<PAGE>
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 December 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 or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
11490 Westheimer, Suite 1000, Houston, Texas 77077
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(281) 721-4200
---------------------------------------------------
(Registrant's telephone number including area code)
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 [_]
The number of shares outstanding of the Company's Common Stock, without par
value was 21,814,294 shares as of February 13, 1998
<PAGE>
ICO, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1997............................................ 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 1997 and 1996....................... 4
Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1997 and 1996....................... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities (no response required).................. -
Item 3. Defaults upon Senior Securities (no response required)........ -
Item 4. Submission of Matters to a Vote of Security Holders (no
response required)............................................ -
Item 5. Other Information (no response required)...................... -
Item 6. Exhibits and Reports on Form 8-K.............................. 14
-2-
<PAGE>
ICO, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited and in thousands, except share data)
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 75,693 $ 83,892
Trade receivables (less allowance for doubtful
accounts of $1,260 and $967, respectively) 53,140 49,963
Other receivables 10,864 779
Inventories 22,709 20,709
Deferred tax asset 3,908 3,812
Prepaid expenses and other 3,646 3,603
-------- --------
Total current assets 169,960 162,758
Property, plant and equipment, at cost 159,838 152,440
Less - accumulated depreciation and amortization (57,799) (54,661)
-------- --------
102,039 97,779
Other assets:
Goodwill (less accumulated amortization of
$5,380 and $5,056 respectively) 49,120 49,761
Investment in joint ventures -- 1,871
Debt offering costs 4,478 4,790
Other 4,264 4,794
-------- --------
$329,861 $321,753
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short term borrowings and current portion of
long-term debt $ 8,750 $10,719
Accounts payable 27,876 21,923
Accrued interest 1,163 4,033
Accrued insurance 2,293 2,095
Accrued salaries and wages 3,516 2,204
Accrued litigation costs 1,772 1,046
Income taxes payable 4,421 1,092
Other accrued expenses 9,003 9,357
-------- --------
Total current liabilities 58,794 52,469
Deferred income taxes 7,654 7,463
Long-term liabilities 1,476 1,649
Long-term debt, net of current portion 133,374 133,034
-------- --------
Total liabilities 201,298 194,615
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value - 500,000
shares authorized; 322,500 shares issued and
outstanding with a liquidation preference
of $32,250 13 13
Common stock, without par value - 50,000,000
shares authorized;
21,814,294 and 21,598,658 shares issued and
outstanding, respectively 38,045 36,966
Additional paid-in capital 109,718 109,814
Cumulative translation adjustment (3,447) (1,953)
Accumulated deficit (15,766) (17,702)
-------- --------
128,563 127,138
-------- --------
$329,861 $321,753
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
---- ----
Revenues:
Oilfield sales and services $ 26,179 $ 22,747
Petrochemical processing sales and services 39,628 13,756
-------- --------
Total net revenues 65,807 36,503
-------- --------
Cost and expenses:
Cost of sales and services 49,057 24,239
Selling, general and administrative 13,344 6,873
Non-recurring litigation charges 1,200 --
Depreciation and amortization 3,418 2,298
Goodwill amortization 337 202
(Gain) loss on sale of fixed assets 243 (18)
Write-down of inventories 100 --
-------- --------
67,699 33,594
-------- --------
Operating income (loss) (1,892) 2,909
-------- --------
Other income and expense:
Gain on sale of equity investment 11,805 --
Interest income 1,085 180
Interest expense (3,495) (379)
Equity in income of joint ventures -- 19
Other 31 25
-------- --------
9,426 (155)
-------- --------
Income before taxes 7,534 2,754
Provision for income taxes 3,854 907
-------- --------
Net income $ 3,680 $ 1,847
======== ========
Preferred Dividends 544 544
-------- --------
Net income applicable to common stock $ 3,136 $ 1,303
======== ========
Basic earnings per common and common equivalent
share (See Note 2) $ .14 $ .07
======== ========
Diluted earnings per common and common equivalent
