U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
----------------- ---------------------------
Commission file number: 0-9358
TYREX OIL COMPANY
~~(Exact~Name~of~Registrant~as~specified~in~its~charter)~
Wyoming 83-0245581
~(State~or~other~jurisdiction (I.R.S.~Employer
~o~f~incorporation~or~organization) Identification~No.)~
~
~
6886 S. Yosemite Street
Englewood, Colorado 80112
~(Address~of~principal~executive~offices) ~~~~(Zip~Code)
~
(303) 741-9123
~(Registrant's~telephone~number,~including~area~code)
~
Indicate by check mark whether the Registrant (l) 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
---- ---
At February 10, 1998, 33,756,798 shares of the Registrant's $.01 par value
common stock were outstanding.
<PAGE>
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Attached.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
~Financial~Condition~
With the merger of Tyrex and 3Si, the Company believes it has the financial
resources to meet the Company's financial needs for its operations during the
next fiscal year. As of December 31, 1997, the Company had working capital of
approximately $45,000, which is subsequent to the completion of the self-tender
offer discussed below.
Management expects to meet long-term liquidity requirements through cash flows
generated by operations supplemented from time to time by short-term borrowings
on a bank line of credit (discussed below).
As discussed in Note 2 to the Financial Statements, on October 27, 1997, the
Company commenced its self-tender offer for up to 6,000,000 shares of its common
stock (exclusive of shares issued in the 3Si merger) at a price of $0.30 per
share. The offer was made pursuant to a Statement filed under Section 13e of
the Securities Exchange Act of 1934 and Rule 13e-4 adopted thereunder. The
self-tender was completed December 23, 1997. The Company, pursuant to the terms
of the self-tender, paid $1,851,366 to acquire 6,005,626 shares (including
fractional shares) into its treasury including offering costs of $49,678.
Subsequent to completion of the self-tender, the Company has 33,756,798 shares
outstanding and 6,050,626 shares in treasury of the 50,000,000 shares authorized
of its $.01 par value common stock.
As discussed in Note 1 to the Financial Statements, on September 30, 1997, the
Company replaced its note payable with a bank with a revolving line of credit
facility with another financial institution. The new revolving line of credit
is at the prime rate of interest and permits the Company to borrow up to $5
million collateralized by accounts receivable and inventory computed under the
terms of the agreement. The line is secured by substantially all of the assets
of the Company. The line does require the Company to maintain certain financial
ratios and limits the Company's ability to pay dividends. At December 31, 1997,
due primarily to the completion of the self-tender offer, the Company is not in
compliance with certain of its financial ratio covenants and is working with the
lender to establish new covenants.
~Results~of~Operations~
- -----------------------
~Quarter~Ended~December~31,~1997~Compared~to~Quarter~Ended~December~31,~1996
~
~Overview~
The Company realized net earnings from operations of $51,859 during the quarter
ended December 31, 1997. The net earnings is created by 3Si's success in
generating sales of approximately $7.9 million for the quarter, primarily in
product sales as discussed further below. The Company also continues to invest
in the Internet security business it commenced in July, 1996. Included in
earnings from operations for the quarter is a loss by 3Si's Internet security
business of approximately $129,000. This loss is attributable to the startup
nature of the business whereby revenues generated by the Internet security
division have not yet covered expenses.
<PAGE>
2
~Comparative~Analysis~
Sales were approximately $7,867,000 during the quarter ended December 31, 1997.
Total sales were up from the same period in the previous year by approximately
$1,949,000 or 32.9%. This change is primarily the result of the Company's
success in increasing product sales during the quarter and the United States
Postal Service ("USPS") sub-contract. Product sales increased approximately
$986,000, or 21.7% as sales to government agencies continued to increase from
the same quarter last year. The USPS sub-contract sales for the second fiscal
quarter of FY1998 and FY1997 were approximately $1,346,000 and $744,000,
respectively, as employees on the contract increased from 43 in December 1996 to
80 in December 1997.
