (filed as
Exhibit 10.22 to Form S-4 dated May 15, 1996)
10.16** -- Employment Agreement dated April 1, 1995 by and between the Registrant and Asher O. Pacholder
and amendments thereto.
10.17** -- Employment Agreement dated April 1, 1995 by and between the Registrant and Sylvia A. Pacholder
and amendments thereto.
21** -- Subsidiaries of the Company
23** -- Consent of Price Waterhouse LLP
27** -- Financial Data Schedule
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>
99** -- Safe Harbor Disclosure
- ------------------
</TABLE>
** Filed herewith
(d) The response to this portion of Item 14 is submitted as a separate section
of this report on page F-1.
29
<PAGE> 32
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 24, 1997
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
-------------------- --------------------- --------------------
<S> <C> <C>
/s/ Sylvia A. Pacholder Chief Executive Officer, President, December 24, 1997
- ---------------------------------
Sylvia A. Pacholder Secretary & Director
(Principal Executive Officer)
/s/ Asher O. Pacholder Chairman of the Board, Chief December 24, 1997
- ---------------------------------
Asher O. Pacholder Financial Officer & Director
(Principal Financial Officer)
/s/ Robin E. Pacholder Senior Vice President and General December 24, 1997
- ----------------------------------
Robin E. Pacholder Counsel; Director
/s/ Jon C. Biro Senior Vice President and Treasurer December 24, 1997
- -------------------------------------
Jon C. Biro (Principal Accounting Officer)
/s/ William E. Cornelius Director December 24, 1997
- ----------------------------------
William E. Cornelius
/s/ James E. Gibson Director December 24, 1997
- ------------------------------------
James E. Gibson
/s/ Walter L. Leib Director December 24, 1997
- --------------------------------------
Walter L. Leib
/s/ William J. Morgan Director December 24, 1997
- ------------------------------------
William J. Morgan
/s/ George S. Sirusas Director December 24, 1997
- --------------------------------------
George S. Sirusas
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
NAME TITLE DATE
-------------------- --------------------- --------------------
<S> <C> <C>
/s/ John F. Williamson Director December 24, 1997
- ---------------------------------
John F. Williamson
/s/ William E. Willoughby Director December 24, 1997
- --------------------------------
William E. Willoughby
</TABLE>
31
<PAGE> 34
ICO, INC. AND SUBSIDIARIES
FORM 10-K
INDEX OF FINANCIAL STATEMENTS AND SCHEDULE
The following financial statements of ICO, Inc. and subsidiaries are required
to be included by Item 14(a):
<TABLE>
<CAPTION>
Financial Statements: PAGE
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet at September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations for the three years
ended September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows for the three years
ended September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Stockholders' Equity for the
three years ended September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
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
<PAGE> 35
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, 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.
As discussed in Notes 1 and 4 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Due to a change in circumstances pursuant to this statement, the Company
recognized a charge of $5,025,000 for the year ended September 30, 1996.
PRICE WATERHOUSE LLP
Houston, Texas
December 19, 1997
F-2
<PAGE> 36
ICO, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------
ASSETS 1997 1996
- ------ ---------------- ----------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,892 $ 13,414
Trade receivables (less allowance for doubtful accounts of
$967 and $706, respectively) 49,963 25,279
Inventories 20,709 7,556
Deferred tax asset 3,812 4,052
Prepaid expenses and other 4,382 3,039
--------- ---------
Total current assets 162,758 53,340
Property, plant and equipment, at cost 152,440 126,170
Less - accumulated depreciation and amortization (54,661) (53,585)
--------- ---------
97,779 72,585
Other assets:
Goodwill (less accumulated amortization of
$5,056 and $4,039, respectively) 49,761 29,915
Investment in joint ventures 1,871 3,400
Debt offering costs 4,790 --
Other 4,794 2,932
--------- ---------
$ 321,753 $ 162,172
========= =========
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 $ 10,719 $ 3,880
Accounts payable 21,923 8,538
Accrued interest 4,033 163
Accrued insurance 2,095 1,613
Accrued salaries and wages 2,204 2,001
Accrued litigation costs 1,046 2,071
Income taxes payable 1,092 --
Accrued expenses 9,357 5,192
--------- ---------
Total current liabilities 52,469 23,458
Deferred income taxes 7,463 1,648
Long-term liabilities 1,649 1,050
Long-term debt, net of current portion 133,034 15,422
--------- ---------
Total liabilities 194,615 41,578
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
Common Stock, without par value - 50,000,000 shares authorized;
21,598,658 and 19,682,494 shares issued and outstanding, respectively 36,966 35,822
Additional paid-in capital 109,814 102,429
Cumulative translation adjustment (1,953) 32
Accumulated deficit (17,702) (17,702)
--------- ---------
127,138 120,594
--------- ---------
Commitments and contingencies (see Note 15)
$ 321,753 $ 162,172
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 37
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Revenues:
Services $ 122,333 $ 89,417 $ 69,172
Sales 75,513 19,246 18,711
---------- ---------- ---------
Total revenues 197,846 108,663 87,883
---------- ---------- ---------
Costs and expenses:
Cost of services 76,050 58,643 45,602
Cost of sales 65,252 16,061 14,283
Selling, general and administrative 31,981 19,996 17,736
Depreciation and amortization 10,332 6,774 4,983
Goodwill amortization 1,017 456 129
(Gain) loss on sale of fixed assets (196) 313 (4)
Impairment of long-term assets -- 5,025 --
Non-recurring compensation arrangements -- 1,812 --
Non-recurring litigation charges -- 1,112 --
Writedown of inventories -- 868 104
---------- ---------- ---------
Total Costs and Expenses 184,436 111,060 82,833
---------- ---------- ---------
Operating income (loss) 13,410 (2,397) 5,050
---------- ---------- ---------
Other income and (expense):
Interest income 2,001 1,277 1,424
Interest expense (5,765) (669) (117)
Equity in income of joint ventures 385 80 --
Other 217 17 --
---------- ---------- ---------
Income (loss) before taxes 10,248 (1,692) 6,357
Provision (benefit) for income taxes 4,150 (632) 567
---------- ---------- ---------
Net income (loss) 6,098 (1,060) 5,790
Preferred Dividends 2,176 2,178 2,176
---------- ---------- ---------
Net income (loss) applicable to common stock $ 3,922 $ (3,238) $ 3,614
========== ========== =========
Earnings (loss) per share $ .19 $ (.24) $ .41
========== ========== =========
Weighted average common and common
equivalent shares outstanding 20,918,000 13,328,000 8,709,000
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Cash flows from operating activities: (In thousands)
<S> <C> <C> <C>
Net income (loss) $ 6,098 $ (1,060) $ 5,790
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,349 7,230 5,112
(Gain) loss on disposition of property, plant,
and equipment (196) 313 (4)
Writedown for impairment of long-term assets -- 5,025 --
Writedown of inventories -- 868 104
Equity in income of joint ventures (385) (80) --
Changes in assets and liabilities, net of the effects
of business acquisitions:
Receivables (3,586) (179) (3,279)
Inventories (7,312) (2,062) 193
Prepaid expenses and other assets 243 1,604 (340)
Deferred taxes 3,243 (1,661) (1,634)
Accounts payable 3,839 953 400
Accrued interest 3,870 161 --
Accrued expenses (3,358) (2) 2,687
--------- -------- ---------
Total adjustments 7,707 12,170 3,239
--------- -------- ---------
Net cash provided by operating activities 13,805 11,110 9,029
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures (15,747) (8,712) (5,838)
Acquisitions, net of cash acquired (29,396) (5,953) (939)
Dispositions of property, plant and equipment 907 199 137
--------- -------- ---------
Net cash used for investing activities (44,236) (14,466) (6,640)
--------- -------- ---------
Cash flows from financing activities:
Net proceeds from sale of stock 794 474 622
Payment of dividend on preferred stock (2,176) (2,178) (2,176)
Payment of dividend on common stock (4,559) (2,830) --
Proceeds from issuance of debt 124,928 491 142
Payment of debt offering costs (5,058) -- --
Debt repayments (13,020) (4,178) (749)
--------- -------- ---------
Net cash provided by (used for) financing activities 100,909 (8,221) (2,161)
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents 70,478 (11,577) 228
Cash and cash equivalents at beginning of year 13,414 24,991 24,763
--------- -------- ---------
Cash and cash equivalents at end of year $ 83,892 $ 13,414 $ 24,991
========= ======== =========
Supplemental Disclosures of Cash Flow Information:
Cash received (paid) during the period for:
Interest received $ 1,981 $ 1,278 $ 1,430
Interest paid (1,857) (688) (127)
Income taxes paid (1,269) (2,709) (992)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
ICO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
PREFERRED --------------------- PAID-IN TRANSLATION ACCUMULATED
STOCK SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT
-------- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $ 13 8,551,574 $ 33,394 $ 56,106 $ (53) $(20,256)
Issuance of shares in connection with:
Acquisitions -- 161,550 843 -- -- --
Exercise of employee stock options -- 133,330 622 -- -- --
ICO Employee Stock Ownership Plan -- 37,457 183 -- -- --
Convertible Exchangeable
Preferred Stock Dividend -- -- -- -- -- (2,176)
Translation adjustment -- -- -- -- 5 --
Net income -- -- -- -- -- 5,790
------- ---------- ------- -------- ------- --------
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 -- -- --
ICO Employee Stock Ownership Plan -- 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 -- -- --
ICO Employee Stock Ownership Plan -- 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)
======= ========== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
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 the estimates are reasonable.
