<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
--------------
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 76-0566682
- ------------------------ ------------------------------------
(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 22,114,016 shares
outstanding as of August 13 , 1999
<PAGE> 2
ICO, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
September 30, 1998................................................ 3
Consolidated Statements of Operations for the Three and
Nine Months Ended June 30, 1999 and 1998.......................... 4
Consolidated Statements of Comprehensive Income for the
Three and Nine Months ended June 30, 1999 and 1998................ 5
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1999 and 1998.......................... 6
Notes to Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks....... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 20
Item 2. Changes in Securities............................................. -
Item 3. Defaults upon Senior Securities................................... -
Item 4. Submission of Matters to a Vote of Security Holders............... -
Item 5. Other Information................................................. -
Item 6. Exhibits and Reports on Form 8-K.................................. 22
</TABLE>
-2-
<PAGE> 3
ICO, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 27,795 $ 51,135
Trade receivables (less allowance for doubtful accounts of $1,686
and $1,690, respectively) 50,142 56,868
Inventories 25,741 29,963
Deferred tax asset 2,987 3,154
Prepaid expenses and other 3,565 4,320
--------- ---------
Total current assets 110,230 145,440
--------- ---------
Property, plant and equipment, at cost 186,752 184,683
Less - accumulated depreciation and amortization (72,593) (67,384)
--------- ---------
114,159 117,299
--------- ---------
Other assets:
Goodwill (less accumulated amortization of $7,783 and $6,592,
respectively) 54,814 57,304
Debt offering costs 3,760 4,180
Other 3,014 4,454
--------- ---------
$ 285,977 $ 328,677
========= =========
LIABILITIES, STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 9,787 $ 12,836
Accounts payable 20,363 24,220
Accrued interest 1,240 4,395
Accrued insurance 2,235 1,790
Accrued salaries and wages 3,525 2,372
Income taxes payable 714 43
Other accrued expenses 12,842 10,564
--------- ---------
Total current liabilities 50,706 56,220
Deferred income taxes 1,434 9,454
Other long-term liabilities 1,711 2,056
Long-term debt, net of current portion 131,172 132,631
--------- ---------
Total liabilities 185,023 200,361
--------- ---------
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
Junior participating preferred stock, without par value - 50,000 shares
authorized; 0 shares issued and outstanding -- --
Common stock, without par value - 50,000,000 shares authorized;
22,114,016 and 22,108,153 shares issued and outstanding, respectively 39,181 39,170
Additional paid-in capital 108,725 108,725
Accumulated other comprehensive loss (6,238) (1,890)
Accumulated deficit (40,727) (17,702)
--------- ---------
100,954 128,316
--------- ---------
$ 285,977 $ 328,677
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Petrochemical processing sales and services $ 47,627 $ 46,718 $ 138,092 $ 128,813
Oilfield sales and services 17,868 26,466 53,740 80,937
--------- --------- --------- ---------
Total net revenues 65,495 73,184 191,832 209,750
--------- --------- --------- ---------
Cost and expenses:
Cost of sales and services 49,103 55,419 147,022 157,475
Selling, general and administrative 10,082 10,009 33,017 34,753
Depreciation 3,534 3,262 10,799 9,128
Amortization of intangibles 663 674 2,088 2,169
Impairment of long-lived assets -- -- 9,291 --
Write-down of fixed assets 425 -- 3,273 --
Write-down of inventories -- -- 1,507 --
Severance expenses 1,500 -- 2,499 --
Write-off of start-up costs -- -- 867 --
--------- --------- --------- ---------
65,307 69,364 210,363 203,525
--------- --------- --------- ---------
Operating income (loss) 188 3,820 (18,531) 6,225
--------- --------- --------- ---------
Other income (expense):
Gain on sale of equity investment -- -- -- 11,805
Currency exchange loss (431) -- (431) --
Interest income 382 772 1,528 2,929
Interest expense (3,385) (3,374) (10,333) (10,339)
Other (3) 13 32 8
--------- --------- --------- ---------
(3,437) (2,589) (9,204) 4,403
--------- --------- --------- ---------
Income (loss) before taxes and extraordinary item (3,249) 1,231 (27,735) 10,628
Provision for income taxes 942 (564) 7,158 5,187
--------- --------- --------- ---------
Income (loss) before extraordinary item $ (2,307) $ 667 $ (20,577) $ 5,441
--------- --------- --------- ---------
Extraordinary gain -- -- 399 --
--------- --------- --------- ---------
Net income (loss) (2,307) 667 (20,178) 5,441
--------- --------- --------- ---------
Preferred Dividends 544 544 1,632 1,632
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ (2,851) $ 123 $ (21,810) $ 3,809
========= ========= ========= =========
Basic and diluted earnings (loss) per share before
extraordinary item (see Note 4) $ (.13) $ .01 $ (1.01) $ .17
Extraordinary item -- -- .02 --
--------- --------- --------- ---------
Basic and diluted earnings (loss) per share $ (.13) $ .01 $ (.99) $ .17
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
ICO, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income (loss) $ (2,307) $ 667 $(20,178) $ 5,441
Other comprehensive loss
Foreign currency translation adjustment (1,471) (235) (4,348) (1,943)
-------- -------- -------- --------
Comprehensive income (loss) $ (3,778) $ 432 $(24,526) $ 3,498
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(20,178) $ 5,441
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 12,887 11,297
Gain on sale of equity investment -- (11,805)
Write-down of inventories 1,507 --
Write-off of start-up costs 867 --
Impairment of long-lived assets 9,291 --
Write-down of fixed assets 3,273 --
Loss on currency exchange 431 --
Changes in assets and liabilities, net of the effects of
business acquisitions:
Receivables 6,299 (5,305)
Inventories 2,005 (6,721)
Prepaid expenses and other assets (15) (1,835)
Income taxes payable 1,079 642
Deferred taxes (8,408) 2,100
Accounts payable (3,429) 891
Accrued interest (3,155) (2,842)
Accrued expenses 3,102 (755)
-------- --------
Total adjustments 25,734 (14,333)
-------- --------
Net cash provided by (used for) operating activities 5,556 (8,892)
-------- --------
Cash flows used for investing activities:
Capital expenditures (12,329) (19,369)
Acquisitions, net of cash acquired (7,603) (17,137)
Disposition of equity investment, net of expenses -- 13,679
Dispositions of property, plant and equipment (15) 2,198
-------- --------
Net cash used for investing activities (19,947) (20,629)
-------- --------
Cash flows used for financing activities:
Net proceeds from sale of stock 12 1,173
Payment of dividend on preferred stock (1,632) (1,632)
Payment of dividend on common stock (1,216) (3,614)
Additional debt 598 4,044
Reductions of debt (6,520) (3,433)
-------- --------
Net cash used for financing activities (8,758) (3,462)
-------- --------
Effect of exchange rates on cash (191) (17)
-------- --------
Net decrease in cash and equivalents (23,340) (33,000)
Cash and equivalents at beginning of period 51,135 83,892
-------- --------
Cash and equivalents at end of period $ 27,795 $ 50,892
======== ========
Supplemental disclosures of cash flow information:
Cash received (paid) during the period for:
Interest received 1,529 2,962
Interest paid (13,497) (12,413)
Income taxes paid (727) (3,348)
</TABLE>
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, 1998 for ICO, Inc. (the "Company"). In the
opinion of management, these interim financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position as of June 30, 1999, the
results of operations for the three and nine months ended June 30, 1999 and 1998
and the changes in its cash position for the nine months ended June 30, 1999 and
1998. Results of operations for the three-month and nine-month periods ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending September 30, 1999. 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, 1998.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The Company is required to adopt SFAS No. 133 in its financial statements for
the fiscal year ending September 30, 2000. Due to the Company's limited use of
derivative instruments, the impact of adopting SFAS No. 133 is not expected to
be material to the Company's financial statements.
