FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number 0-17321
HITOX CORPORATION OF AMERICA
(Name of small business issuer in its charter)
Delaware 74-2081929
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Furman Plaza Building 78401
418 Peoples Street, Corpus Christi, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (512) 882-5175
Securities registered under Section 12(b) of the Act: None.
Securities registered under section 12(g) of the Act:
Common Stock, $0.25 par value
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $10,953,992
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State the aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of February
20, 1996, computed by reference to the closing sale price of the registrant's
Common Stock on NASDAQ system on such date: $6,840,621.
Number of shares of the registrant's Common Stock outstanding as of February
20, 1996
3,657,487
Documents incorporated by reference:
1. Certain portions of the registrant's definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, in connection with the Annual Meeting of Stockholders of the
registrant to be held May 7, 1996, are incorporated by reference into Part
III of this report.
2. Certain portions of the registrant's S-1 registration statement (File No.
33-25354) exhibits are incorporated by reference into Part IV of this
report.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
Item 1. Description of Business
GENERAL
Hitox Corporation of America ("Hitox" or the "Company") is a specialty
chemical company engaged in the business of manufacturing and marketing mineral
products for use as pigments and pigment extenders used in the manufacture of
paints, industrial coatings and plastics. The Company's principal product,
HITOX (Registered trademark) (high grade titanium dioxide), is a unique color
pigment with a high titanium dioxide content. Titanium dioxide is the primary
pigment used by manufacturers of paints, plastics and paper to impart opacity
and durability to the finished product. Hitox enjoys a unique marketing niche
as a lower cost, high quality, buff color pigment that can replace some of the
other color pigments and some or all of the white titanium dioxide in
customer's formulations, providing significant cost savings. HITOX is
chemically inert and non-toxic. HITOX accounted for 78.9% and 74.7% of net
sales in 1995 and 1994, respectively. The Company's strategy includes offering
additional products to its HITOX customers. To this end, Hitox also
manufactures and sells a line of barium sulfate pigment extenders under the
brand name BARTEX (Registered trademark), alumina trihydrate under the name
HALTEX(Registered trademark) which is a filler used in plastics for its flame
retardant properties, and sells iron oxide pigments under the name
OSO(Registered trademark) which are used in primers, color concentrates and
other specialty coatings for its color properties. The Company manufactures
HITOX, BARTEX and HALTEX at its manufacturing facility located in Corpus
Christi, Texas, U.S.A.
The Company's products are currently marketed in the United States and in
approximately 35 other countries. The Company sells its products through a
network of direct sales representatives employed by the Company and independent
stocking distributors in the United States, as well as distributors and agents
overseas. The Company's sales representatives sell directly to end users and
provide marketing support and guidance for the Company's independent
distribution network. The Company has historically relied on an independent
distributor network to sell its products, supported by an in-house sales staff.
The Company was organized by Benilite Corporation of America ("Benilite")
in 1973. Benilite, which was incorporated in Delaware in 1969, developed the
then patented "Benilite process" for producing synthetic rutile ("SR"), the
principal ingredient used in the manufacture of HITOX, from ilmenite ore.
Benilite licensed and helped design several synthetic rutile plants located
throughout the world which utilize this process (including a plant located in
Ipoh, Malaysia, which until September 21, 1994, was owned by the Company, as
discussed below). Benilite concluded that synthetic rutile produced by the
Benilite process could be further processed into a buff-colored titanium
dioxide pigment having many of the characteristics of standard white titanium
dioxide at a significant cost savings. These efforts by Benilite were the
beginning of the Company's business. In 1980, the subsidiary of Benilite
engaged in the development of HITOX was spun off by Benilite to its
shareholders. In December 1988, the Company became a publicly-owned company
after completing a public offering of 1.38 million shares of its common stock.
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The proceeds of the public offering in 1988 were used to purchase,
refurbish and operate a Malaysian synthetic rutile plant located in Ipoh,
Malaysia (the "Plant"). The Plant is owned and operated by Malaysian Titanium
Corporation Sdn. Bhd. ("MT"). The Company held a majority ownership position
in MT until September 21, 1994, when it sold its entire 78.27% ownership
interest to its minority partner, Airtrust International Corporation
("Airtrust") who simultaneously sold a majority interest to a Malaysian
company. The Company had acquired and refurbished the Plant in an attempt to
procure a long term, reliable, reasonably priced source of synthetic rutile,
the vital raw material for producing HITOX pigment. Though the effort to
refurbish the Plant was successful, the Plant output exceeded the Company's
needs for synthetic rutile to produce HITOX pigment. The financial burden of
supporting MT was not sustainable and the Company was forced to sell MT and
recorded a loss on the sale in 1994. As part of the sale transaction, the
Company entered into a supply agreement with MT, under which MT continues to
provide the Company with its vital raw material.
Until September 30, 1994, the Company owned Fluid Minerals Espanola, S.A.
("FME"), a Spanish company which owns a manufacturing facility in Bunuel,
Spain. While the Spanish facility is capable of producing HITOX for sale in
the European market, the expected sales of HITOX in Europe did not materialize
in 1992 or 1993, and by mid-1993, HITOX production was suspended at the plant
in Bunuel. During 1993 and continuing into 1994, the Company attempted to sell
FME, but was unable to find a buyer. On September 30, 1994, the Company sold
all of the Company's shares of FME to Richard L. Bowers, the Company's former
Chairman of the Board, President and Chief Executive Officer, to relieve the
Company from the continuing burden of supporting FME. As part of the
transaction, the Company signed a license agreement with FME permitting the
manufacture and sale of HITOX in Europe. The agreement provides, among other
things, for the payment of a royalty by FME to the Company which is a graduated
percentage of net revenues from HITOX pigment sold by FME, based on the
quantity of those sales.
The sale of the Company's two foreign operating subsidiaries, FME and MT,
resulted in a loss of $3,022,521, which was recorded in the third quarter of
1994. All third party liabilities remained the responsibility of FME and MT.
The Company's financial performance for 1995 was positively impacted by the
sale of the foreign subsidiaries in 1994, and the Company recorded its first
annual profit since 1990.
The Company infused new leadership through selection of a new President
and Chairman of the Board. Thomas A. Landshof was elected as President and
Chief Executive Officer of the Company on August 3, 1994, and serves on the
Board of Directors. Mr. Landshof has over 30 years of experience in the
pigments and coatings field. William B. Hayes was elected Chairman of the
Board on September 30, 1994. Mr. Hayes has over 30 years experience in
titanium dioxide pigments and has been a director of the Company since 1990.
RAW MATERIALS
Titanium dioxide pigment can be produced using ilmenite, natural rutile or
synthetic rutile and titanium slag. Ilmenite is a black material found in
natural mineral deposits and typically has a titanium dioxide content ranging
from 44% to 60%. Ilmenite is found throughout the world, including China,
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India, Australia and North America. In Malaysia, ilmenite is recovered
incidental to tin mining. Synthetic rutile is produced from ilmenite and
typically has a titanium dioxide content ranging from 92% to 95%. There are
ample sources of ilmenite and several producers of synthetic rutile worldwide.
Natural rutile, a mineral with a titanium dioxide content in the range of 95%,
is less prevalent than ilmenite and existing reserves are being depleted.
HITOX, a light buff-colored titanium dioxide pigment, is made from
synthetic rutile. Historically, the Company purchased its synthetic rutile
from third-party manufacturers. While synthetic rutile is a near-commodity
product in some respects and is readily available, there were only three plants
in the world which produced synthetic rutile of a quality suitable for the
manufacture of HITOX. In the late 1980's, only one of these producers was
willing or able to supply this critical material to the Company in adequate
quantities. The producer, located in India, significantly increased the price
beginning in 1989 at which it sold synthetic rutile to the Company and was
unable to meet consistent quality standards required by the Company for the
manufacture of HITOX.
Faced with increasing problems in procuring synthetic rutile at reasonable
prices, the Company began exploring alternative means to supply this vital raw
material. The decision was made to acquire a plant to produce synthetic
rutile. The Company raised approximately $10 million in an initial public
offering in December 1988. Proceeds from the offering, cash flow generated by
the business and bank borrowings were used, together with a $1.3 million
contribution from the Company's minority partner, Airtrust, to purchase and
refurbish the Plant owned by MT as discussed above.
The Plant had been licensed by the Company's predecessor, Benilite, and
some members of the Company's former management were involved in its design and
commissioning in the mid 1970's. The major portion of the refurbishment of
this plant was completed by December 1990 at a cost of $11.6 million. Test
operations began at that time and commercial operation began in September,
1991. The Plant has a design capacity of 50,000 metric tons of synthetic
rutile per year. Since restarting in January of 1991, the Plant has produced a
total of approximately 36,000 metric tons through September 30, 1994.
Production had primarily been scheduled based on the needs of the Company for
synthetic rutile. Efforts to sell synthetic rutile profitably to third parties
were not successful because of a world oversupply and low market prices. MT
generated significant losses since the Plant was restarted in 1991 until it was
divested.
