SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995 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 1-5528
WEDCO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-1689437
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 397 Bloomsbury, New Jersey 08804
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 908-479-4181
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report).
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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at November 13, 1995
Common Stock, $.10 par value 3,567,785
WEDCO TECHNOLOGY, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information:
Consolidated Balance Sheets - 1-2
September 30, 1995 and March 31, 1995 (Unaudited)
Consolidated Statements of Income - For the Six Months 3
and Three Months Ended September 30, 1995
and 1994 (Unaudited)
Consolidated Statements of Changes in Stockholders 4
Equity - For the Six Months Ended September 30, 1995
(Unaudited)
Consolidated Statements of Cash Flows - For the Six Months 5
Ended September 30, 1995 and 1994 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6-7
Management's Discussion and Analysis of Financial 8-11
Condition and Results of Operations
PART II. Other Information 12
Signatures 13
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND MARCH 31, 1995 (UNAUDITED)
Sept. 30, 1995 March 31, 1995
ASSETS
CURRENT ASSETS:
Cash $214,391 $1,039,760
Accounts receivable, less allowance
for doubtful accounts of $52,522
at Sept. 30 and $52,568 at March 31 6,987,288 7,960,327
Due from related parties - current 575,996 760,686
Inventories 2,029,876 2,031,009
Prepaid expenses and other current assets 806,603 990,303
Total current assets 10,614,154 12,782,085
PROPERTY, PLANT AND EQUIPMENT,
less accumulated depreciation of $27,850,640
at Sept. 30 and $26,324,868 at March 31 38,646,066 37,217,297
OTHER ASSETS:
Investment in joint ventures 4,640,246 4,801,795
Land 2,298,109 2,298,109
Due from related parties 804,972 833,987
Other 48,379 59,919
Total other assets 7,791,706 7,993,810
TOTAL $57,051,926 $57,993,192
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND MARCH 31, 1995 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY Sept. 30, 1995 March 31, 1995
CURRENT LIABILITIES:
Notes payable $ 3,532,027 $ 3,103,827
Current maturities of long-term debt 1,699,297 1,761,020
Accounts payable 2,585,232 3,688,585
Accrued payroll 751,427 999,229
Accrued expenses 621,344 354,100
Accrual for environmental cleanup 72,000 72,000
Federal, state and foreign income
taxes payable 739,988 903,841
Other current liabilities 1,323,792 1,166,260
Total current liabilities 11,325,107 12,048,862
LONG-TERM DEBT, LESS CURRENT MATURITIES 15,385,623 15,721,787
ACCRUAL FOR ENVIRONMENTAL CLEANUP 209,706 249,327
DEFERRED COMPENSATION 190,000 100,000
DEFERRED INCOME TAXES 2,488,968 2,762,546
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, authorized
10,495,000 shares at Sept. 30 and
March 31, 1995; issued 4,094,891 shares
at Sept. 30 and March 31, 1995 409,489 409,489
Additional paid-in capital 11,159,205 11,159,205
Retained earnings 17,430,839 16,740,328
Equity adjustment from foreign
currency translation 1,731,349 2,080,008
Total 30,730,882 30,389,030
Less treasury stock - at cost, 527,106 shares
at Sept. 30 and at March 31, 1995 (3,278,360) (3,278,360)
Stockholders' equity - net 27,452,522 27,110,670
TOTAL $57,051,926 $57,993,192
<FN>
See notes to consolidated financial statements.
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
Six Months Ended Three Months Ended
September 30 September 30
1995 1994 1995 1994
NET REVENUE $22,127,725 $20,294,845 $10,918,377 $10,623,445
OPERATING EXPENSES:
Costs of services rendered
and products sold 13,891,407 11,695,509 6,911,434 6,227,762
Selling, general and administrative
expenses 3,992,152 3,728,384 1,960,844 1,923,628
Depreciation 1,948,772 1,628,981 982,576 830,733
Total operating expenses 19,832,331 17,052,874 9,854,854 8,982,123
OPERATING INCOME 2,295,394 3,241,971 1,063,523 1,641,322
OTHER INCOME (EXPENSES):
Equity in income (loss)
of joint ventures (89,591) 356,120 (134,198) 208,704
Interest expense - net (736,604) (671,382) (365,140) (340,171)
Other - net (248,441) 25,327 (260,661) 23,931
Total other (expenses) (1,074,636) (289,935) (759,999) (107,536)
INCOME BEFORE INCOME
TAXES 1,220,758 2,952,036 303,524 1,533,786
INCOME TAXES 530,247 1,028,997 251,203 564,437
NET INCOME 690,511 $1,923,039 52,321 969,349
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $.19 $.53 $.01 $.27
AVERAGE COMMON AND
COMMON EQUIVALENT
SHARES OUTSTANDING 3,622,407 3,608,898 3,640,709 3,612,405
<FN>
See notes to consolidated financial statements.