During April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," which requires that companies expense as incurred costs of
start-up activities and organization costs. The Company is required to adopt SOP
98-5 in its financial statements for the fiscal year ending September 30, 2000.
The adoption of SOP 98-5 is not expected to have a material effect on the
financial results of the Company.
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosure About Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. SFAS No. 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. The Company intends to adopt the requirements of this pronouncement in
financial statements for the year ended September 30, 1999, as required by the
Statement. The Company does not believe that the implementation of SFAS No. 131
will have a material impact on its financial statements.
Certain reclassifications have been made to prior year amounts in order
to conform to current year classifications.
-7-
<PAGE> 8
NOTE 3. ACQUISITION
On February 18, 1999, the Company acquired MilCorp Holdings, Inc. and
MilCorp Industries, Ltd. (collectively "MilCorp") for $7,653,000 in cash and the
assumption of approximately $4,144,000 of debt. The Company will account for the
acquisition using the purchase method of accounting and, as such, the operating
results for MilCorp impact the results of the Company from the date of the
acquisition forward. The acquisition generated approximately $4,700,000 of
Goodwill which will be amortized over 40 years. MilCorp is a leading provider of
fully integrated services for oil country tubular goods, including trucking,
inventory management, inspection and internal coating. MilCorp has facilities
located on 160 acres near Edmonton, Alberta, in the energy-producing region of
Western Canada. MilCorp has been in business for more than fifty years and its
customers include many of Western Canada's large energy companies and drilling
contractors.
NOTE 4. EARNINGS 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 three and nine months ended June 30, 1999 and 1998, the potentially dilutive
effects of the Company's exchangeable preferred stock (would have an
anti-dilutive effect) and common stock options, with exercise prices exceeding
fair market value of the underlying common shares, have been excluded from
diluted earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------
(In thousands, except share data)
Income Shares Amount Income Shares Amount
-------- ---------- ------ ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ (2,307) $ 667
Less: Preferred stock dividends 544 544
-------- ------
BASIC EPS $ (2,851) 22,113,707 $ (.13) $ 123 21,943,713 $ .01
======= =====
EFFECT OF DILUTIVE SECURITIES
Options -- 17,964 -- 20,543
Warrants -- -- -- --
-------- ---------- ------ ----------
DILUTED EPS $ (2,851) 22,131,671 $ (.13) $ 123 21,964,256 $ .01
======== ========== ======= ====== ========== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
(In thousands, except share data)
Income Shares Amount Income Shares Amount
--------- ---------- ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ (20,178) $ 5,441
Less: Preferred stock dividends 1,632 1,632
--------- -------
BASIC EPS $ (21,810) 22,111,715 $ (.99) $ 3,809 21,847,670 $ .17
====== =====
EFFECT OF DILUTIVE SECURITIES
Options -- 6,397 -- 101,068
Warrants -- -- -- 64,393
--------- ---------- ------- ----------
DILUTED EPS $ (21,810) 22,118,112 $ (.99) $ 3,809 22,013,131 $ .17
========= ========== ====== ======= ========== =====
</TABLE>
-8-
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
SFAS 130 establishes new requirements for reporting comprehensive income and its
components. Adoption of this statement had no impact on the Company's net income
or stockholders' equity for the periods presented. SFAS 130 requires unrealized
gains or losses on the Company's foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
NOTE 6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Finished Goods $ 10,380 $ 14,292
Raw Materials 10,505 10,302
Work in Progress 1,248 1,491
Supplies 3,608 3,878
-------- --------
$ 25,741 $ 29,963
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in all parts of this document, including, but
not limited to, availability of liquidity for and level of future capital
expenditures, effects of the Year 2000 issue, demand for the Company's services,
commodity and product price trends and their effects, the effect of legal
proceedings, market conditions, future acquisitions, future growth plans,
financial results and any other statements which are not historical facts are
forward-looking statements within the meaning of section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve
substantial risks and uncertainties. When words such as "anticipate", "believe",
"estimate", "intend", "expect", "plan" and similar expressions are used, they
are intended to identify the statements as forward-looking. Actual results,
performance or achievements can differ materially from results suggested by
these forward-looking statements due to a number of factors, including those
described in the Company's fiscal 1998 Form 10-K dated December 23, 1998.
INTRODUCTION
The Company's revenue is classified within two operating segments:
petrochemical processing and oilfield services. Petrochemical processing
revenues are derived from (1) distributing plastic powders, (2) grinding
petrochemicals into powders (size reduction), providing ancillary services and
selling grinding equipment manufactured by the Company, and (3) compounding
sales and services, which include the manufacture and sale of concentrates. The
Company's distribution operations utilize the Company's size reduction and
compounding facilities to process petrochemical products prior to sale. Oilfield
services revenues include revenues derived from (1) exploration sales and
services (new tubular goods inspection), (2) production sales and services
(reclamation, reconditioning and inspection of used tubular goods and sucker
rods), (3) corrosion control services (coating of tubular goods and sucker
rods), and (4) other sales and services (oilfield engine sales and services in
Canada). Service revenues in both of the Company's business segments are
recorded as the services are performed or, in the case of product sales, upon
shipment to third parties.
-9-
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expansion of the Company's distribution and concentrate
manufacturing businesses within the petrochemical processing segment has had the
effect of reducing overall petrochemical processing margins as a percentage of
revenue. The gross margin percentages for the distribution and concentrate
manufacturing businesses, are generally significantly lower than those generated
by the Company's size reduction services. Several of the Company's petrochemical
processing subsidiaries, including the Company's concentrate manufacturing and
distribution operations, typically buy raw materials, improve the material and
then sell the finished product. In contrast, many of the Company's size
reduction operations typically involve processing customer-owned material
(referred to as "toll" processing).