The Company's gross margin increased between quarters changing from 24.6% of
sales in FY1997 to 30.5% in FY1998 due to the USPS sub-contract creating
higher, consulting based margins (i.e. the compensation related to the delivery
of the consulting sales is included in selling and administrative expenses
versus cost of goods sold) offsetting lower product sales margins. Product
sales margins continued to decline due to the effect of increased competition
from 10.4% in the second quarter of FY1997 to 8.6% in the same quarter of
FY1998. The Company also experienced a favorable impact on its gross margins due
to the elimination of the royalty payment to 3Si's former stockholders. As part
of the merger with Tyrex, Tyrex paid $625,000 to satisfy the License and Royalty
agreement with 3Si's former stockholders. This payment has been capitalized as
an intangible asset and is being amortized using the straight-line method over
20 years.
Selling and administrative expenses increased approximately $788,000, or 51.1%
due primarily to the addition of the labor costs associated with the USPS sub-
contract. During the second quarter of FY1998, the Company incurred additional
labor costs of approximately $510,000 relative to the USPS sub-contract;
additional labor costs of approximately $154,000 relating to increased
commissions paid during the quarter on increased gross margin derived;
approximately $35,000 of Tyrex operating expenses which cease subsequent to
December 31, 1997; and, the remainder relates to various other expenses
including labor costs relating to the increase in personnel in general.
~
~F~iscal~Six~Months~Ended~December~31,~1997~Compared~to~Six~Months~Ended~Decembe
r~31,~1996
~
The same dynamics which effected the quarter (and discussed above), impact the
fiscal year to date results.
The Company realized net earnings from operations of $97,007 for the six months
ended December 31, 1997 due to the Company's increased sales to approximately
$15,168,000 compared to $10,286,000 for the same period last year. The increase
is due to increases in hardware sales (approximately $3,105,000, or 40.1%) and
increases in the USPS sub-contract revenues (approximately $1,210,000, or
87.1%).
The Company's gross margin increased between periods changing from 27.2% of
sales in FY1997 to 30.4% in FY1998 due to the USPS sub-contract creating higher,
consulting based margins offsetting lower product sales margins. Product sales
margins declined from 11.4% for the first six months of FY1997 to 9.2% for the
first six months of FY1998. The Company also experienced a favorable impact on
its gross margins due to the elimination of the royalty payment to 3Si's former
stockholders.
<PAGE>
3
Selling and administrative expenses increased approximately $1,639,000, or 56.8%
due primarily to the addition of the labor costs associated with the USPS sub-
contract. During the first six months of FY1998, the Company incurred
additional labor costs of approximately $987,000 relative to the USPS sub-
contract. Additional selling and administrative expenses include: labor costs of
approximately $415,000 relating to increased commissions paid during the quarter
on increased gross margin derived; approximately $70,000 of Tyrex operating
expenses which cease subsequent to December 31, 1997; and, the remainder relates
to various other expenses including labor costs relating to the increase in
personnel in general.
Interest expense decreased approximately $82,000 and $81,000 during the quarter
and six months ended December 31, 1997, respectively, compared to the prior
periods due to the Company's replacement of its note payable with a bank which
was at prime plus 2.5% with a revolving line of credit facility with another
financial institution at the prime rate of interest.
At December 31, 1997, the Company had 136 employees, including 80 servicing the
USPS sub-contract in Raleigh, NC and 2 in Wyoming versus having had 102 in total
at December 31, 1996 including 43 servicing the USPS sub-contract.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 4. Submission of Matters To A Vote of Security Holders.
None
Part II - OTHER INFORMATION
Item 5. Other Information
On October 27, 1997, the Company commenced its self-tender offer for up to
6,000,000 shares of its common stock (exclusive of shares issued in the 3Si
merger) at a price of $0.30 per share. The offer was made pursuant to a
Statement filed under Section 13e of the Securities Exchange Act of 1934 and
Rule 13e-4 adopted thereunder. The self-tender was completed December 23, 1997.
The Company pursuant to the terms of the self-tender, paid $1,851,366 to acquire
6,007,131 shares (including fractional shares) into its treasury including
offering costs of $49,226.
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable.
(b) A Form 8-K was not required to be filed in the period covered by this
report.
