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 March 31, 1998
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
of 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 April 10, 1998, 33,756,798 shares of the Registrant's $.01 par value
common stock were outstanding.
<PAGE>
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 March 31, 1998, the Company had a working capital
deficit of approximately $216,000, 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 the revolving line of credit (discussed below).
The Company anticipates the need to raise additional equity capital in the
near-term to assist it in completing the development and initial marketing of
its Self-Help Help Desk product line. There is no assurance that the Company
will be successful in completing such a financing.
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 March
31, 1998, 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. The lender has neither
initiated action pursuant to the terms of the loan nor waived action at this
time.
Results of Operations
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Overview
The Company realized a net loss from operations of ($137,502) during the
quarter ended March 31, 1998. The net loss was created by 3Si's seasonal
decline in quarterly product sales as discussed further below and its invest-
ment in its Self-Help Help Desk (SHHD) products and in the Internet security
business. Included in loss from operations for the quarter are research and
development costs for SHHD products of approximately $50,000 and a loss by
3Si's Internet security business of approximately $28,000. The Internet
<PAGE>
security business loss is attributable to the startup nature of the business
whereby revenues generated by the Internet security division have not yet
covered expenses.
The Company commenced, in earnest, its research and development of SHHD
products during the quarter ended March 31, 1998. In February 1998, the
Company established technological feasibility of its first SHHD product and
commenced capitalizing the costs of software development relating to the
product. During the quarter ended March 31, 1998, the Company recorded
research and development expenses of approximately $50,000 and software
development costs of approximately $65,000 relating to this product.
Comparative Analysis
Sales were approximately $6,569,000 during the quarter ended March 31, 1998.
Total sales were up from the same period in the previous year by approximately
$1,507,000 or 29.8%. 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
$967,000, or 27.3% as sales to government agencies and commercial customers
continued to increase from the same quarter last year. The USPS sub-contract
sales for the third fiscal quarter of FY1998 and FY1997 were approximately
$1,410,000 and $835,000, respectively, as employees on the contract increased
from 49 in March 1997 to 80 in March 1998.
The Company did experience its typical seasonal decline in sales during the
third quarter. Sales during the second quarter of FY98 were approximately
$7,867,000 compared to the current quarter's sales of approximately
$6,569,000. This difference of approximately $1,298,000, or 16.5% also
contributes to the Company's loss from operations of approximately ($137,000).
This seasonal decline is similar to that experienced in FY1997 when sales
declined between the second and third quarters by approximately $856,000 or
14.4%.
The Company's gross margin increased between quarters changing from 29.9% of
sales in FY1997 to 32.5% 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 10.3% in the third quarter of FY1997 to 9.0% 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 $670,000, or 41.8%
due primarily to the addition of the labor costs associated with the USPS sub-
contract. During the third quarter of FY1998, the Company incurred additional
labor costs of approximately $473,000 relative to the USPS sub-contract; and
additional labor costs of approximately $45,000 relating to increased
commissions paid during the quarter on increased gross margin derived; the
approximately $50,000 in research and development costs relating to the SHHD
product line; and, the remainder relates to various other expenses including
labor costs relating to the increase in personnel in general.
Cash flow used by operating activities of approximately ($390,000) remained
relatively consistent with the same quarter in the previous fiscal year of
approximately ($374,000) as the Company paid vendors for charges originally
incurred in the previous, and largest, fiscal quarter for sales.
Cash used for investing activities in the quarter ended March 31, 1998,
include software development costs relating to the Company's SHHD product of
approximately $65,000.
<PAGE>
Cash used for financing activities differs between the quarters ended March
31, 1998 and 1997 due primarily to the Company's origination of its note with
a vendor controlled finance company of approximately $500,000 in March 1997.
Fiscal Nine Months Ended March 31, 1998 Compared to Nine Months Ended March
31, 1997
The same dynamics which effected the quarter (and discussed above), impact the
fiscal year-to-date results.
The Company realized a net loss from operations of ($102,599) for the nine
months ended March 31, 1998 due to 3Si's seasonal decline in quarterly product
sales as discussed above and its investment in its Self-Help Help Desk (SHHD)
products and in the Internet security business. Included in loss from
operations for the nine months are research and development costs for SHHD
products of approximately $50,000 and a loss by 3Si's Internet security
business of approximately $235,000. The Internet security business loss is
attributable to the startup nature of the business whereby revenues generated
by the Internet security division have not yet covered expenses.
Sales continue to expand due to the Company's success in increasing product
sales during the nine months and the USPS sub-contract. Product sales have
increased approximately $4,072,000, or 36.1% as sales to government agencies
and commercial customers continue to increase from the same period last year.