Cost of sales and services for the petrochemical processing and
oilfield services segments 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 concentrate
manufacturing operations and the Company's distribution business, purchased raw
materials. Selling, general and administrative expenses consist primarily of
compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company; other sales and marketing expenses; communications costs; systems
costs; insurance costs and legal and accounting professional fees.
The demand for the Company's oilfield products and services depends
upon oil and natural gas prices and the level of oil and natural gas production
and exploration activity. In addition to changes in commodity prices,
exploration and production activities are affected by worldwide economic
conditions, supply and demand for oil and natural gas, seasonal trends and the
political stability of oil-producing countries. The oil and gas industry has
been highly volatile over the past several years, due primarily to the
volatility of oil and natural gas prices. During fiscal 1996 and 1997, the oil
and gas service industry generally experienced increased demand and improved
product and service pricing as a result of improved commodity prices and greater
levels of oil and gas exploration and production activity, due largely to a
strong world economy. In fiscal 1998, however, oil prices declined significantly
versus fiscal 1997 levels. While gas prices also declined during this period,
they declined to a lesser extent. These trends have been attributed to, among
other factors, an excess worldwide oil supply, lower domestic energy demand
resulting from an unseasonably warm winter and declining demand due to the
economic downturn in Southeast Asia. As oil and, to a lesser extent, natural gas
prices declined during this period, demand for oilfield products and services,
including those provided by the Company, softened.
Oil and gas prices continued to fall sharply in the first half of
fiscal 1999, resulting in extremely depressed levels of oilfield exploration and
production activity. The Company's oilfield service revenues and income have
been adversely impacted by these factors. More recently, the price of oil has
risen to above $20 per barrel and natural gas prices have also risen. This
increase, however, has not yet resulted in any material increase in the demand
for the Company's products and services. Although, barring another collapse of
commodity prices, the Company anticipates that oilfield service activity will
increase and, hence, the demand for the Company's oilfield services will
improve, it appears that the level of activity will continue to be relatively
weak during the quarter ended September 30, 1999. Although the Company is
optimistic that, if oil and gas prices remain at or near their present levels,
market conditions will improve at some point, the timing of such a recovery
cannot be predicted with certainty.
-10-
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company:
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1998
------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 27,795,000 $ 51,135,000
Working capital 59,524,000 89,220,000
Current ratio 2.2 2.6
Debt-to-capitalization .58 to 1 .53 to 1
</TABLE>
Cash and cash equivalents decreased $23,340,000 during the nine months
ended June 30, 1999 and working capital declined $29,696,000 during the first
three quarters of fiscal 1999, due to the factors described below.
For the nine months ended June 30, 1999, cash provided by operating
activities increased to $5,556,000 from uses of $(8,892,000) for the nine months
ended June 30, 1998. The improvement occurred despite lower income during the
nine months ended June 30, 1999, compared to the same period of fiscal 1998, due
to the fiscal year 1999 non-cash charges, which were added back to net income to
arrive at operating cash flow and the gain on sale of equity investment, which
was subtracted from 1998 net income to arrive at cash flows from operating
activities, during that period. Additionally, various changes of the working
capital accounts had the effect of increasing cash flows from operations,
compared to fiscal 1998.
Capital expenditures totaled $2,565,000 and $12,329,000 during the
three and nine months ended June 30, 1999, of which $1,975,000 for the
three-month period and $8,189,000 for the nine-month period related to the
Petrochemical Processing business and the remaining $590,000 for the three
months ended June 30, 1999 and $4,140,000 for the nine months ended June 30,
1999 related to the Oilfield Service business. A majority of the expenditures,
within the oilfield service business involved fulfilling commitments made by the
Company during fiscal 1998. For the remainder of fiscal 1999, capital
expenditures are expected to continue to decline compared to fiscal 1998 levels.
The Company anticipates that available cash and/or existing foreign credit
facilities will be sufficient to fund remaining fiscal 1999 capital expenditure
requirements.
Cash flows from financing activities decreased from uses of
$(3,462,000) during the nine months ended June 30, 1998 to uses of $(8,758,000),
during the 1999 period. The decrease was due to lower sale of stock proceeds,
lower debt additions and increased debt repayments, partially offset by lower
common stock dividend payments.
The terms of the Company's Senior Notes limit the amount of liens and
additional indebtedness that the Company can incur and the amount of dividends
which can be paid by the Company. Currently, the Company does not have in place
a domestic credit facility. While the Company considers its current cash
balances an adequate source of liquidity at this time, management is currently
working to establish a domestic credit facility. The Company has available
$10,750,000 of additional borrowing capacity under various foreign facilities.
These foreign facilities are primarily revolving lines of credit with interest
rates ranging from 4.5% to 8.6% and maturities of less than one year.
Outstanding borrowings under these facilities are typically secured by the
assets of the applicable foreign subsidiary.
During the second quarter of fiscal 1999, the Company suspended
dividend payments on common stock. The Board of Directors determined that it
would be in the best interests of shareholders to maximize financial flexibility
by retaining cash within the Company in light of the conditions in the energy
and petrochemicals markets.
-11-
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
% of % of % of % of
NET REVENUES (000'S) 1999 Total 1998 Total 1999 Total 1998 Total
--------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution $ 20,471 43 $ 21,130 45 $ 61,828 45 $ 56,149 44
Size Reduction Services and
Other Sales and Services 11,904 25 12,941 28 36,024 26 39,097 30
Compounding Sales and Services 15,252 32 12,647 27 40,240 29 33,567 26
--------- --------- --------- --------- --------- --------- --------- ---------
Total Petrochemical Processing 47,627 100 46,718 100 138,092 100 128,813 100
--------- --------- --------- ---------
Exploration Sales and Services 5,865 33 10,689 40 18,840 35 31,083 38
Production Sales and Services 6,976 39 8,922 34 20,087 37 27,261 34
Corrosion Control Sales and
Services 3,507 20 6,393 24 11,781 22 19,548 24
Other Sales and Services 1,520 8 462 2 3,032 6 3,045 4
--------- --------- --------- --------- --------- --------- --------- ---------
Total Oilfield Services 17,868 100 26,466 100 53,740 100 80,937 100
--------- --------- --------- ---------
Total $ 65,495 $ 73,184 $ 191,832 $ 209,750
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------- ----------------------------------
% of % of % of % of
OPERATING PROFIT (LOSS) (000'S) 1999 Total 1998 Total 1999 Total 1998 Total
------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Petrochemical Processing $ 2,772 91 $ 2,010 37 $ (6,171) 73 $ 7,435 42
Oilfield Services 278 9 3,393 63 (2,334) 27 10,250 58
------- --- ------- --- -------- --- -------- ---
Total Operations 3,050 100 5,403 100 (8,505) 100 17,685 100
General Corporate Expenses (2,862) (1,583) (10,026) (11,460)
------- ------- -------- --------
Total $ 188 $ 3,820 $(18,531) $ 6,225
======= ======= ======== ========
</TABLE>
Three and Nine Months Ended June 30, 1999 Compared to the Three and Nine Months
Ended June 30, 1998
REVENUES.
