<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-10068
--------
ICO, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1619554
- ------------------------- ------------------------------------
(State of incorporation) (IRS Employer Identification Number)
11490 Westheimer, Suite 1000, Houston, Texas 77077
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(281) 721-4200
------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Common stock, without par value: 21,016,124 shares
outstanding as of May 15, 1997
<PAGE> 2
ICO, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and
September 30, 1996................................................ 3
Consolidated Statements of Operations for the Three
Months and Six Months Ended March 31, 1997 and 1996............... 4
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 1997 and 1996.............................. 5
Notes to Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 12
Item 2. Changes in Securities............................................. 13
Item 3. Defaults upon Senior Securities (no response required)............ -
Item 4. Submission of Matters to a Vote of Security Holders .............. 13
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 14
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 3
ICO, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 6,133,000 $ 13,414,000
Trade receivables (less allowance for doubtful accounts of
$465,000 and $972,000, respectively) 29,682,000 25,279,000
Inventories 12,088,000 7,556,000
Income tax receivable -- 16,000
Deferred tax asset 3,213,000 4,052,000
Prepaid expenses and other 2,638,000 3,023,000
------------- -------------
Total current assets 53,754,000 53,340,000
------------- -------------
Property, plant and equipment, at cost 127,495,000 126,170,000
Less - accumulated depreciation and amortization (50,496,000) (53,585,000)
------------- -------------
76,999,000 72,585,000
------------- -------------
Other assets:
Goodwill (less accumulated amortization of
$4,468,000 and $4,039,000, respectively) 34,779,000 29,915,000
Investment in joint ventures 4,468,000 4,619,000
Other 5,285,000 2,932,000
------------- -------------
$ 175,285,000 $ 163,391,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current portion of long-term debt $ 4,203,000 $ 3,880,000
Accounts payable 12,270,000 8,538,000
Accrued insurance 1,544,000 1,613,000
Accrued salaries and wages 868,000 2,001,000
Accrued litigation costs 930,000 2,071,000
Income taxes payable 490,000 --
Accrued expenses 5,404,000 5,355,000
------------- -------------
Total current liabilities 25,709,000 23,458,000
Deferred income taxes 1,524,000 1,648,000
Long-term liabilities 2,282,000 2,269,000
Long-term debt, net of current portion 19,535,000 15,422,000
------------- -------------
Total liabilities 49,050,000 42,797,000
------------- -------------
Stockholders' equity:
Preferred stock, without par value - 500,000 shares authorized; 322,500
shares issued and outstanding with a liquidation
preference of $32,250,000 13,000 13,000
Common Stock, without par value - 50,000,000 shares authorized;
21,016,124 and 19,682,494 shares issued and outstanding,
respectively 36,079,000 35,822,000
Additional paid-in capital 108,310,000 102,429,000
Cumulative translation adjustment (761,000) 32,000
Accumulated deficit (17,406,000) (17,702,000)
------------- -------------
126,235,000 120,594,000
------------- -------------
Commitments and contingencies -- --
------------- -------------
$ 175,285,000 $ 163,391,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Oilfield sales and services $ 23,595,000 $ 22,095,000 $ 46,342,000 $ 43,828,000
Petrochemical processing sales and services 21,693,000 -- 35,449,000 --
------------ ------------ ------------ ------------
Total net revenues 45,288,000 22,095,000 81,791,000 43,828,000
------------ ------------ ------------ ------------
Cost and expenses:
Cost of sales and services 32,572,000 15,523,000 56,810,000 30,668,000
Selling, general and administrative 6,718,000 3,722,000 13,591,000 7,775,000
Depreciation and amortization 2,608,000 1,337,000 5,109,000 2,676,000
------------ ------------ ------------ ------------
41,898,000 20,582,000 75,510,000 41,119,000
------------ ------------ ------------ ------------
Operating income 3,390,000 1,513,000 6,281,000 2,709,000
------------ ------------ ------------ ------------
Other income and expense:
Interest income 56,000 351,000 236,000 748,000
Interest expense (388,000) (22,000) (767,000) (43,000)
Equity in income (loss) of joint ventures (4,000) -- 15,000 --
Gain on sale of fixed assets 5,000 26,000 23,000 44,000
Other (7,000) -- 18,000 --
------------ ------------ ------------ ------------
(338,000) 355,000 (475,000) 749,000
------------ ------------ ------------ ------------
Income before taxes 3,052,000 1,868,000 5,806,000 3,458,000
Provision for income taxes 1,320,000 95,000 2,227,000 184,000
------------ ------------ ------------ ------------
Net income $ 1,732,000 $ 1,773,000 $ 3,579,000 3,274,000
============ ============ ============ ============
Earnings applicable to common and
common equivalent shares $ .06 $ .14 $ .12 $ .25
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 20,908,819 8,927,361 20,437,655 8,918,028
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,579,000 $ 3,274,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,109,000 2,676,000
Gain on disposition of property, plant, and equipment (23,000) (44,000)
Equity in income of joint ventures (15,000) --
Changes in assets and liabilities, net of the effects of business
acquisitions:
Receivables 911,000 2,244,000
Inventories (1,775,000) (905,000)
Prepaid expenses and other 593,000 (1,446,000)
Deferred taxes 814,000 --
Accounts payable 1,236,000 1,041,000
Accrued expenses (2,697,000) (2,764,000)
------------ ------------
Total adjustments 4,153,000 802,000
------------ ------------
Net cash provided by operating activities 7,732,000 4,076,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,172,000) (4,196,000)
Acquisitions, net of cash acquired (6,843,000) (301,000)
Dispositions of property, plant and equipment 43,000 61,000
------------ ------------
Net cash used for investing activities (11,972,000) (4,436,000)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of stock 244,000 195,000
Payment of dividend on preferred stock (1,088,000) (1,088,000)
Payment of dividend on common stock (2,196,000) (894,000)
Additional debt 3,656,000 --
Reductions of debt (3,657,000) (429,000)
------------ ------------
Net cash used for financing activities (3,041,000) (2,216,000)
------------ ------------
Net decrease in cash and equivalents (7,281,000) (2,576,000)
Cash and equivalents at beginning of period 13,414,000 24,991,000
------------ ------------
Cash and equivalents at end of period $ 6,133,000 $ 22,415,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash received (paid) during
the period for:
Interest received 236,000 748,000
Interest paid (777,000) (43,000)
Income taxes paid (860,000) (1,679,000)
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
Following is a schedule of assets acquired, liabilities assumed or incurred,
and common stock issued in conjunction with the acquisition of Bayshore
Industrial, Inc.:
<TABLE>
<CAPTION>
<S> <C>
Trade receivables $ 4,586,000
Related party receivables 705,000
Inventories 2,793,000
Prepaid expenses and other assets 501,000
Property, plant and equipment 5,074,000
Goodwill 5,215,000
Accounts payable (2,436,000)
Accrued liabilities (736,000)
Deferred tax liability (348,000)
Long term debt (2,616,000)
Common stock issued (5,895,000)
-----------
Cash paid, net of cash acquired $ 6,843,000
===========
</TABLE>
During March 1997, the Company made its initial payment to acquire the
micropowders business of Exxon Chemical Belgium discussed in Note 3 to the
Consolidated Financial Statements. The acquisition was effective April 1, 1997,
and the related short-term and long-term portion of this note was included in
the consolidated balance sheet less the initial payment. The total amount of
the purchase price is included in "other assets".
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements," and accordingly do not include all information and footnotes
required under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Annual Report on Form
10-K for the year ended September 30, 1996 for ICO, Inc. (the "Company"). In
the opinion of management, these interim financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position as of March 31, 1997, the
results of its operations for the three months and six months ended March 31,
1997 and 1996 and the changes in its cash position for the six months ended
March 31, 1997 and 1996. Results of operations for the three-month and
six-month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending September 30, 1997. For
additional information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1996.
NOTE 2. EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS' EQUITY
Earnings per share is based on earnings applicable to common shareholders and
is calculated using the weighted-average number of common shares outstanding.
At March 31, 1997 and 1996, outstanding options and warrants did not have a
materially dilutive effect.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") located in LaPorte, Texas for approximately $6,900,000 in cash and
1,285,012 shares of ICO common stock and the effective assumption of $2.6
million in debt. Bayshore is a provider of concentrates and compounds to resin
producers in the United States. The Company accounted for this acquisition
under the purchase method of accounting.
During fiscal 1996, the Company acquired Rainbow Inspection Company of
Mississippi, Inc. ("Rainbow", in March 1996), Wedco Technology, Inc. ("Wedco",
in April 1996), and Polymer Service, Inc. and Polymer Service of Indiana, Inc.
(collectively referred to as "PSI", in July 1996). The fiscal 1996 acquisitions
were accounted for under the purchase method of accounting.
The following unaudited pro forma information assumes the Bayshore, PSI and
Wedco acquisitions occurred as of the beginning of the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $45,288,000 $40,962,000 $89,898,000 $78,080,000
Net income 1,732,000 943,000 3,782,000 1,780,000
Net income per common and
common equivalent share .06 .02 .13 .03
</TABLE>
NOTE 3. SUBSEQUENT EVENTS
Effective April 1, 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business") for an initial payment of
Dutch Guilders ("NLG") 843,000 ( $500,000) and five additional payments of NLG
674,000 (approximately $350,000 at April, 1997 exchange rates) payable for each
of five years beginning one year after the acquisition date. In addition to the
above consideration, the Company purchased beginning inventory from Exxon
Chemical Belgium and executed a supply agreement to acquire inventories in the
future at scheduled prices. The acquisition of this business complements the
Company's existing European operations by allowing for the distribution of
rotational molding powders throughout Europe, under the ICO Polymers name.
Effective April 30, 1997 the Company acquired Rotec Chemicals Ltd. ("Rotec")
for $2,500,000 cash and 427,351 common shares of ICO, Inc. stock. The Rotec
shareholders may also be entitled to additional consideration in cash and ICO
common stock based
-7-
<PAGE> 8
on the future earnings of Rotec. Rotec serves the United Kingdom, Ireland and
Continental Europe markets and is a producer of high quality concentrates for a
variety of plastics processes.
On May 5, 1997 the Company acquired the 50% interest of Micronyl-Wedco, S.A.
("Micronyl") not previously owned by the Company. The consideration consisted of
15,000,000 French Francs ( $2,610,000) and the assumption of Micronyl's total
outstanding debt as of the acquisition date equal to $1,483,000. Micronyl
provides size-reduction and custom compounding services in France.