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
Equity
Adjustment
Common Stock Additional from Foreign
Number Paid-in Retained Currency
of Shares Amount Capital Earnings Translation
Balance, April 1, 1995 4,094,891 $409,489 $11,159,205 $16,740,328 $2,080,008
Net income 690,511
Adjustment resulting from foreign
currency translations (348,659)
Balance, Sept 30, 1995 4,094,891 $409,489 $11,159,205 $17,430,839 $1,731,,349
Treasury Stock
Number
of Shares Amount
Balance, April 1, 1995 (527,106) $(3,278,360)
Net income
Adjustment resulting from foreign
currency translations
Balance, Sept 30, 1995 (527,106) $(3,278,360)
[FN]
See notes to consolidated financial statements
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
1995 1994
Cash Flows From Operating Activities:
Net Income $ 690,511 $ 1,923,039
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,948,772 1,628,981
Equity in (income) loss of joint ventures 89,591 (356,120)
Increase (decrease) in deferred income taxes (60,471) 14,001
Increase in deferred compensation 90,000
Decrease in accrual for environmental cleanup (39,621) (35,635)
Net change in operating assets and liabilities 17,541 (262,940)
Net cash provided by operating activities 2,736,323 2,911,326
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (4,130,071) (2,618,196)
Decrease in amounts receivable from
related parties 213,705 520,004
Repayment of capital by joint venture ---- 242,720
Net cash used in investing activities (3,916,366) (1,855,472)
Cash Flows From Financing Activities:
Net borrowings (repayments) under
credit agreements 356,637 (1,058,012)
Treasury stock transactions ____ 193,321
Net cash provided by (used in) financing activities 356,637 (864,691)
Effect of foreign exchange rate changes on cash (1,963) 2,683
Net increase (decrease) in cash (825,369) 193,846
Cash at beginning of period 1,039,760 799,268
Cash at end of period $ 214,391 $ 993,114
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 787,608 $ 644,072
Income taxes 708,100 1,002,721
<FN>
See notes to consolidated financial statements.
WEDCO TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements as of September 30, 1995 and for six and
three months ended September 30, 1995 and 1994 are unaudited;
however, the March 31, 1995 balance sheet was derived from audited
financial statements. In the opinion of management, such
financial statements include all adjustments (consisting only of
normal recurring items) necessary for a fair presentation.
The results of operations for the six and three months ended
September 30, 1995 are not necessarily indicative of the results to be
expected for the entire year. Certain prior year amounts have been
reclassified to conform to the current presentation. These financial
statements, note disclosures and other information should be read in
conjunction with the financial statements and related notes of the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995, as filed with the Securitiess and Exchange Commisssion.
2. INVENTORIES
Inventories at September 30, and March 31, 1995 consist of the
following:
September 30 March 31
Raw materials, parts and supplies $1,527,855 $1,696,840
Work in process 502,021 334,169
Total $2,029,876 $2,031,009
If all of the Company's inventories were costed on the first-in,
first-out method, inventories would have been approximately $624,000
higher at September 30 and March 31, 1995.
3. INVESTMENT IN JOINT VENTURES
The following table summarizes the status and results of the
Company's investment in 50% owned joint ventures for the
six months ended September 30, 1995.
Micronyl-
WedTech Inc. Wedco S.A. Total
Balance, April 1, 1995 $2,890,164 $1,911,631 $4,801,795
Equity in income (loss) (216,277) 126,686 (89,591)
Adjustment due to foreign
currency translation _______ (71,958) (71,958)
Balance, Sept 30, 1995 $2,673,887 $1,966,359 $4,640,246
4. COMMITMENTS AND CONTINGENCIES
In conjunction with the sale of real estate owned by a former subsidiary,
the New Jersey Department of Environmental Protection and Energy (D.E.P.E.)
issued an Administrative Consent Order (A.C.O.) to the Company under the
Environmental Clean-up Responsibility Act (E.C.R.A.). According to
E.C.R.A., property title cannot pass to a new owner until the D.E.P.E. is
satisfied that the property meets defined environmental standards or an
A.C.O. has been issued.