Consolidated revenues decreased $7,689,000 (11%) and $17,918,000 (9%)
during the three and nine months ended June 30, 1999, respectively, as compared
to the same periods of fiscal 1998. The declines are attributable to
petrochemical processing revenue increases, more than offset by a decline of
oilfield service revenues.
Petrochemical processing revenues increased from $46,718,000 during the
third quarter of fiscal 1998 and $128,813,000 during the nine months ended June
30, 1998, to $47,627,000 and $138,092,000 for the three and nine months ended
June 30, 1999, respectively. These increases of 2% and 7%, respectively, were
due to the acquisitions of J.R. Courtenay (N.Z.) in March 1998, and Soreco in
June 1998 and an increase of domestic compounding revenues, partially offset by
a European revenue decline. Management believes the European revenue decrease is
primarily the result of lower polymer prices during fiscal 1999, compared to
fiscal 1998. The trend of lower polymer prices has, in many cases, had the
effect of lowering the Company's sales prices and has motivated some
-12-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customers to defer purchases of raw materials and draw down on their
inventories, in the hope that resin prices will continue to fall and, thus,
lower their raw material costs. During the third quarter of fiscal 1999, resin
prices firmed and it appears that the lowering price trend may be reversing. If
prices continue to rise, management would expect this trend to have a positive
effect on the financial results of the petrochemical processing business,
particularly in Europe.
Distribution revenues were $20,471,000 and $61,828,000 for the three
and nine months ended June 30, 1999. These results represent a decrease of
$659,000 (3%) for the three months ended June 30, 1999 and an increase of
$5,679,000 (10%) for the nine months ended June 30, 1999. The quarterly decrease
was the result of lower European distribution revenues primarily attributable to
lower resin prices during fiscal 1999, partially offset by an increase of
domestic distribution revenues. The increase of distribution revenues during the
nine months ended June 30, 1999 was the result of the increase of revenues
resulting from the J.R. Courtenay acquisition, during March 1998, offset, in
part, by a decline in European distribution revenues. Size reduction services
and other sales and service revenues declined $1,037,000 (8%) during the three
months ended June 30, 1999 and declined $3,073,000 (8%) during the nine months
ended June 30, 1999, compared to the same periods of fiscal 1998. Size reduction
revenues totaled $11,904,000 and $36,024,000 for the three and nine months ended
June 30, 1999, respectively. The declines in fiscal 1999, compared to fiscal
1998, resulted primarily from a decline in demand for the Company's products and
services domestically and in Europe. As previously mentioned, the Company
believes the decline in demand is partially attributable to the general decline
of polymer prices in fiscal 1999. Compounding sales and service revenues
increased $2,605,000 (21%) and $6,673,000 (20%) to $15,252,000 and $40,240,000
for the three and nine months ended June 30, 1999, respectively. These increases
are mostly due to greater domestic compounding revenues, due in large part to a
mid-fiscal 1998 domestic compounding capacity expansion and the acquisition of
Soreco made in June 1998.
Oilfield Service revenues declined from $26,466,000 and $80,937,000 for
the three and nine months ended June 30, 1998 to $17,868,000 and $53,740,000 for
the three and nine months ended June 30, 1999. These results represent declines
of $8,598,000 (32%) and $27,197,000 (34%) for the three and nine-month
comparisons, respectively. The revenue decline was broad-based, across all
Oilfield Service product lines and was the result of declining demand for the
Company's oilfield products and services. Declining demand is the result of
depressed average oil and, to a lesser extent, gas prices during most of fiscal
1999, which has resulted in significantly lower rig counts in both the United
States and Canada during fiscal 1999, compared to fiscal 1998. The revenue
decreases were partially offset by the acquisition of MilCorp. During the
quarter ended June 30, 1999 the domestic drilling rig count averaged 523, a 39%
decline from the average of approximately 863 during the same quarter of fiscal
1998. West Texas intermediate crude prices improved from an average price of
$14.66 during the quarter ended June 30, 1998 to $17.76 during the quarter ended
June 30, 1999, a 21% increase. In recent months, the price of oil has continued
to rise to above $20 per barrel. This increase, however, has not yet resulted in
any significant increase in the level of drilling activity in North America. In
fact, the U.S. drilling rig count declined to only 488 rigs on April 30, 1999
and has been rising slowly to 602 rigs as of July 30, 1999. Fortunately,
production activity has been improving as evidenced by a 16% improvement of the
Company's production services revenues over second quarter results. Barring
another collapse of oil and gas prices, the Company anticipates that oilfield
service activity will generally increase and, hence, the demand for the
Company's oilfield services will increase. The timing of the demand recovery,
however, cannot be predicted with certainty. Furthermore, it appears that the
level of activity will continue to be fairly weak in the quarter ended September
30, 1999. The Company has continued to reduce Oilfield Service operating and
overhead costs, while maintaining the Company's position as a leader in
providing high quality and cost-effective services to its customers. These cost
and overhead reductions include Oilfield Services personnel reductions of more
than 30% during the past year and salary reductions during March 1999 of 10% for
most salaried Oilfield Services employees, a portion of Oilfield Service hourly
employees and for certain corporate positions, including the Company's President
and Chief Executive Officer and the Chairman and Chief Financial Officer.
-13-
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COST AND EXPENSES
Consolidated gross margins as a percentage of revenues (calculated as
net revenues minus total costs of sales and services), increased slightly from
24% during the three months ended June 30, 1998 to 25% for the same quarter of
fiscal 1999. Gross margins improved during the quarter due to an increase of
Petrochemical gross margins, partially offset by lower Oilfield Service gross
margins. For the nine months ended June 30, 1999 gross margins were 23%, down
from 25% during the fiscal 1998 period. This decline was primarily driven by
lower Oilfield Service gross margins as a percentage of revenues during fiscal
1999.
Petrochemical gross margins were 25% during the third quarter of fiscal
1999 compared to 20% during the third quarter of fiscal 1998. During the nine
months ended June 30, 1999 Petrochemical Processing gross margins were 22% of
revenues compared to 21% for the same period of fiscal 1998. These improvements
were primarily the result of an increase in domestic and European gross margins
as a percentage of revenues. Domestic profitability gains resulted from cost
cutting efforts, production efficiency improvements and an increase in
compounding volumes at Bayshore Industrial (due in large part to the mid-year
1998 capacity expansion). European improvements resulted from a favorable
revenue mix along with the beneficial effect of rising resin prices.