JOINT VENTURES - Joint ventures included in the Company's financial
results for the years ended September 30, 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; and WedTech, Inc., a
size-reduction and custom compounding company which is 50% owned by the Company
and has production facilities in Brantford, Ontario, and Calgary, Alberta,
Canada, as well as a research and development facility in Dewey, Oklahoma. 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, the
Company has 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. 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 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. The Company also serves the
petrochemical industry by providing customers with size-reduction and other
related services for heat sensitive thermo-plastic materials and manufactures
certain machinery used for those services. The Company operates in the
petrochemical industry in the United States, Europe and Canada. European
operations are conducted through ICO Europe B.V., the holding company for the
foreign petrochemical processing operations. See Note 17 - "Segment and
Foreign Operations Information".
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
F-7
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except share data)
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.
REVENUE AND RELATED COST RECOGNITION - The Company generally
recognizes revenue upon completion of its 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.
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.
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:
<TABLE>
<CAPTION>
CLASSIFICATION YEARS
- -------------- -----
<S> <C>
Site improvements . . . . . . . . . . . . . . . . . . . . . 2-25
Buildings . . . . . . . . . . . . . . . . . . . . . . . . 15-25
Machinery and equipment . . . . . . . . . . . . . . . . . . 1-15
Transportation equipment . . . . . . . . . . . . . . . . . 3-10
</TABLE>
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.
F-8
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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 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. 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.
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.
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 SHARE - Earnings (loss) per share is based on net
income (loss) applicable to common stock and is computed using the weighted
average number of common and common equivalent shares outstanding during the
year including stock options and warrants which may have a dilutive effect.
Outstanding options, warrants and Exchangeable Preferred Stock did not have a
materially dilutive effect for the three years ended September 30, 1997.
F-9
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
SFAS No. 128, "Earnings Per Share" is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
The Company intends to adopt the requirements of this pronouncement in its
financial statements in the first quarter of fiscal 1998. SFAS No. 128
specifies the computation, presentation and disclosure requirements for net
income per share. SFAS No. 128 also requires the presentation of diluted net
income per share which the company has not been previously required to present
under generally accepted accounting principles. The Company does not believe
that the implementation of SFAS No. 128 will have a material impact on its
financial statements.
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. 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, 1997.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts in order to conform to the current year classifications.
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.
NOTE 2 - ACQUISITIONS
The Company entered into the following business combinations during fiscal
years 1997, 1996 and 1995. 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.
1997 ACQUISITIONS
On September 19, 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.
On July 21, 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
F-10
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
$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.
On May 5, 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, consisting of approximately $2,600 in
cash and the effective assumption of $5,000 in total liabilities Micronyl
operates two size reduction facilities in France which perform services similar
to those performed by the Company's other petrochemical size reduction
facilities.
On April 30, 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 Dutch Guilders
("Dfl") 674 ($339 at September 30, 1997 exchange rates) payable for each of
five years beginning one year after the acquisition date. 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 ("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
In 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.
In 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
F-11
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
deferred tax assets (See Note 12 - Income Taxes).
In 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.
1995 ACQUISITIONS
In June 1995, the Company purchased all of the outstanding capital stock of
R.J. Dixon, Inc. (DBA "Spinco") for a total consideration of approximately
$1,300, consisting of approximately $490 in cash, 94,884 shares of Company
common stock valued at approximately $510 and the effective assumption of $304
in total liabilities. Spinco is a Louisiana corporation that provides
inspection and reclamation services for drill pipe and other oil country
tubular goods in the Gulf Coast area.
In March 1995, the Company acquired substantially all of the operating
assets, excluding real estate, of Kebco Pipe Services, Inc. ("Kebco"), which
provides testing, inspecting and reconditioning services for oil country
tubular goods in the West Texas area. Kebco was acquired for a total
consideration of approximately $671, consisting of approximately $629 cash and
a $42 note.
In October 1994, the Company purchased all of the outstanding capital stock
of B&W Equipment Sales and Mfg., Inc. ("B&W") for a total consideration of
approximately $950 consisting of approximately $395 in cash, 66,666 shares of
Company common stock valued at approximately $333 and the effective assumption
of $222 in total liabilities. B&W is a Texas corporation that designs and
manufactures parts and components for nondestructive testing and inspection of
equipment for use in the tubular market.
The following unaudited pro forma information includes each acquisition for
the period in which the transaction occurred and the immediately preceding
period. All material acquisitions made during the three years ended September
30, 1997 are included.
<TABLE>
<CAPTION>
(unaudited)
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
---------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues $246,183 $216,907 $208,704
Net income (loss) 7,603 (1,231) 7,370
Net income (loss) applicable to
common and common equivalent shares $ .25 $(.16) $ .25
</TABLE>
NOTE 3 - UNUSUAL ITEMS
In 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, management determined would not benefit the Company in the
future.
F-12
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
During 1996, the Company recognized unusual charges of $868 due to
obsolescence of inventory within the oilfield service operations.
During the fourth quarter of 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 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 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 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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finished goods $ 7,958 $ 3,633
Raw materials 9,023 826
Work in progress 835 722
Supplies 2,893 2,375
-------- --------
$ 20,709 $ 7,556
======== ========
</TABLE>
F-13
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
September 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land and site improvements $ 24,655 $ 24,034
Buildings 26,618 22,374
Machinery and equipment 84,890 72,335
Transportation equipment 4,322 2,187
Leasehold improvements 1,530 1,797
Construction in progress 10,425 3,443
-------- --------
152,440 126,170
Accumulated depreciation and amortization (54,661) (53,585)
-------- --------
$ 97,779 $ 72,585
======== ========
</TABLE>
Depreciation expense was $10,050, $6,634, and $4,908 for each of the three
years in the period ended September 30, 1997, respectively.
NOTE 7 - LONG-TERM DEBT
Long-term debt at September 30, 1997 and 1996 consists of the
following. Obligations denominated in a foreign currency have been translated
using September 30, 1997 exchange rates.
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
10 3/8% Series A Senior Notes, interest payable semi-annually,
principal due 2007. $120,000 --
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%. 1,922 $1,592
Demand note incurred with the acquisition of Spinco bearing
interest at 5%. 548 523
Domestic fixed and variable term loans repaid in June 1997. -- 8,364
Mortgage loans effective October 1996, the Company converted the
domestic floating rate mortgage loan, with a balance of $1,411 at
September 30, 1996, into 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 1,328 1,411
net book value of $1,219 at September 30, 1997.
</TABLE>
F-14
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
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 L.8 ($13) and is payable
in monthly installments through June 2006. Interest is payable 1,410 1,527
monthly at a fixed rate of 8.90%.
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 L.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. 1,612 --
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 ($2,010) which have a net book value of
Dfl 6,567 ($3,300), as well as a keepwell letter signed by the
Company. Principal payments on the loan are payable in quarterly
installments of Dfl 101 ($51). Interest is payable in quarterly 1,786 2,313
installments at a fixed rate of 7.20%.
Mortgage loans payable of one of the Company's Dutch subsidiaries,
collateralized by mortgages on certain fixed assets of the
subsidiary up to Dfl 3,000 ($1,507) which have a net book value of
Dfl 1,665 ($837) as well as a keepwell letter duly signed by the
Company. Principal payments on these loans are Dfl 150 ($75) and
are payable in semi-annual and annual installments. Interest is
payable in quarterly installments at a fixed rate of 6.50%. 1,432 1,927
Term loan of one of the Company's British subsidiaries,
collateralized by current assets of the subsidiary up to GBP 750
($1,207) and a L.1,000 guarantee from the Company. Payment will be
due seven years from final drawdown, and interest is payable 484 --
quarterly at 7.95%
Term loan of one of the Company's Dutch subsidiaries,
collateralized by the subsidiary's inventory up to Dfl 850 ($427)
which have a book value of Dfl 4,000 ($2,010), as well as a
guarantee from the Company. Interest is payable quarterly at
6.85%, and principal is payable in one payment due April 2004. 427 --
Interest-free term loan of one of the Company's Dutch subsidiaries.
Principal payable annually, in equal installments, over 4 years. 1,695 --
Various secured loan agreements of the Company's French subsidiary
collateralized by certain assets of the subsidiary. The loan
agreements carry various maturities and interest rates ranging from 785 --
5.8% to 9.45%.
Various secured loan agreements of one of the Company's British
subsidiaries collateralized by certain assets with a book value of
L.381 ($615). The loan agreements carry various maturities and
interest rates ranging from 3.56% to 5.85%. 377 --
Term loan of the Company's Italian subsidiary. Balloon principal
payment is due on June 30, 2000. Interest paid annually at a
floating rate according to the Bank of Italy's official discount 1,738 --
rate.
</TABLE>
F-15
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
Term loan of Italian subsidiary with quarterly payments of
principal of L17,748 ($10). 8.5% interest is payable quarterly. 43 --
-------- -------
Total 135,587 17,657
Less current maturities 2,553 2,235
-------- -------
Long-term debt less current maturities $133,034 $15,422
</TABLE>
In June of 1997, the Company issued the Series A Senior Notes and received
proceeds of $114,942 net of offering costs of $5,058. As of September 30,
1997, accumulated amortization of debt offering costs totaled $268. Pursuant
to the loan 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:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30, AMOUNTS
- -------------- -------
<S> <C>
1998 $ 2,553
1999 1,411
2000 3,073
2001 1,336
2002 1,570
Thereafter 125,644
</TABLE>
NOTE 8 - CREDIT ARRANGEMENTS
As of September 30, 1997, the Company maintains the following credit
arrangements with several lending institutions:
In April 1996, the Company established a $15 million revolving line of
credit to be repaid on or before the facility's expiration date of April 17,
1999. The credit facility is secured by certain domestic accounts receivable
and inventory. As of September 30, 1997 and 1996, there were no borrowings
under this agreement.