share (See Note 2) $ .14 $ .06
======== ========
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 3,680 $ 1,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,755 2,500
(Gain) loss on disposition of property, plant,
and equipment 243 (18)
Gain on sale of equity investment (11,805) --
Write-down of inventories 100 --
Equity in income of joint ventures -- (19)
Changes in assets and liabilities, net of the
effects of business acquisitions:
Receivables (3,587) 1,531
Inventories (2,224) (2,050)
Prepaid expenses and other (238) 1,293
Income taxes payable 3,329 965
Deferred taxes 32 (244)
Accounts payable 5,984 (602)
Accrued interest (2,870) (40)
Accrued expenses 1,896 (1,535)
-------- --------
Total adjustments (5,385) 1,781
-------- --------
Net cash provided by (used for) operating activities (1,705) 3,628
-------- --------
Cash flows from investing activities:
Capital expenditures (6,320) (1,590)
Acquisitions, net of cash acquired (2,114) (5,731)
Disposition of equity investment 4,086 --
Dispositions of property, plant and equipment 220 43
-------- --------
Net cash used for investing activities (4,128) (7,278)
-------- --------
Cash flows from financing activities:
Net proceeds from sale of stock 983 234
Payment of dividend on preferred stock (544) --
Payment of dividend on common stock (1,200) --
Additional debt 782 212
Reductions of debt (2,387) (1,023)
-------- --------
Net cash used for financing activities (2,366) (577)
-------- --------
Net increase (decrease) in cash and cash equivalents (8,199) (4,227)
Cash and cash equivalents at beginning of period 83,892 13,414
-------- --------
Cash and cash equivalents at end of period $ 75,693 $ 9,187
======== ========
Supplemental disclosures of cash flow information:
Cash received (paid) during the period for:
Interest received 1,103 180
Interest paid (6,304) (412)
Income taxes paid (458) (162)
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share data)
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, 1997 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 December 31, 1997 and
1996, the results of its operations for the three months ended December 31, 1997
and 1996 and the changes in its cash position for the three months ended
December 31, 1997 and 1996. Results of operations for the three-month period
ended December 31, 1997 are not necessarily indicative of the results that may
be expected for the year ending September 30, 1998. 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, 1997.
Certain reclassifications have been made to prior year amounts in order to
conform to current year classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS' EQUITY
Earnings per share is based on earnings applicable to common shareholders and
is calculated using the weighted average number of common shares outstanding and
in accordance with SFAS 128, "Earnings per Share". During the first quarter of
fiscal 1998, the potentially dilutive effects of the Company's preferred stock
and common stock options, with exercise prices exceeding fair market value of
the underlying common shares, have been excluded from diluted earnings per share
since these items have an anti-dilutive effect.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
--------------- ----------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net Income $3,680 $1,847
Less: Preferred stock dividends 544 544
------ ------
BASIC EPS
Income available to common
shareholders 3,136 21,760,338 $ .14 1,303 19,976,733 $ .07
====== =====
EFFECT OF DILUTIVE SECURITIES
Options -- 84,124 -- 98,253
Warrants -- 66,374 -- 69,750
------ ---------- ------ ----------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $3,136 21,910,836 $ .14 $ 1,303 20,144,736 $ .06
====== ========== ====== ======= ========== =====
</TABLE>
-6-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share data)
NOTE 3. ACQUISITIONS
During December 1997, the Company acquired the operating assets of Curley's
Inspection Service, Inc ("Curley's"). The consideration consisted of $2,000 and
is subject to adjustment based upon future operating revenues. Curley's
provides drill pipe and casing inspection services from locations in Texas and
New Mexico.
During December 1996, the Company acquired Bayshore Industrial ("Bayshore") for
a total consideration of approximately $18,500, consisting of approximately
$6,900 in cash, 1,285,012 shares of Company common stock valued at approximately
$5,900 and the effective assumption of $5,700 in total liabilities. Bayshore is
a provider of concentrates and compounds to resin producers in the United
States.