Oilfield Service gross margins declined to 25% and 23% for the three
and nine months ended June 30, 1999, respectively. During both the three and
nine months ended June 30, 1998, Oilfield Service gross margins were 31%. The
decline was driven by lower volumes, as costs were spread over less revenues,
and weaker pricing, due to very poor market conditions. The Company has reacted
to these conditions by rationalizing the cost structure of the Oilfield Service
business to reflect current activity levels. These cost reductions have included
a 30% headcount reduction of the Oilfield Service workforce during the past
year, a 10% reduction in compensation for most Oilfield Service salaried and
hourly employees, and a significant reduction of contract labor expenses.
Selling, general and administrative costs increased $73,000 (1%) during
the three months ended June 30, 1999 and declined $1,736,000 (5%) during the
nine months ended June 30, 1999, compared to the same periods of fiscal 1998.
The slight quarterly increase was caused by significant sales, general and
administration declines within the Oilfield Service and domestic Petrochemical
Processing businesses and lower corporate management compensation expenses, more
than offset by an increase in workers' compensation expenses, bonus expenses and
the effect of the MilCorp acquisition. The increase in bonus expense is
primarily due to the reversal of accrued bonuses during the third quarter of
1998, compared to minimal bonus expenses incurred during the third quarter of
1999. The year-to-date decrease resulted from significant cost reductions within
the Oilfield Service and domestic Petrochemical businesses, lower corporate
management compensation expenses and lower litigation charges. These declines
were partially offset by an increase of sales, general and administrative
expenses due to the acquisitions of J.R. Courtenay, Soreco and MilCorp and an
increase of workers' compensation expenses. The decline in Oilfield Service and
domestic Petrochemical Processing sales, general and administrative expenses
were driven largely by staffing reductions.
Depreciation and amortization expenses increased from $3,936,000 during
the third quarter of fiscal 1998 to $4,197,000 during the same quarter of fiscal
1999 and from $11,297,000 for the nine months ended June 30, 1998 to $12,887,000
for the nine months ended June 30, 1999. These increases were mostly the result
of capital expenditures and business acquisitions since June 30, 1998.
SECOND QUARTER FISCAL 1999 CHARGES
Impairment of long-lived assets. During the second quarter of fiscal
1999, the Company recognized a $9,291,000 charge for the impairment of
long-lived assets. $748,000 of this charge relates to the oilfield services
business, of which $310,000 of the write-down related to the impairment of
goodwill and the remaining to machinery and equipment. $8,543,000 of the total
charge relates to the petrochemical business and reflects the impairment of four
-14-
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underperforming facilities. $4,812,000 of the petrochemical charge includes the
impairment of goodwill and $3,489,000 consists of machinery and equipment
impairment. The amount of the machinery and equipment impairments were
determined by comparing fair values with the corresponding carrying values of
the assets evaluated. Fair value was determined as the estimated current market
value of the assets evaluated.
Write-down of property, plant and equipment. During the second quarter
of fiscal 1999, the Company reduced the carrying value of property, plant and
equipment primarily due to assets which are obsolete or are not in working order
and will not be used in the future. Of the $2,848,000 write-down, $2,207,000
related to the petrochemical business and $641,000 related to the oilfield
service segment.
Write-downs of inventory. During the second quarter, the Company wrote
down $1,507,000 of inventories to estimated market selling prices (mostly within
the oilfield service business), to reflect current market conditions.
Severance expenses. During the second quarter of fiscal 1999, the
Company recognized severance expenses of $999,000 relating to terminated
employees.
Write-off of start-up costs. The write-off of start-up costs primarily
relates to the closure, during the second quarter of fiscal 1999, of an
operation which had generated capitalized start-up costs. This operation had an
immaterial impact on the Company's financial results prior to the write-off of
capitalized start-up costs.
THIRD QUARTER FISCAL 1999 CHARGES
During the third quarter of fiscal 1999 the Company recognized a
severance charge of $1,500,000 and a fixed asset write-down of $425,000 related
to the management restructuring of the Company's European Petrochemical
Processing operations.
OPERATING INCOME
Operating income decreased from $3,820,000 for the three months ended
June 30, 1998, to $188,000 for the three months ended June 30, 1999 and from
$6,225,000 for the nine months ended June 30, 1998 to a loss of $(18,531,000)
for the nine months ended June 30, 1999. The decrease was due to the changes in
revenues and costs and expenses discussed above.
CURRENCY EXCHANGE LOSS
During the third quarter of fiscal 1999, the Company recognized an
exchange loss of $431,000 related to an intercompany note, which was repaid by a
foreign subsidiary subsequent to June 30, 1999.
GAIN ON SALE OF EQUITY INVESTMENT
During the first quarter of fiscal 1998, the Company recognized a
pre-tax gain of $11,805,000 on the sale of an equity investment. The Company
received cash of $14,484,000 and recorded an after-tax gain of approximately
$6,799,000 on the sale.
-15-
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST INCOME/EXPENSE
Net interest expense was $3,003,000 and $8,805,000 during the three and
nine months ended June 30, 1999. For the three and nine months ended June 30
1998, the Company had net interest expense of $2,602,000 and $7,410,000,
respectively. This change was primarily the result of declining cash balances,
due in large part to acquisitions, as well as internal capital expenditures.
INCOME TAXES
The Company's effective income tax rate decreased to 29% and 26% during
the three and nine months ended June 30, 1999, respectively, compared to 46% and
49% during the three and nine months ended June 30, 1998, respectively. The
effective tax rate decline during the third quarter of fiscal 1999, compared to
fiscal 1998, was due to a change in mixture of pre-tax income generated by the
Company's operations in various taxing jurisdictions. The year-to-date decline
was also caused by a change of the mixture of pre-tax income generated in
different tax jurisdictions, as well as an increase of permanent differences
(primarily due to the second quarter of fiscal 1999 write-down of impaired
goodwill).
NET INCOME
For the three and nine months ended June 30, 1999, the Company had a
net loss of $(2,307,000) and $(20,178,000), respectively, compared to net income
of $667,000 and $5,441,000 for the same periods in fiscal 1998, due to the
factors described above.
FOREIGN CURRENCY TRANSLATION
The fluctuations of the U.S. Dollar against the Dutch Guilder, Swedish
Krona, British Pound, Italian Lira, Canadian Dollar, the French Franc, and the
Australian and New Zealand Dollars have impacted the translation of revenues and
income of the Company's international operations. The table below summarizes the
impact of the above currencies during the three and nine months ended June 30,
1999, compared to the exchange rates used to translate the three and nine months
ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
--------- ---------
<S> <C> <C>
Net revenues $ 237,000 $ 418,000
Operating income 26,000 49,000
Pre-tax income 26,000 45,000
Net income 14,000 25,000
</TABLE>
-16-
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR 2000 ISSUE
The Year 2000 problem arose because some computer programs use only the
last two digits of a year as a reference date, causing the program to improperly
recognize a year that does not begin with "19".