The Company sold its entire ownership interest in MT in 1994 to its
minority partner as described above. As part of the Sale Transaction, a supply
agreement for the supply of synthetic rutile by MT to the Company (the "Supply
Agreement") became effective December 15, 1994. The Supply Agreement has an
initial term of five years, with automatic year to year renewal unless
terminated with twelve months notice by either party. The Supply Agreement is
a take or pay arrangement for a specified minimum annual quantity ("Minimum
Quantity"). Prices for the first two years are fixed, with adjustment based on
a formula for years three through five of the Supply Agreement. The Supply
Agreement provides that the Company will purchase synthetic rutile primarily
from MT during the term of the Supply Agreement. For quantities above the
Minimum Quantity, the Company may seek alternative sources and price quotes,
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which MT will have the right to supply on a meet or release basis. The Supply
Agreement provides for payment of damages in the event that MT is not able to
supply the Minimum Quantity of synthetic rutile to the Company. The corporate
shareholders of MT have provided guarantees that MT will perform under the
Supply Agreement.
BARTEX is produced from high grade barytes (barium sulfate) mined in
China, India, Turkey and Mexico. The Company has not experienced and does not
anticipate having any difficulty in acquiring adequate supplies of this
material. Similarly, alumina trihydrate, the raw material used to manufacture
HALTEX is plentiful and is acquired domestically. The Company also has an
adequate supply of products purchased from other companies for resale.
MANUFACTURING
HITOX Manufacturing Process
HITOX is manufactured from synthetic rutile in a process which
incorporates fluid energy milling. In this process, particles of synthetic
rutile mechanically abrade each other to form the end product, which after
other processing, including testing and quality control procedures, is
collected for bagging and shipping. The Company currently has seven production
lines for HITOX in place at its Corpus Christi plant. One of these production
lines is also used to manufacture BARTEX.
The manufacturing process for producing HITOX is not simple and the
details of the process and the operating parameters of the systems are not
widely known. The HITOX manufacturing process is not patented.
Other Products
BARTEX is a pigment extender or filler which is used to increase the
efficiency of titanium dioxide pigment required for a particular application
and because of its high specific gravity to add weight to the end product.
HALTEX is a pigment filler that is used primarily for its flame retardant and
smoke suppressant properties in plastics and coatings. OSO iron oxides are
pigments that are used for applications such as primers, pigment dispersions,
color concentrates and other coatings. Iron oxide pigments are primarily used
for their color contribution and opacity.
RESEARCH AND DEVELOPMENT
A 5,000 square foot technical center was constructed at the Company's
plant location in Corpus Christi, Texas in 1992, that houses process control,
quality assurance, technical service, and research and development functions.
The technical services group focused on customer service and development in
1995, and did not incur significant research and development expense in 1995.
The Company expensed $37,025 during 1994 related to research and development
activities.
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MARKETING AND CUSTOMERS
Sales and Marketing Department Organization
The Company completed a reorganization of its sales department during the
third quarter of 1995, with the addition of a national sales manager. A
regional sales manager also joined the Company in the third quarter of 1995,
bringing the number of regional sales managers to five. Three of the regional
sales managers live and work in their respective territories, which include the
Southwest, Western and Mid-Western United States. The Company's Corpus Christi
sales and marketing department consists of two regional sales managers, a sales
assistant, a customer service coordinator, and a sales and marketing
administrative coordinator. One regional manager is responsible for Asia and
the other is responsible for Latin America. The Company also has one sales
agent whose territory includes the central United States and whose focus is the
PVC pipe market. The sales and marketing effort is primarily directed at
customers in North America.
Technical Services Group Participation
The technical services group is located in Corpus Christi. The group is
involved in various aspects of customer service, problem solving and product
development, and actively participates in the sales effort. The group has
adapted by investing in advanced technologies and equipment which allow the
technical services staff to assist customers in formulating the Company's
products into their applications.
Domestic Distributors and Agents
The Company's products are currently marketed by 19 independent stocking
distributors and one agent located in 18 states with a combined sales force of
over 200 people. Domestic distributors accounted for approximately 37% of
total net sales in 1995.
Foreign Distributors, Licensees and Agents
There are approximately 26 independent distributors and 10 agents selling
the Company's products abroad. The sales and marketing effort for all areas of
the world except Europe, Israel, and South Africa is directed from Corpus
Christi, Texas. FME is now a licensee, and directs the sales and marketing
efforts in Europe, Israel, and South Africa. Foreign sales through
distributors accounted for approximately 6% of total net sales in 1995.
Customers
End use customers of the Company's products include, among others, such
companies as PPG, Uponor, Centerline Paint, J-M Manufacturing Co., The Sherwin-
Williams Company, Morton International, and Formosa Plastics. The top 10
direct customers accounted for 39% of total net sales in 1995, and 44% of total
net sales in 1994. The direct foreign customers accounted for 6% of total net
sales in 1995. The Company has historically maintained a relatively stable
customer and distributor base.
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Geographic Distribution
The Company sells its products in the United States and markets its
product to customers located in approximately 35 foreign countries. The
Company's foreign sales are made in U.S. dollars to avoid foreign currency
risks.
The Company maintains records reflecting the geographic distribution of
its products, regardless of whether the sale was made directly by the Company
or through its distributors from the Company's warehouse. The following table
reflects the estimated geographic distribution of the Company's products for
the periods shown. Sales of the Company's products purchased by distributors
for resale are expressed in terms of the price paid to the Company for its
products by the distributors.
Estimated Geographic Distribution 1995 1994
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(in thousands of dollars)
United States $9,564 $9,603
Canada & Mexico 692 972
South & Central America 373 128
Europe 16 432
Asia-Australia 237 502
Africa-Middle East 72 -0-
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Total $10,954 $11,637
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Competition
The Company experiences competition with respect to each of its products.
Each product sold by the Company is in direct competition in the market with
products which are very similar. In order to maintain sales volumes, the
Company must rely on its ability to manufacture and distribute products at
competitive prices. The Company believes that quality, delivery on schedule
and price are the principal competitive factors.
Competitors range from large corporations with a full line of production
capabilities and products to small local firms specializing in one or two
products. A number of these competitors are owned and operated by large
diversified corporations. Many of these competitors, such as E.I. DuPont de
Nemours & Co., Inc., SCM Chemical Inc., Kerr-McGee Chemical Corporation and
Kronos, Inc., have substantially greater financial and other resources and
their share of industry sales is substantially larger than the Company's.
The primary competition for HITOX is white titanium dioxide pigment.
However, HITOX historically has had a distinct price advantage compared to
white titanium dioxide pigments. The domestic white titanium dioxide price is
approximately $1.07 per pound delivered while the truck load list price of
HITOX, FOB Corpus Christi is $0.68 per pound. HITOX is sold FOB plant and
white titanium dioxide manufacturers sell on a freight prepaid basis. Freight
costs range from $0.01 to $0.04 per pound, depending on destination. During
1992, an imported buff-colored product was introduced in the domestic market by
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a domestic distributor. This direct competition is not believed to have had a
material adverse impact on sales of HITOX to existing customers.
It is possible that one or more of the large, diversified companies
currently producing white titanium dioxide could at some future time endeavor
to enter the buff-colored titanium dioxide market. The Company believes that
it is unlikely that these companies would enter the buff-colored titanium
dioxide market since (i) none of them has done so to date; (ii) under current
market conditions, they can sell white titanium dioxide at prices substantially
above that for HITOX; (iii) in order to produce a buff-colored titanium
dioxide, they would have to incur the capital investment costs to build a plant
suitable to produce buff-colored titanium dioxide, since the production process
for the two products are very different; and (iv) this would require them to
divert their resources to a product competitive with their white titanium
dioxide, for which they have already made substantial capital investments.
ENVIRONMENTAL REGULATIONS AND PRODUCT SAFETY
The Company's plant in Corpus Christi is subject to regulations
promulgated by the Federal Environmental Protection Agency ("EPA") and state
and local authorities with respect to the discharge of substances into the
environment. The Company believes that the Corpus Christi plant is in
compliance with all applicable federal, state and local laws and regulations
relating to the discharge of substances into the environment, and it does not
expect that any material capital expenditures for environmental control
facilities will be necessary in order to continue such compliance.
HITOX and the ingredient from which it is produced, synthetic rutile, are
non-toxic and non-hazardous. HITOX complies with all applicable laws and
regulations enforced by the United States Food and Drug Administration (the
"FDA") and is an acceptable component of packaging materials used in direct
contact with meat, poultry and other food products; of paints used in
incidental contact with such products; and of other packaging materials, such
as paper and paperboard. HITOX also complies with current color additive
regulations promulgated by the FDA. In addition, HITOX has been tested for
compliance with the applicable standards promulgated by the National Sanitation
Foundation (the "NSF"), and the Company is authorized to use applicable NSF
seals and/or logos in connection with the marketing of HITOX. This
authorization is significant in that end users of titanium dioxide pigments who
wish their products to be NSF approved must use component materials that also
meet NSF standards.
BACKLOG
The Company normally manufactures its pigment products in anticipation of,
and not in response to, customer orders and generally fills orders within a
short time after receipt. Consequently, the Company seeks to maintain adequate
inventories of its pigment products in order to permit it to fill orders
promptly after receipt. As of February 16, 1996, the Company does not have a
significant backlog of customer orders.