The Company maintains several foreign lines of credit through its
wholly-owned subsidiaries. These
F-16
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
facilities totaled $17,245 at September 30, 1997. 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 $8,166 at September 30, 1997.
The weighted average interest rates charged on short-term borrowings under
the Company's various credit facilities at September 30, 1997 and 1996 were
6.43% and 6.61%, respectively.
NOTE 9 - INVESTMENT IN JOINT VENTURES
On February 16, 1996, Wedco commenced legal action against WedTech, Inc., a
Canadian corporation ("WedTech"), which is 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
alleges, among other things, that the various defendants have breached the
terms of the shareholders' agreement among Wedco and the defendants. The
defendants have also filed counterclaims in the action alleging that ICO and
Wedco have breached the shareholders' agreement. Due to these circumstances,
including the then-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 this
changed circumstance, 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. Also, see Note 19 - "Subsequent Events".
NOTE 10 - STOCKHOLDERS' EQUITY
In 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 $1.68 per depositary share are paid annually.
Cash dividends paid during the fiscal years ended September 30, 1997 and
1996 equaled $2,176 and $2,178, respectively, on the Company's Preferred Stock,
of which $2,178 represented a liquidating dividend paid from Additional Paid-in
Capital during the fiscal year ended September 30, 1996. Cumulative
liquidating dividends on the Company's Preferred Stock paid out of Additional
Paid-in Capital through September 30, 1997 totaled $2,779.
Cash dividends paid during the fiscal years ended September 30, 1997 and
1996 equaled $3,922 and $2,830,
F-17
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
respectively, on the Company's common stock, of which $637 and $2,830,
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, 1997 totaled $3,467.
In connection with the Company's 1992 debt restructurings, 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.
Subsequent to the year ended September 30, 1997, 180,000 of these warrants were
exercised and the Company received proceeds of $900.
NOTE 11 - STOCK OPTION PLANS AND COMMON STOCK WARRANTS
The Company has five fixed option plans. The ICO, Inc. 1985 Stock Option
Plan provided for the grant of options to purchase an aggregate of 310,000
shares of the Company's common stock during the ten-year period commencing
January 2, 1985. The ICO, Inc. restated 1993 Non-employee Directors Stock
Option Plan provides for the grant of options to purchase an aggregate of
160,000 shares of the Company's common stock during the ten-year period
commencing June 16, 1993. The ICO, Inc. 1994 Stock Option Plan provides for
the grant of options to purchase an aggregate of 400,000 shares of the
Company's common stock during the ten-year period commencing July 1, 1994. The
ICO, Inc. 1995 Stock Option Plan provides for the grant of options to purchase
an aggregate of 400,000 shares of the Company's common stock during the
ten-year period commencing August 15, 1995. The ICO, Inc. 1996 Stock Option
Plan provides for the grant of options to purchase an aggregate of 800,000
shares of the Company's common stock during the ten-year period commencing
August 29, 1996. 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 174,000, 55,400, and 49,700 shares available
for grant at September 30, 1997, 1996 and 1995, respectively. The following is
a summary of stock option activity for the three years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
FIXED OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
------------------------------ ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year . . . . . . . . . . . . . 810 $ 5.18 487 $ 5.12 213 $ 5.24
Granted . . . . . . . . . . . . . . 770 6.26 470 5.19 470 5.00
Exercised . . . . . . . . . . . . . (156) 4.96 (80) 4.68 (129) 4.64
Forfeited . . . . . . . . . . . . . (17) 5.09 (67) 5.46 (67) 5.56
------ ------ ----- ------ ----- ------
Outstanding at end of year . . . . 1,407 $ 5.80 810 $ 5.18 487 $ 5.12
====== ====== ===== ====== ===== ======
Options exercisable at year end . . 1,407 $ 5.80 810 $ 5.18 487 $ 5.12
====== ====== ===== ====== ===== ======
Weighted average fair value
of options granted during
year ($/share) . . . . . . . . . . $ 2.15 $ 1.83
====== ======
</TABLE>
F-18
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted Avg.
RANGE OF EXERCISE PRICES Number outstanding Remaining Weighted Avg.
- ---------------------------------------------- at 9/30/97 Contractual Life Exercise Price
----------- ---------------- ---------------
<S> <C> <C><C> <C>
$3.75 - $9.75 1,407,268 8 years $5.80
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C>
Net income (loss) $6,098 $4,439 $(1,060) $(1,922)
Net income (loss) per share applicable to common
and common equivalent shares $.19 $.11 $(.24) $(.31)
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Expected dividend yield 3.5% 3.5%
Expected stock price volatility 37.1% 40.2%
Risk-free interest rate 6.4% 6.0%
Expected life of options 7.3 years 7.3 years
</TABLE>
NOTE 12 - INCOME TAXES
The amounts of income (loss) before income taxes attributable to domestic
and foreign operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Domestic $ 5,492 $ (4,592) $ 5,297
Foreign 4,756 2,900 1,060
-------- -------- -------
$10,248 $ (1,692) $ 6,357
======= ======== =======
</TABLE>
F-19
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 44 $ 161 $ 1,633
State 149 165 208
Foreign 2,024 839 359
--------- --------- -------
2,217 1,165 2,200
--------- --------- -------
Deferred:
Federal 1,707 (1,479) (1,633)
State 353 (318) --
Foreign (127) -- --
--------- --------- -------
1,933 (1,797) (1,633)
--------- --------- -------
Total:
Federal 1,751 (1,318) --
State 502 (153) 208
Foreign 1,897 839 359
--------- --------- -------
$ 4,150 $ (632) $ 567
========= ========= =======
</TABLE>
A reconciliation of the income tax expense (benefit) at the federal
statutory rate (35%) to the Company's effective rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $ 3,586 $ (592) $ 2,225
Change in the deferred tax assets valuation
allowance -- (1,365) (1,695)
Non-deductible expenses and other, net 63 189 (7)
Foreign tax rate differential 233 (192) --
Goodwill amortization and write-downs 268 1,328 44
------- -------- -------
$ 4,150 $ (632) $ 567
======= ======== =======
</TABLE>
F-20
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1997 1996
----------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $ 2,373 $ 2,268
Tax credit carryforward 1,023 1,532
Insurance accruals 801 674
Other accruals 174 619
Bad debt allowance 249 394
Compensation accruals 799 857
Legal accruals 572 606
Joint Venture accruals 698 697
Inventory 282 182
Other 33 --
------- ------
7,004 7,829
------- ------
Deferred tax liabilities:
Depreciation and land (8,192) (1,816)
Foreign currency translation adjustment -- (664)
Deferred revenue (306) (279)
------- ------
(8,498) (2,759)
------- ------
Valuation allowance on deferred tax assets (2,157) (2,666)
------- ------
Net deferred tax assets (liabilities) $(3,651) $2,404
------- ------
</TABLE>
The Company changed its assessment of the deferred tax assets valuation
allowance in the fourth quarter of fiscal 1995 to recognize its ability to
benefit from the reversal of temporary differences between financial and
taxable income to the extent that regular federal income taxes have been paid
on taxable income. During 1996, the Company recognized $1,365 as a tax benefit
realized as a reduction of income tax expense to reflect the utilization of net
operating loss carryforwards ("NOLs") and to recognize a tax benefit to the
extent regular federal income taxes have been paid on taxable income.
Effective with the 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 valuation allowance was further reduced by $545 to
reflect the expiration of certain federal tax credits. Upon this revaluation,
the Company recognized $1,328 as a change in net operating loss carryforwards
realized as a reduction of goodwill attributable to the Wedco acquisition. The
Company further reduced the valuation allowance during 1997 to reflect the
expiration of certain federal tax credits.
The Company has for tax return purposes $5,696 and $1,078 in net operating
and capital loss carryforwards, respectively, which expire between 2000 and
2008, and $1,023 in investment, alternative minimum and other tax credit
carryforwards which if utilized will result in a cash savings. The capital
loss carryforward includes $772 which was generated by Wedco prior to the
acquisition by the Company. All other 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.
F-21
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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 works for. 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.
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.
Total expense for all employee benefit plans included in consolidated
results of operations for the years ended September 30, 1997, 1996 and 1995 was
$990, $419, and $183, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
During fiscal 1989, Wedco sold certain assets of its former subsidiary,
Tri-Delta Technology, Inc., for $750, of which $462 is outstanding as of
September 30, 1997, 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% (9.50% at September 30,
1997). 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.
F-22
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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 $4,782 in 1997, $2,951
in 1996, and $2,679 in 1995. Future minimum rental payments as of September
30, 1997 are due as follows:
<TABLE>
<S> <C>
1998 $4,354
1999 3,581
2000 2,960
2001 2,333
2002 1,375
Thereafter 2,525
</TABLE>
The Company is a named defendant in 14 cases involving 14 plaintiffs,
for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. 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. 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. 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 of 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, 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.
Permian Enterprises, Inc. ("Permian") a wholly-owned subsidiary of the
Company, 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, plus interest, suffered by Tidelands and third parties resulting from
the failure of a pipe owned by Tidelands and 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 matter cannot be predicted, given the
initial stages of litigation, but the Company believes Permian has meritorious
defenses in this matter.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle litigation of a dispute concerning the assumption of certain
liabilities in connection with the acquisition of BHTS in 1992. The agreement
stipulates that ICO will pay $846 to reimburse Baker Hughes for various
occupational health claims offset by their reimbursement of the Company's
environmental remediation expenses, relating to former BHTS properties. With
regard to future occupational health claims, the parties have agreed to share
costs 50/50 with ICO's obligations being limited to $500 for each claim and a
maximum contingent liability of $4,500 (net of current accruals) in the
aggregate for all claims. The Company established a $1,122 reserve for this
litigation in the fourth quarter of 1996 (See Note 3 - "Unusual Items").