NOTE 4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
(In thousands)
Finished Goods $ 9,076 $ 7,958
Raw Materials 8,744 9,023
Work in Progress 1,693 835
Supplies 3,196 2,893
------- -------
$22,709 $20,709
======= =======
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains "Forward-Looking Statements" within the
meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve substantial risks and
uncertainties. When words such as "anticipate", "believe", "estimate",
"intend", "expect", "plan" and similar expressions are used, they are intended
to identify the statements as forward-looking. Actual results, performance or
achievements, due to a number of factors including those disclosed in Exhibit
99, to the registrants fiscal 1997 Form 10-K, 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 acquisition of Bayshore in December 1996 and the expansion of the Company's
distribution business within the petrochemical processing segment had the effect
of reducing overall petrochemical processing margins as a percentage of
revenues. The gross margin percentage for the distribution business and
Bayshore's business was generally significantly lower than those generated by
the Company's size reduction services because Bayshore typically buys raw
materials, improves the material and then sells the finished product. In
contrast, the Company's size reduction services typically involve processing
customer-owned material.
The Company's revenue is classified within two categories: oilfield services and
petrochemical processing. Oilfield services revenues include revenues derived
from (i) exploration sales and services (new tubular goods inspection), (ii)
production sales and services (reclamation, reconditioning and inspection of
used tubular goods and sucker rods), (iii) corrosion control services (coating
of tubular goods and sucker rods), and (iv) other sales and services (oilfield
engine sales and services in Canada). Petrochemical processing revenues include
revenues derived from (i) grinding petrochemicals into powders (size reduction),
including other ancillary services and grinding equipment manufacturing, (ii)
compounding sales and services, which includes the manufacture and sale of
concentrates, and (iii) distributing plastic powders. Distribution revenues
primarily include the operating results of the ICO Polymers companies and the
distribution operations of Rotec and Verplast, all of which are wholly-owned
subsidiaries of the Company and operate in Europe. These operations utilize the
Company's size reduction and compounding facilities to process petrochemical
products prior to sale. Revenues, in each of the Company's business segments,
are recorded as the services are performed or, in the case of product sales,
upon shipment to third parties.
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The following are considered by management as key measures of liquidity
applicable to the Company:
December 31, 1997 September 30, 1997
----------------- ------------------
Cash and cash equivalents $ 75,693,000 $ 83,892,000
Working capital 111,166,000 110,289,000
Current ratio 2.9 3.1
Debt-to-capitalization .53 to 1 .53 to 1
Cash and cash equivalents decreased $8,199,000 during the three months ended
December 31, 1997 due to the factors described below.
The Company's working capital increased from $110,289,000 at September 30, 1997
to $111,166,000 at December 31, 1997, as a result of the factors described
below. Subsequent to December 31, 1997 the Company received $10,400,000 in cash
as a result of finalizing the sale of its 50% equity ownership of WedTech, Inc.
The amount was classified as "other receivables" in the December 31, 1997
balance sheet.
-8-
<PAGE>
For the three months ended December 31, 1997 cash provided by (used for)
operating activities decreased to $(1,705,000) compared to $3,628,000 for the
three months ended December 31, 1996. Despite higher net income, the decrease
occurred due to the gain on sale of the WedTech equity investment (classified as
an investing activity), an increase in depreciation and amortization expense,
offset by various changes in working capital accounts (particularly changes in
accounts receivable, inventory, taxes payable and accrued expenses).
Capital expenditures totaled $6,320,000 during the three months ended December
31, 1997, of which $2,031,000 related to the oilfield services segment and the
remaining expenditures related to the petrochemical processing business. The
expenditures were incurred primarily to enhance and expand existing facilities
as opposed to replacement of existing operating assets. Specifically,
$2,518,000 of the expenditures were incurred to expand the Company's Laporte,
Texas compounding facility. This project is expected to be completed during the
second quarter of fiscal 1998. The Company anticipates that available cash
and/or existing credit facilities will be sufficient to fund fiscal 1998 capital
expenditure requirements.
Cash flows used for financing activities increased to $(2,366,000) during the
three months ended December 31, 1997 compared to $(577,000) during the first
three months of fiscal 1997. The increase is due to increased common and
preferred stock dividends and debt repayments. The increase in dividend
payments is due to the fact that the Company paid first quarter fiscal 1997
dividends in January 1997.
During the period commencing on October 1, 1995 and ended on December 31, 1997,
the Company has acquired seventeen businesses. These acquisitions were effected
through using available cash, the issuance of the Company's Common Stock and the
assumption of outstanding debt of the acquired business. The Company anticipates
it will continue to seek acquisitions in the future.