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SEASONALITY
The Company's pigment business has generally experienced higher sales
during the second and third calendar quarters. This is associated with
increased activity in construction and maintenance during warm weather which
increases demand for materials which use pigments such as paints and plastic
pipe.
PATENTS AND TRADEMARKS
The Company currently holds no patents on the processes for manufacturing
any of its products. Four of the Company's products, HITOX, BARTEX, HALTEX,
OSO, UTOX and TITOX are marketed under names which have been registered with
the United States Patent and Trademark Office.
EMPLOYEES
As of December 31, 1995, the Company had a total of 47 full-time
employees, all in the U.S. None of the Company's employees are currently
covered by a collective bargaining agreement with a union.
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Item 2. Description of Property
The Company's corporate headquarters are located in the Furman Plaza
Building in downtown Corpus Christi, Texas, U.S.A. The Company purchased the
building in 1988 for $755,844. The building is a fully-restored historic
structure with five stories containing approximately 22,465 square feet of
office space attached to a five story, 300 car parking garage. The Company
occupies approximately 17% of the office space, with the remaining space
available for lease to tenants. At December 31, 1995, about 71% of the office
space was leased to tenants.
The Company operates a plant in Corpus Christi, Texas which manufactures
HITOX, BARTEX, and HALTEX. The facility is located in the Rincon Industrial
Park on approximately 13 acres of land leased from the Port of Corpus Christi
Authority (the "Port"). The first lease, which covers 10 acres of the plant
site, has a term of 30 years and expires in July 2017. The lease payment is
subject to adjustment every 5 years for what the Port calls the "equalization
valuation". This is used as a means of equalizing rentals on various Port
lands and is determined solely at the discretion of the Port. The second lease
with the Port, which covers 2.86 acres is in its second term of 5 years, and
expires on December 31, 1997, subject to an option to renew for one additional
5 year term.
The Company owns the improvements on the leased site, including a 3,400
square-foot office, a 5,000 square-foot laboratory building, a maintenance shop
and several manufacturing and warehousing buildings containing a total of
approximately 90,000 square feet of space. The leased premises include
approximately 350 lineal feet of bulkheaded industrial canal frontage, which
provides access to the Gulf of Mexico inter-coastal waterway system through the
Corpus Christi ship channel. This property also is serviced by a railroad spur
which runs through the Company's property to the canal.
During 1993, the Company completed remodeling the Corpus Christi
manufacturing facility. The project included renovating the existing plant
production building, as well as converting adjoining warehouse space into a
production area. Included in the original plans was the addition of HITOX
milling equipment and related service equipment. The first phase of the
project, building renovation, was completed in 1992. The second phase, which
included the reconfiguration of old milling lines and the addition of new
milling lines and a boiler, was essentially complete at the end of 1993.
Testing was carried out in early 1994 and HITOX was produced during most of
1994 using the new production configuration.
The Company sold its two foreign operating subsidiaries in 1994 as
described above, and the Company's only remaining properties are located in
Corpus Christi, Texas.
Management believes that all of the facilities and equipment of the
Company are adequately insured.
Item 3. Legal Proceedings
The Company is not a party to any litigation and has been involved in the
past in routine litigation incidental to its business.
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1995.
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EXECUTIVE OFFICERS
The names of the members of the Company's executive officers at March 1,
1995, each of whom is elected annually, are set forth below:
Name Age Position Hitox Since
---- --- -------- -----------
Thomas Landshof 56 President and Chief Executive 1994
Officer
Craig Schkade 41 Chief Financial Officer 1989
and Treasurer
Elizabeth Morgan 54 Secretary 1988
Thomas Landshof has held the position of President and Chief Executive
Officer of the Company since August, 1994, and, he has served on the Board of
Directors since September, 1994. Prior to joining the Company, Mr. Landshof
was president of Consultants Group in Indianapolis, Indiana since 1992. From
1985-1992, he was corporate vice-president of Lilly Industries Inc., also in
Indianapolis. Mr. Landshof worked for Valspar Corporation in Minneapolis,
Minnesota from 1979-1985, and for Conchemco in Lenexa, Kansas from 1972-1978,
which was acquired by Valspar. From 1961-1971 he was employed by NL Industries
in New York. He graduated from Tufts University in 1960.
Craig Schkade was named Treasurer in 1993 and Chief Financial Officer in
January of 1994. Mr. Schkade joined Hitox in 1989, and served as Controller
until transferring to the Company's Malaysian subsidiary in 1990. He served as
General Manager of Malaysian Titanium Corporation and assisted in organizing
the administrative functions of MT during the refurbishment effort. He
returned to Corpus Christi in 1991, and became Director of Corporate
Development. Prior to joining Hitox, he was Chief Accountant at the Port of
Corpus Christi, and prior to that, worked in public accounting with KPMG Peat
Marwick. Mr. Schkade holds a Master of Business Administration degree from
Texas A&M University-Corpus Christi and Bachelor of Business Administration
degrees from the University of Texas at Austin and the University of Texas at
Tyler. He is a Certified Public Accountant.
Elizabeth Morgan has served as Secretary since November 1988 and as
Assistant to the President since September 1988. Prior to joining the Company,
she served as Administrative Assistant to the President of Carl Oil & Gas Co.,
an independent oil and gas exploration company based in Corpus Christi, Texas.
No executive officer of the Company has any family relationship with any
other director or executive officer of the Company.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company became a publicly owned company in December, 1988. Prior to
that time, the Company's stock was not listed nor traded on any stock
exchanges. From February 7, 1989 to February 10, 1995, the Company's common
stock was listed and traded on the National Market System of the National
Association of Securities Dealers Automated Quotation System (Nasdaq) (symbol:
HTXA), and since February 10, 1995, has been listed and traded on the Nasdaq
SmallCap Market System. The table below sets forth the high and low closing
sales price of the Company's common stock for the periods indicated, according
to published sources.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
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1995 High 3.50 4.625 5.00 4.813
Low 1.875 3.50 3.875 2.875
1994 High 5.25 4.25 4.50 3.00
Low 3.50 3.25 3.00 1.75
The reduction in net tangible assets occasioned by the sale of the
Company's two foreign operating subsidiaries, MT and FME, along with annual net
losses, required the Company's securities to be moved from the Nasdaq National
Market System to the Nasdaq SmallCap Market System effective February 10, 1995.
No cash dividends have ever been paid on the Company's Common Stock. The
Company is prohibited from paying cash dividends under its loan agreement with
NationsBank. (See Note 6 of Notes to Financial Statements.)
The approximate number of holders of record of the Company's Common Stock
as of December 31, 1995 was 137.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net Sales: Net sales for 1995 were $10,953,992, a decrease of $682,910 or
5.9% as compared to 1994 net sales of $11,636,902. The 1994 amount included
$770,655 of sales of the two former subsidiaries which were divested in 1994.
Total 1995 sales of HITOX were $8,643,259, which accounted for 78.9% of total
sales in 1995, as compared to $8,695,766, or 74.7% of total sales in 1994. The
Company's financial performance continues to be dependent on sales of the
single product line, HITOX pigments.
The Company's net sales in the U.S. decreased by 0.4%, to $9,564,112 in
1995 from $9,603,268 in 1994. Net sales for use in foreign countries decreased
31.7% to $1,389,880 in 1995, from $2,033,634 in 1994. The Company's European
net sales, which have declined each year since 1989, decreased $416,608 from
1994. All of the 1994 European sales were through FME, which was divested in
1994. The Company now receives royalty fees from FME on European sales under a
licensing agreement. Sales to Asian countries decreased by $264,515, due
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almost entirely to a one-time 1994 toll processing job performed by MT. Net
sales in South and Central American countries and Mexico increased slightly in
1995 from 1994 levels, while Canadian net sales decreased slightly in 1995.
Cost of Sales: Total cost of sales decreased $1,121,441 or 12.9% from
1994. The large percentage decrease in cost of sales as compared to the
smaller percentage decrease in net sales is primarily a result of realizing
essentially no margin on the 1994 foreign subsidiary sales of $770,655. The
remainder of the decrease in cost of sales is related to lower 1995 raw
material costs and increased plant efficiency. The result is a gross profit
margin of 31.0% in 1995 as compared to 25.3% in 1994 (excluding inventory
valuation charges of $10,389 and $199,811, respectively).
General, Administrative and Selling Expenses: Total general,
administrative and selling expenses for 1995 were $2,156,432, a decrease of
$724,822, or 25.2%, compared with 1994. This decrease is due to the sale of MT
and FME. As a percentage of sales, these expenses were 19.7% in 1995, and
24.7% in 1994. Bad debt expense has been insignificant during both periods.
Loss from sale of foreign subsidiaries: The Company entered into
agreements for the sale of all assets of both of its foreign operating
subsidiaries, MT and FME, in the third quarter of 1994. The sales of MT and
FME resulted in a loss of $3,474,601 and a gain of $452,080, respectively.
Shut-Down Expenses: MT was shut down during part of 1994 due to a lack of
demand for synthetic rutile from the U.S. operations of the Company. Stoppage
expenses incurred by MT in the amount of $240,419 were comprised of production
salaries and general production overhead during the shut down period.