There are various other claims and pending actions incidental to the
business operations of the Company. In the
F-23
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
opinion of the Company's management, the Company's potential liability in these
matters has been adequately accrued in the financial statements.
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 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1997 1996
--------------------------------------
<S> <C> <C>
Trade receivables $ 21,248 $ 7,011
Related party receivables 703 645
Inventories 6,751 1,353
Prepaid expenses and other assets 2,887 2,727
Property, plant and equipment 21,851 42,797
Goodwill 20,666 29,307
Investment in joint ventures (1,689) 4,538
Deferred tax asset 1,232 156
Accounts payable (9,696) (1,962)
Accrued liabilities (9,164) (6,889)
Deferred tax liability (3,993) (1,055)
Long-term debt (13,360) (21,239)
Common stock issued (8,040) (51,436)
--------- -------
Cash paid, net of cash acquired $ 29,396 $ 5,953
======== =======
</TABLE>
In 1996 the Company purchased real estate by issuing debt of $80.
During fiscal years 1997, 1996 and 1995, the Company issued to
employees $333, $199, and $183 worth of common stock, respectively, in
connection with the Company's Employee Stock Ownership Plans.
F-24
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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, 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 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.
<TABLE>
<CAPTION>
Oilfield Petrochemical
Sales Processing Sales Total General
and Services and Services Operations Corporate Consolidated
------------- ---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
NET REVENUES
YEARS ENDED SEPT. 30,
1997 $ 98,057 $99,789 $197,846 $ -- $197,846
1996 89,390 19,273 108,663 -- 108,663
1995 87,883 -- 87,883 -- 87,883
DEPRECIATION AND
AMORTIZATION
YEARS ENDED SEPT. 30,
1997 $ 4,996 $ 6,124 $ 11,120 $ 229 $ 11,349
1996 5,078 1,846 6,924 306 7,230
1995 4,943 -- 4,943 169 5,112
OPERATING INCOME (LOSS)
YEARS ENDED SEPT. 30,
1997 $ 14,447 $ 8,180 $ 22,627 $ (9,217) $ 13,410
1996 11,562 (4,068) 7,494 (9,891) (2,397)
1995 12,085 -- 12,085 (7,035) 5,050
CAPITAL EXPENDITURES
YEARS ENDED SEPT. 30,
1997 $ 4,548 $10,954 $ 15,502 $ 245 $ 15,747
1996 6,637 1,533 8,170 542 8,712
1995 5,323 -- 5,323 515 5,838
IDENTIFIABLE ASSETS
AT SEPT. 30,
1997 $ 65,377 $163,882 $229,259 $ 92,494 $321,753
1996 62,191 82,498 144,689 17,483 162,172
1995 61,558 -- 61,558 26,625 88,183
</TABLE>
F-25
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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.
<TABLE>
<CAPTION>
United Total General
States Europe Other Operations Corporate Consolidated
------------ ------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES
YEARS ENDED SEPT. 30,
1997 $144,332 $43,684 $9,830 $197,846 $ __ $197,846
1996 92,077 9,934 6,652 108,663 -- 108,663
1995 80,101 -- 7,782 87,883 -- 87,883
OPERATING INCOME (LOSS)
YEARS ENDED SEPT. 30,
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)
1995 10,624 -- 1,461 12,085 (7,035) 5,050
IDENTIFIABLE ASSETS
AT SEPT. 30,
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
1995 57,401 -- 4,157 61,558 26,625 88,183
</TABLE>
Operating income reflected above includes net revenues, less cost and
expenses of operations, including unusual items discussed more fully in Note 3
- - Unusual 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 legal expenses.
Corporate identifiable assets consist of cash, cash equivalents, deferred tax
assets, unamortized bond offering costs, and total income taxes payable or
receivable.
NOTE 18 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected financial information for each
quarter in the fiscal years ended September 30, 1997 and September 30, 1996,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
1996 1997 1997 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $36,503 $45,288 $55,254 $60,801
Gross profit 12,264 12,716 15,403 16,161
Operating income 2,909 3,395 3,970 3,136
Net income 1,847 1,732 1,628 891
Earnings per share .06 .06 .05 .02
</TABLE>
F-26
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
1995 1996 1996 1996(1)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $21,751 $22,121 $29,658 $35,133
Gross profit 6,606 6,598 9,276 11,479
Operating income 1,213 1,539 1,851 (7,000)
Net income (loss) 1,500 1,773 1,428 (5,761)
Earnings per share $0.11 $0.14 $0.06 ($0.55)
</TABLE>
(1) The fourth quarter ended September 30, 1996 includes charges for the
Unusual Items discussed in Note 3 and a charge in accordance with SFAS No.
121, as discussed in Note 4.
NOTE 19 - SUBSEQUENT EVENTS
SHAREHOLDERS' RIGHTS PLAN
On October 31, 1997, the Board of Directors adopted a Shareholders' Rights
Plan (the "Rights Plan") and declared a dividend of one Series C 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 stockholders 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 stockholders 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 initially will be evidenced by the Company's
common stock certificates and will 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.
F-27
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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.
SALE OF CANADIAN EQUITY INVESTMENT
On December 15, 1997, the Company received CDN $5,815 (USD $4,360 at
current exchange rates) from Polyvector Corporation representing a 28% down
payment on Polyvector's exercise of its option to purchase the Company's 50%
ownership interest in WedTech for CDN $20,768 million ($14,579 at current
exchange rates). The Company expects to receive the balance of the purchase
price upon consummation of the sale in January 1998.
EXCHANGE OF 10 3/8% SENIOR NOTES DUE 2007
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.
F-28
<PAGE> 62
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>
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)
3.1 -- Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 4 to Form S-3
dated September 13, 1993)
3.2 -- By-Laws of the Company (filed as Exhibit 3(ii) to Form 10-Q for the quarter ended June 30,
1996)
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 -- Registration Rights Agreement dated June 9, 1997 by and between the Company and Bear, Stearns &
Co., Inc., relating to Senior Notes due 2007 (filed as Exhibit 4.2 to Form S-4 dated June 17,
1997)
4.3 -- Warrant Agreement -- Series A, dated as of September 1, 1992, between the Registration and
Society National Bank (filed as Exhibit 4 of the Registrant's Annual Report on Form 10-K for
1992)
4.4 -- 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)
4.5 -- 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 __,
1997.)
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 -- 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)
10.5 -- 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed as Exhibit 99 to the
Registrant's Form S-8 dated September 1,3 1993)
10.6 -- 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)
10.7 -- 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)
10.8 -- 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)
10.9 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to
Form S-4 dated May 15, 1996)
10.10 -- Consulting Agreement -- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15,
1996)
10.11 -- Salary Continuation Agreement -- William E. Willoughby (filed as Exhibit 10.14 to Form S-4
dated May 15, 1996)
10.12 -- Addendum to Salary Continuation Agreement -- William E. Willoughby (filed as Exhibit 10.15 to
form S-4 dated May 15, 1996)
10.13 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May
15, 1996)
10.14 -- 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)
10.15 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders (filed as
Exhibit 10.22 to Form S-4 dated May 15, 1996)
10.16** -- Employment Agreement dated April 1, 1995 by and between the Registrant and Asher O. Pacholder
and amendments thereto.
10.17** -- Employment Agreement dated April 1, 1995 by and between the Registrant and Sylvia A. Pacholder
and amendments thereto.
21** -- Subsidiaries of the Company
23** -- Consent of Price Waterhouse LLP
27** -- Financial Data Schedule
99** -- Safe Harbor Disclosure
</TABLE>
- ------------------
** Filed herewith
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement between ICO, INC., a Texas corporation (the
"COMPANY"), and ASHER 0. PACHOLDER (the "Executive") is dated this 1st day of
April, 1995.
RECITALS:
Executive has served on the Board of Directors of the Company since 1990
and the Company has relied heavily on his business acumen and financial
expertise in developing the strategic plans for the Company.
The Company, on behalf of itself and its shareholders, wishes to continue
to retain Executive as an integral part of the management of the Company and to
assure itself of the continuity of management and Executive of continued
employment.
IT IS, THEREFORE, AGREED:
1. OPERATION OF AGREEMENT. The "Effective Date" shall be on the date
this Agreement is signed as indicated above.
2. EMPLOYMENT PERIOD. Unless sooner terminated pursuant to the other
provisions hereof, the Company agrees to employ Executive for a period beginning
with the Effective Date of this Agreement and terminating December 31, 1998.
Said term of employment shall be extended automatically from day to day until
such time as either party shall give written notice to the other that no further
such automatic extensions shall occur, in which event Executive's employment
shall terminate on a date three years after such notice has been received. As
used herein, the term "Employment Period" shall mean the period beginning on the
Effective Date and ending on the date the Executive's employment terminates.
3. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall be engaged as the
Chairman of the Board of the Company, and the Company agrees to use its best
efforts to cause Executive to be nominated and elected as a director of the
Company; subject, however, to the Executive's reelection by the shareholders of
the Company at the annual shareholders' meeting when his applicable class of
directors is to be voted upon by the shareholders. In such position, Executive
shall have such duties and authority as are reasonably accorded and expected of
a Chairman of the Board consistent with the bylaws of the Company and shall have
such other duties and authority as shall be reasonably determined from time to
time by the Board.