The Company has been working toward Year 2000 readiness since 1997 and
is proceeding on schedule. Completion of the project is scheduled for the fourth
fiscal quarter of 1999.
To improve access to business information through common, integrated
computing systems within business operations, the Company has begun a business
systems replacement project for its domestic, Australian and New Zealand
petrochemical operations. The new systems ("Business Replacement Systems"),
which are expected to make these operations' business computer systems Year 2000
compliant, are scheduled for completion by September 1999. Implementation of
these programs is approximately 95% complete. The Company has developed a
contingency plan in which it would upgrade rather than replace existing systems
to make them Year 2000 compliant. A decision to implement the contingency plan
will be made by the end of the fourth fiscal quarter of 1999. Remaining business
software programs, which are used by the Company's Oilfield and European
Petrochemical operations, have been modified, in the case of Oilfield
operations, and upgraded, in the case of European Petrochemical operations, to
make them Year 2000 compliant.
The implementation of the Year 2000 project has not resulted in any
other IT projects being deferred, except for a delay in non-Year-2000-related
upgrades of the Oilfield operation's business software program. The Company has
already begun making these upgrades.
Overview. The Company's Project is divided into four sections:
Corporate and Facility Infrastructure, Applications Software, Inspection and
Processing Equipment, and Third-Party Suppliers. Each section consists of four
phases: Year 2000 readiness analysis and assessment; retiring, replacing, or
upgrading items that are not Year 2000 ready; remediation testing of upgraded
and replacement hardware and software; and contingency planning.
Applications Software. The Application Software section includes the
conversion of software which is not Year 2000 compliant or, where available from
the supplier, the replacement of such software. Application Software consists of
all software not used directly in conjunction with the operation of the
Company's manufacturing and service facilities. The Company estimates that the
software conversion phase is now 92% complete. The remaining conversions are
scheduled to be completed by the end of the fourth fiscal quarter of 1999. The
testing phase is conducted as the software is replaced and is scheduled to be
completed in the Company's fourth fiscal quarter of 1999. The Company does not
foresee the need for a contingency plan in this area, but should one be needed,
the Company has developed a plan in which it would install upgraded versions of
its application software.
Corporate Infrastructure. The Corporate Infrastructure section consists
of mainframe and desktop computing hardware and connectivity. The Company
believes its United States infrastructure is Year 2000 compliant, and the
testing of this infrastructure to confirm its compliance has been completed. The
Company has completed the replacement of its European infrastructure, which the
Company believes is Year 2000 compliant. The Company's Australian and New
Zealand corporate infrastructures are complete and the Company believes these
infrastructures are Year 2000 compliant. The Company's Canadian infrastructures,
which include the infrastructure for MilCorp, which was acquired during and did
not become part of the Company's Year 2000 readiness project until the second
fiscal quarter of 1999, are scheduled for completion in the fourth fiscal
quarter of 1999.
Facility Infrastructure. The Facility Infrastructure section consists
of hardware and systems software, including embedded computer chips, used in the
operation of the Company's facilities. The testing and repair of Facility
Infrastructure has been completed for the Company's U.S., European, and
Australian and New Zealand operations. Facility Infrastructure testing and
repair for the Company's Canadian operations is scheduled for completion during
-17-
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the fourth fiscal quarter of 1999. Contingency planning for this section began
in the second fiscal quarter of 1999 and is scheduled to be completed during the
fourth quarter of fiscal 1999.
Inspection and Processing Equipment. The Company's oilfield services
sector uses inspection and processing equipment, which the Company believes to
currently be Year 2000 compliant. The Company's petrochemical sector uses
processing equipment, which the Company believes to currently be Year 2000
compliant. The equipment is scheduled to be tested and repaired, if necessary,
during the quarter ended December 31, 1999. The Company does not foresee the
need for any contingency planning in this area.
Third Party Suppliers. The Company has identified, communicated with
and evaluated the state of Year 2000 preparedness of critical Third Party
Suppliers for all its operations except for MilCorp. The Company has developed a
contingency plan in which it has identified alternative suppliers that can be
used if necessary. The Company is scheduled to complete this process for MilCorp
during the fourth fiscal quarter of 1999.
Costs. The total cost associated with required software and hardware
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position or results of operations. The estimated total
cost of the Year 2000 project is approximately $490,000. The total amount
expended on the project through June 30, 1999 was about $400,000. The estimated
future cost of completing the Year 2000 project is estimated to be approximately
$90,000. The cost to implement the Business Replacement Systems is not included
in these estimates. Costs related to the Year 2000 project will be accounted for
in accordance with the Company's existing policies. Other than purchases of new
hardware and software, Year 2000 project expenditures will be expensed as
incurred.
Risks. A Year 2000 failure could result in a business disruption that
adversely affects the Company's business, financial condition or results of
operations. For example, if a Year 2000 failure causes insufficient rail and
freight service to be available to the Company, the receipt of raw materials and
the shipment of finished products by the Company's petrochemical operations
could be curtailed. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company cannot determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition. The Company believes that, with
the implementation of new business systems and completion of the Year 2000
Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
-18-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include short-term debt
obligations carrying variable interest rates, and forward currency contracts
intended to hedge accounts payable obligations denominated in currencies other
than a given operation's functional currency.
The Company's strategy has typically been to finance only working
capital with variable interest rate debt and to fix interest rates for the
financing of long-term assets. Forward currency contracts are used by the
Company as a method to establish a fixed functional currency cost for raw
material purchases denominated in non-functional currency (typically the U.S.
dollar).
The following table summarizes the Company's market sensitive financial
instruments. These transactions are considered non-trading activities.
<TABLE>
<CAPTION>
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS JUNE 30, 1999
- --------------------- --------------------------------------------------------------------------------
Variable interest rate debt:
WEIGHTED AVERAGE
CURRENCY DENOMINATION US$ EQUIVALENT IN THOUSANDS YEAR-END INTEREST RATE EXPECTED MATURITY
- --------------------- --------------------------- ---------------------- -----------------
<S> <C> <C> <C>
Dutch Guilders $1,046 4.00% less than one year
British Pounds Sterling 724 7.00% less than one year
French Francs 78 4.12% 2001
Italian Lira 4,523 3.74% less than one year
Australian Dollar 364 8.75% less than one year
Canadian Dollar 3,741 8.11% less than one year
</TABLE>
ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
Forward Exchange Agreements (000s):
RECEIVE US$/PAY NZ$:
- --------------------
Contract Amounts US$ 869
Average Contractual Exchange Rate (NZ$/US$) .5430
Expected Maturity Dates August 1999 through December 1999
RECEIVE US$/PAY AUSTRALIAN $:
- -----------------------------
Contract Amounts US$ 1,431
Average Contractual Exchange Rate (A$/US$) .6526
Expected Maturity Dates August 1999 through December 1999
-19-
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a named defendant in eight cases involving eight
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992; June
29, 1995; June 29, 1995; August 15, 1995; July 23, 1997; and June 1, 1999). For
the most part, the Company is generally protected under worker's compensation
law from claims under these suits except to the extent a judgment is awarded
against the Company for intentional tort. The standard of liability applicable
to all except one of the Company's pending cases is intentional tort, a stricter
standard than the gross negligence standard applicable to wrongful death cases.