Inventory Valuation Charge: In 1995 and 1994, the Company recorded charges
to earnings of $10,389 and $199,811, respectively, primarily to reflect the
reduced market value of certain raw material inventory.
Interest expense: Interest expense in 1995 decreased $802,549 compared
with 1994. Interest expense incurred by MT and FME during 1994 was $442,655.
The interest expense on the line of credit decreased $260,141 because the
Company maintained a zero balance on its line of credit during the majority of
1995. The mortgage on the Company's plant and equipment was paid off during
1995 also, resulting in a decrease of $19,921 in interest expense. In
addition, the Company was able to invest excess funds in temporary investments
during 1995, resulting in interest income of $27,584. The 1995 repayment by MT
of amounts owed to the Company triggered a foreign currency gain of $20,356.
Minority interest: During 1994, the Company was a majority shareholder in
MT. This resulted in income of $183,666. The Company did not own any active
subsidiaries during 1995.
Income taxes: Income tax expense for 1995 was $4,625, which represented
the 1995 alternative minimum tax liability. In 1994, a benefit of $766,873 was
recorded primarily due to the carry back of losses incurred and the sale of the
Company's foreign subsidiaries.
Cash and cash equivalents: The balance in cash and cash equivalents
decreased $1,655,133 from the end of 1994 to the end of 1995. The December 31,
<PAGE> 15
<PAGE>
1994 balance was high because the Company held a $1,450,000 certificate of
deposit representing proceeds received from the sale of MT. These funds were
used to pay off the balance on the Company's line of credit during January
1995.
Inventories: The $1,038,770 increase in inventories is due to the timing
of raw material receipts. Each bulk shipment of raw material from Malaysia can
produce a large change in inventories. At the end of 1994, there was no raw
material in transit. At December 31, 1995, raw material, totaling $1,263,750,
was in transit.
Accounts payable: The accounts payable increase of $1,037,643 from 1994
to 1995 mirrors the increase in inventories. The total outstanding amount
invoiced by MT for synthetic rutile at the end of 1995 was $1,131,250.
Notes payable to banks: At the end of 1994, $2,267,000 was borrowed under
the line of credit with NationsBank. At the end of 1995, there was no balance
on the line of credit.
Accrued expenses: The decrease of $328,321 in accrued expenses from 1994
to 1995 is explained by a $0 balance in accrued debenture interest at 1995 as
compared to a 1994 balance of $565,250. The decrease was partially offset by a
$250,747 increase in accrued inventory costs, comprised of raw material and
ocean freight.
Current maturities of long-term debt: At the end of 1994, both the
mortgage on the plant and equipment and on the office building were classified
as current liabilities since both notes were due in June of 1995. In February
1995, the mortgage on the plant and equipment was paid off. Also during 1995,
in conjunction with the new loan agreement with NationsBank, the mortgage on
the office building was modified and the due date extended to February 28,
2002. Therefore, at the end of 1995, only the current amount of the note on
the office building was classified as a current liability.
Other long-term debt, excluding current maturities: As explained above,
all of the remaining principal on the two outstanding mortgages was classified
as current maturities of long-term debt at the end of 1994. At December 31,
1995, the mortgage on the office building had been modified and the due date
extended. Therefore, the majority of the balance was classified as long-term
debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet strengthened in 1995 from improved operating
performance after the divestiture of its foreign subsidiaries in the third
quarter of 1994. The Company had working capital of $4,325,281 at December 31,
1995 compared to $2,811,563 at December 31, 1994. Total liabilities decreased
from $8,907,541 at December 31, 1994 to $7,256,278 at December 31, 1995. The
Company applied a substantial amount of its cash position at December 31, 1994
to pay off the entire $2,267,000 outstanding balance in its bank line of credit
in mid-January, 1995 and did not borrow on the line of credit for the rest of
the year. Total debt of $5,464,237 at December 31, 1995, is comprised of
$5,000,000 in principal amount of subordinated debentures, and $464,237 in bank
debt.
<PAGE> 16
<PAGE>
Prospectively, the Company intends to finance its operations principally
through cash on hand, cash flows generated by operations and through bank
financing. 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 with its former subsidiary, MT. 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 Company
anticipates that it will need and take delivery of the quantities stipulated in
the Supply Agreement.
On August 31, 1995, the Company entered into a new loan agreement (the
"Loan Agreement") with NationsBank of Texas, N.A., (the "Bank"). The Loan
Agreement increases the amount of the Company's revolving line of credit from
$1,400,000 to $2,000,000, and extends the maturity date until April 30, 1997.
The line of credit provides for monthly interest payments on any outstanding
principal balance at an interest rate of the Bank's prime plus 1%. The Company
did not access the line of credit during the quarters ended September 30, 1995
or December 31, 1995.
The Loan Agreement also extends the maturity of a mortgage note on the
Company's headquarters building which had a principal balance of $486,849 on
August 31, 1995. The mortgage note is payable in 77 equal monthly installments
of $8,390 each, including principal and interest, at an interest rate of 9.5%,
and matures February 28, 2002. Both the line of credit and the mortgage note
are secured by the office building, inventory and accounts receivable.
By September 30, 1995, the Company had paid in full the accrued and
overdue interest of $861,326 to the holders of the $5,000,000 subordinated
debentures (the "Debentures"). On August 1, 1995, the Company began to make
monthly payments of $43,750 to the Debenture holders on the current interest
and intends to continue this practice. (See Note 6 of Notes to Financial
Statements.)
OTHER MATTERS
Inflation has not had a significant impact on the Company's business, and
it is not expected to have a major impact in the foreseeable future.
The Company's primary product line, HITOX pigment, competes in a world-
wide white titanium dioxide pigment market. That market has typically
experienced business cycle swings lasting several years. The early 1990's was
a period of recession, typified by an oversupply of titanium dioxide and low
prices. That cycle appears to have turned as major white titanium dioxide
producers have announced price increases for white titanium dioxide. HITOX
pigment is less expensive than white titanium dioxide, which is a key to
marketing and selling HITOX. The price difference between HITOX and white
titanium dioxide pigment narrowed during the recession of the early 1990's.
The Company anticipates that current conditions may provide an opportunity to
regain some of the sales which have been lost over recent years.
<PAGE> 17
<PAGE>
NEW ACCOUNTING STANDARDS
The following is a brief discussion of the SFAS pronouncements issued by
the FASB in 1995 which apply to the Company:
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the present value of expected future cash flows from the use
of the asset and its eventual disposition are less than the carrying amount of
the asset, an impairment loss is recognized. This statement will be adopted in
the first quarter of 1996. The adoption is not expected to have a material
impact on financial position or results of operations.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123, effective for fiscal years beginning after December
15, 1995, defines a fair value-based method of accounting and establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Under the fair value-based method, compensation cost is
measured at the grant date based upon the value of the award and is recognized
over the service period. SFAS 123 allows for the election to continue to
measure stock-based compensation cost using the intrinsic value method of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The election of this option requires a pro forma
disclosure of net income and earnings per share as if the fair value-based
method of accounting, as defined by SFAS 123, had been applied. The Company
has not made a final decision regarding whether it will continue to account for
stock option grants under APB 25, or adopt SFAS 123.
Item 7. Financial Statements
The Financial Statements are set out in this annual report on Form 10-KSB
commencing on page 23.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On September 19, 1995, management of Hitox Corporation of America, as
directed by the Board of Directors, engaged the accounting firm of Ernst &
Young LLP as its independent certified public accountants and as the Company's
independent auditors, and dismissed the firm of Deloitte & Touche LLP, which
was the principal independent certified public accountant for the Company's
1994 audited financial statements.
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements or during any subsequent interim period.
<PAGE> 18
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information which will be contained under the caption "Election of
Directors" in the Company's Definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders is incorporated by reference in response to this Item
9. See Item 4, Part I of this Form 10-KSB for the caption "Executive Officers"
for information concerning executive officers.
Item 10. Executive Compensation
Information under the caption "Executive Compensation", which will be
contained in the Company's Definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders, is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information under the caption "Executive Compensation - Security Ownership
of Management", which will be contained in the Company's Definitive Proxy
Statement for its 1996 Annual Meeting of Shareholders, is incorporated herein
by reference.
Item 12. Certain Relationships and Related Transactions
The discussion under the caption "Certain Transactions", which will be
contained in the Company's Definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders, is incorporated herein by reference.
<PAGE> 19
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are being filed as part of this annual
report on Form 10-KSB:
1. Financial Statements - The financial statements filed as part
of this report are listed in the "Index to Financial Statements"
on page 23 hereof.
2. Exhibits - The Exhibits listed below are filed as part of, or
incorporated by reference into, this report.