The following unaudited pro forma information assumes the Rotec, Bayshore, PSI
and Wedco acquisitions occurred as of the beginning of the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $48,119,000 $43,358,000 $95,258,000 $82,348,000
Net income 1,786,000 1,195,000 3,776,000 1,928,000
Net income per common and
common equivalent share .06 .03 .12 .04
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This material contains "Forward-Looking Statements" within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve substantial risks and uncertainties. When
words such as "anticipate", "believe", "estimate", intend", "expect", "plan"
and similar expressions are used, they are intended to identify the statements
as forward-looking. Actual results, performance or achievements 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 of
both revenues and gross margins in comparison to its historical performance. As
part of the strategy initiated with the Wedco acquisition, the Company acquired
PSI (which solidified the company's domestic petrochemical size reduction
market share and added management expertise), continued to emphasize its
European petrochemical processing business and established a domestic sales
force. The Company has also implemented a plan of consolidation involving the
closure of three domestic petrochemical processing plants. Two plants have
already been closed (in Houston, Texas and Long Beach, California) and the
third will be closed during fiscal 1997. Due to this timing, the benefits of
these closures were not reflected in the results of the first quarter and a
portion of the second quarter. The Company believes the closures will reduce
operating costs and capital expenditures requirements. As a result of the above
initiatives and the reduction of expenses, overall operating results of the
Company's size reduction businesses have improved as compared to the combined
results of Wedco and PSI for the year earlier periods, prior to these companies
being acquired by the Company.
The acquisition of Bayshore in December of 1996 is expected to have the effect
of reducing overall petrochemical processing margins. The gross margin
percentage for Bayshore's business is generally lower than those generated by
the Company's size reduction services because Bayshore typically buys raw
materials, improves the material and then sells the finished product. In
contrast, the Company's size reduction services typically involve processing
customer owned material. The expansion of the Company's distribution business
within the petrochemical processing segment will also have the effect of
reducing consolidated gross margins.
-8-
<PAGE> 9
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 and reconditioning
of used tubular goods and sucker rods and inspection of new sucker rods), (iii)
corrosion control services (coating of tubular goods and sucker rods), and (iv)
other sales and services (oilfield engine sales and services in Canada).
Petrochemical processing revenues include revenues derived from grinding
petrochemicals into powders (size reduction), the manufacture of concentrates,
compounding, distributing plastic powders to customers, other ancillary
services (included in grinding services) and grinding equipment manufacturing.
Revenues are recorded as the services are performed or the equipment is shipped
to third-parties.
Cost of sales and services is primarily comprised of compensation and benefits
to non-administrative employees, occupancy costs, repair and maintenance,
electricity and equipment costs and supplies, and, in the case of Bayshore and
the Company's distribution business, purchased raw materials. Selling, general
and administrative expenses consist primarily of compensation and related
benefits to the sales and marketing, executive management, accounting, human
resources and other administrative employees of the Company, other sales and
marketing expenses, communications costs, systems costs, insurance costs and
legal and accounting professional fees.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
-------------------------------------------- -----------------------------------------
% of % of % of % of
NET REVENUES (000'S) 1997 Total 1996 Total 1997 Total 1996 Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration Sales and Services $ 8,799 19 $ 8,231 37 $ 17,735 22 $ 16,686 38
Production Sales and Services 8,218 18 7,689 35 15,870 20 14,879 34
Corrosion Control Services 5,420 12 5,505 25 10,798 13 10,942 25
Other Sales and Services 1,158 3 670 3 1,939 2 1,321 3
-------- -------- -------- -------- -------- -------- -------- --------
Total Oilfield Services Revenues 23,595 52 22,095 100 46,342 57 43,828 100
-------- -------- -------- -------- -------- -------- -------- --------
Total Petrochemical Processing 21,693 48 -- -- 35,449 43 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 45,288 100 $ 22,095 100 $ 81,791 100 $ 43,828 100
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
-------------------------------------------- -----------------------------------------
% of % of % of % of
OPERATING PROFIT (000'S) 1997 Total 1996 Total 1997 Total 1996 Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield Services $ 3,116 62 $ 2,833 100 $ 7,146 69 $ 5,413 100
Petrochemical Processing 1,938 38 -- -- 3,261 31 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total Operations 5,054 100 2,833 100 10,407 100 5,413 100
General Corporate Expenses (1,664) (1,320) (4,126) (2,704)
-------- -------- -------- --------
Total $ 3,390 $ 1,513 $ 6,281 $ 2,709
======== ======== ======== ========
</TABLE>
-9-
<PAGE> 10
Six and Three Months Ended March 31, 1997 Compared to Six and Three Months
Ended March 31, 1996
REVENUES. Consolidated revenues increased 86.6% and 105% in the six and three
months ended March 31, 1997, respectively, as compared to the same period last
year. These improvements are primarily due to the fiscal 1996 acquisitions.
Oilfield service revenues increased $2,514,000 or 5.7% and $1,500,000 or 6.8%
during the six and three months ended March 31, 1997, respectively, compared to
the same periods in fiscal 1996. Revenues from exploration services increased
$1,049,000 or 6.3% and $568,000 or 6.9% from the six and three months ended
March 31, 1996, respectively, compared to the same periods of fiscal 1997. These
improvements were driven primarily by increased sales volumes of the Company's
Houston, Texas tubular service facility. Demand for the Company's exploration
services is driven, in part, by the average domestic rig count which increased
16% and 21% during the six and three months ended March 31, 1997, respectively,
versus the comparable periods in fiscal 1996. Revenues from production services
increased $991,000 or 6.7% and $529,000 or 6.9% for the six and three months
ended March 31, 1997, respectively, compared to the same periods in fiscal 1996.
The demand for these services has been favorably impacted by generally higher
oil prices in fiscal 1997 versus fiscal 1996. The increases in production
services revenues were due in large part to increased Canadian sucker rod
inspection revenues resulting from higher levels of production activity in
Western Canada. Corrosion control revenues decreased $144,000 or 1.3% and
$85,000 or 1.5% during the six and three months ended March 31, 1997,
respectively, compared to the same periods of fiscal 1996. These changes were
primarily due to lower West Texas sales volumes. Other sales and services
consist of revenues generated by the Company's Canadian subsidiary relating to
the reconditioning and selling of engines used in connection with oil well
pumping units. These revenues increased due to greater production activity in
Western Canada, during fiscal 1997, versus the comparable periods in fiscal
1996.
Petrochemical processing sales and services relate entirely to revenues of the
Company's Wedco, PSI and Bayshore subsidiaries which were acquired in April,
July and December, 1996, respectively. During the six months ended March 31,
1997 petrochemical processing revenues included grinding and other,
concentrate, and distribution revenues of $21,500,000, $12,684,000 and
$1,265,000, respectively. During the three months ended March 31, 1997
petrochemical processing revenues included size reduction and other,
concentrate, and distribution revenues of $10,831,000, $9,861,000 and
$1,001,000, respectively.
COSTS AND EXPENSES. Gross profit as a percentage of revenues were 30.5% and
28.2% during the six and three months ended March 31, 1997, respectively,
versus 30.0% and 29.8% for the six and three months ended March 31, 1996,
respectively. Within the oilfield services business, gross margins as a
percentage of revenues increased less than 1% during the six months ended March
31, 1997 compared to the year earlier period and increased just over 1% during
the quarter ended March 31, 1997 compared to the quarter ended March 31, 1996.
These improvements are due to an overall increase in sales volumes and modest
price improvements within some of the Company's oilfield services markets
without a proportionate increase in costs and expenses. The gross margins of
the Company's size reduction operations are generally higher than the margins
of the oilfield service operations. Conversely, the gross margins of the
Company's concentrate manufacturing and distribution businesses are generally
lower due to the higher raw material cost component included in these revenues
as compared to the Company's other petrochemical services. The Company
anticipates that as the concentrate and distribution businesses expand, overall
gross margins, as a percentage of sales, will decline.
The Company closed two petrochemical processing facilities during the six
months ended March 31, 1997 and plans to close a third facility in fiscal 1997
(See "Introduction"). Due to the timing of the closures, however, the full cost
benefits of the closures were not reflected in the results of the first quarter
and a portion of the second quarter.
Selling, general and administrative costs increased $5,816,000 and $2,996,000
during the six and three months ended March 31, 1997, respectively, versus the
same periods of fiscal 1996. Selling, general and administrative costs as a
percentage of sales decreased to 16.6% and 14.8% during the six and three
months ended March 31, 1997, respectively, from 17.7% and 16.8% for the six and
three months ended March 31, 1996. The overall increases in these costs were
primarily the result of acquisitions in the latter part of fiscal 1996 and in
fiscal 1997 and, to a lesser extent, higher legal and employee compensation
expenses during the six and three months ended March 31, 1997 versus the same
periods of fiscal 1996, partially offset by lower costs relating the Company's
workers' compensation insurance program.
Depreciation and amortization expense increased from $2,676,000 and $1,337,000
for the six and three months ended March 31, 1996, respectively, to $5,109,000
and $2,608,000 for the six and three months ended March 31, 1997. The increases
resulted from additions of property, plant and equipment and goodwill primarily
due to the acquisitions made during fiscal 1996 and fiscal 1997.
-10-
<PAGE> 11
OPERATING INCOME. Operating income increased from $2,709,000 and $1,513,000 for
the six and three months ended March 31, 1996, respectively, to $6,281,000 and
$3,390,000 for the same periods of fiscal 1997. The increases are due to the
changes in revenues and costs and expenses discussed above. Particularly
significant were lower insurance costs relating to workers' compensation,
within the oilfield service operations.
INTEREST INCOME/EXPENSE. Net interest expense was $531,000 and $332,000 during
the six and three months ended March 31, 1997, respectively. For the six and
three months ended March 31, 1996, the Company had net interest income of
$705,000 and $329,000, respectively. These changes are due to the fiscal 1996
and fiscal 1997 acquisitions which increased the Company's debt and reduced
investable cash balances.