The Company currently has no pending cases in which wrongful death is alleged.
Although one suit against the Company involves negligence claims that, in
theory, could circumvent the Company's immunity protections under the workers'
compensation law, the Company does not believe that this litigation, referred to
as the Roark litigation, should have a material adverse effect on the financial
condition, results of operations and/or cash flow of the Company. As described
in more detail below, the Roark litigation names the Company and Baker Hughes,
Inc. ("Baker Hughes"), among others, as defendants and falls within the
provisions of an agreement between the Company and Baker Hughes that limits the
Company's obligations in the litigation.
In fiscal 1993, the Company settled two other suits, both of which
alleged wrongful death caused by silicosis-related diseases, which resulted in a
total charge of $605,000. In 1994, the Company was dismissed without liability
from two suits alleging intentional tort against the Company for
silicosis-related disease. In 1996, the Company obtained a non-suit in two other
intentional tort cases and in early 1997 was non-suited in an additional tort
case. During the second quarter of fiscal 1998, three cases involving alleged
silicosis-related deaths were settled. The Company was fully insured for all
three cases and, as a result, did not incur any settlement costs. During the
second quarter of fiscal 1998, the Company was non-suited in one intentional
tort case, and during the fourth quarter of fiscal 1998, the Company was
non-suited in two additional tort cases. During the second quarter of fiscal
1999, the Company was non-suited in an additional intentional tort case. 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. Except for the Roark litigation, 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, pursuant to which Baker
Hughes Tubular Services ("BHTS") was acquired by the Company, provides that
Baker Hughes will reimburse the Company for 50% of the BHTS environmental
remediation costs in excess of $318,000, with Baker Hughes' total reimbursement
obligation being limited to $2,000,000 (current BHTS obligation is $1,650,000).
BHTS is a responsible party at two hazardous waste disposal sites that are
currently undergoing remediation pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who
were responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas.
-20-
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Remediation of the French Limited site has been completed, with only natural
attenuation of contaminants in groundwater occurring at this time. Remediation
has not yet commenced at the Sheridan site. Current plans for cleanup of this
site, as set forth in the federal Record of Decision, call for on-site
bioremediation of the soils in tanks and natural attenuation of contaminants in
the groundwater. However, treatability studies to evaluate possible new remedies
for the soils, such as in-place bioremediation, are being conducted as part of a
Remedial Technology Review Program. Based on the completed status of the
remediation at the French Limited site and BHTS's minimal contribution of wastes
at both of the sites, the Company believes that its future liability under the
agreement with Baker Hughes with respect to these two sites will not be
material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500,000 for each claim and a maximum contingent liability of $5,000,000
($4,500,000 net of current accruals) in the aggregate, for all claims. This
agreement governs the Company's liability with respect to the Roark litigation,
which involves occupational health claims arising out of Roark's employment at
BHTS. Based on the limitation on the Company's obligations provided for in the
agreement, the Company does not believe the Roark litigation will have a
material adverse effect on the financial condition, results of operations and/or
cash flow of the Company.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13 million in
the trial of its case against John Wood Group PLC relating to the 1994 contract
for the purchase of the operating assets of NDT Systems, Inc. and certain
related entities. The court subsequently entered a judgment for $15,750,000 in
the Company's favor, which includes pre-judgment interest on the jury award. The
Company is also entitled to post-judgment interest. The Wood Group is currently
appealing the judgment and has posted a bond for the entire amount of the
judgment. This award has not been reflected in the Company's balance sheet or
operating results. The Company was represented on a contingency fee basis, and
its attorneys will receive a portion of the amount awarded to the Company.
Until the third fiscal quarter of 1999, Wedco was a plaintiff and a
counterclaim defendant and the Company was a third party defendant in a lawsuit
filed on February 16, 1996 by Wedco against Polyvector Corporation
("Polyvector"), John Lefas ("Lefas"), the principal shareholder of Polyvector,
and Fred Feder ("Feder"), a former director of Wedco, which was pending in the
federal district court for the District of New Jersey (the "New Jersey Action").
Wedco alleged, among other things, that Lefas and Polyvector had breached
certain terms of the shareholders' agreement among Wedco and the defendants and
sought damages for such breaches. Wedco also alleged, among other things, that
Feder had breached his fiduciary duty to Wedco. WedTech (which had been 50%
owned by each Wedco and Polyvector), Polyvector and Lefas had 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 sought, among other things,
reimbursement for alleged damages. On January 16, 1998, Polyvector finalized its
purchase of Wedco's 50% ownership interest in WedTech for CDN $20.8 million. A
proceeding initiated on June 25, 1998 had been brought in the Ontario Court
(General Division) by WedTech Inc. and Polyvector against the Company and others
for damages and other relief (the "Canadian Action"). The factual complaints
raised in the Canadian Action appeared to duplicate the claims raised in the New
Jersey Action. During the second fiscal quarter of 1999, the parties to the New
Jersey Action and the Canadian Action reached an agreement that settled all
outstanding issues in both actions. During the third fiscal quarter of 1999, the
parties entered into a settlement, the terms of which did not have a material
adverse affect on the Company's financial condition.
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made by Oil Country
Tubular Limited ("OCTL"), a company based in India. OCTL alleges that its claim,
which it has brought in the Court of Arbitration of the International Chamber of
Commerce, arises in
-21-
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
connection with a Foreign Collaboration Agreement entered into between it and
Baker Hughes Tubular Services, Inc., a corporation whose name was changed to ICO
Tubular Services, Inc. after acquisition by the Company in 1992. OCTL claims,
among other items, that it did not receive technical assistance, spare parts,
and certain raw materials necessary for its oilfield tubular services plant in
India. OCTL seeks damages in excess of $96 million, calculated in part based on
lost profit projections over a number of years, from ICO Tubular Services, Inc.
and its co-respondent, Baker Hughes Incorporated. The Company had only
peripheral knowledge of the dispute between OCTL and Baker Hughes Incorporated
prior to the filing of OCTL's claim. The arbitration proceeding is at an early
stage, with answers to OCTL's claim having been filed in November 1998. The
Tribunal will consider ICO's challenge to jurisdiction on October 5, 1999. While
the outcome of this arbitration matter cannot be predicted, the Company plans to
contest the claims vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Reference is hereby made to the exhibit index which appears on
page 23.