As of January 31, 1998, the Company had approximately $23,000,000 million in
additional borrowing capacity available under various credit arrangements.
$15,000,000 is available under the Company's domestic credit facility and the
remaining is available under various foreign facilities. Currently the Company
has no outstanding indebtedness under the domestic credit facility.
The Company issued 120,000,000 10 3/8% Senior Notes in June 1997. The debt
matures June 1, 2007 and interest is payable on June 1 and December 1 of each
year beginning December 1, 1997.
-9-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS)
NET REVENUES 1997 % of 1996 % of
Total Total
-------------------------------------
<S> <C> <C> <C> <C>
Exploration Sales and Services $ 9,687 37 $ 8,936 39
Production Sales and Services 8,938 34 7,652 34
Corrosion Control Sales and Services 6,301 24 5,378 24
Other Sales and Services 1,253 5 781 3
-------- ----- ------- -----
Total Oilfield Services Revenues 26,179 100 22,747 100
-------- -------
Size Reduction Services and Other Sales and Services 13,461 34 10,669 78
Compounding Sales and Services 10,851 27 2,824 21
Distribution 15,316 39 263 2
-------- ----- ------- -----
Total Petrochemical Processing Revenues 39,628 100 13,756 100
-------- -------
$ 65,807 $36,503
======== =======
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS)
OPERATING PROFIT 1997 % of 1996 % of
Total Total
-------------------------------------
Oilfield Services $ 2,882 52 $ 3,352 75
Petrochemical Processing 2,638 48 1,323 25
-------- ----- ------- -----
Total Operations 5,520 100 4,675 100
General Corporate Expenses (7,412) (1,766)
-------- -------
($1,892) $ 2,909
======== =======
</TABLE>
Three Months Ended December 31, 1997 Compared to the Three Months Ended
December 31, 1996
REVENUES
- --------
Consolidated net revenues increased $29,304,000 or 80% during the three months
ended December 31, 1997, compared to the three months ended December 31, 1996
due principally to additional revenues generated by the businesses acquired by
the Company in fiscal 1997.
The oilfield service segment experienced revenue growth across all business
lines, improving $3,432,000 or 15% in the first quarter of fiscal 1998 compared
to the same quarter in fiscal 1997. This growth was broad based and almost
entirely due to internal factors rather than as a result of acquisitions.
Driven by a higher average domestic rig count (10% higher in the first quarter
of fiscal 1998 compared to the year earlier quarter), exploration service
revenues increased $751,000 or 8% during the first three months fiscal 1998
compared to the same period of fiscal 1997. Despite lower average oil prices
during the quarter ended December 31, 1997 and as a result of increased sales
volumes, production service revenues increased $1,286,000 or 17%, compared to
the quarter ended December 31, 1996. Also, as a result of increased volumes,
corrosion control revenues improved to $6,301,000 in the first quarter of 1998
from $5,378,000 in the first quarter of 1997, an increase of $923,000 (17%).
Other sales and services, which consist of revenues generated by the Company's
Canadian subsidiary relating to the sale and recondition of engines used for oil
production, also increased.
-10-
<PAGE>
Petrochemical Processing revenues increased $25,872,000 or 188% during the
quarter ended December 31, 1997 compared to the year earlier quarter. Much of
this growth was due to the acquisitions within this business segment completed
in fiscal 1997, as well as the growth of the Company's European distribution
business.
Grinding services and other sales and service revenues increased $2,792,000 or
26% from $10,669,000 during the first quarter of fiscal 1997 to $13,461,000 in
the same quarter of fiscal 1998. This growth was primarily the result of
acquiring Verplast and Micronyl in fiscal 1997 and modest growth experienced by
operating facilities represented in each comparable quarter. These sales
increases were partially offset by the effect of foreign currency exchange
rates. Compounding sales and services increased $8,027,000 or 284%, during the
first quarter of fiscal 1998, compared to the first quarter of fiscal 1997,
primarily due to the acquisition of Bayshore in December 1996. Distribution
revenues increased $15,053,000 compared to the year earlier quarter, due to the
acquisitions of: Verplast, Rotec and the micropowders business of Exxon
Chemical Belgium and the growth of other European distribution businesses,
established by the Company in fiscal 1997.