(b) Excluding periods of vacation and sick leave to which the
Executive is entitled, the Executive agrees to devote reasonable attention and
time during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the
<PAGE> 2
responsibilities assigned to the Executive hereunder, to use reasonable best
efforts to perform faithfully and efficiently such responsibilities. The
Company recognizes that Executive does presently serve and in the future will
from time to time serve on the Board of Directors of other companies, charities
and civic associations. In addition, Executive does serve and is compensated
as Chief Executive Officer of Pacholder Associates, Inc. and may in the future
serve and be compensated as an officer or director of companies affiliated with
the Company. Compensation or remuneration received by the Executive as an
executive of Pacholder Associates, Inc. or of other affiliates or as a director
of unaffiliated companies shall be retained by Executive in addition to
compensation provided under this Agreement. It is expressly understood and
agreed that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, such prior conduct of activities, and
any subsequent conduct of activities similar in nature and scope shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
4. COMPENSATION.
(a) Base Salary. During the Employment Period, the Executive shall
receive a base salary ("Base Salary") of $150,000 per annum payable
semi-monthly. During the Employment Period, the Base Salary shall be reviewed
at least annually and shall be increased at any time and from time to time to
reflect at a minimum increases in the cost of living and such other increases as
shall be consistent with increases in base salary awarded in the ordinary course
of business to other key executives. Any increase in the Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. The Base Salary shall not be reduced after any such increase.
(b) Annual Bonus. In addition to the Base Salary, the Executive shall
be awarded, for each fiscal year during the Employment Period, an annual bonus
(an "Annual Bonus") (either pursuant to a bonus or incentive plan or program of
the Company or otherwise) in cash in such amount as shall be determined by the
Board. Each such Annual Bonus shall be payable in January of the fiscal year
next following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall otherwise elect to defer the receipt of such Annual Bonus.
(c) Incentive, Savings and Retirement Plans. In addition to the Base
Salary and Annual Bonus payable as hereinabove provided, the Executive shall be
entitled to participate, during the Employment Period, in all incentive, savings
and retirement plans and programs that may be adopted by the Board for other key
executives of the Company.
(d) Stock Options. In addition to the Base Salary and other benefits
accorded to Executive under this Agreement, Executive shall receive on the
Effective Date fully vested options exercisable for 30,000 shares of Common
Stock of the Company at an exercise price equal to the closing sales price of
the Common Stock on the NASDAQ National Market System on the Effective Date.
Such options shall be granted as incentive stock options to the extent
permissible under law and the terms of the 1994 Stock Option Plan. Executive
also shall be entitled to receive
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<PAGE> 3
stock options in the future under the Company's then existing stock option
plans in an amount and under such terms as the Board of Directors or a
committee thereof shall determine.
(e) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under each welfare benefit
plan of the Company, including, without limitation, all medical, dental,
disability, group life, accidental death and travel accident insurance plans and
programs of the Company, as in effect immediately preceding the Effective Date
or as in effect at any time thereafter with respect to other key executives.
(f) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the policies and procedures of the Company as
in effect immediately preceding the Effective Date or as in effect at any time
thereafter with respect to other key executives.
(g) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the policies of the
Company as in effect immediately preceding the Effective Date or as in effect at
any time thereafter with respect to other key executives. Such fringe benefits
shall include the use of a luxury automobile at the Company's expense.
(h) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to secretarial and other assistance, at
least equal to those provided to the Executive immediately preceding the
Effective Date or as provided at any time thereafter with respect to other key
executives.
(i) Vacation. During the Employment Period, the Executive shall be
entitled to annual paid vacation that in no event shall be less than four weeks
per year.
5. TERMINATION.
(a) Death or Disabilities. This Agreement shall terminate
automatically upon the Executive's death. The Company may terminate this
Agreement, after having established the Executive's Disability (pursuant to the
definition of "Disability" set forth below), by giving to the Executive written
notice of its intention to terminate the Executive's employment. In such a
case, the Executive's employment with the Company shall terminate effective on
the 90th day after receipt of such notice (the "Disability Effective Date"),
provided that, within 90 days after such receipt, the Executive shall fail to
return to full-time performance of the Executive's duties. For purposes of this
Agreement, "Disability" means disability which, after the expiration of more
than 26 weeks after its commencement, is determined to be total and permanent by
a physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such agreement to
acceptability not to be withheld unreasonably).
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<PAGE> 4
(b) Cause. The Company may terminate the Executive's employment for
"Cause." For purposes of this Agreement, "Cause" means (i) an act or acts of
dishonesty taken by the Executive and intended to result in substantial personal
enrichment of the Executive at the expense of the Company or (ii) repeated
violations by the Executive of the Executive's obligations under Section 3 of
this Agreement which are demonstrably willful and deliberate on the Executive's
part and which result in material injury to the Company. If the Company wishes
to terminate the Executive's employment pursuant to clause (ii) above, the
Company shall first give written notice of its intention to the Executive which
notice shall set forth in reasonable detail the repeated violations which are
alleged by the Company, and the Executive shall have a 30-day period in which to
cure such violations prior to the expiration of which he may not be terminated
pursuant to such clause (ii).
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" means
(i) Executive ceasing for any reason to be the Chairman
of the Board of the Company, other than by death, disability or termination
by the Executive of employment with the Company other than for Good Reason;
(ii) (A) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 3 of this Agreement or (B) any
other action by the Company which results in a diminishment in such
position, authority, duties or responsibilities, other than an
insubstantial and inadvertent action which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(iii) any failure by the Company to comply with any of the
provisions of Section 4 of this Agreement, other than an insubstantial and
inadvertent failure which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(iv) the Company's requiring the Executive to be based at any
office or location outside the greater Houston metropolitan area, except
for travel reasonably required in the performance of the Executive's
responsibilities;
(v) any purported termination by the Company of the Executive's
employment otherwise than as permitted by this Agreement, it being
understood that any such purported termination shall not be effective for
any purpose of this Agreement;
(vi) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement; or
(vii) if Executive shall no longer be employed by the Company for any
reason within two years after the occurrence of a "Change of Control."
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<PAGE> 5
For the purpose of this Agreement, a "Change of Control" shall mean a
change of control of the Company during the Employment Period (as defined in
Section 3 below) of a nature that would be required to be reported in response
to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); provided that, without limitation, such a "Change of Control"
shall be deemed to have occurred if:
(i) (A) the Company shall not be the surviving entity in any
merger, consolidation or other transaction (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of
the Company) or (B) the shareholders of the Company prior to any such
merger, consolidation or other transaction do not continue to own at least
60% of the surviving entity;
(ii) the Company sells, leases or exchanges all or substantially
all of its assets to any other person or entity (other than a wholly-owned
subsidiary of the Company);
(iii) the Company is materially or completely liquidated;
(iv) a third person, including a "group" as such term is used in
Section 13(d)(3) of the Exchange Act, becomes the beneficial owner,
directly or indirectly, of (A) 50% or more of the combined voting power of
the Company's outstanding voting securities ordinarily having the right to
vote for the election of directors of the Company or (B) 20% or more of the
combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of the
Company if such acquisition is not approved by the Board of Directors then
in office immediately prior to the acquisition;
(v) any person (other than the Company) purchases any voting
securities of the Company in a tender or exchange offer with the intent,
express or implied, of purchasing or otherwise acquiring voting control of
the Company; or
(vi) during any consecutive two-year period, individuals who
constituted the Board of Directors of the Company (together with any new
directors whose election by the Board of Directors or whose nomination for
election by the Shareholders of the Company was approved by a vote of at
least three-quarters of the directors still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors then in office.
For purposes of this Section 6(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
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<PAGE> 6
(d) Notice of Termination. Any termination by the Company for Cause
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the termination date is
other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than 15 days after the giving of such notice).
(e) Date of Termination. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as the
case may be. If the Executive's employment is terminated by the Company in
breach of this Agreement, the Date of Termination shall be the date on which the
Company notifies the Executive of such termination.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Death. If the Executive's employment is terminated by reason of
the Executive's death, this Agreement shall terminate without further
obligations to the Executive's legal representatives under this Agreement other
than those obligations accrued hereunder at the date of the Executive's death or
as specified in this paragraph. Anything in this Agreement to the contrary
notwithstanding, the Executive's family shall be entitled to receive benefits at
least equal to those provided by the Company to surviving families of executives
of the Company under such plans, programs and policies relating to family death
benefits, if any, as in effect at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive and/or the
Executive's family, as in effect at any time thereafter with respect to other
key executives and their families. In addition, any previously granted unvested
options received by the Executive pursuant to any stock option plans of the
Company prior to his death shall become immediately vested and fully exercisable
by Executive's estate for the full term of the original grant of the option or
options to the extent permissible by the option plan or plans, notwithstanding
any provisions regarding exercisability provided therein.
(b) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability, the Executive shall be entitled after the
Disability Effective Date to his Base Salary for a three-year period commencing
with the Disability Effective Date and shall receive such other benefits at
least equal to those provided by the Company to disabled employees and/or their
families in accordance with such plans, programs and policies relating to
disability, if any, as in effect during the 90-day period immediately preceding
the Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter with respect to other key executives
and their families. In addition, any previously granted unvested options
received by the Executive pursuant to any stock option plans of the Company
prior to Executive's Disability shall become immediately vested and fully
exercisable by Executive or his estate for the full term of the original grant
of the option or options to the extent permissible by the option plan or plans,
notwithstanding any provisions regarding exercisability provided therein.
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<PAGE> 7
(c) Cause. If the Executive's employment shall be terminated for
Cause, the Company shall pay the Executive his full Base Salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given
and shall have no further obligations to the Executive under this Agreement.