Exhibit
No. Description
- --- -----------
3.1(1) Certificate of Incorporation of the Company as amended
through January 28, 1988
3.2(2) Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 28, 1991
3.3(1) By-laws of the Company
3.4(7) Amendment to the By-laws of the Company dated June 1, 1994
3.5 Amendment to the By-laws of the Company dated February 28,
1995
4.1(1) Form of Common Stock Certificate
4.2(3) Form of Convertible Subordinated Debenture of the Company
dated June 15, 1992 and related purchase agreements
4.3(7) Form of First Amendment to the Note Purchase Agreement
covering the Convertible Subordinated Debenture of the
Company dated September 30, 1994
4.4(8) Form of Second Amendment to the Note Purchase Agreement
covering the Convertible Subordinated Debenture of the
Company dated February 28, 1995
4.5(8) Form of Warrant Agreement for issuance of 50,000 warrants
dated September 30, 1994
4.6(8) Form of Warrant Agreement for issuance of 50,000 warrants
dated February 28, 1995
4.7(8) Form of Warrant Agreement for issuance of 1,111,111 warrants
dated February 28, 1995
10.1(4) Second Amended and Restated Loan Agreement with Corpus
Christi National Bank dated June 30, 1992
10.2(4) Loan Agreement amendment with Corpus Christi National Bank
dated January 31, 1993
10.3(5) Third Amended and Restated Loan Agreement with Corpus
Christi National Bank dated April 30, 1993
10.4(7) Fourth Amended and Restated Financing and Security Agreement
dated February 15, 1995
10.5(9) Loan Agreement with NationsBank dated August 31, 1995
10.6(1) Lease from Port of Corpus Christi Authority dated April 14,
1987
10.7(1) Lease from Port of Corpus Christi Authority dated January
12, 1988 as amended on December 24, 1992
10.8(4) Option to extend Lease from Port of Corpus Christi Authority
dated December 24, 1992
10.9(1) Summary Plan Description for the Hitox Profit Sharing Plan &
Trust
<PAGE> 20
<PAGE>
10.10(6) Letter Agreement dated September 21, 1994 between Airtrust
International Corporation and Hitox Corporation of America
for the purchase by Airtrust International Corporation of
all of the shares of Malaysian Titanium Corporation Sdn.
Bhd., owned by Hitox Corporation of America.
11 Computation of Earnings per Share
16(10) Letter on Change in Certifying Accountant
21 Subsidiaries of Registrant: No significant subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ---------------------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-25354) filed November 3,
1988, which registration statement became effective December 14, 1988.
(2) Incorporated by reference to the 1991 Form 10-K.
(3) Incorporated by reference to the Form 8-K dated June 15, 1992.
(4) Incorporated by reference to the 1992 Form 10-K.
(5) Incorporated by reference to the 1993 Form 10-KSB.
(6) Incorporated by reference to the Form 8-K dated September 21, 1994.
(7) Incorporated by reference to the 1994 Form 10-KSB.
(8) Incorporated by reference to the March 31, 1995 Form 10-QSB.
(9) Incorporated by reference to the September 30, 1995 Form 10-QSB.
(10) Incorporated by reference to the Form 8-K dated September 19, 1995.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1995.
<PAGE> 21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By THOMAS A. LANDSHOF
------------------------------
(Thomas A. Landshof, President & CEO)
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signatures Capacity with the Company Date
---------- ------------------------- ----
THOMAS A. LANDSHOF President and March 25, 1996
- -------------------- Chief Executive Officer
(Thomas A. Landshof) Director
CRAIG SCHKADE Chief Financial Officer March 25, 1996
- -------------------- and Treasurer
(Craig Schkade) (Principal Financial and Accounting Officer)
WILLIAM B. HAYES Chairman of the Board March 25, 1996
- --------------------
(William B. Hayes)
ROBERT J. CRESCI Director March 25, 1996
- --------------------
(Robert J. Cresci)
KEVIN S. MOORE Director March 25, 1996
- --------------------
(Kevin S. Moore)
MICHAEL A. NICOLAIS Director March 25, 1996
- --------------------
(Michael A. Nicolais)
BERNARD A. PAULSON Director March 25, 1996
- --------------------
(Bernard A. Paulson)
<PAGE> 22
<PAGE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
Annual Report on Form 10-KSB
Item 7
Index to Financial Statements
Page
----
Hitox Corporation of America and Subsidiaries
Report of Independent Auditors - December 31, 1995 24
Report of Independent Auditors - December 31, 1994 25
Balance Sheets - December 31, 1995 and 1994 26
Consolidated Statements of Operations - Years ended
December 31, 1995 and 1994 27
Consolidated Statements of Shareholders' Equity-Years ended
December 31, 1995 and 1994 28
Consolidated Statements of Cash Flows-Years ended
December 31, 1995 and 1994 29
Notes to Financial Statements 30
<PAGE> 23
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Hitox Corporation of America
Corpus Christi, Texas
We have audited the accompanying balance sheet of Hitox Corporation of America
as of December 31, 1995, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hitox Corporation of America
at December 31, 1995 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Antonio, Texas
February 15, 1996
<PAGE> 24
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Hitox Corporation of America
Corpus Christi, Texas
We have audited the accompanying consolidated balance sheet of Hitox
Corporation of America and subsidiaries as of December 31, 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1994 consolidated financial statements present fairly, in
all material respects, the financial position of Hitox Corporation of America
and its subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Antonio, Texas
March 15, 1995
<PAGE> 25
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
BALANCE SHEETS
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 827,993 $ 2,483,126
Receivables:
Trade accounts receivable; no allowance for
doubtful accounts considered necessary 1,129,488 959,266
Other 28,474 131,666
----------- -----------
Total Receivables 1,157,962 1,090,932
Inventories 4,154,240 3,115,470
Other current assets 35,652 29,576
----------- -----------
Total current assets 6,175,847 6,719,104
PROPERTY, PLANT AND EQUIPMENT, net 4,337,809 4,776,854
OTHER ASSETS 171,235 230,771
----------- -----------
$10,684,891 $11,726,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,254,407 $ 216,764
Notes payable to banks ------ 2,267,000
Accrued expenses 537,634 865,955
Current maturities of long-term debt 58,525 557,822
----------- -----------
Total current liabilities 1,850,566 3,907,541
SUBORDINATED DEBENTURES - RELATED PARTY 5,000,000 5,000,000
OTHER LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 405,712 ------
----------- -----------
Total liabilities 7,256,278 8,907,541
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $.25 par value: authorized,
10,000,000 shares; shares outstanding after
deducting 88,240 shares held in treasury,
3,657,487 and 3,656,787 in 1995 and 1994,
respectively 936,432 936,257
Additional paid-in capital 10,603,488 10,594,438
Accumulated deficit (8,068,352) (8,668,552)
----------- -----------
3,471,568 2,862,143
Less: cost of treasury stock (42,955) (42,955)
----------- -----------
Total shareholders' equity 3,428,613 2,819,188
----------- -----------
$10,684,891 $11,726,729
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 26
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
NET SALES $10,953,992 $11,636,902
COSTS AND EXPENSES:
Cost of sales 7,562,276 8,683,717
General, administrative and selling expenses 2,156,432 2,881,254
Loss from sale of foreign subsidiaries ------ 3,022,521
Shut-down expenses ------ 240,419
Inventory valuation charge 10,389 199,811
----------- -----------
OPERATING INCOME (LOSS) 1,224,895 (3,390,820)
OTHER EXPENSES:
Interest expense, net 577,001 1,379,550
Other, net 43,069 2,677
----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND INCOME TAXES 604,825 (4,773,047)
Minority interest ------ 183,666
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 604,825 (4,589,381)
INCOME TAX EXPENSE (BENEFIT):
Current 4,625 (631,873)
Deferred ------ (135,000)
----------- -----------
4,625 (766,873)
----------- -----------
NET INCOME (LOSS) $ 600,200 $(3,822,508)
=========== ===========
Net income (loss) per common share:
Primary $ 0.16 $ (1.05)
Fully diluted 0.16 (1.05)<F1>
Weighted average common shares and
equivalents outstanding:
Primary 3,741,697 3,656,787
Fully diluted 3,741,697 4,214,578
<FN>
See accompanying notes.
