U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
------- -------
Commission file number 0-17321
HITOX CORPORATION OF AMERICA
(Exact name of small business issuer as specified in its charter)
Delaware 74-2081929
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Furman Plaza Building
418 Peoples Street, Corpus Christi, Texas 78401
(Address of principal executive offices)
Issuer's telephone number: (512) 882-5175
None
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, $0.25 par value 4,657,487
(Class) (Outstanding as of October 22, 1997)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE> 1
<PAGE>
HITOX CORPORATION OF AMERICA
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--
September 30, 1997 and December 31, 1996 3-4
Condensed Statements of Income--
three months ended September 30, 1997 and 1996 and
nine months ended September30, 1997 and 1996 5
Condensed Statements of Cash Flows--
nine months ended September 30, 1997 and 1996 6
Notes to Condensed Financial
Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. Other Information
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
<PAGE> 2
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
September 30, 1997 AND DECEMBER 31, 1996
(in thousands)
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,386 $ 1,509
Trade accounts receivable; no allowance for
doubtful accounts considered necessary 1,297 1,101
Other receivables 10 70
Inventories:
Raw materials 3,792 2,666
Finished goods 1,088 976
Supplies 78 75
------------------- -------------------
Total inventories 4,958 3,717
Other current assets 79 33
------------------- -------------------
Total current assets 7,730 6,430
Property, plant and equipment 9,355 9,123
Accumulated depreciation (5,647) (5,204)
------------------- -------------------
3,708 3,919
Other assets 25 25
------------------- -------------------
$ 11,463 $ 10,374
=================== ===================
</TABLE>
See Notes to Condensed Financial Statements
<PAGE> 3
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
September 30, 1997 AND DECEMBER 31, 1996
(in thousands, except par value)
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
------------------- -------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 199 $ 165
Accounts payable - MTC 650 418
Accrued expenses 396 257
Current maturities of long-term debt 397 373
------------------- -------------------
Total current liabilities 1,642 1,213
Other long-term debt, excluding current maturities 731 1,032
------------------- -------------------
Total liabilities 2,373 2,245
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value: authorized,
5,000 shares; no shares outstanding -- --
Common stock $.25 par value: authorized,
10,000 shares; 4,657 shares outstanding
after deducting 88 shares held in treasury 1,186 1,186
Additional paid-in capital 14,341 14,341
Accumulated deficit (6,394) (7,355)
------------------- -------------------
9,133 8,172
Less: cost of treasury stock (43) (43)
------------------- -------------------
Total shareholders' equity 9,090 8,129
------------------- -------------------
$ 11,463 $ 10,374
=================== ===================
</TABLE>
See Notes to Condensed Financial Statements
<PAGE> 4
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 2,482 $ 3,198 $ 8,651 $ 8,853
Costs and expenses:
Cost of products sold 1,712 2,159 5,896 6,197
Selling, administrative and general 474 616 1,764 1,702
------------- ------------- ------------- -------------
Operating income 296 423 991 954
Other income (expenses):
Interest income 19 9 55 17
Interest expense (25) (33) (81) (320)
Other, net 3 (2) 5 (25)
------------- ------------- ------------- -------------
Income before income tax
and extraordinary item 293 397 970 626
Provision for income tax 5 3 9 3
------------- ------------- ------------- -------------
Income before extraordinary item 288 394 961 623
Extraordinary item,
early extinguishment of debt - (112) - (112)
------------- ------------- ------------- -------------
NET INCOME $ 288 $ 282 $ 961 $ 511
============= ============= ============= =============
Income per common share:
Income before extraordinary item $ 0.06 $ 0.08 $ 0.20 $ 0.15
Extraordinary item - (0.02) - (0.02)
------------- ------------- ------------- -------------
Net Income $ 0.06 $ 0.06 $ 0.20 $ 0.13
============= ============= ============= =============
Weighted average common shares and
equivalents outstanding: 4,727 4,719 4,710 4,085
</TABLE>
See Notes to Condensed Financial Statements
<PAGE> 5
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 961 $ 511
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 442 475
Inventory valuation charge 4
Extraordinary item 112
Changes in working capital:
Receivables (136) (343)
Inventories (1,241) (159)
Other current assets (46) (41)
Accounts payable and accrued expenses 405 (670)
----------------- -----------------
Net cash provided by (used in) operating activities 385 (111)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (231) (118)
----------------- -----------------
Net cash used in investing activities (231) (118)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (277) (5,044)
Proceeds from long-term debt -- 1,000
Proceeds from the issuance of common stock -- 3,988
----------------- -----------------
Net cash used in financing activities (277) (56)
----------------- -----------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (123) (285)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 1,509 828
----------------- -----------------
AT END OF PERIOD $ 1,386 $ 543
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 81 $ 320
Income taxes paid 9 3
</TABLE>
See Notes to Condensed Financial Statements
<PAGE> 6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Accounting Policies
Basis of Presentation
The interim financial statements of Hitox Corporation of America (the
"Company") are unaudited, but include all adjustments which the Company deems
necessary for a fair presentation of its financial position and results of
operations. All adjustments are of a normal and recurring nature. Results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. All significant accounting policies conform to
