U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
------- -------
Commission file number 0-17321
HITOX CORPORATION OF AMERICA
(Exact name of small business issuer as specified in its charter)
Delaware 74-2081929
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Furman Plaza Building
418 Peoples Street, Corpus Christi, Texas 78401
(Address of principal executive offices)
Issuer's telephone number: (512) 882-5175
None
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, $0.25 par value 4,657,487
(Class) (Outstanding as of October 16, 1996)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE> 1
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HITOX CORPORATION OF AMERICA
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--
September 30, 1996 and December 31, 1995 3-4
Condensed Statements of Income--
three months ended September 30, 1996 and 1995 and
nine months ended September 30, 1996 and 1995 5
Condensed Statements of Cash Flows--
nine months ended September 30, 1996 and 1995 6
Notes to Condensed Financial
Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
<PAGE> 2
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(in thousands)
<CAPTION>
September 30, 1996 December 31,
(Unaudited) 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 543 $ 828
Trade accounts receivable; no allowance for
doubtful accounts considered necessary 1,494 1,130
Other receivables 7 28
Inventories:
Raw materials 3,354 2,923
Finished goods 873 1,141
Supplies 82 90
------------------ -----------------
Total inventories 4,309 4,154
Other current assets 77 36
------------------ -----------------
Total current assets 6,430 6,176
Property, plant and equipment 9,101 8,983
Accumulated depreciation (5,087) (4,645)
------------------ -----------------
4,014 4,338
Other assets 26 171
------------------ -----------------
$ 10,470 $ 10,685
================== =================
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
<PAGE> 3
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(in thousands, except par value)
<CAPTION>
September 30, 1996 December 31,
(Unaudited) 1995
------------------ -----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 807 $ 1,254
Accrued expenses 315 538
Current maturities of long-term debt 293 59
------------------ -----------------
Total current liabilities 1,415 1,851
Subordinated debentures - related party -- 5,000
Other long-term debt, excluding current maturities 1,128 406
------------------ -----------------
Total liabilities 2,543 7,257
Commitments and contingencies
Shareholders' equity:
Common stock $.25 par value; authorized 10,000
shares; shares outstanding after deducting 88
shares held in treasury, 4,657 at September 30, 1996
and 3,657 at December 31, 1995, respectively 1,186 936
Additional paid-in capital 14,341 10,603
Accumulated deficit (7,557) (8,068)
------------------ -----------------
7,970 3,471
Less: cost of treasury stock (43) (43)
------------------ -----------------
Total shareholders' equity 7,927 3,428
------------------ -----------------
$ 10,470 $ 10,685
================== =================
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
<PAGE> 4
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 3,198 $ 2,818 $ 8,853 $ 8,690
Costs and expenses:
Cost of products sold 2,159 1,918 6,197 5,951
Selling, administrative and general 616 542 1,702 1,686
------------- ------------- ------------- -------------
Operating income 423 358 954 1,053
Other income (expenses):
Interest income 9 8 17 40
Interest expense (33) (149) (320) (479)
Other, net (2) (13) (25) (30)
------------- ------------- ------------- -------------
Income before income tax
and extraordinary item 397 204 626 584
Provision for income tax 3 2 3 3
------------- ------------- ------------- -------------
Income before extraordinary item 394 202 623 581
Extraordinary item,
early extinguishment of debt (112) -- (112) --
------------- ------------- ------------- -------------
NET INCOME $ 282 $ 202 $ 511 $ 581
============= ============= ============= =============
Income per common share:
Income before extraordinary item $ 0.08 $ 0.05 $ 0.15 $ 0.15
Extraordinary item (0.02) -- (0.02) --
------------- ------------- ------------- -------------
Net income $ 0.06 $ 0.05 $ 0.13 $ 0.15
============= ============= ============= =============
Weighted average common shares and
equivalents outstanding: 4,719 3,849 4,085 3,809
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
<PAGE> 5
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<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 511 $ 581
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 475 515
Inventory valuation charge 4 --
Warrants issued to subordinated debenture holders -- 6
Extraordinary item 112 --
Changes in working capital:
Receivables (343) (770)
Inventories (159) (255)
Other current assets (41) 51
Accounts payable and accrued expenses (670) 459
----------------- -----------------
Net cash (used in) provided by operating activities (111) 587
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (118) (135)
----------------- -----------------
Net cash used in investing activities (118) (135)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (5,044) (80)
Proceeds from long-term debt 1,000 --
Net payments on revolving line of credit -- (2,267)
Proceeds from the issuance of common stock 3,988 --
----------------- -----------------