GROSS PROFITS
- -------------
Gross profits (calculated as net revenues minus cost of sales) as a percentage
of revenues declined to 26% during the first quarter of fiscal 1998 compared to
34% in the same quarter of fiscal 1997. The decline was a result of lower gross
profit margins in both the petrochemical processing and oilfield service
segments. Within the oilfield service business, gross profits as a percentage
of revenues declined to 29% during the three months ended December 31, 1997,
compared to 31% during the three months ended December 31, 1996. The 2% decline
was the result of a different mixture of sales and service revenues in each
comparable period. Within the petrochemical processing business, gross margins
as a percentage of revenues declined to 23% in the first quarter of fiscal 1998
from 38% in the same quarter of fiscal 1997. This decline was the result of
increasing distribution and compounding sales revenues, which typically generate
lower gross margins as compared to revenues generated by the Company's other
petrochemical processing services, that are generally performed on a tolling
basis (i.e., the company processes customer owned material).
COST AND EXPENSES
- -----------------
Selling, general and administrative costs increased from $6,873,000 during the
first quarter of fiscal 1997 to $13,344,000 during the first quarter of fiscal
1998. The $6,471,000 increase was due in large part to the fiscal 1997
acquisitions of Verplast, Rotec and Micronyl. Additionally, the Company incurred
higher costs in fiscal 1998 compared to the same quarter in 1997 for bonus
expenses, workers' compensation expenses, legal costs, oilfield service sales
expenses, corporate administrative costs, bad debt expenses and unsuccessful
acquisition expenses. As a percentage of revenues, sales, general and
administrative costs were 20% during the three months ended December 31, 1997,
compared to 19% during the three months ended December 31, 1996. The 1% increase
was the result of the increase in expenses described above, offset by the effect
of increased distribution and compounding revenues, as these operations incur
relatively less sales, general and administrative costs, as a percentage of
revenues. Non-recurring litigation charges were recognized during the first
quarter of fiscal 1998 because the Company determined that it was probable that
certain legal matters of the Company would likely result in a charge to income
and that these charges could be reasonably estimated.
Depreciation and amortization expenses increased to $3,755,000 in the first
quarter of fiscal 1998 compared to $2,500,000 during the same quarter of fiscal
1997. The increase was the result of goodwill and property, plant and equipment
additions since December 31, 1996, primarily due to the Company's business
acquisitions.
OPERATING INCOME
- ----------------
Operating income (loss) declined $4,801,000 to ($1,892,000) during the first
quarter of fiscal 1998 compared to $2,909,000 during the first quarter of fiscal
1997. The decline was due to the changes in revenues and expenses as discussed
above. Bonus expenses of $1,300,000 and the non-recurring litigation charges
increased corporate operating expenses. The bonuses were paid to over 300
salaried employees and over 500 hourly employees.
GAIN ON SALE OF EQUITY INVESTMENT
- ---------------------------------
During the first quarter of fiscal 1998, the Company recognized a pretax gain
of $11,805,000 on the sale of the Company's 50% equity ownership in WedTech Inc.
The Company received cash of $14,484,000 and recorded an after tax gain of
$6,684,000 from the sale.
INTEREST EXPENSE
- ----------------
Net interest expense increased to $2,410,000 during the first quarter of fiscal
1998 compared to $199,000 during the same quarter of fiscal 1997. This change
was the result of the June 1997 issuance of $120,000,000 10 3/8% Senior Notes
and, to a lesser extent, debt assumed in connection with the fiscal 1997
acquisitions.
-11-
<PAGE>
INCOME TAXES
- ------------
The Company's effective income tax rate increased to 51% during the three months
ended December 31, 1997 compared to 33% during the quarter ended December 31,
1996. The increase was primarily the result of the sale of the Company's equity
investment in WedTech which created tax expense equal to 43% of the pretax gain.
The Company's overall tax rate has also increased due to the mixture of pre-tax
income generated by the Company's operations in various taxing jurisdictions. In
addition, the majority of the Company's domestic state tax liability is being
derived from the Company's capital base rather than net income.