INCOME TAXES. The Company's effective tax rate increased to 38.4% and 43.3%
during the six and three months of fiscal 1997, respectively, compared to 5.3%
and 5.1% during the same periods of fiscal 1996. This change is due to the
Company decreasing its valuation allowance through the provision for income
taxes to reflect its ability to benefit from temporary differences during
fiscal 1996. In connection with the April 1996 acquisition of Wedco, the
Company reversed the remaining valuation allowance against net tax assets
expected to be realized, resulting in a decrease of acquired goodwill. As a
result of the reversal of the valuation allowance in April 1996 and increased
goodwill amortization, which is not tax deductible, provisions for income taxes
for periods subsequent to the Wedco acquisition will be higher as a percentage
of pre-tax income than reported in fiscal 1995 and fiscal 1996.
NET INCOME. For the six and three months ended March 31, 1997, the Company had
net income of $3,579,000 and $1,732,000, respectively, as compared to net
income of $3,274,000 and $1,773,000 for the same periods in fiscal 1996 due to
the factors described above.
FOREIGN CURRENCY TRANSLATION. The fluctuation of the dollar against the Dutch
Guilder, the British Pound and the Swedish Krona has impacted the translation
of revenues and income of Wedco's European operations into U.S. dollars for the
six months ended March 31, 1997. Gains and losses from the translation of
certain balance sheet accounts are not included in determining net income, but
are accumulated as a separate component of stockholders' equity. These
unrealized gains and losses are subject to deferred income taxes. As a result
of the dollar's fluctuation against these currencies and changes in the net
assets of foreign subsidiaries, stockholders' equity decreased net of deferred
income taxes by $793,000 during the six months ended March 31, 1997. This
change was due primarily to a change of Dutch Guilder to U.S. Dollar exchange
rates.
Liquidity and Capital Resources
Cash and cash equivalents decreased $7,281,000 during the six months ended
March 31, 1997 to $6,133,000 from $13,414,000 at September 30, 1996. This
change resulted from cash generated by operating activities offset by cash used
for investing and financing activities, discussed below.
For the six months ended March 31, 1997 cash provided by operating activities
increased to $7,732,000 compared to $4,076,000 for the six months ended March
31, 1996. The increase was primarily due to higher net income and depreciation
and amortization expense offset by various changes in working capital accounts.
The Company had working capital of $28,045,000 at March 31, 1997 compared to
$29,882,000 at September 30, 1996.
Cash flows used for financing activities increased to $3,041,000 during the
first six months of fiscal year 1997 compared to $2,216,000 during the first
six months of 1996. The increase is due to the increase in common stock
dividends, resulting from the increase in the number of common shares
outstanding, offset by lower net debt repayments, net of debt incurred.
Capital expenditures totaled $5,172,000 during the six months ended March 31,
1997 excluding property, plant and equipment of $5,074,000 acquired with the
acquisition of Bayshore. Of the capital expenditures, $1,952,000 related to the
oilfield services segment and the remaining related to the petrochemical
processing business. The expenditures were primarily incurred to enhance and
expand existing facilities. For the remainder of fiscal 1997, capital
expenditures are expected to be approximately $7,800,000 and are expected to be
financed through cash generated from operations and existing cash. This figure
includes approximately $3,000,000 to build an additional compounding line
within the Company's LaPorte, Texas facility. The Company used $6,843,000 in
cash, net of cash acquired, to purchase Bayshore.
During the period commencing on October 1, 1995 and ended on March 31, 1997,
the Company has acquired four companies, three within the specialty
petrochemical processing businesses. Since March 31, 1997, the Company has
acquired three additional businesses. These acquisitions required significant
investment by the Company in cash, Company common stock issued to the
-11-
<PAGE> 12
former owners of the acquired businesses and indebtedness effectively assumed
by the Company. Much of the changes of the March 31, 1997 balance sheet from
September 30, 1996 are a result of these acquisitions (including $2,247,000 in
"other assets" relating to the acquisition of the Micropowders Business which
was effective April 1, 1997). The Company anticipates it will continue to seek
acquisitions which will be funded with existing cash, the issuance of equity
securities and/or the assumption or incurrence of indebtedness, including
indebtedness under the Company's domestic credit facility.
As of March 31, 1997, the Company had approximately $18,452,000 in additional
borrowing capacity available under various credit arrangements. $14,616,000 of
this amount is available under the Company's domestic credit facility and the
remaining is available under various foreign facilities. Subsequent to March
31, 1997, the Company borrowed $5.3 million under its bank credit facility
primarily to fund the Rotec and Micronyl acquisitions.
On May 12, 1997 the Company announced its engagement of a placement agent to
assist it in a private offering of an aggregate of $100 million of Senior Notes
to institutional investors to refinance indebtedness, for capital expenditures
and for acquisitions and other general corporate purposes. The offering will be
effected without registration under the Securities Act of 1933 or any state
securities law. The senior Notes may not be publicly offered or sold in the
United States absent registration or an applicable exemption from such
registration requirements. There can be no assurance that the offering will be
completed.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a named defendant in 12 cases involving 12 plaintiffs, filed
since June 1990, for personal injury claims alleging exposure to silica
resulting in silicosis-related disease. The Company is generally protected under
workers' compensation law from claims under these suits except to the extent a
judgment is awarded against the Company for intentional tort. In 1994, the
Company was dismissed without liability from two suits alleging intentional tort
against the Company for silicosis-related disease. In fiscal 1993, the Company
settled two other suits, both of which alleged wrongful death caused by
silicosis-related diseases, which resulted in a total charge of $605,000. In
1996, the Company obtained a non-suit in two other intentional tort cases and in
early 1997 was non-suited in an additional tort case. Three of the pending
personal injury cases involve three alleged silicosis-related deaths, which are
premised upon allegations of gross negligence. The standard liability applicable
to the remainder of the pending cases is intentional tort, a stricter standard
than the gross negligence standard applicable to the wrongful death cases. The
Company and its counsel cannot at this time predict with any reasonable
certainty the outcome of any of the remaining suits or whether or in what
circumstances additional suits may be filed. Except as described below, the
Company does not believe, however, that such suits will have a material adverse
effect on its financial condition or results of operations. The Company has in
effect general liability and employer's liability insurance policies applicable
to the referenced suits; however, the extent and 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 conditions or results of operations of the
Company.
The Company's agreement with Baker Hughes, Incorporated ("Baker Hughes")
pursuant to which Baker Hughes Tubular Services ("BHTS") was acquired by the
Company, provides that Baker Hughes will reimburse the Company for 50% of the
BHTS environmental remediation costs in excess of $318,000, with Baker Hughes'
total reimbursement obligation being limited to $1,000,000. BHTS is a
responsible party at two hazardous waste disposal sites that are currently
undergoing remediation pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who were
responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas. Remediation of the French Limited site
has been completed, with only natural attenuation of contaminants in groundwater
occurring at this time. Remediation has not yet commenced at the Sheridan site;
current plans set forth in the federal Record of Decision for cleanup of the
site call for bioremediation of the soils and natural attenuation of
contaminants in the groundwater. Based on the completed status of the
remediation at the French Limited site and BHTS's minimal contribution of wastes
at both of the sites, the Company believes that its future liability under the
agreement with Baker Hughes with respect to these two sites will not be
material.
During December of 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992.
-12-
<PAGE> 13
The agreement stipulates that with regard to future occupational health claims,
the parties shall share costs equally, with the Company's obligations being
limited to $500,000 for each claim and a maximum contingent liability of
$4,500,000 (net of current accruals) in the aggregate, for all claims.
Wedco is a plaintiff and a counterclaim defendant and the Company is a third
party defendant in a lawsuit filed by Wedco against Polyvector Corporation
("Polyvector") and John Lefas ("Lefas"), the current president of WedTech and
principal shareholder of Polyvector, which is pending in the federal district
court for the District of New Jersey. Wedco alleges, among other things, that
the various defendants have breached the terms of the shareholders' agreement
among Wedco and the defendants and seeks performance of the terms of such
agreement. WedTech, Polyvector and Lefas have asserted various counterclaims and
third party claims against the Company allegedly arising out of the Company's
merger with Wedco and the conduct of WedTech's affairs under the shareholders'
agreement. The defendants are seeking, among other things, injunctive relief,
recission of the transfer of WedTech shares in the merger between Wedco and the
Company and reimbursement for alleged damages. The case is in the preliminary
discovery stage. The outcome of this litigation cannot be predicted, but the
Company believes it has meritorious defenses to the counterclaims and third
party claims.
Permian Enterprises, Inc., a wholly owned subsidiary of the Company ("Permian")
is a defendant in a case filed by Tidelands Oil Production Company ("Tidelands")
pending in the Superior Court of Los Angeles County, California (Long Beach
division) alleging Permian is liable for damages exceeding $1.1 million suffered
by Tidelands and third parties resulting from the failure of a pipe owned by
Tidelands and which was allegedly lined by Permian. Discovery in this case is
ongoing, and a jury trial in the case is currently scheduled for 1998. The
outcome of this litigation cannot be predicted, but the Company believes Permian
has meritorious defenses in this matter.
The Company is also named as a defendant in certain lawsuits arising in the
ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
During and subsequent to the quarter ended March 31, 1997, the Company issued
the following unregistered common shares which were exempt pursuant to Section
4(2) of the Securities Act of 1933:
<TABLE>
<CAPTION>
Number of Shares
Date of Common Stock Transaction
---- --------------- -----------
<S> <C> <C>
March 26, 1997 113,446 Issued to former shareholders of Bayshore
Industrial, Inc. for working capital adjustment
pursuant to merger agreement
April 30, 1997 427,351 Issued to former shareholders of Rotec Chemicals, Ltd.
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on March 3, 1997 for
the following purposes:
1) To elect four Class III Directors to serve until the 2000 Annual
Meeting of Shareholders and until their respective successors are
elected and qualified;
2) To ratify and approve the selection of Price Waterhouse LLP as the
Company's independent accountants for the ensuing fiscal year; and
3) To consider and act upon any matters incidental to the foregoing
purposes and transact such other business as may properly come before
the meeting or any adjournment thereof.
Holders of shares of Common Stock of record on the books of the Company at the
close of business on January 13, 1997 were entitled to vote at the meeting.
Asher O. Pacholder, John F. Williamson, Walter L. Leib and James E. Gibson were
elected as Class III Directors at the annual meeting with 19,214,810,
19,300,231, 19,299,278 and 19,300,231 votes for; and 211,947, 126,526, 127,479
and 126,526 abstentions, respectively. There were zero votes against and zero
votes withheld.