Net cash used in financing activities (56) (2,347)
NET DECREASE IN CASH AND
CASH EQUIVALENTS (285) (1,895)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 828 2,483
----------------- -----------------
AT END OF PERIOD $ 543 $ 588
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 310 $ 1,066
Income taxes paid 3 3
Income tax refunds received -- 39
<FN>
See Notes to Condensed Financial Statements
</FN>
</TABLE>
<PAGE> 6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Accounting Policies
Basis of Presentation
The interim financial statements of Hitox Corporation of America (the
"Company") are unaudited, but include all adjustments which the Company deems
necessary for a fair presentation of its financial position and results of
operations. All adjustments are of a normal and recurring nature. Results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. All significant accounting policies conform to
those previously set forth in the Company's fiscal 1995 Annual Report on Form
10-KSB.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Reclassification
Certain reclassifications have been made to prior periods' condensed
financial statements to conform to present reporting classifications.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company has accounted for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognized no compensation expense for the stock option grants. The Company
will not adopt FASB Statement No. 123, Accounting for Stock-Based Compensation,
and will continue to account for stock option grants in accordance with APB
Opinion No. 25. FASB Statement 123 requires certain disclosures about stock-
based compensation plans for all companies regardless of the method used to
account for them. Effective in 1996 calendar year-end financial statements,
companies that continue to apply APB 25 will be required to disclose pro forma
information as if the measurement provisions of Statement 123 had been adopted
in their entirety.
2. Sale of Common Stock and Partial Prepayment of Subordinated Debentures
On June 26, 1996, the Company completed the previously announced sale of
1,000,000 shares of common stock at $4.00 per share to Syarikat Megawati Sdn.
Bhd. ("Syarikat Megawati"). Syarikat Megawati is the majority owner of
Malaysian Titanium Corporation, which supplies the Company with its primary raw
material, synthetic rutile. The $4,000,000 proceeds from the sale were used to
prepay $4,000,000 of the outstanding principal balance on $5,000,000 in 10.5%
<PAGE> 7
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subordinated debenture notes (the "Debentures") on July 1, 1996. As discussed
in Note 3, this resulted in an extraordinary charge to income in the third
quarter.
3. Prepayment of Debentures and Extraordinary Charge
On July 31, 1996, the Company prepaid the remaining $1,000,000 principal
balance on the Debentures using the proceeds of a term note under an amended
loan agreement with the Company's bank (See Note 4). The prepayment made it
necessary to accelerate the amortization of unamortized debenture origination
fees, and resulted in an extraordinary charge of $112,000 in the third quarter
of 1996. No income tax effect was recognized from the extraordinary charge
because the Company has an operating loss carryforward.
4. Debt
On July 31, 1996, the Company executed an amended loan agreement (the
"Amended Loan Agreement") with NationsBank of Texas, N.A., (the "Bank"), which
includes the existing $2,000,000 line of credit and the mortgage note on the
Company's headquarters. The Amended Loan Agreement provides a new $1,000,000
term loan (the "Term Loan") to the Company, with an interest rate of 8.17% per
annum. The repayment terms of the Term Loan provide for monthly payments of
interest only until December 31, 1996, with monthly payments of principal and
interest of $31,415 beginning January 31, 1997, with the final payment due on
January 31, 2000. The proceeds of the Term Loan were used to prepay the
remaining $1,000,000 principal balance on the Debentures on July 31, 1996.
Also as part of the Amended Loan Agreement, the expiration date of the
Company's line of credit was extended from April 30, 1997 to April 30, 1998,
and the interest rate was reduced from the Bank's prime rate plus 1.0% to the
Bank's prime rate plus 0.75%. The Amended Loan Agreement also reduces the
interest rate on the mortgage note on the building which includes the Company's
corporate headquarters from 9.5% to 9.0%. The Company had no outstanding
balance on the line of credit at September 30, 1996. The line of credit and
the term notes are secured by the office building, inventory and accounts
receivable. The Amended Loan Agreement contains covenants which, among other
things, require maintenance of certain financial ratios. The Company was in
compliance with all covenants for the quarter ended September 30, 1996.
5. Commitments
The Company purchases its primary raw material, synthetic rutile, under a
supply agreement (the "Supply Agreement"). The Supply Agreement contains a
take or pay arrangement for specified quantities on a yearly basis, with a
fixed price for the first two years of its five year term. The first price
adjustment, if any, under that Supply Agreement will be effective for orders
placed in 1997, the third year of the Supply Agreement. The Company
anticipates that it will take delivery of the quantities stipulated in the
Supply Agreement.