<F1>
Antidilutive
</FN>
</TABLE>
<PAGE> 27
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK
------------------- PAID-IN ACCUMULATED TRANSLATION ------------------
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES AMOUNT TOTAL
--------- -------- ----------- ----------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1994 3,745,027 $936,257 $10,556,938 $(4,846,044) $ 7,414 88,240 $(42,955) $ 6,611,610
Net Loss ------ ------ ------ (3,822,508) ------ ------ ------ (3,822,508)
Cumulative foreign
currency
translation
adjustment ------ ------ ------ ------ 235,267 ------ ------ 235,267
Cumulative foreign
currency
translation
adjustment
included in loss
on sale of
foreign
subsidiaries ------ ------ ------ ------ (242,681) ------ ------ (242,681)
Grant of warrants ------ ------ 37,500 ------ ------ ------ ------ 37,500
--------- -------- ----------- ----------- --------- ---------- -------- -----------
BALANCE AT
DECEMBER 31, 1994 3,745,027 936,257 10,594,438 (8,668,552) 0 88,240 (42,955) 2,819,188
Net Income ------ ------ ------ 600,200 ------ ------ ------ 600,200
Exercise of stock
options 700 175 2,800 ------ ------ ------ ------ 2,975
Grant of warrants ------ ------ 6,250 ------ ------ ------ ------ 6,250
--------- -------- ----------- ----------- --------- ---------- -------- -----------
BALANCE AT
DECEMBER 31, 1995 3,745,727 $936,432 $10,603,488 $(8,068,352) $ 0 88,240 $(42,955) $ 3,428,613
========= ======== =========== =========== ========= ========== ======== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE> 28
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 600,200 $ (3,822,508)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on sales of subsidiaries ------ 3,022,521
Depreciation and amortization 682,927 772,903
Inventory valuation charge 10,389 199,811
Loss on sale of property, plant and equipment 871 21,579
Common stock warrants issued 6,250 37,500
Deferred income taxes ------ (135,000)
Minority interest ------ (183,666)
Changes in working capital, net of effects of
disposition of MT and FME in 1994:
Receivables (67,030) 595,557
Inventories (1,049,159) 1,446,761
Other current assets (6,076) 11,336
Accounts payable and accrued expenses 709,322 (1,462,289)
------------ ------------
Net cash provided by operating activities 887,694 504,505
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of MT and FME ------ 1,506,185
Additions to property, plant and equipment, net of retirements (187,153) (46,369)
Proceeds from sales of property, plant and equipment ------ 125
Other, net 1,936 50,858
------------ ------------
Net cash (used in) provided by investing activities (185,217) 1,510,799
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (93,585) (755,718)
Proceeds from long-term debt ------ ------
Net (payments) proceeds on revolving line of credit (2,267,000) 684,935
Proceeds from the issuance of common stock and exercise of
common stock options 2,975 ------
------------ ------------
Net cash used in financing activities (2,357,610) (70,783)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ------ 1,731
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,655,133) 1,946,252
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 2,483,126 536,874
------------ ------------
CASH AND CASH EQUIVALENTS END OF YEAR $ 827,993 $ 2,483,126
============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 4,625 $ 36,635
Income tax refunds 39,148 640,408
Interest paid 1,210,781 642,984
Non-cash financing activities:
Issuance of common stock warrants to holders of Debentures $ 6,250 $ 37,500
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE> 29
<PAGE>
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business Description
Hitox Corporation of America ("Hitox" or the "Company"), a Delaware
Corporation, is engaged in a single industry, the manufacture and sale of
mineral products for use as pigments and extenders, primarily in the
manufacture of paints, industrial coatings and plastics. Until their sale in
September 1994, the Company's subsidiaries included Malaysian Titanium
Corporation Sdn. Bhd ("MT") and Fluid Minerals Espanola, S.A. ("FME"). MT,
located in Ipoh, Malaysia, manufactures synthetic rutile which is sold to the
Company as a raw material for the manufacture of its principal product. FME,
located in Bunuel, Spain, manufactures the same product as the Company for sale
throughout Europe.
Basis of Presentation and Principles of Consolidation
The financial statements are prepared in accordance with generally
accepted accounting principles and include the accounts of the Company and,
through September 30, 1994, its subsidiaries referred to above. All
significant intercompany transactions and balances have been eliminated in
consolidation.
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.
The Company entered into a five year agreement for the continued supply of
its primary raw material, synthetic rutile, by MT effective December 15, 1994.
(See Note 8 of Notes to Financial Statements.)
Cash and Cash Equivalents
The Company considers all highly liquid investments readily convertible to
known cash amounts and with a maturity of three months or less at the date of
purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
respective assets which range from 3-35 years, except in Malaysia where the
Company's production facility was depreciated using the units of production
method. Maintenance and repair costs are charged to expense as incurred.
<PAGE> 30
<PAGE>
Revenue Recognition
Sales are recognized when the product is shipped. The Company does not
use cash discounts and customers have no right of return. The Company's
pigment business has generally experienced higher sales during the second and
third calendar quarters, which is associated with increased activity in
construction and maintenance during warm weather which increases demand for
materials which use pigments such as paints and plastic pipe. The Company's
principal product line, HITOX pigments, accounted for 78.9% of total sales in
1995.
Income Taxes
The Company records income taxes under Financial Accounting Standards
Board Statement No. 109, using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currency are
translated to U.S. dollars at the rate of exchange in effect at the balance
sheet date, and items of income and expense are translated at average yearly
rates. Gains and losses on foreign currency transactions are included in
income currently. Gains and losses on translation of the assets and
liabilities of the Company's foreign subsidiaries were accumulated in the
"Cumulative Foreign Currency Translation Adjustment" as a separate component of
shareholders' equity in the balance sheet up until the date of sale of those
foreign subsidiaries when this amount was included in the loss from sale of
foreign subsidiaries.
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
has not made a final decision regarding whether it will continue to account for
stock option grants under APB Opinion No. 25, or adopt FASB Statement No. 123,
Accounting for Stock-Based Compensation. The Company will be required to apply
the requirements of FASB Statement No. 123 in the first quarter of 1996.
Reclassifications
Certain 1994 balances have been reclassified for comparative purposes.
Net Income (Loss) Per Share
The net income (loss) per share is based on the weighted average number of
common shares and common equivalent shares outstanding in 1995 and 1994,
assuming the exercise of the common stock options and warrants using the
<PAGE> 31
<PAGE>
treasury stock method, except when antidilutive. Common stock equivalents were
excluded from the 1994 calculation because they are antidilutive when losses
are realized.
2. The Company's Foreign Operating Subsidiaries
Malaysian Subsidiary
In 1991, the Company and its minority partner, Airtrust International
Corporation ("Airtrust"), substantially completed their joint venture effort
which began in 1988 to acquire, own and refurbish an idle synthetic rutile
plant located in Ipoh, Malaysia. The plant was shut down during 1994, and
incurred stoppage expenses of $240,419. Nine months of operations of the
Malaysian subsidiary, MT, were included in the 1994 results of operations.
Spanish Subsidiary
Results for the year ended December 31, 1994 included nine months of
operations of the Spanish subsidiary, FME.
3. Sale of Foreign Subsidiaries
On September 21, 1994, the Company entered into an agreement for the sale
of all of the Company's shares of MT to Airtrust for $1,750,000 (the "Sale
Transaction"), subject to adjustment for changes in the net worth of MT from
July 31, 1994 to September 30, 1994. The Sale Transaction was also subject to
Malaysian government approval which was received on December 7, 1994. The
Company received net proceeds from the sale of $1,506,185, and concurrent with
the closing, a supply agreement became effective which provides for a supply of
synthetic rutile from MT to the Company.
On September 30, 1994, an agreement was executed for the sale of all of
the Company's shares of FME to the Company's former Chairman of the Board,
President and Chief Executive Officer, for a nominal amount to relieve the
Company from the continuing burden of supporting FME. The FME third party
liabilities, which totaled approximately $763,000 at September 30, 1994, were
assumed by the purchaser. As part of the transaction, the Company signed an
eight-year license agreement with FME permitting the manufacture and sale of
HITOX in Europe. The agreement provides, among other things, for the quarterly
payment of a royalty by FME to the Company which is a graduated percentage of
net revenues from HITOX pigment sold by FME, ranging from 2% to 6%, based on
the quantity of those sales.
The sales of the Company's two foreign subsidiaries, MT and FME, resulted
in a loss of $3,474,601 and a gain of $452,080, respectively, which were
recorded in the third quarter of 1994.
<PAGE> 32
<PAGE>
4. Inventories
A summary of inventories follows:
December 31,
--------------------------
1995 1994
----------- -----------
Raw materials $ 2,922,701 $ 2,034,420
Finished goods 1,141,160 983,851
Supplies 90,379 97,199
----------- -----------
Total Inventories $ 4,154,240 $ 3,115,470
=========== ===========
At December 31, 1995, the finished goods inventory of the Company's
principal product, HITOX, is 67% material cost and 33% production cost.
During 1995 and 1994, the Company recorded a charge to earnings of $10,389
and $199,811, respectively, to reflect the reduced market value of certain
baryte inventory. Baryte is the raw material used to produce BARTEX. See Note
8 regarding purchase commitments for synthetic rutile.
5. Property, Plant and Equipment
Major classifications and expected lives of property, plant and equipment
are summarized below:
December 31,
----------------------------
Expected Life 1995 1994
--------------- ------------ ------------
Office building and land 35 years $ 1,247,992 $ 1,222,736
Production facilities 10, 20 years 3,179,960 3,178,383
Machinery and equipment 5, 7 years 3,971,052 3,860,274
Furniture and fixtures 7, 10, 20 years 575,771 591,725
Construction in progress N/A 8,278 2,006
------------ ------------
Total 8,983,053 8,855,124
Less accumulated depreciation (4,645,244) (4,078,270)
------------ ------------
Property, Plant and
Equipment, net $ 4,337,809 $ 4,776,854
============ ============
The amount of depreciation calculated on the Company's fixed assets for the
years ending December 31, 1995 and December 31, 1994 was $625,327, and
$742,809, respectively.