The selection of Price Waterhouse LLP as the Company's auditors for the 1997
fiscal year was approved by the following vote: 19,016,658 votes for, 25,945
votes against, 66,422 abstentions and 317,732 votes withheld.
-13-
<PAGE> 14
ITEM 5. OTHER INFORMATION
On May 12, 1997 the Company announced that it has engaged a placement agent to
assist it in a private offering to institutional investors of an aggregate of
$100,000,000 of Senior Notes. Proceeds of the offering will be used to
refinance outstanding indebtedness of the Company and its subsidiaries, for
capital expenditures, for acquisitions and other general corporate purposes.
The offering will be effected without registration under the Securities Act of
1933 or any state securities law. The Senior Notes may not publicly be offered
or sold in the United States absent registration or an applicable exemption
from such registration requirements. There can be no assurance that the
offering will be completed.
In connection with the offering, the Company is including pro forma financial
information to reflect the 1996 acquisitions of Wedco Technology, Inc., the
Polymer Service companies, the 1997 acquisitions of Bayshore Industrial, Inc.
and Rotec Chemicals, Ltd. and the offering. The PSI and Bayshore acquisitions
did not require an 8-K Filing under Item 2 and thus, the Company is filing as
Exhibit 99.1, which is hereby incorporated by reference, the unaudited pro
forma condensed consolidated financial statements for and as of the six months
ended March 31, 1996 and the fiscal year ended September 30, 1996 to give
effect to the acquisitions above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this report:
Exhibit 10 - Amended and Restated Business Loan Agreement dated
February 21, 1997 between the Registrant and Bank of
America, Texas, N.A.
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Unaudited pro forma condensed consolidated financial
statements as of and for the six months ended March 31,
1997 and the fiscal year ended September 30, 1996
On May 12, 1997 the Company filed a Form 8-K Current Report regarding the
acquisition of Rotec Chemicals, Ltd.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ICO, Inc.
-----------------------------------
(Registrant)
/s/ Asher O. Pacholder
May 15, 1997 -----------------------------------
Asher O. Pacholder
Chairman and Chief Financial Officer
(Principal Financial Officer)
/s/ Jon C. Biro
-----------------------------------
Jon C. Biro
Senior Vice President and Treasurer
(Principal Accounting Officer)
-15-
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10 - Amended and Restated Business Loan Agreement dated February
21, 1997 between the Registrant and Bank of America, Texas,
N.A.
27 - Financial Data Schedule
99.1 - Unaudited pro forma condensed consolidated financial statements
as of and for the six months ended March 31, 1997 and the
fiscal year ended September 30, 1996
</TABLE>
<PAGE> 1
EXHIBIT 10
[BANK OF AMERICA LOGO]
AMENDED AND RESTATED
BUSINESS LOAN AGREEMENT
(RECEIVABLES AND INVENTORY)
================================================================================
This Agreement dated as of February 21, 1997, is between Bank of America Texas,
N.A. (the "Bank") and ICO, INC. (the "Borrower"). This Agreement amends and
restates that certain Business Loan Agreement (Receivables and Inventory)
between Bank and Borrower dated as of April 17, 1996.
1. DEFINITIONS In addition to the terms which are defined elsewhere in this
Agreement, the following terms have the meanings indicated for the purposes of
this Agreement:
1.1 "BORROWING BASE" means:
(a) the sum of:
(i) 80% of the balance due on Acceptable Receivables; and
(ii) at the Borrower's election and subject to the terms of this
Agreement the lesser of, 40% of the value of Acceptable
Inventory consisting of domestic finished goods and raw
materials or 50% of 1.1 (a) (i) above.
In determining the value of Acceptable Inventory to be included in the
Borrowing Base, the Bank will use the lowest of (i) the Borrower's cost, (ii)
the Borrower's estimated market value, or (iii) the Bank's independent
determination of the resale value of such inventory in such quantities and on
such terms as the Bank deems appropriate.
1.2 "ACCEPTABLE RECEIVABLE" means an account receivable which satisfies the
following requirements:
(a) The account has resulted from the sale of goods or the performance of
services by the Borrower or any subsidiary or affiliate which has
executed a guaranty and security documents acceptable to the Bank
("Pledging Guarantor") in the ordinary course of the Borrower's
business.
(b) There are no conditions which must be satisfied before the Borrower or
Pledging Guarantor is entitled to receive payment of the account.
Accounts arising from COD sales, consignments or guaranteed sales are
not acceptable.
(c) The debtor upon the account does not claim any defense to payment and
has not asserted any counterclaims or offsets against the Borrower or
Pledging Guarantor.
(d) The account represents a genuine obligation of the debtor for goods
sold and accepted by the debtor, or for services performed for and
accepted by the debtor.
(e) The Borrower or Pledging Guarantor has sent an invoice to the debtor
in the amount of the account.
(f) The account is owned by the Borrower or Pledging Guarantor free of any
title defects or any liens or interests of others except the first
priority security interest in favor of the Bank.
(g) The debtor upon the account is not any of the following:
(i) an employee, affiliate, parent or subsidiary of the Borrower
or Pledging Guarantor, or an entity which has common officers
or directors with the Borrower or any Pledging Guarantor.
(ii) the U.S. government or any agency or department of the U.S.
government unless the Bank agrees in writing to accept the
obligation and the Borrower or Pledging Guarantor complies
with the procedures in the Federal Assignment of Claims Act
of 1940 with respect to the obligation.
(iii) any state, county, city, town or municipality.
(iv) any person or entity located in a foreign country, excluding
Canada.
(h) The account is not in default. An account will be considered in
default if any of the following occur:
(i) The account is not paid within the 91 day period starting on
its invoice date;
(ii) The debtor obligated upon the account suspends business,
makes a general assignment for the benefit of creditors, or
fails to pay its debts generally as they come due; or
(iii) Any petition is filed by or against the debtor obligated upon
the account under any bankruptcy law or any other law or laws
for the relief of debtors;
1
<PAGE> 2
(i) The account is not the obligation of a debtor who is in default (as
defined above) on 50% or more of the accounts upon which debtor is
obligated.
(j) The account does not arise from the sale of goods which remain in the
Borrower's or Pledging Guarantor's possession or under the Borrower's
or Pledging Guarantor's control.
(k) The account does not arise from the sale of minerals (including oil
and gas) at the wellhead or minehead;
(l) The account is not evidenced by a promissory note or chattel paper.
(m) The account is otherwise acceptable to the Bank.
1.3 "ACCEPTABLE INVENTORY" means finished goods and raw materials inventory
that satisfies the following requirements:
(a) The inventory is owned by the Borrower or Pledging Guarantor free of
any title defects or any liens or interests of others except the first
priority security interest in favor of the Bank.
(b) The inventory is permanently located at locations which the Borrower
or Pledging Guarantor has disclosed to the Bank and which are
acceptable to the Bank. If the inventory is covered by a negotiable
document of title (such as a warehouse receipt) that document must be
delivered to the Bank.
(c) The inventory is held for sale or use in the ordinary course of the
Borrower's or Pledging Guarantor's business and is of good and
merchantable quality. Inventory which is obsolete, unsalable, damaged,
defective, discontinued or slow-moving or which has been returned by
the buyer, is not acceptable. Display items, work-in-process and
packing and shipping materials are not acceptable.
(d) The inventory is not placed on consignment.
(e) The inventory is otherwise acceptable to the Bank.
2. LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide
a line of credit to the Borrower. The amount of the line of credit
(the "Commitment") is equal to the lesser of (a) Fifteen Million and
No/100 Dollars ($15,000,000.00) or, (b) the amount of the Borrowing
Base, provided, that the sum of (i) the principal amount outstanding
under the line of credit, plus (ii) the aggregate face amount of all
letters of credit outstanding hereunder, shall not at any time exceed
the Borrowing Base.
(b) This is a revolving line of credit with a within line facility for
letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) Each advance must be for at least One Hundred Thousand and No/100
Dollars ($100,000.00), or for the amount of the remaining available
line of credit, if less.
(d) The Borrower agrees (i) not to permit the outstanding principal
balance of the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and
not yet reimbursed, to exceed the Commitment, and (ii) not to permit
the sum of (A) the principal amount outstanding under the line of
credit, plus (B) the aggregate face amount of all letters of credit
outstanding under the line of credit to exceed the Borrowing Base. If
the Borrower exceeds either such limit, the Borrower will immediately
pay the excess to the Bank upon the Bank's demand. The Bank may apply
payments received from the Borrower under this Paragraph to the
obligations of the Borrower to the Bank in the order and the manner as
the Bank, in its discretion, may determine.
2.2 AVAILABILITY PERIOD. The line of credit is available between the
date of this Agreement and April 17, 1999 (the "Expiration Date") unless the
Borrower is in default.
2.3 INTEREST RATE.
(a) Unless the Borrower elects an Optional interest rate as described
below, the interest rate applicable to the line of credit is the
lesser of (a) the maximum lawful rate of interest permitted under
applicable usury laws, now or hereafter enacted (the "Maximum Rate"),
or (b) the Reference Rate.
Notwithstanding the foregoing, if at any time the Reference Rate shall exceed
the Maximum Rate and thereafter the Reference Rate shall become less than the
Maximum Rate, the rate of interest payable shall be the Maximum Rate
2
<PAGE> 3
until the Bank shall have received the amount of interest it otherwise would
have received if the interest payable had not been limited by the Maximum Rate
during the period of time the Reference Rate exceeded the Maximum Rate.
The Reference Rate is the rate of interest publicly announced from time to time
by the Bank in Irving, Texas, as its Reference Rate. The Reference Rate is set
by the Bank based on various factors, including its costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans. The Bank may price loans to its customers at, above, or
below the Reference Rate. Any change in the Reference Rate will take effect at
the opening of business on the day specified in the public announcement of a
change in the Bank's Reference Rate.
2.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on March 31, 1997, and on the last day
of each June, September, and December thereafter until payment in full
of all principal outstanding under the line of credit.
(b) The Borrower will repay in full all principal and accrued but unpaid
interest and other charges outstanding under the line of credit no
later than April 17, 1999.
(c) The Borrower may prepay the line of credit in full or in part at any
time without penalty except as described in Section 3 below.
2.5 LETTERS OF CREDIT. This line of credit may be used for financing:
(a) commercial letters of credit with a maximum maturity not to extend
beyond the Expiration Date. Each commercial letter of credit will
require drafts payable at sight.