The USPS sub-contract contributed additional sales year-to-date of
approximately $1,785,000.
The Company's gross margin increased between periods changing from 28.1% of
sales in FY1997 to 31.1% in FY1998 due to the USPS sub-contract creating
higher, consulting based margins offsetting lower product sales margins.
Product sales margins declined from 10.4% for the first nine months of FY1997
to 9.2% for the first nine months of FY1998. The Company also experienced a
favorable impact on its gross margins fiscal year-to-date due to the
elimination of the royalty payment to 3Si's former stockholders.
Selling and administrative expenses increased approximately $2,309,000, or
51.4% due primarily to the addition of the labor costs associated with the
USPS sub-contract. During the first nine months of FY1998, the Company
incurred additional labor costs of approximately $1,460,000 relative to the
USPS sub-contract. Additional selling and administrative expenses include:
labor costs of approximately $460,000 relating to increased commissions paid
during the nine months 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 $64,000 during the nine months ended
March 31, 1998 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.
The Company had cash flow provided by operating activities of approximately
$434,000 for the nine months ended March 31, 1998 compared to cash flow used
by operating activities of approximately ($92,000) as the Company primarily
used its new revolving line of credit to finance customer accounts receivable.
Additionally, the Company has incurred less of a loss year-to-date in FY1998
by approximately $204,000.
Cash used for financing activities differs between the nine months ended March
31, 1998 and 1997 due primarily to the Company's completion of its self-tender
offer in December 1997.
<PAGE>
At March 31, 1998, the Company had 136 employees, including 80 servicing the
USPS sub-contract in Raleigh, NC versus having had 100 in total at March 31,
1997 including 49 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
None.
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: May 15, 1998 By: /s/ Frederick J. Slack
Frederick J. Slack,
Chief Executive Officer
By: /s/ Paul F. Kaufhold
Paul F. Kaufhold,
Chief Financial Officer
<PAGE>
Tyrex Oil Company
Index to Financial Statements
Consolidated Balance Sheets, at March 31, 1998(Unaudited)
and June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Statements of Operations for the quarter and
nine months ended March 31, 1998 and 1997 (Unaudited) . . . . . . . F-2
Consolidated Statements of Cash Flows for the quarter and
nine months ended March 31, 1998 and 1997 (Unaudited) . . . . . . . F-3
Notes to Consolidated Interim Financial Statements(Unaudited). . . . F-4
<PAGE>
Item 1
CONSOLIDATED FINANCIAL STATEMENTS
TYREX OIL COMPANY
March 31, 1998
<PAGE>
<TABLE>
Tyrex Oil Company
Consolidated Balance Sheets
March 31, 1998 (Unaudited) and
June 30, 1997
ASSETS
March 31,1998 June 30,
(Unaudited) 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note 2) $ 210,525 2,219,145
Accounts receivable - trade 4,932,780 3,334,430
Inventory 301,402 643,474
Other current assets 76,335 61,102
Total current assets 5,521,042 6,258,151
PROPERTY AND EQUIPMENT, AT COST
Computer systems 443,628 358,438
Furniture and fixtures 167,998 228,480
Leasehold improvements 78,338 73,082
Total property and equipment 689,964 660,000
Less accumulated depreciation and
amortization 316,891 297,258
Net property and equipment 373,073 362,742
OTHER ASSETS
Deposits 31,296 20,534
Other (note 4) 664,408 622,396
Total other assets 695,704 642,930
Total assets $6,589,819 7,263,823
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit (note 1) $2,353,654 -
Notes payable (note 1) 5,643 1,264,271
Current portion of capital lease 24,661 22,734
Accounts payable - trade 3,245,278 2,774,908
Customer deposits 7,345 120,498
Accrued liabilities 100,517 308,338
Total current liabilities 5,737,098 4,490,749
LONG-TERM DEBT 40,731 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) (103,874) (1,277)
Treasury stock, at cost, 6,050,626
shares (45,000 at June 30, 1997) (1,857,353) (5,987)
Total stockholders' equity 811,990 2,708,572
Total liabilities and
stockholders' equity $6,589,819 7,263,823
<FN>
See accompanying notes to interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Tyrex Oil Company
Consolidated Statements of Operations
For the Quarters and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
Quarter Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
<CAPTION>
<S> <C> <C> <C> <C>
Product sales $4,510,300 3,543,330 15,360,578 11,288,661
Consulting and other
service revenue 2,058,590 1,518,189 6,376,568 4,058,910