(d) Good Reason; Other Than for Cause or Disability. If, during the
Employment Period, the Company shall terminate the Executive's employment other
than for Cause or Disability, or the employment of the Executive shall be
terminated by the Executive for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 10 days after the Date of Termination the aggregate of the following
amounts:
(A) if not theretofore paid, the Executive's Base Salary
through the Date of Termination at the rate in effect on the Date of
Termination;
(B) the product of (x) the greater of the highest Annual
Bonus paid to the Executive during the Employment Period and 50% of
the Executive's Base Salary in the year of termination and (y) the
fraction obtained by dividing (i) the number of days which Executive
has been employed during a particular year by (ii) 365; and
(C) three times the sum of (x) the Executive's annual Base
Salary at the rate in effect at the time Notice of Termination was
given and (y) the greater of the highest Annual Bonus paid to the
Executive during the Employment Period and 50% of the Executive's Base
Salary in the year of termination;
(ii) any previously granted unvested options received by Executive
pursuant to any stock option plans of the Company prior to such termination
shall become immediately vested and fully exercisable by Executive or by
Executive's estate for the full term of the original grant of the option or
options to the extent permissible by the option plan or plans,
notwithstanding any provisions to the contrary provided in such stock
option plans or agreements;
(iii) the Company shall, promptly upon submission by the Executive
of supporting documentation, pay or reimburse to the Executive any costs
and expenses (including moving and relocation expenses) paid or incurred by
the Executive which would have been payable under Section 4(f) if the
Executive's employment had not terminated; and
(iv) for a period of three years after the Date of Termination,
the Company shall continue benefits to the Executive and/or the Executive's
family at least equal to those which would have been provided to them in
accordance with the plans, programs and policies described in Sections 4(e)
and 4(g) of this Agreement (or, if more
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<PAGE> 8
favorable to Executive, as in effect at any time thereafter with respect to
other key employees) if the Executive's employment had not been terminated.
In addition, Executive shall be entitled to receive the luxury automobile
provided to him under Section 4(g) of this Agreement.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive may
have under any stock option or other agreements with the Company or any of its
affiliated companies. Amounts which are vested benefits or which the Executive
is otherwise entitled to receive under any plan or program of the Company or any
of its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
8. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
The Company agrees to pay, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof or as a result of any contest by the Executive
against the amount of any payment pursuant to Section 9 of this Agreement, plus
in each case interest, compounded quarterly, on the total unpaid amount
determined to be payable under this Agreement, such interest to be calculated at
a rate equal to 2% in excess of the prime commercial lending rate published in
the Wall Street Journal in effect from time to time during the period of such
nonpayment.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding
anything to the contrary in this Agreement, in the event that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest or penalties, are hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional payment (a
"Gross-up Payment") in an amount such that after payment by Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any claim
by the Internal Revenue Service which, if successful, would require the Company
to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any,
initially determined by the
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<PAGE> 9
Company and Executive) within five days of the receipt of such claim. The
Company shall notify Executive in writing at least five days prior to the due
date of any response required with respect to such claim if it plans to contest
the claim. If the Company decides to contest such claim, Executive shall
cooperate fully with the Company in such action; provided, however, the Company
shall bear and pay directly or indirectly all costs and expenses (including
additional interest and penalties) incurred in connection with such action and
shall indemnify and hold Executive harmless, on an after-tax basis, for any
Excise Tax or income tax, including interest and penalties with respect
thereto, imposed as a result of the Company's action. If, as a result of the
Company's action with respect to a claim, Executive receives a refund of any
amount paid by the Company with respect to such claim, Executive shall promptly
pay such refund to the Company. If the Company fails to timely notify
Executive whether it will contest such claim or the Company determines not to
contest such claim, then the Company shall immediately pay to Executive the
portion of such claim, if any, which it has not previously paid to Executive.
10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company and which shall not be public
knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the Company and continuing for a period of one year, the Executive shall
not, without the prior written consent of the Company, communicate or divulge
any such information, knowledge or data to anyone other than the Company and
those designated by it. In no event shall an asserted violation of the
provisions of this Section 10 constitute a basis for deferring or withholding
any amounts otherwise payable to the Executive under this Agreement.
11. SUCCESSORS.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors.
(c) In the event of a Change of Control, any parent company or
successor shall, in the case of a successor, by an agreement in form and
substance satisfactory to the Executive, expressly assume and agree to perform
this Agreement and, in the case of a parent company, by an agreement in form and
substance satisfactory to the Executive, guarantee and agree to cause the
performance of this Agreement, in each case, in the same manner and to the same
extent as the Company would be required to perform if no Change of Control had
taken place.
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<PAGE> 10
12. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Dr. Asher 0. Pacholder
19 Windemere
Houston, Texas 77063
If to the Company:
ICO, Inc.
Northborough Tower
100 Glenborough Drive, Suite 250
Houston, Texas 77067
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) This Agreement contains the entire understanding of the Company and
the Executive with respect to the subject matter hereof.
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<PAGE> 11
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name on its behalf, all as of the day and year
first above written.
/s/ Asher 0. Pacholder
-----------------------------------
DR. ASHER 0. PACHOLDER
ICO, INC.
By /s/ Jon C. Biro
--------------------------------
Name: Jon C. Biro
Title: Controller/Treasurer
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<PAGE> 12
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This Employment Agreement between ICO, Inc., a Texas corporation (the
"Company"), and ASHER O. PACHOLDER (the "Executive") dated this 1st day of
April, 1995 is hereby amended as follows:
Paragraph 2 is hereby deleted in its entirety and the following
paragraph 2 substituted in its place instead.
"EMPLOYMENT PERIOD. Unless sooner terminated pursuant to the
other provisions hereof, the Company agrees to employ
Executive for a period beginning with the Effective Date of
this Agreement and terminating December 31, 2001. Said term
of employment shall be extended automatically from day to day
until such time as either party shall give written notice to
the other that no further such automatic extensions shall
occur, in which event Executive's employment shall terminate
on a date five years after such notice has been received. As
used herein, the term "Employment Period" shall mean the
period beginning on the Effective Date and ending on the date
the Executive's employment terminates."
Except as amended by this first amendment all other provisions of the
Asher O. Pacholder Employment Agreement are hereby ratified and reaffirmed.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from the Compensation Committee of its Board of
Directors, the Company has caused these presents to be executed in its name on
its behalf, this 14th day of June, 1996.
/s/ Asher O. Pacholder
------------------------------------------
ASHER O. PACHOLDER
ICO, INC.
By /s/ Jon C. Biro
----------------------------------------
Name: Jon C. Biro
Title: Treasurer
<PAGE> 13
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
The Employment Agreement (the "Agreement") between ICO, Inc. a Texas
corporation (the "Company") and Asher O. Pacholder (the "Executive") dated
April 1, 1995, as amended by the First Amendment to Employment Agreement dated
June 14, 1996, is amended hereby as follows:
Paragraph 4(a) of the Agreement is deleted in its entirety and the
following paragraph 4(a) substituted in its place.
(a) Base Salary. During the Employment Period and
commencing on January 1, 1997, the Executive shall receive a base salary ("Base
Salary") of $310,000 per annum payable bi-weekly. During the Employment
Period, the Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time to reflect at a minimum, increases
in the cost of living and such other increases as shall be consistent with
increases in base salary awarded in the ordinary course of business to other
key executives. Any increase int he Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. The Base
Salary shall not be reduced after any such increase.
Except as amended by this second amendment, all other provisions of
the Agreement hereby are ratified and affirmed.
In witness whereof, the Executive has set her hand hereunto, and
pursuant to the authorization from the compensation Committee of the Board of
Directors, the Company has caused these presents to be executed in its name on
its behalf, this 7th day of February, 1997.
-------------------
/s/ Asher O. Pacholder
------------------------------------------
Asher O. Pacholder
ICO, INC.
By: /s/ Jon C. Biro
---------------------------------------
Name: Jon C. Biro
Title: Senior Vice President and Treasurer
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement between ICO, INC., a Texas corporation (the
"Company"), and SYLVIA PACHOLDER (the "Executive") is dated this 1st day of
April, 1995.
RECITALS:
Executive has served on the Board of Directors of the Company since
1993 and the Company has relied heavily on her business acumen and financial
expertise in developing the strategic plans for the Company.
The Company, on behalf of itself and its shareholders, wishes to
continue to retain Executive as an integral part of the management of the
Company and to assure itself of the continuity of management and Executive of
continued employment.
IT IS, THEREFORE, AGREED:
1. OPERATION OF AGREEMENT. The "Effective Date" shall be on the
date this Agreement is signed as indicated above.
2. EMPLOYMENT PERIOD. Unless sooner terminated pursuant to the
other provisions hereof, the Company agrees to employ Executive for a period
beginning with the Effective Date of this Agreement and terminating December
31, 1998. Said term of employment shall be extended automatically from day to
day until such time as either party shall give written notice to the other that
no further such automatic extensions shall occur, in which event Executive's
employment shall terminate on a date three years after such notice has been
received. As used herein, the term "Employment Period" shall mean the period
beginning on the Effective Date and ending on the date the Executive's
employment terminates.
3. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall be
engaged as the President and Chief Executive Officer of the Company. In such
position, Executive shall have such duties and authority as are reasonably
accorded and expected of a President and Chief Executive Officer consistent
with the bylaws of the Company and shall have such other duties and authority
as shall be reasonably determined from time to time by the Board.