(b) standby letters of credit with a maximum maturity not to extend beyond
the Expiration Date.
(c) The amount of the letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet reimbursed)
may not exceed Five Million and No/100 Dollars ($5,000,000.00).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under the line of credit.
The amount will bear interest and be payable as described elsewhere in
this Section 2.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form
and content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter of
Credit as a condition precedent to the issuance by the Bank of each
letter of credit hereunder.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
3. OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or portions of the
lines of credit (during the availability period and during the term repayment
period) bear interest at the rate(s) described below during an interest period
agreed to by the Bank and the Borrower; provided, however, that the Borrower
shall not have the option or right to elect to have all or any portion of the
lines of credit bear interest at the rate(s) described below when such rate(s)
exceeds the Maximum Rate. Each interest rate is a rate per year. Interest will
be paid on the last day of each interest period, and on the last day of each
quarter during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the portion.
3
<PAGE> 4
3.1 LIBOR RATE. The Borrower may elect to have all or portions of the
principal balance of the lines of credit bear interest at the LIBOR Rate plus
one and one-quarter percent (1.25%) (the "Eurodollar Rate"):
Designation of a Eurodollar Rate portion is subject to the following
requirements:
(a) The interest period during which the Eurodollar Rate will be in effect
will be 30, 60, 90 or 180 days. The last day of the interest period
will be determined by the Bank using the practices of the London
inter-bank market.
(b) Each Eurodollar Rate portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).
(c) The Borrower shall irrevocably request a Eurodollar Rate portion no
later than 11:00 a.m. Houston time three (3) banking days before the
commencement of the interest period.
(d) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
LIBOR Rate = London Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's London
Branch, London, Great Britain, would offer U.S. dollar
deposits for the applicable interest period to other major
banks in the London inter-branch market at approximately
11:00 a.m. London time two (2) Banking Days prior to the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in the Federal Reserve Board
Regulation D, rounded upward to the nearest 1/100 of one
percent. The percentage will be expressed as a decimal, and
will include, but not be limited to, marginal, emergency,
supplemental, special and other reserve percentages.
(e) The Borrower may not elect a Eurodollar Rate with respect to any
portion of the principal balance of the lines of credit which is
scheduled to be repaid before the last day of the applicable interest
period.
(f) Any portion of the principal balance of the lines of credit already
bearing interest at the Eurodollar Rate will not be converted to a
different rate during its interest period.
(g) Each prepayment of a Eurodollar Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount
of accrued interest on the amount prepaid; and a prepayment fee equal
to the present value of the amount (if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the
interest period, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the London
inter-bank market for a period starting on the date on which
it was prepaid and ending on the last day of the interest
period for such portion.
(h) The Bank will have no obligation to accept an election for a
Eurodollar Rate portion if dollar deposits in the principal amount,
and for periods equal to the interest period, of a Eurodollar Rate
portion are not available in the London inter-bank market. No interest
period will continue past the Expiration Date.
(i) If at any time during any applicable interest period the Eurodollar
Rate shall exceed the Maximum Rate and thereafter the Eurodollar Rate
shall become less than the Maximum Rate, the rate of interest payable
shall be the Maximum Rate until the Bank shall have received the
amount of interest it otherwise would have received if the interest
payable had not been limited by the Maximum Rate during the period of
time the Eurodollar Rate exceeded the Maximum Rate.
4. FEES AND EXPENSES
4.1 UNUSED COMMITMENT FEE. Subject to the provisions of Section 4.3 hereof,
the Borrower agrees to pay a fee on any difference between the Commitment and
the amount of credit it actually uses, determined by the weighted average loan
balance maintained during the specified period. The fee will be calculated at
0.25% per year.
4
<PAGE> 5
This fee is due on June 30, 1996, and on the last day of each quarter
until the expiration of the availability period.
4.2 EXPENSES.
(a) The Borrower agrees to reimburse the Bank for any reasonable expenses
it incurs in the preparation of this Agreement and any agreement or
instrument required by this Agreement. Expenses include, but are not
limited to, reasonable attorneys' fees.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic
audits and appraisals of the personal property collateral securing
this Agreement, at such intervals as the Bank may reasonably require.
The audits and appraisals may be performed by employees of the Bank or
by independent appraisers.
4.3 NO EXCESS FEES. Notwithstanding anything to the contrary in this
Section 4, in no event shall any sum payable under this Section 4 (to
the extent, if any, constituting interest under any applicable laws),
together with all amounts constituting interest under applicable laws
and payable in connection with the credit evidenced hereby, exceed the
Maximum Rate or the maximum amount of interest permitted to be
charged, taken, reserved, received or contracted for under applicable
usury laws.
5. COLLATERAL
5.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by "Personal Property Collateral" which shall mean
all accounts receivable and inventory of the Borrower and Pledging Guarantor's.
The Personal Property Collateral will be further defined in security
agreement(s) to be executed by the Borrower and Pledging Guarantor's.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
6.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank
from time to time;
(b) made in immediately available funds, or such other type of funds
selected by the Bank;
(c) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
6.3 BANKING DAYS. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in Texas. For amounts bearing interest at an offshore rate (if any), a
banking day is a day other than a Saturday or a Sunday on which the Bank is
open for business in Texas and California and dealing in offshore dollars. All
payments and disbursements which would be due on a day which is not a banking
day will be due on the next banking day. All payments received on a day which
is not a banking day will be applied to the credit on the next banking day.
6.4 TAXES. The Borrower will not deduct any taxes from any payments it
makes to the Bank. If any government authority imposes any taxes on any
payments made by the Borrower, the Borrower will pay the taxes. Upon request by
the Bank, the Borrower will confirm that it has paid the taxes by giving the
Bank official tax receipts (or notarized copies) within 30 days after the due
date. However, the Borrower will not pay the Bank's net income taxes or
intangible taxes.
6.5 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360 day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used. Notwithstanding the foregoing, interest at
the Maximum Rate will always be computed on the basis of a 365-day year and the
actual number of days elapsed.
6.6 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at the lesser of (a) the Maximum Rate and (b) a rate
per annum which is 4.00 percentage point(s) higher than the rate of interest
otherwise provided under this Agreement. This will not constitute a waiver of
any default.
5
<PAGE> 6
7. CONDITIONS
7.1 CONDITIONS TO FIRST ADVANCE. The Bank must receive the following items,
in form and content acceptable to the Bank, before it is required to extend any
credit to the Borrower under this Agreement:
(a) AUTHORIZATIONS. Evidence that the execution, delivery and
performance by the Borrower and any guarantor or
subordinating creditor of this Agreement and any instrument
or agreement required under this Agreement have been duly
authorized.
(b) SECURITY AGREEMENTS. Signed original security agreements,
assignments, financing statements and fixture filings
(together with collateral in which the Bank requires a
possessory security interest), which the Bank requires.
(c) EVIDENCE OF PRIORITY. Evidence that security interests and
liens in favor of the Bank are valid, enforceable, and prior
to all others' rights and interests, except those the Bank
consents to in writing.
(d) INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
(e) GUARANTIES. Guaranties signed by ICO International, Inc., ICO
Tubular Services, Inc., Permian Enterprises, Inc., FIS
Acquisition Corp., Shearer Supply Ltd., The Innovation
Company, S.A. de C.V., B&W Equipment Sales and Mfg., Inc.,
RJD Acquisition Corp, Polymer Service, Inc., Polymer Service
of Indiana, Inc., and Bayshore Industrial, Inc. on the Bank's
standard form in an amount as may be acceptable, from time to
time, to the Bank. The Borrower further covenants and agrees
that, upon the acquisition or establishment of any Subsidiary
(as hereinafter defined) after the date hereof (except Wedco
Technology, Inc. and its subsidiaries), it shall cause such
Subsidiary to execute a guaranty, in form and content
acceptable to the Bank, of the Borrower's obligations under
this Agreement as a condition precedent to the Bank's making
of any advance or issuance of any letter of credit hereunder.
As used herein, the term "Subsidiary" shall mean any
corporation fifty percent (50%) or more of the shares of
which are owned, directly or indirectly, by the Borrower, or
any other business entity fifty percent (50%) or more of the
ownership interest of which is owned, directly or indirectly,
by the Borrower.
(f) LEGAL OPINION. A written opinion from the Borrower's legal
counsel, covering such matters as the Bank may require. The
legal counsel and the terms of the opinion must be acceptable
to the Bank.
(g) OTHER ITEMS. Any other items that the Bank reasonably
requires.
8. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement,
and until the Bank is repaid in full, the Borrower makes the following
representations and warranties. Each request for an extension of credit
constitutes a renewed representation.
8.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed
and existing under the laws of the state where organized.
8.2 AUTHORIZATION. This Agreement, and any instrument or agreement
required hereunder, are within the Borrower's or Guarantor's powers, have been
duly authorized, and do not conflict with any of its organizational papers.
8.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed
and delivered, will be similarly legal, valid, binding and enforceable.
8.4 GOOD STANDING. In Borrower's state of incorporation and in each state
where it is required to do so to conduct its business as presently conducted,
Borrower is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
8.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
6
<PAGE> 7
8.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition.
(b) prepared in accordance with GAAP in form and content as reasonably
required by the Bank.
(c) in compliance with all government regulations that apply.
8.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
8.8 COLLATERAL. Except as otherwise provided by this Agreement, all
collateral required in this Agreement is owned by the grantor of the security
interest free of any title defects or any liens or interests of others.
8.9 OTHER OBLIGATIONS. To the best of Borrower's knowledge, the Borrower
is not in default on any obligation for borrowed money, any purchase money
obligation or any other material lease, commitment, contract, instrument or
obligation.
8.10 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
8.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
8.12 MERCHANTABLE INVENTORY. All inventory which is included in the
Borrowing Base is of good and merchantable quality and free from defects.
8.13 LOCATION OF BORROWER. The Borrower's and any Pledging Guarantor's place
of business (or, if the Borrower has more than one place of business, its chief
executive office) is located at the address listed under the Borrower's
signature on this Agreement or Pledging Guarantor's signature on guaranties
executed in connection with this Agreement.
9. COVENANTS The Borrower agrees, so long as credit is available under
this Agreement and until the Bank is repaid in full:
9.1 USE OF PROCEEDS. To use the proceeds of the credit only for working
capital and general corporate purposes.