those previously set forth in the Company's fiscal 1996 Annual Report on Form
10-KSB.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
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
did not adopt FASB Statement No. 123, Accounting for Stock-Based Compensation,
and will continue to account for stock option grants in accordance with APB
Opinion No. 25. FASB Statement 123 requires certain disclosures about stock-
based compensation plans for all companies regardless of the method used to
account for them. Effective in 1996 calendar year-end financial statements,
companies that continue to apply APB 25 are required to disclose pro forma
information as if the measurement provisions of Statement 123 had been adopted
in their entirety. Such pro forma information was included in the Company's
1996 Form 10-KSB.
2. Sale of Common Stock and Partial Prepayment of Subordinated Debentures
On June 26, 1996, the Company completed the sale of 1,000,000 shares of
common stock at $4.00 per share to Megamin Ventures Sdn. Bhd. ("Megamin
Ventures"), formerly Syarikat Megawati Sdn. Bhd. Megamin Ventures is the
majority owner of Malaysian Titanium Corporation ("MTC"), which supplies the
Company with its primary raw material, synthetic rutile. The $4,000,000
proceeds from the sale were used to prepay $4,000,000 of the outstanding
principal balance on $5,000,000 in 10.5% subordinated debenture notes (the
"Debentures") on July 1, 1996.
<PAGE> 7
<PAGE>
3. Prepayment of Debentures
On July 31, 1996, the Company prepaid the remaining $1,000,000 principal
balance on the Debentures using the proceeds of a term note under an amended
loan agreement with the Company's bank (See Note 4).
4. Debt
On July 31, 1996, the Company executed an amended loan agreement (the
"Amended Loan Agreement") with NationsBank of Texas, N.A., (the "Bank"), which
includes the existing $2,000,000 line of credit and the mortgage note on the
Company's headquarters. The Amended Loan Agreement provides a new $1,000,000
term loan (the "Term Loan") to the Company, with an interest rate of 8.17% per
annum. The repayment terms of the Term Loan provided for monthly payments of
interest only until December 31, 1996, and monthly payments of principal and
interest of $31,415 began January 31, 1997, with the final payment due on
January 31, 2000. The proceeds of the Term Loan were used to prepay the
remaining $1,000,000 principal balance on the Debentures on July 31, 1996.
Also as part of the Amended Loan Agreement, the expiration date of the
Company's line of credit was extended from April 30, 1997 to April 30, 1998,
and the interest rate was reduced from the Bank's prime rate plus 1.0% to the
Bank's prime rate plus 0.75%. The Amended Loan Agreement also reduces the
interest rate on the mortgage note on the building which includes the Company's
corporate headquarters from 9.5% to 9.0%. The Company had no outstanding
balance on the line of credit at September 30, 1997. The line of credit and
the term notes are secured by the office building, inventory and accounts
receivable. The Amended Loan Agreement contains covenants which, among other
things, require maintenance of certain financial ratios. The Company was in
compliance with all covenants for the quarter ended September 30, 1997.
5. Commitments
The Company purchases its primary raw material, synthetic rutile, under a
supply agreement (the "Supply Agreement"). The Supply Agreement contains a take
or pay arrangement for specified quantities on a yearly basis, with a fixed
price for the first two years of its five year term. The first price
adjustment, a 3.6% increase, is effective for orders placed in 1997, the third
year of the Supply Agreement.
6. Impact of Statement of Financial Accounting Standards No. 128
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the statement, primary earnings per share will be replaced with
basic earnings per share and fully diluted earnings per share will be replaced
with diluted earnings per share. For the three month and nine month periods
ended September 30, 1997 and September 30, 1996, Statement 128 results in only
one change in earnings per share. For the nine month period ended September
<PAGE> 8
<PAGE>
30, 1997, the new basic calculation results in an earnings per share of $0.21,
compared with reported earnings per share of $0.20.