(b) There were no reports on Form 8-K during the Company's fiscal 1999 third
quarter.
-22-
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following instruments and documents are included as Exhibits to
this Form 10-Q. Exhibits incorporated by reference are so indicated by
parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -----------------------------------------------------------------
<S> <C>
2.1 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the
Registrant (filed as Exhibit 99.2 to Form 8-K dated May 12, 1997)
2.2 -- Plan of Merger of ICO Merger Sub, Inc. with and into ICO, Inc.
(filed as Exhibit 2.4 to Form 10-Q dated August 13, 1998)
3.1 -- Articles of Incorporation of the Company dated March 20, 1998.
(filed as Exhibit 3.1 to Form 10-Q dated August 13, 1998)
3.2 -- Statement of Designation of $6.75 Convertible Exchangeable
Preferred Stock dated March 30, 1998 (filed as Exhibit 3.2 to Form
10-K dated December 23, 1998)
3.3 -- Certificate of Designation of Junior Participating Preferred Stock
of ICO Holdings, Inc. dated March 30, 1998 (filed as Exhibit 3.3
to Form 10-K dated December 23, 1998)
3.4 -- Amended and Restated By-Laws of the Company dated May 12, 1999.
4.1 -- Indenture dated as of June 9, 1997 between the Company, as
issuer, and Fleet National Bank, as trustee, relating to Senior
Notes due 2007 (filed as Exhibit 4.1 to Form S-4 dated June 17,
1997)
4.2 -- First Supplemental Indenture and Amendment dated April 1,1998
between the Company, as issuer, and State Street and Trust Company
(formerly Fleet National Bank), as trustee, relating to Senior
Notes due 2007 (filed as Exhibit 4.2 to Form 10-Q dated May 15,
1998)
4.3 -- Second Supplemental Indenture and Amendment dated April 1, 1998
between ICO P&O, Inc., a wholly owned subsidiary of the
Registrant, and State Street and Trust Company (formerly Fleet
National Bank), as trustee, relating to Senior Notes due 2007
(filed as Exhibit 4.3 to Form 10-Q dated May 15, 1998)
4.4 -- Warrant Agreement -- Series A, dated as of September 1, 1992,
between the Registrant and Society National Bank (filed as Exhibit
4 of the Registrant's Annual Report on Form 10-K for 1992)
4.5 -- Stock Registration Rights Agreement dated April 30, 1996 by and
between the Company, a subsidiary of the Company and the Wedco
Shareholders Group, as defined (filed as Exhibit 4.4 to Form S-4
dated May 15, 1996)
4.6 -- Shareholders' Rights Agreement dated November 20, 1997 by and
between the Company and Harris Trust and Savings Bank, as rights
agent (filed as Exhibit 1 to Form 8-A dated December 22, 1997)
4.7 -- Shareholder Rights Agreement dated April 1, 1998 by and between
the Registrant and Harris Trust and Savings Bank, as rights agent
(filed as Exhibit 4.7 to Form 10-Q for the quarter ended March 31,
1998)
10.1 -- 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)
10.2 -- Second Amended and Restated 1993 Stock Option Plan for
Non-Employee Directors of ICO, Inc. (filed as Exhibit A to the
Registrant's Definitive Proxy Statement dated January 26, 1999 for
the Annual Meeting of Shareholders)
10.3 -- 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)
</TABLE>
-23-
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT
NO. EXHIBIT
- ------- -----------------------------------------------------------------
10.4 -- 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)
10.5 -- 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)
10.6 -- ICO, Inc. 1998 Stock Option Plan (filed as Exhibit A to
Registrant's Definitive Proxy Statement dated January 23, 1998 for
the Annual Meeting of Shareholders)
10.7 -- Willoughby International Stockholders Agreement dated April 30,
1996 (filed as Exhibit 10.9 to Form S-4 dated May 15, 1996)
10.8 -- Consulting Agreement -- William E. Willoughby (filed as Exhibit
10.13 to Form S-4 dated May 15, 1996)
10.9 -- Salary Continuation Agreement -- William E. Willoughby (filed as
Exhibit 10.14 to Form S-4 dated May 15, 1996)
10.10 -- Addendum to Salary Continuation Agreement -- William E.
Willoughby (filed as Exhibit 10.15 to form S-4 dated May 15, 1996)
10.11 -- Non-Competition Covenant William E. Willoughby (filed as
Exhibit 10.11 to Form S-4 dated May 15, 1996)
10.12 -- 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)
10.13 -- Stockholders Agreement respecting voting of shares of certain
ICO common shareholders (filed as Exhibit 10.22 to Form S-4 dated
May 15, 1996)
10.14 -- 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)
10.15 -- Employment Agreement dated April 1, 1995 by and between the
Registrant and Sylvia A. Pacholder and amendments thereto (filed
as Exhibit 10.17 to Form 10-K dated December 29, 1997).
10.16 -- Employment Agreement dated September 4, 1998 by and between the
Registrant and Jon C. Biro (Filed as Exhibit 10.20 to Form 10-K
dated December 23, 1998)
10.17 -- Employment Agreement dated September 4, 1998 by and between the
Registrant and Isaac H. Joseph (Filed as Exhibit 10.21 to Form
10-K dated December 23, 1998)
21 -- Subsidiaries of the Company (Filed as Exhibit 21 to Form 10-K dated
December 23, 1998)
27** -- Financial Data Schedule
- --------
** Filed herewith
-24-
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ICO, Inc.
------------------------------------
(Registrant)
/s/ Asher O. Pacholder
------------------------------------
August 13, 1999 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)
-25-
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly filing on Form 10-Q for the period ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 27,795,000
<SECURITIES> 0
<RECEIVABLES> 51,828,000
<ALLOWANCES> 1,686,000
<INVENTORY> 25,741,000
<CURRENT-ASSETS> 110,230,000
<PP&E> 186,752,000
<DEPRECIATION> (72,593,000)
<TOTAL-ASSETS> 285,977,000
<CURRENT-LIABILITIES> 50,706,000
<BONDS> 0
0
13,000
<COMMON> 39,181,000
<OTHER-SE> 61,760,000
<TOTAL-LIABILITY-AND-EQUITY> 285,977,000
<SALES> 191,832,000
<TOTAL-REVENUES> 191,832,000
<CGS> 147,022,000
<TOTAL-COSTS> 210,363,000
<OTHER-EXPENSES> (399,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,805,000)
<INCOME-PRETAX> (27,735,000)
<INCOME-TAX> 7,158,000
<INCOME-CONTINUING> (20,577,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 399,000
<CHANGES> 0
<NET-INCOME> (21,810,000)
<EPS-BASIC> (.99)
<EPS-DILUTED> (.99)
</TABLE>