(b) Excluding periods of vacation and sick leave to which
the Executive is entitled, the Executive agrees to devote reasonable attention
and time during normal business hours to the business and affairs of the
Company and, to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use reasonable best efforts to perform
faithfully and efficiently such responsibilities. The Company recognizes that
Executive may in the future serve as a director or as an officer of other
companies, charities and civic associations,
<PAGE> 2
including, without limitation, Pacholder Associates, Inc., and may be
compensated in such capacities. Compensation or remuneration received by the
Executive as an officer or director of Pacholder Associates, Inc. or other
entity shall be retained by Executive in addition to compensation provided
under this Agreement.
4. COMPENSATION.
(a) Base Salary. During the Employment Period, the
Executive shall receive a base salary ("Base Salary") of $175,000 per annum
payable semi-monthly. During the Employment Period, the Base Salary shall be
reviewed at least annually and shall be increased at any time and from time to
time to reflect at a minimum increases in the cost of living and such other
increases as shall be consistent with increases in base salary awarded in the
ordinary course of business to other key executives. Any increase in the Base
Salary shall not serve to limit or reduce any other obligation to the Executive
under this Agreement. The Base Salary shall not be reduced after any such
increase.
(b) Annual Bonus. In addition to the Base Salary, the
Executive shall be awarded, for each fiscal year during the Employment Period,
an annual bonus (an "Annual Bonus") (either pursuant to a bonus or incentive
plan or program of the Company or otherwise) in cash in such amount as shall be
determined by the Board. Each such Annual Bonus shall be payable in January of
the fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall otherwise elect to defer the receipt of
such Annual Bonus.
(c) Incentive, Savings and Retirement Plans. In addition
to the Base Salary and Annual Bonus payable as hereinabove provided, the
Executive shall be entitled to participate, during the Employment Period, in
all incentive, savings and retirement plans and programs that may be adopted by
the Board for other key executives of the Company.
(d) Stock Options. In addition to the Base Salary and
other benefits accorded to Executive under this Agreement, Executive also shall
be entitled to receive stock options in the future under the Company's then
existing stock option plans in an amount and under such terms as the Board of
Directors or a committee thereof shall determine.
(e) Welfare Benefit Plans. During the Employment Period,
the Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under each welfare
benefit plan of the Company, including, without limitation, all medical,
dental, disability, group life, accidental death and travel accident insurance
plans and programs of the Company, as in effect immediately preceding the
Effective Date or as in effect at any time thereafter with respect to other key
executives.
(f) Expenses. During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the policies and
procedures of the Company as in effect immediately preceding the Effective Date
or as in effect at any time thereafter with respect to other key executives.
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<PAGE> 3
(g) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits in accordance with the policies
of the Company as in effect immediately preceding the Effective Date or as in
effect at any time thereafter with respect to other key executives.
(h) Office and Support Staff. During the Employment
Period, the Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to secretarial and other
assistance, at least equal to those provided to the Executive immediately
preceding the Effective Date or as provided at any time thereafter with respect
to other key executives.
(i) Vacation. During the Employment Period, the
Executive shall be entitled to annual paid vacation that in no event shall be
less than four weeks per year.
5. TERMINATION.
(a) Death or Disability. This Agreement shall terminate
automatically upon the Executive's death. The Company may terminate this
Agreement, after having established the Executive's Disability (pursuant to the
definition of "Disability" set forth below), by giving to the Executive written
notice of its intention to terminate the Executive's employment. In such a
case, the Executive's employment with the Company shall terminate effective on
the 90th day after receipt of such notice (the "Disability Effective Date"),
provided that, within 90 days after such receipt, the Executive shall fail to
return to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" means disability which, after the expiration of
more than 26 weeks after its commencement, is determined to be total and
permanent by a physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative (such agreement to
acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's
employment for "Cause." For purposes of this Agreement, "Cause" means (i) an
act or acts of dishonesty taken by the Executive and intended to result in
substantial personal enrichment of the Executive at the expense of the Company
or (ii) repeated violations by the Executive of the Executive's obligations
under Section 3 of this Agreement which are demonstrably willful and deliberate
on the Executive's part and which result in material injury to the Company. If
the Company wishes to terminate the Executive's employment pursuant to clause
(ii) above, the Company shall first give written notice of its intention to the
Executive which notice shall set forth in reasonable detail the repeated
violations which are alleged by the Company, and the Executive shall have a
30-day period in which to cure such violations prior to the expiration of which
she may not be terminated pursuant to such clause (ii).
(c) Good Reason. The Executive's employment may be
terminated by the Executive for Good Reason. For purposes of this Agreement,
"Good Reason" means
-3-
<PAGE> 4
(i) Executive ceasing for any reason to be the
President and Chief Executive Officer of the Company, other than by
death, disability or termination by the Executive of employment with
the Company other than for Good Reason;
(ii) (A) the assignment to the Executive of any
duties inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities as contemplated by Section 3 of
this Agreement or (B) any other action by the Company which results in
a diminishment in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent action
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) any failure by the Company to comply with
any of the provisions of Section 4 of this Agreement, other than an
insubstantial and inadvertent failure which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(iv) the Company's requiring the Executive to be
based at any office or location outside the greater Houston
metropolitan area, except for travel reasonably required in the
performance of the Executive's responsibilities;
(v) any purported termination by the Company of
the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination
shall not be effective for any purpose of this Agreement;
(vi) any failure by the Company to comply with and
satisfy Section 11(c) of this Agreement; or
(vii) if Executive shall no longer be employed by
the Company for any reason within two years after the occurrence of a
"Change of Control."
For the purpose of this Agreement, a "Change of Control" shall mean a
change of control of the Company during the Employment Period (as defined in
Section 3 below) of a nature that would be required to be reported in response
to Item 1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"); provided that, without limitation, such a "Change of
Control" shall be deemed to have occurred if:
(i) (A) the Company shall not be the surviving
entity in any merger, consolidation or other transaction (or survives
only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company) or (B) the shareholders of the Company
prior to any such merger, consolidation or other transaction do not
continue to own at least 60% of the surviving entity;
-4-
<PAGE> 5
(ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other
than a wholly-owned subsidiary of the Company);
(iii) the Company is materially or completely
liquidated;
(iv) a third person, including a "group" as such
term is used in Section 13(d)(3) of the Exchange Act, becomes the
beneficial owner, directly or indirectly, of (A) 50% or more of the
combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of
the Company or (B) 20% or more of the combined voting power of the
Company's outstanding voting securities ordinarily having the right to
vote for the election of directors of the Company if such acquisition
is not approved by the Board of Directors then in office immediately
prior to the acquisition;
(v) any person (other than the Company) purchases
any voting securities of the Company in a tender or exchange offer
with the intent, express or implied, of purchasing or otherwise
acquiring voting control of the Company; or
(vi) during any consecutive two-year period,
individuals who constituted the Board of Directors of the Company
(together with any new directors whose election by the Board of
Directors or whose nomination for election by the Shareholders of the
Company was approved by a vote of at least three-quarters of the
directors still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office.
For purposes of this Section 6(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the
Company for Cause or by the Executive for Good Reason shall be communicated by
Notice of Termination to the other party hereto given in accordance with
Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated and
(iii) if the termination date is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than 15 days after
the giving of such notice).
(e) Date of Termination. "Date of Termination" means the
date of receipt of the Notice of Termination or any later date specified
therein, as the case may be. If the Executive's employment is terminated by
the Company in breach of this Agreement, the Date of Termination shall be the
date on which the Company notifies the Executive of such termination.
-5-
<PAGE> 6
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Death. If the Executive's employment is terminated
by reason of the Executive's death, this Agreement shall terminate without
further obligations to the Executive's legal representatives under this
Agreement other than those obligations accrued hereunder at the date of the
Executive's death or as specified in this paragraph. Anything in this
Agreement to the contrary notwithstanding, the Executive's family shall be
entitled to receive benefits at least equal to those provided by the Company to
surviving families of executives of the Company under such plans, programs and
policies relating to family death benefits, if any, as in effect at any time
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter with respect to other key executives and their families. In
addition, any previously granted unvested options received by the Executive
pursuant to any stock option plans of the Company prior to her death shall
become immediately vested and fully exercisable by Executive's estate for the
full term of the original grant of the option or options to the extent
permissible by the option plan or plans, notwithstanding any provisions
regarding exercisability provided therein.
(b) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability, the Executive shall be
entitled after the Disability Effective Date to her Base Salary for a
three-year period commencing with the Disability Effective Date and shall
receive such other benefits at least equal to those provided by the Company to
disabled employees and/or their families in accordance with such plans,
programs and policies relating to disability, if any, as in effect during the
90-day period immediately preceding the Effective Date or, if more favorable to
the Executive and/or the Executive's family, as in effect at any time
thereafter with respect to other key executives and their families. In
addition, any previously granted unvested options received by the Executive
pursuant to any stock option plans of the Company prior to Executive's
Disability shall become immediately vested and fully exercisable by Executive
or her estate for the full term of the original grant of the option or options
to the extent permissible by the option plan or plans, notwithstanding any
provisions regarding exercisability provided therein.
(c) Cause. If the Executive's employment shall be
terminated for Cause, the Company shall pay the Executive her full Base Salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given and shall have no further obligations to the Executive
under this Agreement.