<PAGE> 33
<PAGE>
6. Long-Term Debt and Notes Payable to Banks
A summary of long-term debt follows:
December 31,
--------------------------
1995 1994
----------- -----------
10 1/2% subordinated notes,
issued in a private placement (See (a) below) $ 5,000,000 $ 5,000,000
Regional base rate plus 1/2% (effective rate of 10%
at December 31, 1994) term note payable to a U.S.
bank ------ 42,123
9.5% term note payable to a U.S. bank, incorporated
into the Loan Agreement as described in (b) below,
due February 28, 2002 464,237 515,699
----------- -----------
Total 5,464,237 5,557,822
Less current maturities 58,525 557,822
----------- -----------
Total long-term debt $ 5,405,712 $5,000,000
=========== ===========
(a) On June 15, 1992, the Company executed a note purchase agreement (the
"Note Purchase Agreement"), under which the Company issued $5,000,000 of
10.5% convertible subordinated debentures (the "Debentures"), due June 15,
1998, interest payable semi-annually, $500,000 of principal due quarterly to
commence on September 15, 1996. $3,500,000 of the Debentures are held by
Delaware State Employee's Retirement Fund, $822,000 by the Trust for Defined
Benefit Plan of ICI American Holdings, Inc. and $678,000 by Zeneca Holdings,
Inc. These Debentures were convertible into 555,555 common shares at $9.00
per share at discretion of holder, subject to adjustment for earnings
targets. On February 28, 1995, the Note Purchase Agreement was amended to
eliminate the conversion feature and the earnings targets from the
Debentures. Also on that date, the Debenture holders were issued 1,111,111
warrants at an exercise price of $4.50 per share. The amendment also
postponed the beginning of principal repayments by one year to September 15,
1997, and extended the due date one year to June 15, 1999. In addition, the
amendment changed the interest payments from semi-annual to monthly. Should
there be a change in control of the Company, the Debentures would immediately
become due and payable. Debenture origination fees paid in 1992 (consisting
of legal and placement fees) were $347,510. These fees were capitalized and
reflected in other assets in the balance sheet and are being amortized over
the term of the Debentures. Accumulated amortization at December 31, 1995
and 1994 was $201,600 and $144,000, respectively.
(b) On August 31, 1995, the Company entered into a new loan agreement (the
"Loan Agreement") with NationsBank of Texas, N.A., (the "Bank"). The Loan
Agreement extends the maturity of a mortgage note on the Company's
headquarters building which had a principal balance of $486,849 on August 31,
1995. The mortgage note is payable in 77 equal monthly installments of
$8,390 each, including principal and interest, at an interest rate of 9.5%,
and matures February 28, 2002. The Loan Agreement also increases the amount
of the Company's revolving line of credit from $1,400,000 to $2,000,000, and
extends the maturity date until April 30, 1997. The line of credit provides
for monthly interest payments on any outstanding principal balance at an
<PAGE> 34
<PAGE>
interest rate of the Bank's prime plus 1%. Maximum advances under the line
of credit are restricted by the amount of specified percentages of certain of
the Company's inventories and accounts receivable. The Company did not
access the line of credit during the quarters ended September 30, 1995 or
December 31, 1995. Both the line of credit and the mortgage note are secured
by the office building, inventory and accounts receivable. The Loan
Agreement imposes financial covenants specifying minimum working capital,
tangible net worth, current ratio, and fixed charge coverage ratio, as well
as a maximum ratio of total debt to capital funds. The covenants are
required to be calculated at the end of each quarter. The Company was in
compliance with all covenants at the end of the third and fourth quarters of
1995. The Company is prohibited from paying dividends without the prior
approval of the Bank.
The following is a summary of maturities of long-term debt as of December 31,
1995:
Year Ending December 31,
------------------------
1996 58,525
1997 1,064,418
1998 2,070,904
1999 2,078,043
2000 85,901
Thereafter 106,446
------------
Total $ 5,464,237
============
The total amount of interest expense for 1995 and 1994 was $624,938 and
$1,327,683, respectively.
7. Income Taxes
A reconciliation between the Company's effective tax rate and the Federal
statutory rate on earnings is as follows:
Years Ended December 31,
--------------------------
1995 1994
----------- -----------
Expense (benefit) computed at statutory rates $ 205,641 $(1,560,390)
Nondeductible foreign losses ------ 534,900
Other, net (18,016) 7,617
Change in valuation allowance (183,000) 251,000
----------- -----------
$ 4,625 $ (766,873)
=========== ===========
Deferred income taxes reflect the effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carry forwards. The tax effects of significant items comprising
<PAGE> 35
<PAGE>
the Company's net deferred tax asset as of December 31, 1995 and 1994 are as
follows:
Years Ended December 31,
---------------------------
1995 1994
Rounded Rounded
----------- -----------
Deferred Tax Liabilities:
- ------------------------
Book - tax difference of U.S. property, plant and
equipment $ 184,000 $ 185,000
----------- -----------
Total deferred liabilities 184,000 185,000
----------- -----------
Deferred Tax Assets:
- -------------------
Net operating loss carry forwards 4,696,000 4,783,000
Alternative minimum tax credit carry forward 18,000 18,000
Other deferred assets 90,000 187,000
----------- -----------
Total deferred assets 4,804,000 4,988,000
----------- -----------
Net deferred tax assets before valuation allowance 4,620,000 4,803,000
----------- -----------
Valuation allowance (4,620,000) (4,803,000)
----------- -----------
Net deferred tax liability $ ------ $ ------
=========== ===========
The Company has net operating loss carry forwards as of December 31, 1995 as
follows:
Expiration
Amount Date
----------- ----------
Federal income tax loss carry forward from 1993 $ 1,341,000 2008
Federal income tax loss carry forward from 1994 12,471,000 2009
-----------
$13,812,000
===========
8. Commitments and Contingencies
Purchase Commitments
The Company sold its entire ownership interest in its Malaysian subsidiary
in 1994. (See Note 3 of Notes to Financial Statements.) As part of that
transaction, the Company entered into an agreement for the supply of synthetic
rutile by MT to the Company (the "Supply Agreement") which became effective
December 15, 1994. The Supply Agreement has an initial term of five years,
with on-going automatic year to year renewal unless terminated with twelve
months notice by either party. The Supply Agreement is a take or pay
arrangement for a specified minimum annual quantity ("Minimum Quantity"). The
Company purchased a total of $4,094,700 during 1995, thereby satisfying its
first year purchase commitment under the Supply Agreement. Prices for the
first two years of the Supply Agreement are fixed. The price for years three
through five is to be adjusted from the second year price according to changes
in the costs of raw materials and energy used to produce the synthetic rutile.
<PAGE> 36
<PAGE>
Should quantities of synthetic rutile above the Minimum Quantity be
required, the Company may seek alternative sources and price quotes. MT will
have the right to supply the additional requirement on a meet or release basis.
The Supply Agreement provides for the payment of damages in the event that MT
is not able to supply the Minimum Quantity of synthetic rutile, and likewise,
in the event that the Company does not take the Minimum Quantity and MT cannot
sell the shortfall of synthetic rutile on the open market at a comparable
price. The Company expects to need and purchase the Minimum Quantity in each
of the years under the Supply Agreement.
Leases
The Company operates a plant in Corpus Christi, Texas. The facility is
located in the Rincon Industrial Park on approximately 13 acres of land leased
under non-cancelable operating leases from the Port of Corpus Christi Authority
(the "Port"). The first lease, which covers 10 acres of the plant site, has a
term of 30 years and expires in July 2017. The lease payment is subject to
adjustment every 5 years for what the Port calls the "equalization valuation".
This is used as a means of equalizing rentals on various Port lands and is
determined solely at the discretion of the Port. The second lease with the
Port, which covers 2.86 acres is in its second term of 5 years, and expires on
December 31, 1997, subject to an option to renew for one additional 5 year
term.
Minimum future rental payments under these leases as of December 31, 1995 are
as follows:
Years Ending December 31,
-------------------------
1996 $ 53,400
1997 53,400
1998 24,000
1999 24,000
2000 24,000
Later years 396,000
---------
Total minimum lease payments $ 574,800
=========
Rent expense under these leases was $53,400 per year during 1995 and 1994.
It is expected that as these leases expire, the Company will renew or replace
them with leases on similar assets, at potentially higher rates.
<PAGE> 37
<PAGE>
The Company leases office space in its office building under
noncancellable operating leases to third parties. Total rental income received
pursuant to these leases in 1995 and 1994, amounted to approximately $117,700
and $122,600, respectively. Minimum future rentals receivable under these
leases as of December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $ 102,561
1997 69,051
1998 19,536
1999 15,791
2000 ------
---------
Total $ 206,939
=========
Contingencies
The Company believes that the Corpus Christi plant is in compliance with
all applicable federal, state and local laws and regulations relating to the
discharge of substances into the environment, and it does not expect that any
material capital expenditures for environmental control facilities will be
necessary in order to continue such compliance.
9. Stock Options and Warrants
Stock Options
The Company's 1990 Incentive Plan for Hitox Corporation of America (the
"Plan") provides for the award of a variety of incentive compensation
arrangements to such employees and directors as may be determined by a
Committee of the Board (the "Committee"). The original Plan provided that
options or awards for as many as 175,000 shares of the Company's common stock
may be granted by the Committee. In 1995, the Board of Directors approved an
amendment to the Plan increasing the number of shares available to grant
thereunder to 625,000. The Plan also provides for the automatic granting
annually of options for 2,500 shares of common stock to non-employee directors
of the Company. Options must be exercised within ten years from the date of
grant or forfeited. All options are issued at an exercise price equal to the
stock's market value on the date of grant. Exercise prices on options
outstanding at December 31, 1995 ranged from $2.625 to $10.625 per share.