Net sales 6,568,890 5,061,519 21,737,146 15,347,571
Cost of products sold 4,104,541 3,258,435 13,952,006 10,117,840
Costs of contract labor 327,917 212,514 1,033,510 682,950
Royalty expense - 75,938 - 230,475
Total cost of sales 4,432,458 3,546,887 14,985,516 11,031,265
Gross profit 2,136,432 1,514,632 6,751,630 4,316,306
Selling and administrative
expenses (note 4) 2,273,934 1,604,137 6,797,264 4,488,441
Earnings (loss) from
operations (137,502) (89,505) (45,634) (172,135)
Other income (expense):
Interest income 2,473 2,580 60,790 7,376
Interest expense (64,887) (48,546) (124,636) (188,828)
Miscellaneous income 310 42,409 6,881 46,850
Total other expense (62,104) (3,557) (56,965) (134,602)
Loss before income
taxes (199,606) (93,062) (102,599) (306,737)
Income taxes (Note 5) - - - -
Net loss $ (199,606) (93,062) (102,599) (306,737)
Loss per common share $ (0.01) (310.21) 0.00 (1,022.46)
Weighted average shares
outstanding(note 6) 33,756,798 300 35,054,921 300
<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 Nine Months Ended March 31, 1998 and 1997
(Unaudited)
Quarter Ende Nine Months Ended
March 31, March 31,
<CAPTION> 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(199,606) (93,062) (102,599) (306,737)
Reconciling adjustments:
Depreciation and amortization 34,753 26,940 104,258 65,092
Gain on sale of equipment - 40,623 2,665 40,623
Change in operating assets
and liabilities:
Accounts receivable 749,793 1,998,516 (1,598,350) 1,040,107
Inventory 397,050 (82,465) 342,072 (46,427)
Other assets 9,483 (49,785) (25,994) (42,945)
Revolving line (3,243) - 1,562,209 (175,000)
Accounts payable (952,200)(2,290,995) 470,370 (448,809)
Other liabilities (425,759) 76,073 (320,976) (218,139)
Total adjustments (190,123) (281,093) 536,254 214,502
Net cash provided by operating
activities (389,729) (374,155) 433,655 (92,235)
Investing activities:
Purchases of equipment (16,199) (26,786) (93,815) (130,787)
Software development costs (65,450) - (65,450) -
Merger costs - - (8,279) -
Net cash used in investing
activities (81,649) (26,786) (167,544) (130,787)
Financing activities:
Revolving line of credit,
portion used to pay note
payable - - 791,446 -
Payments on notes payable (102,206) 459,963 (1,258,628) 208,221
Payments on capital lease (7,149) (3,459) (21,843) (13,471)
Proceeds from exercise of
options (note 3) - - 65,660 -
Payments on self-tender - - (1,851,366) -
Dividends paid, prior to merger - (33,642) - (95,886)
Net cash used by financing
activities (109,355) 422,862 (2,274,731) 98,864
Net change in cash and cash
equivalents (580,733) 21,921 (2,008,620) (124,158)
Cash and cash equivalents,
beginning 791,258 22,597 2,219,145 168,676
Cash and cash equivalents,
ending $ 210,525 44,518 210,525 44,518
Supplemental disclosures of cash
flow information:
Interest paid $ 57,355 31,512 114,799 182,762
<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 nine months ended March 31, 1998
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 nine months ended March 31, 1998
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 nine months ended March 31, 1998
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 nine months ended March 31, 1997 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 March 31, 1998, 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. The lender has neither initiated action pursuant to the terms of the
loan nor waived action at this time.
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 March 31, 1998 were as follows:
<TABLE>
<S> <C>
Beginning 469,000
Granted -
Exercised 469,000
Terminated -
Outstanding March 31, 1998 -
</TABLE>
All of the options exercised were at a price of $.14 per share.
Note 4 - Research & Development and Software Development Costs
During the quarter ended March 31, 1998, the Company incurred approximately
$50,300 of research & development costs relative to its first Self-Help Help
Desk product. The research & development costs are included in selling
and administrative expenses in the financial statements. The Company
determined the technological feasibility of the product during the quarter and
commenced capitalizing software development costs relative to the product.
During the quarter ended March 31, 1998, the Company incurred and capitalized
software development costs of approximately $65,500. Software development
costs are included in other assets in the financial statements.
Note 5 - Income Taxes
At March 31, 1998, 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 6 - Earnings Per Share
Earnings per share for the quarter and nine months ended March 31, 1998 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 March 31, 1997 are calculated
using the 300 outstanding shares of 3Si only.
F-5