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.
Tyrex Oil Company
(Registrant)
Date: February 13, 1998 By: /s/ Frederick J. Slack
----------------------------------
Frederick J. Slack,
Chief Executive Officer
By: /s/ Paul F. Kaufhold
----------------------------------
Paul F. Kaufhold,
Chief Financial Officer
<PAGE>
4
Tyrex Oil Company
Index to Financial Statements
Consolidated Balance Sheets, at December 31, 1997(Unaudited)
and June 30, 1997 F-1
Consolidated Statements of Operations for the quarter and
six months ended December 31, 1997 and 1996 (Unaudited) F-2
Consolidated Statements of Cash Flows for the quarter and
six months ended December 31, 1997 and 1996 (Unaudited) F-3
Notes to Consolidated Interim Financial Statements(Unaudited) F-4
<PAGE>
5
Item 1
CONSOLIDATED FINANCIAL STATEMENTS
TYREX OIL COMPANY
December 31, 1997
<PAGE>
<TABLE>
Tyrex Oil Company
Consolidated Balance Sheets
December 31, 1997 (Unaudited) and
June 30, 1997
<CAPTION>
December31,
ASSETS 1997 June 30,
(Unaudited) 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note 2) $ 791,258 2,219,145
Accounts receivable - trade 5,682,573 3,334,430
Inventory 698,452 643,474
Other current assets 92,289 61,102
Total current assets 7,264,572 6,258,151
PROPERTY AND EQUIPMENT, AT COST
Computer systems 428,465 358,438
Furniture and fixtures 167,411 228,480
Leasehold improvements 77,888 73,082
Total property and equipment 673,764 660,000
Less accumulated depreciation and
amortization 289,951 297,258
Net property and equipment 383,813 362,742
OTHER ASSETS
Deposits 24,824 20,534
Other 606,771 622,396
Total other assets 631,595 642,930
Total assets $8,279,980 7,263,823
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit (note 1) $2,356,897 -
Notes payable (note 1) 107,849 1,264,271
Current portion of capital lease 23,984 22,734
Accounts payable - trade 4,197,479 2,774,908
Customer deposits 111,556 120,498
Accrued liabilities 422,062 308,338
Total current liabilities 7,219,827 4,490,749
LONG-TERM DEBT 48,558 64,502
STOCKHOLDERS' EQUITY (notes 2 and 3)
Common stock - authorized 50,000,000
shares of $.01 par value; issued
39,762,424; outstanding 33,756,798 397,624 392,934
Additional paid in capital 2,375,593 2,322,902
Retained earnings (deficit) 95,731 (1,277 )
Treasury stock, at cost, 6,050,626
shares (45,000 at June 30, 1997) (1,857,353 ) (5,987 )
Total stockholders' equity 1,011,595 2,708,572
Total liabilities and
stockholders' equity $8,279,980 7,263,823
<FN>
See accompanying notes to interim consolidated financial statements.