Inspections have shown that the site contains contaminates which must be
removed. Accordingly, a remediation plan was prepared and approved by the
D.E.P.E. The Company has provided accruals of $1,400,000 for the total
estimated costs related to cleanup activities, of which $1,118,294 has been
paid as of September 30, 1995. Recent sampling results indicate that the
Company's groundwater remediation program is working effectively to reduce
the level of groundwater contamination. It is difficult to estimate, with
a high level of confidence, the total costs which may be incurred in
cleaning this site. Expenses in excess of what the Company has recorded
could be incurred due to the inherent uncertainty surrounding the extent of
contamination, the complexity of governmental regulations and their
interpretations and the varying costs and effectiveness of cleanup
technologies. The Company believes, however, that its reserve is
sufficient to satisfy current D.E.P.E. requirements.
5. POTENTIAL ACQUISITION
On August 14, 1995, the Company announced it had agreed with ICO, Inc. on
the principal terms of the acquisition of the Company by ICO, Inc. by means
of a merger. If the transaction is consummated as contemplated, the
Company's shareholders will receive $5.71 in cash and 1.8 shares of ICO,
Inc. common stock for each share of the Company's common stock held. After
completion of definitive documentation, the Board of Directors of both
companies are expected to meet in the near future to consider the proposed
merger. The merger will also be subject to approval of each company's
shareholders, satisfaction of certain regulatory requirements and other
conditions customary in transactions of this nature. ICO, Inc., based in
Houston, Texas, serves the energy industry by testing, inspecting,
reconditioning and coating sucker rods and OCTG, basic tools utilized in
exploration and production for oil and natural gas. For its most recent
fiscal year, which ended September 30, 1995, ICO, Inc. reported net
revenues of $88.9 million, income before federal taxes of $6.4 million
and net income of $5.8 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Wedco reported an 9.0% and 2.8% increase in net revenues for the six and
three-month periods ended September 30, 1995, respectively, when compared
to the same periods in 1994. Operating income decreased by 29.2% and 35.2%
during these same periods, respectively. The cyclical downturn in the
worldwide plastics industry experienced during the current fiscal year,
resulted in declines in the utilization of machinery and equipment and
the absorption of certain overhead costs in several of the Company's
facilities. Furthermore, a portion of the increase in revenues reported
during the current six-month period is attributed to an increase in
compounding services rendered by the Company's Dutch subsidiary. Such
compounding revenues yield lower margins than traditional processing
services. Income from the Company's equity in joint ventures decreased
by 125.2% and 164.3% during the current six and the three-month periods,
respectively, primarily as a result of a decline in earnings experienced
by the Company's Canadian joint venture. Interest expense increased 9.7% and
7.3% during the current six and three-month periods, respectively, when
compared to the same periods of 1994. Other expenses also increased by
approximately $297,000 during the six and three-month periods ended
September 30, 1995, as compared to the same periods of the prior year,
due to the Company incurring certain expenses associated with the potential
acquisition of the Company. The decreases in operating income and joint
venture earnings, coupled with an increase in other expenses, resulted
in a 64.1% and 94.6% decline in net income for the six and three-month
periods ended September 30, 1995, respectively, when compared to the
same periods of the prior fiscal year.
Net Revenues and Operating Income
The components of the increases in net revenues, as noted above,
were as follows:
Six Months Three Months
Components Ended September 30 Ended September 30
of Revenue Growth 1995 vs. 1994 1995 vs. 1994
Processing Services:
Volume decrease $(1,603,000) $(1,108,000)
Change in average price
per pound (1) 1,741,000 667,000
Machinery sales 687,000 380,000
Foreign currency translation (2) 1,008,000 356,000
Total revenue growth $ 1,833,000 $ 295,000
<FN>
(1) Based on average price per pound, which is affected by product mix and
volume processed during the period.
(2) Due to changes in the translation rates used to convert the revenues of
Wedco Europe B.V. into U.S. dollars.