7. Impact of Statement of Financial Accounting Standards No. 129
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement consolidates existing guidance on
disclosures about the Company's capital structure into one Statement. SFAS No.
129 is effective for financial statements for periods ending after December 15,
1997. Because the Company already makes the disclosures required by this
Statement, the adoption will have no impact.
8. Impact of Statement of Financial Accounting Standards No. 130
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement establishes standards for the reporting and display of
comprehensive income and its components in the full set of financial
statements, and does not address recognition or measurement of comprehensive
income and its components. The adoptions of this Statement will not have a
material effect on the financial statements. SFAS No. 130 will become
effective in 1998, however, earlier adoption is allowed.
9. Impact of Statement of Financial Accounting Standards No. 131
Also, in June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting of financial information from operating segments in
annual and interim financial statements. This Statement requires that
financial information be reported on the basis that it is reported internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 will become effective in 1998. Because the Company is
in a single line of business, it will not be affected by SFAS No. 131.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Sales:
Net sales for the third quarter of 1997 were $2,482,000 as compared
to $3,198,000 for the same quarter in 1996. Total net sales for the nine
months ended September 30, 1997 were $8,651,000 compared with $8,853,000 for
the same period in 1996. Sales of the Company's primary product, HITOX
pigment, were lower in the third quarter of 1997 and year to date compared with
1996, but were partially offset by increased sales of the Company's other
primary product, BARTEX pigments.
<PAGE> 9
<PAGE>
Gross Profit:
Gross profit for the third quarter of 1997 was $770,000, as compared with
$1,039,000 for the third quarter of 1996, a decrease of $269,000. Gross
profit as a percentage of sales was 31.0% in the third quarter this year as
compared to 32.5% in the same quarter last year. The year to date gross
profit for the nine months ended September 30, 1997 was $2,755,000, or 31.8%
of net sales compared with $2,656,000 or 30.0% of net sales for the same
period of 1996. The improvement in the 1997 year to date gross profit
percentages compared with the same period of 1996 is the result of lower raw
material costs and improved efficiency in 1997.
Expenses:
Total selling, administrative and general expenses decreased from $616,000
during the third quarter of 1996, to $474,000 for the third quarter of 1997,
representing a decrease of $142,000 or 23.1%. Total selling, administrative
and general expenses increased from $1,702,000 during the nine months ended
September 30, 1996, to $1,764,000 for the same period of 1997, representing
approximately a 3.6% increase. The lower expenses in the third quarter of 1997
compared with the third quarter of 1996 are primarily due to lower performance
based benefits, and selling expenses. The increase from the first nine months
of 1996 to the first nine months of 1997 is attributable to higher 1997
salaries and technical expenses.
Interest Income:
During the third quarter of 1997, excess funds were deposited in short-
term interest bearing investments resulting in interest income of $19,000. For
1996, interest income for the third quarter was $9,000. For the nine months
ended September 30, 1997, interest income was $55,000 compared to $17,000 for
the corresponding period in 1996. The increased amounts of interest income are
due to higher cash balances available for investment in 1997.
Interest Expense:
Interest expense decreased $8,000 in the third quarter of 1997 as compared
with the same quarter last year. For the nine month period ended September 30,
1997, interest expense decreased $239,000, compared with 1996. Interest
expense was lower in 1997 because on July 1, 1996, the Company prepaid
$4,000,000 of the outstanding principal balance on its subordinated debentures
(the "Debentures"), using proceeds from the sale of the Company's common stock.
The remaining $1,000,000 principal balance on the Debentures was prepaid in
full on July 31, 1996, using the proceeds of a new $1,000,000 term loan with a
lower interest rate.
Provision for Income Tax:
The Company has net operating loss and other carry forwards available to
offset the Company's regular taxable income. However, the Company is subject
to alternative minimum tax. Provision for income tax was $5,000 for the third
quarter of 1997 and $9,000 for the nine months ended September 30, 1997.
<PAGE> 10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet is strong at September 30, 1997. Working
capital increased from $5,217,000 at December 31, 1996 to $6,088,000 at
September 30, 1997. Cash decreased from $1,509,000 at December 31, 1996 to
$1,386,000 at September 30, 1997. During the nine month period, cash from
operating activities totaled $385,000, while $277,000 was used in financing
activities and $231,000 was used in investing activities. Accounts receivable
increased at September 30, 1997 compared with December 31, 1996, due to a
change in the mix of customers and terms in the relevant periods. Inventories
as well as accounts payable and accrued expenses have increased, primarily due
to raw material in transit. The Company had no outstanding borrowings on its
line of credit at September 30, 1997, which has a limit of $2,000,000.