NET INCOME
- ----------
The Company's net income increased to $3,680,000 for the quarter ended December
31, 1997 compared to $1,847,000 for the quarter ended December 31, 1996. The
increase of $1,833,000 was a result of the changes described above.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
The fluctuations of the U.S. dollar against the Dutch guilder, Swedish krona,
British pound, Italian lira, Canadian dollar and the French franc have impacted
the translation of the Company's results of operations in the first quarter of
fiscal 1998 and 1997. The table below summarizes the impact of the guilder,
pound, Canadian dollar and krona currency fluctuations (i.e. relevant currency
exposures) during the three months ended December 31, 1997 compared to the
exchange rates used to translate the operating results of the three months
ended December 31, 1996.
Net Revenues $(591,000)
Operating Income (68,000)
Pre-tax Income (61,000)
Net Income (42,000)
-12-
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a named defendant in 14 cases involving 14 plaintiffs, for
personal injury claims alleging exposure to silica resulting in silicosis-
related disease. The Company is generally protected under worker's compensation
law from claims under these suits except to the extent a judgment is awarded
against the Company for intentional tort. In 1994, the Company was dismissed
without liability from two suits alleging intentional tort against the Company
for silicosis-related disease. In fiscal 1993, the Company settled two other
suits, both of which alleged wrongful death caused by silicosis-related
diseases, which resulted in a total charge of $605,000. In 1996, the Company
obtained a non-suit in two other intentional tort cases and in early 1997 was
non-suited in an additional tort case. Three of the pending personal injury
cases involve three alleged silicosis-related deaths, which are premised upon
allegations of gross negligence. The standard of liability applicable to the
remainder of the pending cases is intentional tort, a stricter standard than the
gross negligence standard applicable to the wrongful death cases. The Company
and its counsel cannot at this time predict with any reasonable certainty the
outcome of any of the remaining suits or whether or in what circumstances
additional suits may be filed. Except as described below, the Company does not
believe, however, that such suits will have a material adverse effect on its
financial condition, results of operations or cash flows. The Company has in
effect in some instances general liability and employer's liability insurance
policies applicable to the referenced suits; however, the extent and amount of
coverage is limited and the Company has been advised by certain insurance
carriers of a reservation of rights with regard to policy obligations pertaining
to the suits because of various exclusions in the policies. If an adverse
judgment is obtained against the Company in any of the referenced suits which is
ultimately determined not to be covered by insurance, the amount of such
judgment could have a material adverse effect on the financial condition,
results of operations and/or cash flows of the Company.
The Company's agreement with Baker Hughes, Incorporated ("Baker Hughes"),
pursuant to which Baker Hughes Tubular Services ("BHTS") was acquired by the
Company, provides that Baker Hughes will reimburse the Company for 50% of the
BHTS environmental remediation costs in excess of $318,000, with Baker Hughes'
total reimbursement obligation being limited to $1,000,000. BHTS is a
responsible party at two hazardous waste disposal sites that are currently
undergoing remediation pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who were
responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas. Remediation of the French Limited site
has been completed, with only natural attenuation of contaminants in groundwater
occurring at this time. Remediation has not yet commenced at the Sheridan site;
current plans for cleanup of the site as set forth in the federal Record of
Decision, for cleanup of the site call for on-site bioremediation of the soils
in tanks and natural attenuation of contaminants in the groundwater. However,
treatability studies to evaluate possible new remedies for the soils, such as
in-place bioremediation, are being conducted as part of a Remedial Technology
Review Program. Based on the completed status of the remediation at the French
Limited site and BHTS's minimal contribution of wastes at both of the sites, the
Company believes that its future liability under the agreement with Baker Hughes
with respect to these two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500,000 for each claim and a maximum contingent liability of $4,500,000 (net
of current accruals) in the aggregate, for all claims.
On November 21, 1997, a Texas state court jury awarded the Company
approximately $13 million in the trial of its case against John Wood Group PLC
relating to the 1994 contract for the purchase of the operating assets of NDT
Systems, Inc. and certain related entities. The court subsequently entered a
judgment for $15,750,000 in ICO's favor. This amount includes pre-judgment
interest on the jury award. The Company may also be entitled to post-judgment
interest. This gain has not been reflected in the Company's operating results.