9.2 FINANCIAL INFORMATION. To provide the following financial information
and statements and such additional information as requested by the Bank from
time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's
annual financial statements, along with a compliance certificate
certified by an officer of the Borrower. These financial statements
must be audited (with an unqualified opinion) by Price Waterhouse LLP
or other accounting firm acceptable to the Bank in its reasonable
discretion. The statements shall be prepared on a consolidated basis.
Borrower will provide Borrower prepared consolidating statements.
(b) Within 45 days of the period's end, with the exception of the last
fiscal quarter of each year, the Borrower's quarterly financial
statements, along with a compliance certificate certified by an
officer of the Borrower. These financial statements may be Borrower
prepared. These statements shall be prepared on a consolidated and,
with respect to Subsidiaries deemed by the Bank to be material, on a
consolidating basis.
(c) Copies of Borrower's Form 10-K Annual Report and 10-Q Quarterly Report
within 15 days after the date of filing with the Securities and
Exchange Commission.
(d) A borrowing certificate setting forth the respective amounts of
Acceptable Receivables and Acceptable Inventory as of the last day of
each month within 30 days after month end.
7
<PAGE> 8
(e) The covenants described in Paragraphs 9.3, 9.4 and 9.5 shall be
calculated based on the Borrower's consolidated financial statements
as submitted, including and excluding any amounts from Wedco
Technology, Inc.
9.3 TANGIBLE NET WORTH. To maintain on a consolidated basis tangible net
worth equal to at least Sixty Four Million and No/100 Dollars ($64,000,000.00),
which amount shall be increased on the last day of each fiscal year of the
Borrower, beginning September 30, 1997, by an amount equal to 25% of the
positive net income for such fiscal year.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles and
monies due from affiliates, officers, directors or shareholders of the
Borrower) less total liabilities, including but not limited to accrued and
deferred income taxes, and any reserves against assets.
9.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a
consolidated basis a ratio of Total Liabilities to Tangible Net Worth not
exceeding 0.75:1.00.
"Total Liabilities" means the sum of current liabilities plus long term
liabilities.
9.5 PROFITABILITY. To maintain on a consolidated basis a positive net
income of at least $1,000,000 before taxes and extraordinary items (excluding
non-cash non-recurring items, including the writedown of intangible assets),
and a positive net income of $1,000,000 after taxes and extraordinary items
(excluding non-cash non-recurring items, including the writedown of intangible
assets), for each annual accounting period.
9.6 OTHER DEBTS. That neither the Borrower nor any guarantor shall have
outstanding or incur any direct or contingent debts (other than those to the
Bank), or become liable for the debts of others without the Bank's written
consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts and capital lease obligations for business purposes
which do not exceed a total principal amount of One Million and No/100
Dollars ($1,000,000.00) outstanding at any one time.
(e) Debts and capital lease obligations in existence on the date of this
Agreement disclosed in writing to the Bank.
9.7 OTHER LIENS. That neither the Borrower nor any guarantor shall create,
assume, or allow any security interest or lien (including judicial liens) on
property the Borrower or any guarantor now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Additional liens which secure obligations in a total principal amount
not exceeding One Million and No/100 Dollars ($1,000,000.00).
(d) Liens in existence prior to the date of this Agreement.
(e) Statutory liens of mechanics, materialmen, landlords, employees,
carriers, shippers, and warehousemen for services or materials for
which payment is not yet due.
(f) Liens incurred or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance and
other types of social security.
9.8 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit which in the reasonable opinion of management after
seeking legal advice will result in a loss over One Million and No/100
Dollars ($1,000,000.00) in excess of any insurance coverage against
the Borrower (or any guarantor).
(b) any dispute between the Borrower (or any guarantor) and any government
authority which if adversely resolved would have a material adverse
effect on the Borrower (or any guarantor).
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
financial condition or operations.
8
<PAGE> 9
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
9.9 BOOKS AND RECORDS. To maintain adequate books and records.
9.10 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
9.11 COMPLIANCE WITH LAWS. To comply with the laws, (including any
fictitious name statute), regulations, and orders of any government body with
authority over the Borrower's business, where a failure to comply would
adversely affect the Borrower's ability to conduct its business as presently
conducted or could subject the Borrower to criminal penalties or other material
penalties.
9.12 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now have which are material to the
conduct of the Borrower's business as presently conducted.
9.13 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
9.14 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect
its security interests and liens.
9.15 COOPERATION. To take any reasonable action requested by the Bank to
carry out the intent of this Agreement.
9.16 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain adequate property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount reasonably
acceptable to the Bank. The insurance must be issued by an insurance
company acceptable to the Bank and must include a lender's loss
payable endorsement in favor of the Bank in a form acceptable to the
Bank. The Bank has reviewed Borrower's current insurance and considers
such coverage adequate.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, deliver to the
Bank a copy of each insurance policy or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
9.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's or Wedco Technology, Inc.'s present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pooling of interest, joint
venture, syndicate, or other combination unless provided for elsewhere
in this Section 9.17.
(d) lease, or dispose of all or a substantial part of the Borrower's
business or the Borrower's assets.
(e) acquire or purchase a business or its assets whether by acquisition or
merger, unless (a) the entity being acquired is of a similar business,
(b) the acquisition is not considered hostile, (c) no event of default
exists prior to or results because of such acquisition, and (d) the
acquisition does not entail cash consideration exceeding the greater
of (i) 10% of Borrower's net worth, or (ii) Five Million and No/100
Dollars ($5,000,000.00) .
(f) sell or otherwise dispose of any assets for significantly less than
fair market value or enter into any sale and leaseback agreement
covering any of its fixed or capital assets of material value.
Nothing contained in this Agreement shall prohibit the ownership of Borrower
and/or Wedco from being transferred to a newly formed corporation that operates
strictly as a holding company to own the capital stock of Borrower and/or
Wedco.
10. HAZARDOUS WASTE INDEMNIFICATION The Borrower will indemnify and hold
harmless the Bank from any loss or liability directly or indirectly arising out
of the use, generation, manufacture, production, storage, release, threatened
release, discharge, disposal or presence of a hazardous substance in violation
of applicable law on, under or about the Borrower's property or operations or
property leased to the Borrower. The indemnity includes but is not
9
<PAGE> 10
limited to attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. For these purposes, the term "hazardous
substances" means any substance which is or becomes designated as "hazardous"
or "toxic" under any federal, state or local law. This indemnity will survive
repayment of the Borrower's obligations to the Bank.
11. DEFAULT If any of the following events occur, the Bank may do one or
more of the following: (i) declare the Borrower in default, (ii) stop making
any additional credit available to the Borrower, (iii) exercise any and all
rights and remedies as may be available to the Bank under the terms of any
collateral documents, security instruments, debt instruments or any other
document or instrument executed in connection herewith or in any way related
hereto, (iv) exercise any and all rights and remedies as may be available to
the Bank at law or in equity, and (v) declare the entire debt created and
evidenced hereby to be immediately due and payable in full, whereupon the
entire unpaid principal indebtedness evidenced hereby, and all accrued unpaid
interest thereon, shall at once mature and become due and payable without
presentment, demand, protest, grace or notice of any kind (including, without
limitation, notice of intent to accelerate, notice of acceleration or notice of
protest), all of which are hereby severally waived by the Borrower.
11.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement within 5 days after the date when due, and has failed to cure such
non-payment within 5 business days after receipt of written notice from the
Bank of such non-payment, provided however, the Bank will not be required to
give such notice more than 2 times in any twelve month period.
11.2 NON-COMPLIANCE. The Borrower or any guarantor fails to meet the
condition of, or fails to perform any obligation under the following
agreements, and has failed to cure such failure(s) within 10 business days
after receipt of written notice from the Bank of such failure.
(a) this Agreement,
(b) any other agreement made in connection with this loan, or
(c) any other agreement the Borrower or any guarantor has with the Bank or
any affiliate of the Bank.
11.3 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower (or any guarantor) has obtained from anyone else
or which the Borrower (or any guarantor) has guaranteed which with the giving
of notice or passage of time or both would permit the holder of such agreement
to accelerate the indebtedness governed thereby, or demand payment from
Borrower or such guarantor.
11.4 LIEN PRIORITY. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any personal property given as security for this loan,
despite the Bank having filed a financing statement describing the collateral
and despite the Bank having taken all action within its direct control
necessary to perfect its lien and security interest.
11.5 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations of a material nature or Borrower's disclosure or
failure to disclose is willful.
11.6 BANKRUPTCY. The Borrower (or any guarantor) or any general partner of
the Borrower files a bankruptcy petition, a bankruptcy petition is filed
against the Borrower (or any guarantor) or any general partner of the Borrower
and such involuntary petition filed by five or fewer trade creditors is not
dismissed within 14 days of filing, or the Borrower (or any guarantor) or any
general partner of the Borrower makes a general assignment for the benefit of
creditors.
11.7 RECEIVERS. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
11.8 JUDGMENTS. Any final non-appealable judgments or arbitration awards
are entered against the Borrower (or any guarantor) after the date of this
Agreement, or the Borrower (or any guarantor) after the date of this Agreement
enters into any settlement agreements with respect to any litigation or
arbitration, in any fiscal year in the aggregate net amount of One Million and
No/100 Dollars ($1,000,000.00) or more in excess of any insurance coverage.
11.9 GOVERNMENT ACTION. Any government authority take action that the Bank
reasonably believes materially adversely affects the Borrower's (or any
guarantor's) financial condition or ability to repay.
10
<PAGE> 11
11.10 DEFAULT UNDER GUARANTY OR SUBORDINATION AGREEMENT. Any guaranty,
subordination agreement, security agreement, deed of trust, or other document
required by this Agreement is revoked in whole or in part, violated or no
longer in effect, except as a result of any act or omission by the Bank.
11.11 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's (or any guarantor's) financial condition, properties or prospects,
or ability to repay the loan.
11.12 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made in
accordance with accounting principles applied consistently with those applied
in the preparation of the Borrower's financial statements dated September 30,
1996.
12.2 TEXAS LAW. This Agreement is governed by Texas law.
12.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's
and the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the
right of set-off against the Borrower.
12.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered
in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the bank, including claims for
injury to persons, property or business interests (torts).