</TABLE>
F-1
<PAGE>
<TABLE>
Tyrex Oil Company
Consolidated Statements of Operations
For the Quarters and Six Months Ended December 31, 1997 and 1996
(Unaudited)
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Product sales $5,533,847 4,548,044 10,850,278 7,745,331
Consulting and other service
revenue 2,332,767 1,369,590 4,317,978 2,540,721
Net sales 7,866,614 5,917,634 15,168,256 10,286,052
Cost of products sold 5,059,943 4,076,366 9,847,465 6,859,404
Costs of contract labor 410,638 294,350 705,593 470,436
Royalty expense - 89,870 - 154,538
Total cost of sales 5,470,581 4,460,586 10,553,058 7,484,378
Gross profit 2,396,033 1,457,048 4,615,198 2,801,674
Selling and administrative
expenses 2,330,277 1,541,810 4,523,330 2,884,304
Earnings (loss) from
operations 65,756 (84,762 ) 91,868 (82,630 )
Other income (expense):
Interest income 17,118 1,225 58,317 4,796
Interest expense (33,014 ) (114,938 ) (59,749 ) (140,282 )
Miscellaneous income 1,999 1,396 6,571 4,441
Total other income
(expense) (13,897 ) (112,317 ) 5,139 (131,045 )
Earnings (loss) before
income taxes 51,859 (197,079 ) 97,007 (213,675 )
Income taxes (Note 4) - - - -
Net earnings (loss) $ 51,859 (197,079 ) 97,007 (213,675 )
Earnings (loss) per
common share $ 0.00 656.93 0.00 (712.25 )
Weighted average shares
outstanding(note 5) 38,605,153 300 38,949,289 300
<FN>
See accompanying notes to interim consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
Tyrex Oil Company
Consolidated Statements of Cash Flows
For the Quarters and Six Months Ended December 31, 1997 and 1996
(Unaudited)
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating activities:
Net earnings (loss) $ 51,859 (197,078) 97,007 (213,675)
Reconciling adjustments:
Depreciation and amortization 34,753 14,250 69,505 38,152
Gain on sale of equipment 2,665 - 2,665 -
Change in operating assets
and liabilities:
Accounts receivable (2,081,477) (906,199) (2,348,143) (958,409)
Inventory (355,971) 27,797 (54,978) 36,038
Other assets (11,632) 44,894 (35,477) 6,840
Revolving line 1,561,041 125,000 1,565,451 (175,000)
Accounts payable 1,385,084 1,289,774 1,422,571 1,842,186
Other liabilities (14,075) (195,687) 104,784 (294,212)
Total adjustments 520,388 399,829 726,378 495,595
Net cash provided by operating
activities 572,247 202,751 823,384 281,920
Investing activities:
Purchases of equipment (3,460) (80,464) (77,616) (104,001)
Merger costs - - (8,279) -
Net cash used in investing
activities (3,460) (80,464) (85,895) (104,001)
Financing activities:
Revolving line of credit,
portion used to pay note
payable - - 791,446 -
Payments on notes payable (95,503) (115,332) (1,156,422) (251,742)
Payments on capital lease (9,320) (6,735) (14,694) (10,012)
Proceeds from exercise of
options (note 3) 65,660 - 65,660 -
Payments on self-tender (1,851,366) - (1,851,366) -
Dividends paid, prior to merger - (31,870) - (62,244)
Net cash used by financing
activities (1,890,529) (153,937) (2,165,376) (323,998)
Net change in cash and cash
equivalents (1,321,742) (31,650) (1,427,887) (146,079)
Cash and cash equivalents,
beginning 2,113,000 54,247 2,219,145 168,676
Cash and cash equivalents, ending $ 791,258 22,597 791,258 22,597
Supplemental disclosures of cash
flow information:
Interest paid $ 22,273 124,674 57,444 151,250
<FN>
See accompanying notes to interim consolidated financial statements.
</TABLE>
F-3
<PAGE>
Tyrex Oil Company
Notes to Interim Consolidated Financial Statements
(Unaudited)
The unaudited historical interim consolidated financial statements
reflect, in the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. The accounting policies
followed by the Company are set forth in Note 1 to the Company's financial
statements in the Company's report on Form 10-K.
Operating results for the quarter and six months ended December 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending June 30, 1998.
Presentation
- ------------
On May 28, 1997, Tyrex Oil Company (Tyrex) acquired 100% of the common stock of
Kimbrough Computer Sales, Inc. d/b/a 3Si, Inc. (3Si) in a reverse merger
accounted for as a purchase. Under the terms of the merger, 3Si is a wholly
owned subsidiary of Tyrex. The merger has been accounted for financial
statement purposes as a purchase of Tyrex by 3Si, since the merger resulted in
83.4% of the outstanding stock of Tyrex being held by the 3Si stockholders
(subsequent to the completion of the self-tender discussed below).
On May 30, 1997, Tyrex sold all of its oil and gas properties. As such, the
operations of Tyrex during the quarter and six months ended December 31, 1997
include only a limited amount of operating expenses and interest income. Tyrex's
primary asset is its ownership of 3Si.