The Company was represented on a contingency fee basis, and its attorneys will
receive a portion of the amount awarded to the Company.
Wedco is a plaintiff and a counterclaim defendant and the Company is a
third party defendant in a lawsuit filed by Wedco against Polyvector Corporation
("Polyvector") and John Lefas ("Lefas"), the principal shareholder of
Polyvector, which is pending in the federal district court for the District of
New Jersey. An action related facts and circumstances is also pending in the
Ontario Court, General Division. Wedco alleges, among other things, that the
various defendants have breached the terms of the shareholders' agreement among
Wedco and the defendants and seeks performance of the terms of such agreement.
WedTech, Polyvector and Lefas have asserted various counterclaims and third
party claims against the Company allegedly arising out of the Company's merger
with
-13-
<PAGE>
Wedco and the conduct of WedTech's affairs under the shareholders' agreement.
The defendants are seeking, among other things, injunctive relief, recission of
the transfer of WedTech shares in the merger between Wedco and the Company and
reimbursement for alleged damages. On January 16, 1998, Polyvector finalized its
purchase of Wedco's 50% ownership interest in WedTech for CDN $20.8 million.
Both the New Jersey and Canadian actions were stayed pending the sale. The
Company expects litigation between the parties to continue. The outcome of this
litigation cannot be predicted, but the Company believes it has meritorious
defenses to the counterclaims and third party claims.
Permian Enterprises, Inc. ("Permian") a wholly-owned subsidiary of the
Company, is a defendant in a case filed by Tidelands Oil Production Company
("Tidelands") pending in the Superior Court of Los Angeles County, California
(Long Beach division) alleging Permian is liable for damages exceeding $1.1
million, plus interest, suffered by Tidelands and third parties resulting from
the failure of a pipe owned by Tidelands and which was allegedly lined by
Permian. Discovery in this case is ongoing, and a jury trial in the case is
currently scheduled for 1998. The outcome of this litigation cannot be
predicted, but the Company believes Permian has meritorious defenses in this
matter.
The Company is also named as a defendant in certain lawsuits arising in the
ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of S-K:
The following instruments and documents are included as Exhibits to
this Form 10-Q. Exhibits incorporated by reference are so indicated by
parenthetical information.
EXHIBIT NO. EXHIBIT
- ----------- ------------------------------
2.1 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the
Registrant (filed as Exhibit 99.2 to Form 8-K dated May 12, 1997)
2.2 -- Framework Agreement and Stock Sale & Purchase Agreements dated July
21, 1997 among ICO, Inc., Wedco Italy, S.p.A. (a wholly owned
subsidiary of the Company), DARAC's S.p.A., Mr. Francesco Panzini,
and Mr. Massimo Viviani (filed as Exhibit 2 to Form 8-K dated August
5, 1997)
3.1 -- Amended and Restated Articles of Incorporation of the Company (filed
as Exhibit 4 to Form S-3 dated September 13, 1993)
3.2 -- By-Laws of the Company (filed as Exhibit 3(ii) to Form 10-Q for the
quarter ended June 30, 1996)
4.1 -- Indenture dated as of June 9, 1997 between the Company, as issuer,
and Fleet National Bank, as trustee, relating to Senior Notes due
2007 (filed as Exhibit 4.1 to Form S-4 dated June 17, 1997)
4.2 -- Warrant Agreement -- Series A, dated as of September 1, 1992, between
the Registrant and Society National Bank (filed as Exhibit 4 of the
Registrant's Annual Report on Form 10-K for 1992)
4.3 -- Stock Registration Rights Agreement dated April 30, 1996 by and
between the Company, a subsidiary of the company and the Wedco
Shareholders Group, as defined (filed as Exhibit 4.4 to Form S-4
dated May 15, 1996)
4.4 -- Shareholders' Rights Agreement dated November 20, 1997 by and between
the Company and Harris Trust and Savings Bank, as rights agent (filed
as Exhibit 1 to Form 8-A dated December 22, 1997.)