During the six months ended September 30, 1995, the Company processed
approximately 193 million pounds of material as compared to approximately 210
million pounds in the same period of the prior fiscal year. This decrease in
volume is reflective of the downturn in the plastics industry experienced
during the current six-month period when compared to the same period in 1994,
as well as an increase in competition in the United States. On a consolidated
basis, as a percentage of net revenues, operating expenses, excluding general
corporate expenses, were 82.9% and 76.2% for the six months ended
September 30, 1995 and 1994, respectively. The same percentages for the
three-month periods ended September 30, 1995 and 1994 were 83.4% and 76.8%,
respectively. Operating margins have declined in the current six and
three-month periods as a result of the underutilization of machinery and
equipment, increased labor costs in certain domestic locations and the
increase in lower margin compounding revenues experienced in Europe. As a
percentage of net revenues, general corporate expenses, excluding costs
associated with the potential acquisition of the Company, remained unchanged at
6.8% and 7.8% during the six and three-month periods ended September 30, 1995
and 1994, respectively.
Other Income (Expense)
Income from the Company's investment in joint ventures decreased by 125.2% and
164.3% during the current six and three-month periods, respectively, when
compared to the same periods of the prior year. Both of the Company's joint
ventures reported a decline in earnings during the current six and three-month
periods. In France, Micronyl-Wedco S.A.'s earnings have been affected by the
current decline in the plastics industry, resulting in a decrease in the
volume of materials processed during the current periods. In Canada, WedTech
Inc.'s earnings continue to be negatively impacted by ongoing costs associated
with its sales, marketing and administrative office in Toronto, Canada and
repetitive monthly losses associated with its research and production facility
in Dewey, Oklahoma. Furthermore, the current market for grinding and
compounding services in Canada has become increasingly more competitive.
As such, these revenues are yielding lower margins than in prior periods. The
impact of all of the above, coupled with increased interest expense related
to financing these activities, was a 230.7% decline in WedTech Inc.'s earnings
during the current six-month period. Under the equity method of accounting,
net revenues of the joint ventures are not included in the consolidated net
revenues of the Company.
As a result of the increase in the U.S. prime lending rate and increased foreign
borrowings related to capital expenditures, interest expense increased by
approximately $65,000 and $25,000 during the six and three-month periods ended
September 30, 1995, as compared to the same periods in 1994.
Other expenses increased by approximately $297,000 during the six and
three-month periods ended September 30, 1995 when compared to the same periods
of the previous fiscal year. This increase reflects the cost of professional
services incurred by the Company in connection with the potential acquisition
of the Company. It is anticipated that during the Company's third quarter of
fiscal 1996, additional costs will be incurred and expensed in relation to this
potential transaction.
Income Taxes
As a result of the 58.7% and 80.2% decline in pre-tax income experienced during
the six and three-month periods ended September 30, 1995, respectively, as
compared to the same periods in 1994, the Company's consolidated income tax
provision declined by 48.5% and 55.5% during these same periods, respectively.
The Company's effective tax rate, expressed as a percentage of pre-tax income,
was 43.4% and 82.8% during the six and three-month periods ended September 30,
1995, respectively, as compared to 34.9% and 36.8% during the same periods of
the prior fiscal year, respectively. The increase in the Company's effective
tax rate during the current six and three-month periods reflects the utilization
of tax-loss carryforwards by the Company's U.K. subsidiary during the same
periods of the prior fiscal year, as well as the effect of federal and state
regulations which prohibit the Company from treating the costs associated with
the potential acquisition of the Company as deductible expenses for income tax
purposes.
Foreign Currency Translation
The fluctuation of the dollar against the Dutch guilder and the British pound
have impacted the translation of revenues and income of Wedco Europe B.V. into
U.S. dollars for the six and three-month periods ended September 30, 1995, as
compared to the same periods of the prior fiscal year. The increases due to
this translation impact, in certain amounts shown on the Consolidated Statements
of Income, are as follows:
Six Months Three Months
Ended September 30 Ended September 30
1995 vs. 1994 1995 vs. 1994
Net revenues $ 1,008,000 $356,000
Operating income 184,000 70,000
Pre-tax income 171,000 70,000
Net income 128,000 48,000
Gains and losses from the translation of certain balance sheet accounts
are not included in determining net income, but are accumulated as a
separate component of stockholders' equity. These unrealized gains and
losses are subject to deferred income taxes. As a result of the
dollar's fluctuation against the Dutch guilder and British pound and
changes in the net assets of foreign subsidiaries, stockholders'
equity decreased, net of deferred income taxes, by approximately
$349,000 during the six-month period ended September 30, 1995.