<PAGE> 8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Sales:
Net sales for the third quarter of 1996 were $3,198,000 as compared to
$2,818,000 for the same quarter in 1995. Total net sales for the nine months
ended September 30, 1996 were $8,853,000 compared with $8,690,000 for the same
period in 1995. Sales of the Company's primary product, HITOX pigment,
increased in the third quarter of 1996 compared with the same quarter of 1995,
contributing to the higher third quarter sales in 1996. Year to date sales of
HITOX pigment in 1996 are below sales for the same nine months of 1995 due to
general softness in the titanium dioxide pigment market, both domestically and
especially abroad. The lower year to date HITOX pigment sales were more than
offset by increases in sales of other pigment products.
Gross Profit:
Gross profit for the third quarter of 1996 was $1,039,000, as compared
with $900,000 for the third quarter of 1995, an increase of $139,000. Gross
profit as a percentage of sales increased to 32.5% in the third quarter this
year as compared to 31.9% in the same quarter last year. The improvement in
the 1996 third quarter gross profit percentage compared with the third quarter
of 1995 is the result of higher average sales prices in the third quarter of
1996 and lower costs for synthetic rutile. The year to date gross profit for
the nine months ended September 30, 1996 was $2,656,000, or 30.0% of net sales
compared with $2,739,000, or 31.5% of net sales for the same period of 1995.
The decrease in year to date gross profit percentage for 1996 compared with
1995 is primarily the result of higher raw material costs during the first six
months of 1996.
Expenses:
Total selling, administrative and general expenses increased from $542,000
during the third quarter of 1995, to $616,000 for the third quarter of 1996,
representing an increase of approximately 13.7%. Total selling, administrative
and general expenses increased from $1,686,000 during the nine months ended
September 30, 1995, to $1,702,000 for the same period of 1996, representing an
increase of less than 1.0%. The higher expenses in the third quarter of 1996
compared with 1995 are primarily the result of higher selling expenses. Year
to date expenses for 1996 are only slightly ahead of 1995 because the increase
in selling expenses for 1996 was almost offset by a decrease in administrative
and general expenses.
Interest Income:
During the third quarter of 1996, excess funds were deposited in short-
term interest bearing investments resulting in interest income of $9,000.
Total interest income for the nine months ended September 30, 1996 was $17,000.
For 1995, interest income for the third quarter was $8,000, and for the nine
<PAGE> 9
<PAGE>
months ended September 30, interest income was $40,000. Included in the nine
month total for 1995 is $20,000 resulting from a one time foreign currency
transaction gain.
Interest Expense:
Interest expense decreased $116,000 in the third quarter of 1996 as
compared with the same quarter last year. For the nine month period ended
September 30, 1996, interest expense decreased $159,000, compared with 1995.
Interest expense was higher in 1995 because the Company had more debt
outstanding, and accrued additional interest on unpaid interest related to its
subordinated debentures (the "Debentures"), because the Company's bank
prohibited making payments to the Debenture holders. That situation was
resolved with the signing of a new loan agreement in August of 1995. In 1996,
all scheduled payments to the Debenture holders were timely made, and on July
1, 1996, the Company prepaid $4,000,000 of the outstanding principal balance on
the Debentures using proceeds from the sale of the Company's common stock.
Provision for Income Tax:
The Company has net operating loss and other carry forwards available to
offset the Company's regular taxable income. However, the Company is subject
to alternative minimum tax, and a provision for income tax of $3,000 was
recorded in the third quarter of 1996. Provision for income tax was $2,000 for
the third quarter of 1995, and $3,000 for the nine months ended September 30,
1995.
Extraordinary Item:
During July of 1996, the Company prepaid the outstanding $5,000,000
principal balance on the Debentures, using the proceeds of a $1,000,000 term
note under an amended loan agreement with the Company's bank, and the
$4,000,000 proceeds from the sale of common stock. The prepayment made it
necessary to accelerate the amortization of unamortized debenture origination
fees, and resulted in an extraordinary charge of $112,000 in the third quarter
of 1996. No income tax effect was recognized from the extraordinary charge
because the Company has an operating loss carryforward. There were no
extraordinary charges in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At the end of June, the Company completed the previously announced sale of
1,000,000 shares of common stock at $4.00 per share. The proceeds were used
to prepay $4,000,000 in outstanding principal on the Debentures at par on July
1, 1996. The remaining $1,000,000 principal balance on the Debentures was
prepaid in full on July 31, 1996, using the proceeds of a new $1,000,000 term
loan with the Company's bank, NationsBank of Texas, N.A., (the "Bank"). The
Company used a net $56,000 in financing activities for the nine months ended
September 30, 1996. The Company used a net $111,000 of cash in operating
activities for the nine months ended September 30, 1996, primarily as a result
of changes in working capital. Accounts receivable increased at September 30,
1996 compared with December 31, 1995, due to higher sales volumes, while
<PAGE> 10
<PAGE>
accounts payable and accrued expenses have decreased, primarily due to payments
for raw material. The Company had a cash balance of $543,000 at September 30,
1996, and no outstanding borrowings on its line of credit, which has a limit of
$2,000,000.