The Company on an ongoing basis will finance its operations principally
through cash flows generated by operations, through bank financing and through
cash on hand. The Company has a continuing need for working capital to finance
raw material purchases, primarily synthetic rutile, which is now purchased
under a supply agreement (the "Supply Agreement") with its former subsidiary,
Malaysian Titanium Corporation. The Supply Agreement contains a take or pay
arrangement for specified quantities on a yearly basis, with a fixed price for
the first two years of its five year term. The first price adjustment, a 3.6%
increase, is effective for orders placed in 1997, the third year of the Supply
Agreement.
On July 31, 1996, the Company executed an amended loan agreement with the
Bank (the "Amended Loan Agreement"). The Amended Loan Agreement provides a new
$1,000,000 term loan (the "Term Loan") to the Company, with an interest rate of
8.17% per annum. The repayment terms of the Term Loan provided for monthly
payments of interest only until December 31, 1996, and monthly payments of
principal and interest of $31,415 began January 31, 1997, with the final
payment due on January 31, 2000. The proceeds of the Term Loan were used to
prepay the remaining $1,000,000 principal balance on the Debentures on July 31,
1996. Also as part of the Amended Loan Agreement, the expiration date of the
Company's line of credit was extended from April 30, 1997 to April 30, 1998,
and the interest rate was reduced from the Bank's prime rate plus 1.0% to the
Bank's prime rate plus 0.75%. The Amended Loan Agreement also reduces the
interest rate on the mortgage note on the building which includes the Company's
corporate headquarters from 9.5% to 9.0%.
<PAGE> 11
<PAGE>
PART II
Item 5. Other Information
On October 30, 1997 the Board of Directors of Hitox Corporation of
America accepted the resignation of Thomas A. Landshof as the President and
Chief Executive Officer of the Company. Bernard A. Paulson, an outside
Director, will assume the duties of CEO on an interim basis.
Item 6. Exhibits and Reports on Form 8-K
Page No.
(a) Exhibit 11 - Earnings per share 13
Exhibit 27 - Financial Data Schedule 14
(b) Reports on Form 8-K None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Hitox Corporation of America
- ----------------------------------
(Registrant)
Date: November 13, 1997 BERNARD A. PAULSON
---------------- ----------------------------------
Bernard A. Paulson,
Acting Chief Executive Officer
Date: November 13, 1997 CRAIG A. SCHKADE
----------------- ----------------------------------
Craig A. Schkade, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE> 12
<PAGE>
<TABLE>
Hitox Corporation of America Exhibit 11
Computation of Earnings Per Share (EPS)
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1997 1996 1997 1996
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES OUTSTANDING
Common Stock 4,657 4,657 4,657 4,012
Common Stock Equivalents, assumed exercise
of stock options and warrants (Treasury
Stock Method at average market value) 70 61 40 73
----------- ----------- ----------- ---------
Total for Primary EPS 4,727 4,718 4,697 4,085
Assumed exercise of stock options and
warrants (Treasury Stock Method at
greater of average or end of period
market value) - 1 13 -
----------- ----------- ----------- ---------
Total for Fully Diluted EPS 4,727 4,719 4,710 4,085
INCOME
Income for primary EPS:
Net income $ 288 $ 282 $ 961 $ 511
Income for fully diluted EPS:
Net income 288 282 961 511
INCOME PER SHARE
Primary $ 0.06 $ 0.06 $ 0.20 $ 0.13
Fully Diluted 0.06 0.06 0.20 0.13
</TABLE>
<PAGE> 13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $1386
<SECURITIES> 0
<RECEIVABLES> 1297
<ALLOWANCES> 0
<INVENTORY> 4958
<CURRENT-ASSETS> 7730
<PP&E> 9355
<DEPRECIATION> 5647
<TOTAL-ASSETS> $11463
<CURRENT-LIABILITIES> $1642
<BONDS> 731
0
0
<COMMON> 1186
<OTHER-SE> 7904
<TOTAL-LIABILITY-AND-EQUITY> $11463
<SALES> $8651
<TOTAL-REVENUES> 8711
<CGS> 5896
<TOTAL-COSTS> 5896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 970
<INCOME-TAX> 9
<INCOME-CONTINUING> 961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $961
<EPS-PRIMARY> $0.20
<EPS-DILUTED> $0.20
</TABLE>