(d) Good Reason; Other Than for Cause or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability, or the employment of the
Executive shall be terminated by the Executive for Good Reason:
(i) the Company shall pay to the Executive in a
lump sum in cash within 10 days after the Date of Termination the
aggregate of the following amounts:
-6-
<PAGE> 7
(A) if not theretofore paid, the
Executive's Base Salary through the Date of Termination at the
rate in effect on the Date of Termination;
(B) the product of (x) the greater of
the highest Annual Bonus paid to the Executive during the
Employment Period and 50% of the Executive's Base Salary in
the year of termination and (y) the fraction obtained by
dividing (i) the number of days which Executive has been
employed during a particular year by (ii) 365; and
(C) three times the sum of (x) the
Executive's annual Base Salary at the rate in effect at the
time Notice of Termination was given and (y) the greater of
the highest Annual Bonus paid to the Executive during the
Employment Period and 50% of the Executive's Base Salary in
the year of termination;
(ii) any previously granted unvested options
received by Executive pursuant to any stock option plans of the
Company prior to such termination shall become immediately vested and
fully exercisable by Executive or by Executive's estate for the full
term of the original grant of the option or options to the extent
permissible by the option plan or plans, notwithstanding any
provisions to the contrary provided in such stock option plans or
agreements;
(iii) the Company shall, promptly upon submission
by the Executive of supporting documentation, pay or reimburse to the
Executive any costs and expenses (including moving and relocation
expenses) paid or incurred by the Executive which would have been
payable under Section 4(f) if the Executive's employment had not
terminated; and
(iv) for a period of three years after the Date of
Termination, the Company shall continue benefits to the Executive
and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs and
policies described in Sections 4(e) and 4(g) of this Agreement (or, if
more favorable to Executive, as in effect at any time thereafter with
respect to other key employees) if the Executive's employment had not
been terminated.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan or program.
-7-
<PAGE> 8
8. FULL SETTLEMENT. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any circumstances, including,
without limitation, any set-off, counterclaim, recoupment, defense or other
right which the Company may have against the Executive or others. In no event
shall the Executive be obligated to seek other employment by way of mitigation
of the amounts payable to the Executive under any of the provisions of this
Agreement. The Company agrees to pay, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company or others of the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof or as a result of any contest
by the Executive against the amount of any payment pursuant to Section 9 of
this Agreement, plus in each case interest, compounded quarterly, on the total
unpaid amount determined to be payable under this Agreement, such interest to
be calculated at a rate equal to 2% in excess of the prime commercial lending
rate published in the Wall Street Journal in effect from time to time during
the period of such nonpayment.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding
anything to the contrary in this Agreement, in the event that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest
or penalties with respect to such excise tax (such excise tax, together with
any such interest or penalties, are hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional payment (a
"Gross-up Payment") in an amount such that after payment by Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if
any, initially determined by the Company and Executive) within five days of the
receipt of such claim. The Company shall notify Executive in writing at least
five days prior to the due date of any response required with respect to such
claim if it plans to contest the claim. If the Company decides to contest such
claim, Executive shall cooperate fully with the Company in such action;
provided, however, the Company shall bear and pay directly or indirectly all
costs and expenses (including additional interest and penalties) incurred in
connection with such action and shall indemnify and hold Executive harmless, on
an after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of the Company's action.
If, as a result of the Company's action with respect to a claim, Executive
receives a refund of any amount paid by the Company with respect to such claim,
Executive shall promptly pay such refund to the Company. If the Company fails
to timely notify Executive whether it will contest such claim or the Company
determines not to contest such claim, then the Company shall immediately pay to
Executive the portion of such claim, if any, which it has not previously paid
to Executive.
-8-
<PAGE> 9
10. CONFIDENTIAL INFORMATION. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company and which shall
not be public knowledge (other than by acts by the Executive or her
representatives in violation of this Agreement). After termination of the
Executive's employment with the Company and continuing for a period of one
year, the Executive shall not, without the prior written consent of the
Company, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
11. SUCCESSORS.
(a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors.
(c) In the event of a Change of Control, any parent
company or successor shall, in the case of a successor, by an agreement in form
and substance satisfactory to the Executive, expressly assume and agree to
perform this Agreement and, in the case of a parent company, by an agreement in
form and substance satisfactory to the Executive, guarantee and agree to cause
the performance of this Agreement, in each case, in the same manner and to the
same extent as the Company would be required to perform if no Change of Control
had taken place.
12. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall
be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
-9-
<PAGE> 10
If to the Executive:
Sylvia Pacholder
19 Windemere
Houston, Texas 77063
If to the Company:
ICO, Inc.
Northborough Tower
100 Glenborough Drive, Suite 250
Houston, Texas 77067
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable
under this Agreement such Federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) This Agreement contains the entire understanding of
the Company and the Executive with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set her hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Sylvia A. Pacholder
---------------------------------------------
SYLVIA PACHOLDER
ICO, INC.
By /s/ Jon C. Biro
-------------------------------------------
Name: Jon C. Biro
Title: Controller/Treasurer
-10-
<PAGE> 11
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This Employment Agreement between ICO, Inc., a Texas corporation (the
"Company"), and SYLVIA A. PACHOLDER (the "Executive") dated this 1st day of
April, 1995 is hereby amended as follows:
Paragraph 2 is hereby deleted in its entirety and the following
paragraph 2 substituted in its place instead.
"EMPLOYMENT PERIOD. Unless sooner terminated pursuant to the
other provisions hereof, the Company agrees to employ
Executive for a period beginning with the Effective Date of
this Agreement and terminating December 31, 2001. Said term
of employment shall be extended automatically from day to day
until such time as either party shall give written notice to
the other that no further such automatic extensions shall
occur, in which event Executive's employment shall terminate
on a date five years after such notice has been received. As
used herein, the term "Employment Period" shall mean the
period beginning on the Effective Date and ending on the date
the Executive's employment terminates."
Except as amended by this first amendment all other provisions of the
Sylvia A. Pacholder Employment Agreement are hereby ratified and reaffirmed.
IN WITNESS WHEREOF, the Executive has hereunto set her hand and,
pursuant to the authorization from the Compensation Committee of its Board of
Directors, the Company has caused these presents to be executed in its name on
its behalf, this 14th day of June, 1996.
/s/ Sylvia A. Pacholder
---------------------------------------------
SYLVIA A. PACHOLDER
ICO, INC.
By /s/ Jon C. Biro
-------------------------------------------
Name: Jon C. Biro
Title: Treasurer
<PAGE> 12
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
The Employment Agreement (the "Agreement") between ICO, Inc. a Texas
corporation (the "Company") and Sylvia A. Pacholder (the "Executive") dated
April 1, 1995, as amended by the First Amendment to Employment Agreement dated
June 14, 1996, is amended hereby as follows:
Paragraph 4(a) of the Agreement is deleted in its entirety and the
following paragraph 4(a) substituted in its place.
(a) Base Salary. During the Employment Period and
commencing on January 1, 1997, the Executive shall receive a base salary ("Base
Salary") of $325,000 per annum payable bi-weekly. During the Employment
Period, the Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time to reflect at a minimum, increases
in the cost of living and such other increases as shall be consistent with
increases in base salary awarded in the ordinary course of business to other
key executives. Any increase int he Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. The Base
Salary shall not be reduced after any such increase.
Except as amended by this second amendment, all other provisions of
the Agreement hereby are ratified and affirmed.
In witness whereof, the Executive has set her hand hereunto, and
pursuant to the authorization from the compensation Committee of the Board of
Directors, the Company has caused these presents to be executed in its name on
its behalf, this 7th day of February, 1997.
-------------------
/s/ Sylvia A. Pacholder
-------------------------------------------
Sylvia A. Pacholder
ICO, INC.
By: /s/ Jon C. Biro
----------------------------------------
Name: Jon C. Biro
Title: Senior Vice President and Treasurer
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Permian Enterprises, Inc.
ICO Shearer, Inc.
The Innovation Company, S.A. de C.V.
B&W Equipment Sales and Mfg., Inc.
Wedco Technology, Inc.
Wedco, Inc.
Tri-Delta Technology, Inc.
Polymer Services, Inc.
Polymer Services of Indiana, Inc.
Bayshore Industrial, Inc.
ICO Europe B.V.
Wedco Holland B.V.
Wedco Technology U.K. Ltd.
Rotec Chemicals Ltd.
Wedco France S.A.
Wedco Italy Srl
Verplast SpA
Tec-Ma Srl
ICO Italy Srl
ICO Polymers, B.V.
ICO Polymers U.K., Ltd.
ICO U.K., Ltd.
ICO Minerals, Inc.
Wedco Petrochemicals, Inc.
Wedco Sweden AB
ICO Polymers Scandinavia AB
ICO Polymers France
Wedco Domestic International Sales
S-1
<PAGE> 1
ITEM 14. C(1) 23 CONSENT OF PRICE WATERHOUSE LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 dated January 26, 1988; September 13, 1993; October 25,
1994; October 23, 1995 and January 21, 1997 of ICO, Inc. of our report dated
December 19, 1997 appearing on Page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Houston, Texas
December 26, 1997
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FILING ON FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 83,892,000
<SECURITIES> 0
<RECEIVABLES> 50,930,000
<ALLOWANCES> (967,000)
<INVENTORY> 20,709,000
<CURRENT-ASSETS> 162,758,000
<PP&E> 152,440,000
<DEPRECIATION> (54,661,000)
<TOTAL-ASSETS> 321,753,000
<CURRENT-LIABILITIES> 52,469,000
<BONDS> 0
0
13,000
<COMMON> 36,966,000
<OTHER-SE> 90,159,000
<TOTAL-LIABILITY-AND-EQUITY> 321,753,000
<SALES> 197,846,000
<TOTAL-REVENUES> 197,846,000
<CGS> 141,302,000
<TOTAL-COSTS> 184,436,000
<OTHER-EXPENSES> (602,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,764,000
<INCOME-PRETAX> 10,248,000
<INCOME-TAX> 4,150,000
<INCOME-CONTINUING> 6,098,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,098,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
<PAGE> 1
EXHIBIT 99 - SAFE HARBOR DISCLOSURE
S-5
<PAGE> 2
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-K 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 and
Maywood, Illinois (all of which have been closed) 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
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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.
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