The Company on an ongoing basis will finance its operations principally
through cash flows generated by operations, through bank financing and through
cash on hand. The Company has a continuing need for working capital to finance
raw material purchases, primarily synthetic rutile, which is now purchased
under a supply agreement (the "Supply Agreement") with its former subsidiary,
Malaysian Titanium Corporation. The Supply Agreement contains a take or pay
arrangement for specified quantities on a yearly basis, with a fixed price for
the first two years of its five year term. The first price adjustment, if any,
under that Supply Agreement will be effective for orders placed in 1997, the
third year of the Supply Agreement. The Company anticipates that it will take
delivery of the quantities stipulated in the Supply Agreement.
On July 31, 1996, the Company executed an amended loan agreement with the
Bank (the "Amended Loan Agreement"). The Amended Loan Agreement provides a new
$1,000,000 term loan (the "Term Loan") to the Company, with an interest rate of
8.17% per annum. The repayment terms of the Term Loan provide for monthly
payments of interest only until December 31, 1996, with monthly payments of
principal and interest of $31,415 beginning January 31, 1997, with the final
payment due on January 31, 2000. The proceeds of the Term Loan were used to
prepay the remaining $1,000,000 principal balance on the Debentures on July 31,
1996. Also as part of the Amended Loan Agreement, the expiration date of the
Company's line of credit was extended from April 30, 1997 to April 30, 1998,
and the interest rate was reduced from the Bank's prime rate plus 1.0% to the
Bank's prime rate plus 0.75%. The Amended Loan Agreement also reduces the
interest rate on the mortgage note on the building which includes the Company's
corporate headquarters from 9.5% to 9.0%.
<PAGE> 11
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
Page No.
--------
(a) Exhibit 11 - Earnings per share 13
Exhibit 27 - Financial Data Schedule 14
(b) Reports on Form 8-K None
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.
Hitox Corporation of America
- --------------------------------------
(Registrant)
Date: November 12, 1996 THOMAS A. LANDSHOF
----------------- -------------------------------
Thomas A. Landshof, President and
Chief Executive Officer
Date: November 12, 1996 CRAIG A.SCHKADE
----------------- -------------------------------
Craig A. Schkade, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE> 12
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<TABLE>
Hitox Corporation of America Exhibit 11
Computation of Earnings Per Share (EPS)
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES OUTSTANDING
Common Stock 4,657 3,657 4,012 3,657
Common Stock Equivalents, assumed exercise
of stock options and warrants (Treasury
Stock Method at average market value) 61 143 73 79
--------- --------- --------- ---------
Total for Primary EPS 4,718 3,800 4,085 3,736
Assumed exercise of stock options and
warrants (Treasury Stock Method at
greater of average or end of period
market value) 1 49 -- 73
--------- --------- --------- ---------
Total for Fully Diluted EPS 4,719 3,849 4,085 3,809
INCOME
Income for primary EPS:
Net income $ 282 $ 202 $ 511 $ 581
Income for fully diluted EPS:
Net income 282 202 511 581
INCOME PER SHARE
Primary $ 0.06 $ 0.05 $ 0.13 $ 0.16
Fully Diluted 0.06 0.05 0.13 0.15
</TABLE>
<PAGE> 13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 543
<SECURITIES> 0
<RECEIVABLES> 1494
<ALLOWANCES> 0
<INVENTORY> 4309
<CURRENT-ASSETS> 6430
<PP&E> 9101
<DEPRECIATION> 5087
<TOTAL-ASSETS> 10470
<CURRENT-LIABILITIES> 1415
<BONDS> 1128
0
0
<COMMON> 1186
<OTHER-SE> 6741
<TOTAL-LIABILITY-AND-EQUITY> 10470
<SALES> 8853
<TOTAL-REVENUES> 8870
<CGS> 6197
<TOTAL-COSTS> 6197
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320
<INCOME-PRETAX> 626
<INCOME-TAX> 3
<INCOME-CONTINUING> 623
<DISCONTINUED> 0
<EXTRAORDINARY> (112)
<CHANGES> 0
<NET-INCOME> 511
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