(b) At the request of the Borrower or the bank, an such controversies or
claims will be settled by binding arbitration in accordance with the
United States Arbitration Act. THE UNITED STATES ARBITRATION ACT WILL
APPLY EVEN THOUGH THIS AGREEMENT PROVIDES THAT IT IS GOVERNED BY TEXAS
LAW.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statutes
of limitations. The arbitrators will have the authority to decide
whether any such claim or controversy is barred by the statute of
limitations and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitratable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to an authorized court of law to be confirmed and enforced.
(g) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(h) The pursuit of a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank,
including the suing party, to submit the controversy or claim to
arbitration of the other party contests the lawsuit.
11
<PAGE> 12
12.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
12.6 COSTS. If the Bank incurs any reasonable expenses in connection with
administering or enforcing this Agreement, or if the Bank takes collection
action under this Agreement, it is entitled to costs and reasonable attorneys'
fees, including any allocated costs of in-house counsel.
12.7 ATTORNEYS' FEES. In the event of a lawsuit or arbitration proceeding,
the prevailing party is entitled to recover costs and reasonable attorneys'
fees (including any allocated costs of in-house counsel) incurred in connection
with the lawsuit or arbitration proceeding, as determined by the court or
arbitrator.
12.8 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and
the Borrower may specify from time to time in writing.
12.9 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
12.10 COUNTERPARTS. This Agreement may be executed in as many counterparts
as necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.
12.11 USURY LAWS. It is the intention of the parties to comply with
applicable usury laws; accordingly, it is agreed that notwithstanding any
provisions to the contrary in this Agreement or in any of the documents
evidencing or securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such instruments or documents require or permit the
payment, contracting for, charging, taking, reserving or receiving any sums
constituting interest, as defined under applicable usury laws, in excess of the
maximum amount permitted by such laws. If any such excess of interest is
contracted for, paid, charged, taken, reserved or received under this Agreement
or under any of the documents evidencing or securing payment hereof or
otherwise relating hereto, on the amount of principal actually outstanding from
time to time shall exceed the maximum amount of interest permitted by
applicable usury laws, then in any such event (i) the provisions of this
Section shall govern and control; (ii) any such excess shall be canceled
automatically to the extent of such excess, and shall not be collected or
collectible; (iii) any such excess which is or has been received shall be
credited against the unpaid principal balance hereof or refunded to the
Borrower, at the Bank's option; and (iv) the effective rate of interest shall
be automatically reduced to the maximum lawful rate allowed under applicable
laws as construed by courts having jurisdiction hereof or thereof. It is
further agreed that without limitation of the foregoing, all calculations of
the rate of interest calculated for, paid, charged, taken, reserved or received
under this Agreement or under such other documents or instruments that are made
for the purpose of determining whether such rate exceeds the maximum lawful
rate of interest, shall be made, to the extent permitted by applicable usury
laws, by amortizing, prorating, allocating and spreading in equal parts during
the period of the full stated term of the indebtedness, all interest at any
time contractor for, paid, charged, taken, reserved or received from the
Borrower or otherwise by the holder or holders thereof. The terms of this
section shall be deemed to be incorporated in every loan document, security
instrument, debt instrument, and communication relating to this Agreement and
the law evidenced hereby. The term "applicable usury laws" shall mean such law
of the State of Texas or the laws of the United States; whichever laws allow
the higher rate of interest, as such laws now exist; provided, however, that if
such laws shall hereafter allow higher rates of interest. then the applicable
usury laws shall be the laws allowing the higher rate to be effective as of the
effective date of such laws. To the extent that TEX. REV. STAT. ANN. art
5069-1.04, as amended (the "Act"), is relevant to the Bank for the purposes of
determining the Maximum Rate, the parties elect to determine the Maximum Rate
under the Act pursuant to the "indicate rate ceiling" from time to time in
effect, as referred to and defined in article 1.04(a)(1) of the Act; subject,
however, to any right the Bank may have subsequently under applicable law, to
change the method of determining the Maximum Rate.
12.12 NO ORAL AGREEMENTS. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the
Bank and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and
the Borrower concerning this credit; and
12
<PAGE> 13
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
THIS WRITTEN AGREEMENT AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION
HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
13
<PAGE> 14
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA TEXAS, N.A.
By: /s/ VICTOR N. TEKELL
---------------------------------
Victor N. Tekell
Vice President
Address where notices to the Bank are to be sent:
Bank of America Texas, N.A.
Attn: Commercial Loan Services
333 Clay Street, Ste. 3600
Houston, Texas 77002
ICO, INC.
By: /s/ JON C. BIRO
---------------------------------
Jon C. Biro
Treasurer
Address where notices to the Borrower
are to be sent:
11490 Westheimer, Suite 1000
Houston, Texas 77077
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY FILING ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,133,000
<SECURITIES> 0
<RECEIVABLES> 30,147,000
<ALLOWANCES> (465,000)
<INVENTORY> 12,088,000
<CURRENT-ASSETS> 53,754,000
<PP&E> 127,495,000
<DEPRECIATION> (50,496,000)
<TOTAL-ASSETS> 175,285,000
<CURRENT-LIABILITIES> 25,709,000
<BONDS> 0
0
13,000
<COMMON> 36,079,000
<OTHER-SE> 90,143,000
<TOTAL-LIABILITY-AND-EQUITY> 175,285,000
<SALES> 81,791,000
<TOTAL-REVENUES> 81,791,000
<CGS> 56,810,000
<TOTAL-COSTS> 75,510,000
<OTHER-EXPENSES> (56,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 531,000
<INCOME-PRETAX> 5,806,000
<INCOME-TAX> 2,227,000
<INCOME-CONTINUING> 3,579,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,579,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
<PAGE> 1
EXHIBIT 99.1
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
Set forth below are the unaudited pro forma condensed consolidated
statements of operations of the Company for the year ended September 30, 1996
and the six months ended March 31, 1997 and the unaudited pro forma condensed
consolidated balance sheet of the Company at March 31, 1997. The unaudited pro
forma condensed consolidated statements of operations include the historical
results of the Company and give effect to the fiscal 1996 and 1997 acquisitions
of Wedco, PSI, Bayshore and Rotec as if they had occurred as of the beginning of
the periods presented. The unaudited pro forma condensed consolidated balance
sheet gives effect to the fiscal 1997 acquisition of Rotec as if it had occurred
as of March 31, 1997. The pro forma financial data do not purport to be
indicative of the Company's financial position or results of operations that
would actually have been obtained had the acquisitions been completed as of the
date or for the periods presented, or to project the Company's financial
position or results of operations at any future date or for any future period.
The unaudited pro forma adjustments are based upon available information and
upon certain assumptions that the Company believes are reasonable.
<PAGE> 2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL (NOTE 1)
------------------------------------------------------------------------------
ACQUISITIONS
-----------------------------------------------------
ICO WEDCO(1) WEDCO(2) ROTEC(3) PSI(4) BAYSHORE(5) SUBTOTAL
----------- -------- -------- -------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues...................... $ 108,663 $20,797 $ 3,060 $9,933 $4,328 $29,703 $176,484
COST AND EXPENSES:
Cost of sales and services........ 74,704 13,464 2,141 8,190 2,734 26,081 127,314
Selling, general and
administrative expenses......... 19,996 4,889 1,897 1,016 1,130 1,886 30,814
Depreciation and amortization..... 7,230 2,058 329 233 329 392 10,571
Impairment of long-term assets.... 5,025 5,025
Non-recurring compensation
arrangements.................... 1,812 1,812
Non-recurring litigation
charges......................... 1,112 1,112
Write-down of inventories......... 868 868
----------- ------- ------- ------ ------ ------- --------
Operating income (loss)........... (2,084) 386 (1,307) 494 135 1,344 (1,032)
----------- ------- ------- ------ ------ ------- --------
Interest expense (income), net.... (608) 724 120 45 120 182 583
Other (income) expense, net....... 216 554 86 35 (14) 877
----------- ------- ------- ------ ------ ------- --------
Income (loss) before taxes........ (1,692) (892) (1,513) 414 15 1,176 (2,492)
Income taxes (benefit)............ (632) (60) (292) 110 400 (474)
----------- ------- ------- ------ ------ ------- --------
Net income (loss)................. (1,060) (832) (1,221) 304 15 776 (2,018)
----------- ------- ------- ------ ------ ------- --------
Preferred stock dividends......... 2,178 2,178
----------- ------- ------- ------ ------ ------- --------
Net income (loss) available for
common shareholders............. $ (3,238) $ (832) $(1,221) $ 304 $ 15 $ 776 $ (4,196)
=========== ======= ======= ====== ====== ======= ========
Earnings applicable to ordinary
share equivalents............... $ (0.24)
===========
Weighted average shares
outstanding..................... 13,327,855
===========
EBITDA(6)......................... $ 5,146 $ 2,444 $ (978) $ 727 $ 464 $ 1,736 $ 9,539
Adjusted EBITDA(7)................ 13,963 2,444 (978) 727 464 1,736 18,356
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
(NOTE 2) COMBINED
------------ ----------
<S> <C> <C>
Net Revenues...................... $ 176,484
COST AND EXPENSES:
Cost of sales and services........ 127,314
Selling, general and
administrative expenses......... $ (1,174)a 27,989
(1,118)b
(533)c
Depreciation and amortization..... 209 d 11,198
418 e
Impairment of long-term assets.... 5,025
Non-recurring compensation
arrangements.................... 1,812
Non-recurring litigation
charges......................... 1,112
Write-down of inventories......... 868
---------- ----------
Operating income (loss)........... 2,198 1,166
---------- ----------
Interest expense (income), net.... 706 f 1,289
Other (income) expense, net....... 877
---------- ----------
Income (loss) before taxes........ 1,492 (1,000)
Income taxes (benefit)............ 2,117 g 1,643
---------- ----------
Net income (loss)................. (625) (2,643)
---------- ----------
Preferred stock dividends......... 2,178
---------- ----------
Net income (loss) available for
common shareholders............. $ (625) $ (4,821)
========== ==========
Earnings applicable to ordinary
share equivalents............... $ (0.23)
==========
Weighted average shares
outstanding..................... 7,909,850 h 21,237,705
========== ==========
EBITDA(6)......................... 12,364
Adjusted EBITDA(7)................ 21,181
----------
</TABLE>
- ---------------
(1) Historical information for the six-month period ended March 31, 1996.
(2) Historical information for the one-month period ended April 30, 1996.
(3) Historical information for the twelve-month period ended December 31, 1996,
translated from British Pounds Sterling using an average exchange rate
of $1.59.