10.1 -- Amended and Restated Business Loan Agreement dated February 21, 1997
between the Registrant and Bank of America, Texas, N.A. (filed as
Exhibit 10 to Form 10-Q dated May 14, 1997)
10.2 -- Substituted First Amendment to Amended and Restated Business Loan
Agreement by and between the Company and Bank of America Texas, N.A.
dated June 6, 1997 (filed as Exhibit 10 to Form 10-Q dated
August 14, 1997)
-14-
<PAGE>
EXHIBIT NO. EXHIBIT
- ----------- ------------------------------
10.3 -- Second Amendment to Amended and Restated Business Loan Agreement
between the Registrant and Bank of America, Texas, N.A. dated August
29, 1997 (filed as Exhibit 10.3 to Form S-4 dated October 3, 1997)
10.4 -- ICO, Inc. 1985 Stock Option Plan, as amended (filed as Exhibit B to
the Registrant's Definitive Proxy Statement dated April 27, 1987 for
the Annual Meeting of Shareholders)
10.5 -- 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed
as Exhibit 99 to the Registrant's Form S-8 dated September 1,3 1993)
10.6 -- 1994 Stock Option Plan of ICO, Inc. (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated June 24, 1994 for the
Annual Meeting of Shareholders)
10.7 -- ICO, Inc. 1995 Stock Option Plan (filed as Exhibit A to Registrant's
Definitive Proxy Statement dated August 10, 1995 for the Annual
Meeting of Shareholders)
10.8 -- ICO, Inc. 1996 Stock Option Plan (filed as Exhibit A to Registrant's
Definitive Proxy Statement dated August 29, 1996 for the annual
Meeting of Shareholders)
10.9 -- Willoughby International Stockholders Agreement dated April 30, 1996
(filed as Exhibit 10.9 to Form S-4 dated May 15, 1996)
10.10 -- Consulting Agreement -- William E. Willoughby (filed as Exhibit 10.13
to Form S-4 dated May 15, 1996)
10.11 -- Salary Continuation Agreement -- William E. Willoughby (filed as
Exhibit 10.14 to Form S-4 dated May 15, 1996)
10.12 -- Addendum to Salary Continuation Agreement -- William E. Willoughby
(filed as Exhibit 10.15 to form S-4 dated May 15, 1996)
10.13 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit
10.11 to Form S-4 dated May 15, 1996)
10.14 -- Stockholders Agreement respecting voting of shares of certain former
Wedco common shareholders (filed as Exhibit 10.21 to Form S-4 dated
May 15, 1996)
10.15 -- Stockholders Agreement respecting voting of shares of certain ICO
common shareholders (filed as Exhibit 10.22 to Form S-4 dated May 15,
1996)
10.16 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Asher O. Pacholder and amendments thereto (filed as
Exhibit 10.16 to Form 10-K dated December 29, 1997)
10.17 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Sylvia A. Pacholder and amendments thereto (filed as
Exhibit 10.17 to Form 10-K dated December 29, 1997).
21 -- Subsidiaries of the Company (filed as Exhibit 21 to Form 10-K dated
December 29, 1997).
27** -- Financial Data Schedule
99 -- Safe Harbor Disclosure (filed as Exhibit 99 to Form 10-K dated
December 29, 1997).
__________________
**Filed herewith
-15-
<PAGE>
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
-----------------------------
February 13, 1998 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)
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly filing on Form 10-Q for the period ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 75,693,000
<SECURITIES> 0
<RECEIVABLES> 65,264,000
<ALLOWANCES> (1,260,000)
<INVENTORY> 22,709,000
<CURRENT-ASSETS> 169,960,000
<PP&E> 159,838,000
<DEPRECIATION> (57,799,000)
<TOTAL-ASSETS> 329,861,000
<CURRENT-LIABILITIES> 58,794,000
<BONDS> 0
0
13,000
<COMMON> 38,045,000
<OTHER-SE> 90,505,000
<TOTAL-LIABILITY-AND-EQUITY> 329,861,000
<SALES> 65,807,000
<TOTAL-REVENUES> 65,807,000
<CGS> 49,057,000
<TOTAL-COSTS> 67,699,000
<OTHER-EXPENSES> 11,836,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,410,000
<INCOME-PRETAX> 7,534,000
<INCOME-TAX> 3,854,000
<INCOME-CONTINUING> 3,680,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,680,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