Financial Condition
Working capital decreased from March 31 to September 30, 1995 by
approximately $1.4 million. While several components of working capital
fluctuated during this six-month period, the $1.4 million decrease is
primarily the result of decreases in cash, accounts receivable, prepaid
expenses and accounts payable, offset by an increase in short-term notes payable
and accrued expenses. The decrease in working capital resulted in a decline
in the Company's current ratio from 1.1:1 at March 31, 1995 to 0.94:1 at
September 30, 1995. As of September 30, 1995, the Company's debt to net
equity ratio, including notes payable and current maturities of long-term
debt, decreased to 0.75:1 from 0.76:1 at March 31, 1995. This decrease in
leverage is primarily the result of earnings experienced during
the current six-month period.
Capital Expansion and Resources
During the first six months of fiscal 1996, the Company generated $2.7 million
in cash from its operating activities, a decrease of $0.2 million when
compared to the same period of the prior fiscal year. Substantially all of
the cash generated in the current six-month period was invested in capital
expenditures. Net cash used in investing activities increased to $3,916,000
for the six months ended September 30, 1995 from $1,855,000 in the same
period of the prior fiscal year. This fluctuation reflects a $1,512,000
increase in capital expenditures, a $306,000 decrease in amounts collected
from related parties and a $243,000 repayment of capital by our Canadian
joint venture resulting from the redemption of 342,100 Class D special
shares during the six months ended September 30, 1994. Cash flows from
financing activities increased by approximately $1.2 million during
the six-month period ended September 30, 1995 as compared to the same
period of the prior fiscal year, primarily as a result of an increase in
short-term borrowings by the Company's European subsidiary.
For the year ending March 31, 1996, management's objective is to foster growth
in earnings, through productivity improvements, increased capacity utilization
and continued emphasis on cost containment measures. With that strategy in
place, a capital budget of approximately $6.8 million has been proposed for
fiscal 1996. The Company anticipates that capital expenditures for fiscal
1996 will be limited to maintaining or improving the Company's existing
facilities and installing new processing systems in these facilities in
order to meet specific market opportunities. The Company anticipates
financing its capital expenditures with cash provided by operating
activities and additional borrowings as needed. As of September 30, 1995,
the Company has approximately $7.8 million available under its domestic and
foreign credit facilities.
Contingencies
In regard to the environmental cleanup, discussed more fully in Note 4 to the
Consolidated Financial Statements, the Company anticipates paying for the
cleanup with cash provided by operations. If the current provision remains
adequate, these costs should not significantly affect the financial position,
results of operations or cash flows of the Company.
Effect of Inflation
The Company believes the relatively moderate rate of inflation currently being
experienced will not have a significant impact on the Company's sales or
profitability.
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings:
No matters to report.
ITEM 2. Changes in Securities:
None.
ITEM 3. Defaults Upon Senior Securities:
None.
ITEM 4. Submission of Matters to a Vote of Security Holders:
On August 22, 1995, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the shareholders elected
as directors: Edward N. Barol (with 3,077,938 affirmative votes and 4,209
votes withheld), Robert F. Bush (with 3,080,676 affirmative votes and
1,471 votes withheld), Donald C. Cuomo (with 3,081,287 affirmative votes
and 860 votes withheld), Fred R. Feder (with 3,072,756 affirmative votes
and 9,391 votes withheld), Walter L. Leib (with 3,078,169 affirmative
votes and 3,978 votes withheld), George S. Sirusas (with 3,078,169
affirmative votes and 3,978 votes withheld), Theo J.M.L. Verhoeff (with
3,081,287 affirmative votes and 860 votes withheld), William C. Willoughby
(with 3,081,287 affirmative votes and 860 votes withheld), and William E.
Willoughby (with 3,081,287 affirmative votes and 860 votes withheld).
ITEM 5. Other Information:
None.
ITEM 6. Exhibits and Reports on Form 8-K:
A Form 8-K, dated August 22, 1995, reported the Company had agreed
with ICO, Inc. on the principal terms of the acquisition of the
Company by ICO, Inc. by means of a merger, under Item 5.
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.
WEDCO TECHNOLOGY, INC.
November 17, 1995 /s/William E. Willoughby
Date William E. Willoughby
President and Chairman of the Board
November 17, 1995 /s/Robert F. Bush
Date Robert F. Bush
Vice President - Finance