The financial statements for the quarter and six months ended December 31, 1997
contain the unaudited results of operations and financial position of 3Si and
Tyrex on a consolidated basis. All intercompany balances and transactions have
been eliminated in the consolidated financial statements. The financial
statements for the quarter and six months ended December 31, 1996 include the
results of operations for 3Si only.
Note 1 - Revolving Line of Credit
- ---------------------------------
On September 30, 1997, the Company replaced its note payable with a bank with a
revolving line of credit facility with another financial institution. The new
revolving line of credit is at the prime rate of interest and permits the
Company to borrow up to $5 million collateralized by accounts receivable and
inventory computed under the terms of the agreement. The line is secured by
substantially all of the assets of the Company. The line does require the
Company to maintain certain financial ratios and limits the Company's ability to
pay dividends. At December 31, 1997, due primarily to the completion of the
self-tender offer, the Company is not in compliance with certain of its
financial ratio covenants and is working with the lender to establish new
covenants.
Note 2 - Self-Tender
- --------------------
On October 27, 1997, the Company commenced its self-tender offer for up to
6,000,000 shares of its common stock (exclusive of shares issued in the 3Si
merger) at a price of $0.30 per share pursuant to a Statement filed under
Section 13e of the Securities Exchange Act of 1934 and Rule 13e-4 adopted
thereunder. The self-tender was completed December 23, 1997. The Company
pursuant to the terms of the self-tender, paid $1,851,366 to acquire 6,005,626
shares (including fractional shares) into its treasury including offering costs
of $49,678. Subsequent to completion of the self-tender, the Company has
33,756,798 shares outstanding and 6,050,626 shares in treasury of the 50,000,000
shares authorized of its $.01 par value common stock.
F-4
<PAGE>
Tyrex Oil Company
Notes to Interim Consolidated Financial Statements, Continued
Note 3 - Stock Options and Warrants
- -----------------------------------
Changes in the status of options outstanding under the Tyrex stock option plan
from July 1, 1997 through December 31, 1997 were as follows:
Beginning 469,000
Granted -
Exercised 469,000
Terminated -
Outstanding December 31, 1997 -
All of the options exercised were at a price of $.14 per share.
During the quarter ended December 31, 1997, the Company granted warrants to
purchase 350,000 shares of the Company's common stock at $0.16 per share (the
fair value at date of grant). These warrants are exercisable until June 30,
1999. The Company extended the termination date on warrants to purchase 400,000
shares of the Company's common stock at $0.255 per share from December 31, 1997
to December 31, 1999.
Note 4 - Income Taxes
- ---------------------
At December 31, 1997, the Company has net operating loss carryforwards
sufficient to offset any tax liability arising during the period. Prior to the
merger, 3Si was organized as an S Corporation; therefore, all earnings were
passed through to the 3Si stockholders and taxed on their individual tax
returns.
Note 5 - Earnings Per Share
- ---------------------------
Earnings per share for the quarter and six months ended December 31, 1997 is
computed on the basis of the weighted average number of common stock shares
only, as shares subject to warrants and stock options are at exercise prices
greater than the quarter's average market price. The weighted average number of
shares for the quarter and six months ended December 31, 1996 are calculated
using the 300 outstanding shares of 3Si only.
F-5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 791,258
<SECURITIES> 0
<RECEIVABLES> 5,736,132
<ALLOWANCES> 53,559
<INVENTORY> 698,452
<CURRENT-ASSETS> 7,264,572
<PP&E> 673,764
<DEPRECIATION> 289,951
<TOTAL-ASSETS> 8,279,980
<CURRENT-LIABILITIES> 7,219,827
<BONDS> 0
0
0
<COMMON> 397,624
<OTHER-SE> 613,971
<TOTAL-LIABILITY-AND-EQUITY> 8,279,980
<SALES> 5,533,847
<TOTAL-REVENUES> 7,866,614
<CGS> 5,059,943
<TOTAL-COSTS> 5,470,581
<OTHER-EXPENSES> 2,296,160
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 33,014
<INCOME-PRETAX> 51,859
<INCOME-TAX> 0
<INCOME-CONTINUING> 51,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,859
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