(4) Historical information for the nine-month, nineteen-day period ended July
19, 1996.
(5) Historical information for the eleven-month, ten-day period ended December
10, 1996.
(6) EBITDA represents income from operations before interest expense, other
income and expense, provision for income taxes, extraordinary items and
depreciation and amortization. EBITDA is a widely accepted indicator of a
company's ability to service debt. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operations, or
other income or cash flow data prepared in accordance with generally
accepted accounting principles or a measure of a company's profitability or
liquidity.
(7) Adjusted EBITDA is comprised of EBITDA plus the following fiscal 1996
operating expenses: impairment of long term assets, non-recurring
compensation arrangements, non-recurring litigation and writedown of
inventories. Adjusted EBITDA is provided as additional information regarding
ICO's ability to service debt, but, as with EBITDA, should not be considered
in isolation or as a substitute for net income, cash flows from operations,
or other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
25
<PAGE> 3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL (NOTE 1)
-----------------------------------------------
ACQUISITIONS Pro Forma
---------------------- Adjustments Pro Forma
ICO ROTEC(1) BAYSHORE(2) SUBTOTAL (Note 2) Combined
----------- -------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues.............. $ 81,791 $5,360 $8,107 $95,258 $ 95,258
COST AND EXPENSES:
Cost of sales and
services................ 56,810 4,386 7,098 68,294 68,294
Selling, general and
administrative
expenses................ 13,591 750 446 14,787 (128)c 14,659
Depreciation and
amortization............ 5,109 138 21 5,268 159e 5,427
----------- ------ ------ ------- ---------- -----------
Operating income (loss)... 6,281 86 542 6,909 (31) 6,878
----------- ------ ------ ------- ---------- -----------
Interest expense (income),
net..................... 531 27 56 614 152f 766
Other (income) expense,
net..................... (56) (56) (56)
----------- ------ ------ ------- ---------- -----------
Income (loss) before
taxes................... 5,806 59 486 6,351 (183) 6,168
Income taxes (benefit).... 2,227 16 168 2,411 (18)g 2,393
----------- ------ ------ ------- ---------- -----------
Net income (loss)......... 3,579 43 318 3,940 (165) 3,775
=========== ====== ====== ======= ========== ===========
Preferred stock
dividends............... 1,088 1,088 1,088
----------- ------- -----------
Net income (loss)
available for common
shareholders............ $ 2,491 $ 43 $ 318 $ 2,852 $ (165) $ 2,687
=========== ====== ====== ======= ========== ===========
Earnings applicable to
ordinary share
equivalents............. $ 0.12 $ 0.12
=========== ===========
Weighted average shares
outstanding............. 20,630,478 1,331,494h 21,961,972
=========== ========== ===========
EBITDA(3)................. $ 11,390 $ 224 $ 563 $12,177 $ 12,305
</TABLE>
- ---------------
(1) Historical information for the six-month period ended March 31, 1997,
translated from British Pounds Sterling using an average exchange
rate of $1.68.
(2) Historical information for the two-month, ten-day period ended
December 10, 1996.
(3) See note (6) to the preceding table.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
<PAGE> 4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL (NOTE 1)
--------------------------------- PRO FORMA
ROTEC ADJUSTMENTS PRO FORMA
ICO ACQUISITION(1) SUBTOTAL (NOTE 2) COMBINED
-------- -------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents.................... $ 6,133 $ 139 $ 6,272 $ $ 6,272
Trade receivables, net.................. 29,682 2,219 31,901 31,901
Inventories............................. 12,088 755 12,843 12,843
Deferred tax asset...................... 3,213 3,213 3,213
Prepaid expenses and other.............. 2,638 135 2,773 2,773
-------- ------ -------- ------- --------
Total Current Assets............ 53,754 3,248 57,002 57,002
-------- ------ -------- ------- --------
Property, plant and equipment, net...... 76,999 1,272 78,271 200 j 78,471
-------- ------ -------- ------- --------
Goodwill................................ 34,779 34,779 2,988 k 37,767
Investment in joint ventures............ 4,468 4,468 4,468
Other................................... 5,285 5,285 5,285
-------- ------ -------- ------- --------
TOTAL ASSETS.................... $175,285 $4,520 $179,805 $ 3,188 $182,993
======== ====== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short term borrowings and current
portion of long-term debt............. $ 4,203 $ 621 $ 4,824 2,500 i $ 7,324
Accounts payable........................ 12,270 1,631 13,901 13,901
Accrued expenses........................ 8,746 441 9,187 9,187
Income taxes payable.................... 490 490 490
-------- ------ -------- ------- --------
Total Current Liabilities....... 25,709 2,693 28,402 2,500 30,902
-------- ------ -------- ------- --------
Long-term debt net of current portion... 19,535 304 19,839 19,839
Deferred income taxes................... 1,524 86 1,610 1,610
Other long-term liabilities............. 2,282 2,282 2,282
-------- ------ -------- ------- --------
TOTAL LIABILITIES............... 49,050 3,083 52,133 2,500 54,633
-------- ------ -------- ------- --------
STOCKHOLDERS' EQUITY.................... 126,235 1,437 127,672 2,125 l 128,360
(1,437)l
-------- ------ -------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............ $175,285 $4,520 $179,805 $ 3,188 $182,993
======== ====== ======== ======= ========
</TABLE>
- --------
(1) Translated from British Pounds Sterling using an exchange rate of $1.64.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
27
<PAGE> 5
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- ACQUISITIONS INCLUDED IN PRO FORMA FINANCIAL STATEMENTS
Effective April 30, 1996, the Company acquired Wedco. Wedco serves the
petrochemical industry by providing plastics size reduction services and related
machinery. The consideration paid consisted of 10,232,609 shares of Company
Common Stock, $4,637,000 in cash (including transaction fees and expenses) and
the effective assumption in the merger of $29,947,000 in total liabilities.
In July 1996, the Company acquired PSI located in Beaumont, Texas and East
Chicago, Indiana. The consideration paid consisted of 431,826 shares of Company
Common Stock, $1,984,000 in cash (including transaction expenses) and the
effective assumption in the acquisition of $2,073,000 in total liabilities.
In December 1996, the Company acquired Bayshore located in LaPorte, Texas
for approximately $6,900,000 in cash, 1,289,012 shares of Company Common Stock
and the effective assumption in the acquisition of $2,616,000 in debt.
In April 1997, the Company acquired Rotec of Rushden, England. Rotec serves
the United Kingdom, Ireland and Continental Europe markets and is a producer of
high quality concentrates for a variety of plastics processes. The Company paid
$2,500,000 in cash and issued 427,351 shares of Company Common Stock. The
purchase price is also subject to an earnout provision based upon future net
income.
All acquisitions were accounted for under the purchase method of
accounting. The acquisitions of Rainbow, the Micropowders Business and Micronyl
are not included in the pro forma financial statements.
NOTE 2 -- PRO FORMA ADJUSTMENTS
Statement of Operations:
(a) To remove compensation expense for director and employee stock options
redeemed in connection with the Wedco merger.
(b) To remove merger costs expensed by Wedco ($423,000), and to reflect
incremental cost savings resulting from Wedco no longer being a separate public
company ($145,000) and cost savings resulting from the retirement of certain
Wedco executives ($550,000).
(c) To remove shareholder salaries and bonuses which will no longer be
paid.
(d) To increase amortization for intangibles (including goodwill) and
reduce depreciation for machinery and equipment after the purchase price
accounting adjustments for the Wedco acquisition. Historically, Wedco
depreciated machinery and equipment over 10 years. Select assets which have
useful lives in excess of this time period are now being depreciated over their
estimated useful life. Goodwill is amortized over a useful life of 40 years and
value allocated to a non-compete agreement is amortized over the 10-year term of
the agreement.
ICO has analyzed the past and expected future operating performance of
Wedco, the competitive and regulatory environment in which Wedco operates and
has assessed the expected future life of Wedco's basic technology concluding
that, as of the acquisition date, the future life of goodwill is forty years or
greater. Accordingly, goodwill is amortized over an estimated useful life of 40
years, the maximum allowable life under APB 17. ICO's policy is to periodically
review goodwill and other intangibles to assess recoverability and review the
impact of events and circumstances which may warrant a revision to the estimated
useful life. Impairments would be recognized in operating results if a permanent
diminution in value were to occur.
(e) To increase amortization related to goodwill and non-compete agreements
and increase depreciation for machinery and equipment resulting from purchase
price accounting adjustments for all the acquisitions,
28
<PAGE> 6
excluding Wedco. Goodwill is amortized over a useful life of 40 years and value
allocated to non-compete agreements is amortized over the life of the
agreements.
(f) To reflect interest expense for debt incurred to consummate the
acquisitions.
(g) To reflect the tax effect of the pro forma income statement adjustments
($1,492 and ($183) for the pro forma periods ended September 30, 1996 and March
31, 1997, respectively) and to remove the fiscal 1996 income statement effect of
the reversal of a portion of the Company's valuation allowance on deferred tax
assets. In fiscal 1996, the Company recognized a $1,365,000 ($.10 per share) tax
benefit as a reversal of the valuation allowance to the extent taxes had been
paid.
Upon the acquisition of Wedco, the Company changed its assessment of the
valuation allowance to only reserve against tax assets which are not expected to
be utilized. Upon this revaluation, the Company recognized $1,328,000 ($.10 per
share) as a change in net deferred tax assets realized as a reduction of
goodwill attributable to the Wedco acquisition. Had the acquisition occurred on
the first day of fiscal year 1996, the entire reversal of the valuation
allowance would have reduced goodwill attributable to Wedco.
ICO continues to realize a cash savings from $5,629,000 (i.e., a tax
benefit of $1,914,000) in net operating loss carryforwards (at March 31, 1997)
for tax purposes. The benefits resulting from the utilization of the net
operating loss carryforwards, however, are no longer recognized in the income
statements prepared in accordance with generally accepted accounting principles.
(h) To give effect to shares issued in connection with the acquisitions.
Balance Sheet:
(i) To reflect debt incurred under the Company's credit facility to
consummate the Rotec acquisition.
(j) To increase Rotec's property, plant and equipment to estimated fair
market value.
(k) To reflect the excess purchase price over fair value of net tangible
assets acquired allocated to goodwill.
(l) To eliminate Rotec stockholders' equity accounts and reflect the value
of shares issued in connection with the acquisition.
29