Options may be issued subject to a vesting schedule at the discretion of the
Board of Director's Compensation Committee. Under APB Opinion No. 25, no
compensation expense has been recorded.
In addition, during 1991, 75,000 non-qualified stock options were granted
to the officers of the Company at an exercise price of $9.75 per share and
expire during 1998. There also were 3,000 non-qualified stock options granted
in 1989 that are currently outstanding and exercisable at a price of $9.00, and
expire in 1996. During 1995, another 50,000 options were issued outside the
plan at an exercise price of $2.625.
<PAGE> 38
<PAGE>
The following table summarizes certain information regarding stock options
granted:
Options
------------------------------------
Outstanding Weighted
Total and Average Range of
Reserved Exercisable Price Prices
-------- ----------- -------- --------------
Balances at January 1, 1994 221,600 209,400 ------ $4.25-$10.625
Granted ------ 15,000 $3.250 $3.25
Forfeited ------ (27,325) ------ $4.75-$5.50
-------- -----------
Balances at December 31, 1994 221,600 197,075 $7.125 $3.25-$10.625
Additional options
authorized 500,000 ------ ------ ------
Granted ------ 391,000 $3.367 $2.625-$4.25
Exercised (700) (700) $4.125 $4.125
Forfeited ------ (10,400) $4.588 $4.125-$5.50
-------- -----------
Balances at December 31, 1995 720,900 576,975 $4.628 $2.625-$10.625
======== ===========
Stock Warrants
The Company and the Debenture trustee amended the Note Purchase Agreement
to accommodate changes which recognize the Company's new structure and
financial condition, as well as the waivers and forbearance granted to the
Company by the Debenture holders. The changes to the Note Purchase Agreement
eliminated the conversion feature. The Company issued warrants to the
Debenture holders to purchase an aggregate of 1,111,111 shares of the Company's
common stock, at a conversion price of $4.50 per share.
The Company has also granted the Debenture holders additional warrants to
purchase common stock from the Company in consideration of their agreements,
waivers and forbearance, as follows:
* Warrants to purchase 50,000 shares at $2.50 per share were granted on
February 28, 1995, and expire February 28, 2000. Based on the market
price on the grant date of $2.625, the Company recorded an expense of
$6,250 in the first quarter of 1995 related to these warrants.
* Warrants to purchase 50,000 shares at $2.50 per share were granted on
September 30, 1994, and expire September 30, 1999. Based on the market
price on the grant date of $3.25, the Company recorded an expense of
$37,500 related to the warrants during the third quarter of 1994.
In connection with all of the Company's stock options and warrants,
1,932,011 shares of the Company's common stock have been reserved.
10. Profit Sharing Plan
The Company has a profit sharing plan that covers all employees.
Contributions to the plan are determined by the Board of Directors and are
<PAGE> 39
<PAGE>
limited to the maximum amount deductible by the Company for Federal income tax
purposes. For the years ended December 31, 1995 and 1994, there were no
contributions to the plan.
The Company also offers a 401(k) savings plan administered by a bank.
Employees are eligible to participate in the plan after completing six months
of service with the Company. The Company matches contributions up to $400 per
year per employee. Total Company contributions to the 401(k) plan for the
years ended December 31, 1995 and 1994 were $13,847 and $16,109, respectively.
11. Principal Customer Information and Export Sales
Revenues from major customers (those providing 10% or more of total revenue):
Years Ended December 31,
----------------------------
1995 1994
------------ ------------
Customer
- --------
Customer A 12% 13%
Customer B 5% 10%
Revenues from export sales were as follows:
Years Ended December 31,
---------------------------
Geographic Region 1995 1994
- ----------------- ------------ -----------
Europe $ 15,775 $ 432,383
Canada 633,192 701,735
South and Central America and Mexico 432,329 399,657
Asia 233,009 497,525
Other Regions 75,575 2,334
------------ -----------
Total $ 1,389,880 $ 2,033,634
============ ===========
The Company sells its products both directly to end users and to
distributors. The top 10 direct customers accounted for 39% of total net sales
in 1995, and 44% of total net sales in 1994. Domestic distributors accounted
for approximately 37% of total net sales in 1995.
12. Foreign Operations
During 1995, the Company had no foreign operations, since both foreign
subsidiaries were divested in 1994.
<PAGE> 40
<PAGE>
During 1994, the Company's operations were as follows:
United
States Malaysian Spanish
Operations Operations Operations Other(1) Consolidated
Net Sales:
Unaffiliated
companies $10,958,080 $ 246,440 $ 432,382 $ ------ $11,636,902
Affiliated
companies(2) 42,241 2,704,550 85,765 (2,832,556) ------
----------- ---------- --------- ----------- -----------
Total $11,000,321 $2,950,990 $ 518,147 $(2,832,556) $11,636,902
=========== ========== ========= =========== ===========
Operating
Profit (loss) $ 246,671 $ (387,337) $(227,633) $(3,022,521) $(3,390,820)
=========== ========== ========= =========== ===========
Identifiable
Assets $11,726,729 $ 0 $ 0 $ 0 $11,726,729
=========== ========== ========= =========== ===========
(1) Included in "Other" are intersegment eliminations and adjustment for losses
on sales of subsidiaries
(2) Sales between affiliated companies are recorded at cost
<PAGE> 41
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Item Page
- -- ---- ----
3.5 Amendment to the By-laws of the Company dated February 28, 1995 43
11 Computation of Earnings per Share 44
21 Subsidiaries of Registrant: No significant subsidiaries --
23 Consent of Independent Auditors 45
27 Financial Data Schedule 46
<PAGE> 42
<PAGE>
EXHIBIT 3.5
HITOX CORPORATION OF AMERICA
AMENDMENT TO BY-LAWS
FEBRUARY 28, 1995
The Board of Directors approved the following amendment:
RESOLVED, that the first sentence of Section 1, Article II of the By-Laws of
--------------
the Corporation be amended to read as follows:
SECTION 1. The number of directors which shall constitute the whole
--------------------------------------------------------
Board of Directors of the Corporation shall be fixed from time to
-----------------------------------------------------------------
time by resolution of the Board of Directors (any such resolution of
--------------------------------------------------------------------
the Board of Directors being subject to a later resolution of the
-----------------------------------------------------------------
Board of Directors), but shall not be less than six (6), who shall
------------------------------------------------------------------
serve and hold office until their respective successors are duly
-----------------------------------------------------------------
elected and qualified or until their resignation or removal,
------------------------------------------------------------
whichever shall be first. Directors need not be stockholders. A
-------------------------
majority of the total number of directors shall constitute a quorum
for the transaction of business. The vote of the majority of the
directors present at a meeting at which a quorum is present, shall be
the act of the Board of Directors. If at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time until a
quorum shall have been obtained.
<PAGE> 43
<PAGE>
EXHIBIT 11
HITOX CORPORATION OF AMERICA AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
-------------------------
1995 1994
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Common Stock 3,657,487 3,656,787
Common Stock Equivalents, assumed exercise
of stock options (Treasury Stock Method at
average market value) 84,210 ------
----------- -----------
Total for primary earnings per share 3,741,697 3,656,787
Other potentially dilutive securities -
Assumed conversion of 10 1/2% convertible
subordinated debentures into 555,555
shares of common stock ------ 555,555
Assumed exercise of stock options/warrants
(Treasury Stock Method at greater of
average or end of period market value) ------ 2,236
----------- -----------
Total for fully diluted earnings per share 3,741,697 4,214,578
=========== ===========
LOSS
Loss for primary earnings per share:
Net loss $ 600,200 $(3,822,508)
=========== ===========
Loss for fully diluted earnings per share:
Net loss $ 600,200 $(3,822,508)
Interest, net of income taxes, on 10 1/2%
convertible subordinated debentures ------ 543,375
Amortization of loan origination fees, net
of income taxes ------ 57,600
----------- -----------
Net loss for fully diluted
earnings per share $ 600,200 $(3,221,533)
=========== ===========
LOSS PER SHARE
Primary $ 0.16 $ (1.05)
Fully diluted 0.16 (0.76)
<PAGE> 44
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No. 33-
39755 of Hitox Corporation and subsidiaries on Form S-8 of our report dated
March 15, 1995 appearing in this Annual Report on Form 10-KSB of Hitox
Corporation for the year ended December 31, 1995.
DELOITTE & TOUCHE
San Antonio, Texas
March 2, 1996
<PAGE> 45
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> $828
<SECURITIES> 0
<RECEIVABLES> 1129
<ALLOWANCES> 0
<INVENTORY> 4154
<CURRENT-ASSETS> 6176
<PP&E> 8983
<DEPRECIATION> 4645
<TOTAL-ASSETS> $10685
<CURRENT-LIABILITIES> $1851
<BONDS> 5406
0
0
<COMMON> 936
<OTHER-SE> 2492
<TOTAL-LIABILITY-AND-EQUITY> $10685
<SALES> $10954
<TOTAL-REVENUES> 10954
<CGS> 7562
<TOTAL-COSTS> 7562
<OTHER-EXPENSES> 0
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<NET-INCOME> $600
<EPS-PRIMARY> $0.16
<EPS-DILUTED> $0.16
</TABLE>
