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 March 31, 1998
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)
722 Burleson Street, Corpus Christi, Texas 78402
(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 April 30, 1998)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
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HITOX CORPORATION OF AMERICA
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets--
March 31, 1998 and December 31, 1997 3-4
Condensed Statements of Income--
three months ended March 31, 1998 and 1997 5
Condensed Statements of Cash Flows--
three months ended March 31, 1998 and 1997 6
Notes to Condensed Financial
Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-11
PART II. Other Information
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
March 31, 1998 December 31,
(Unaudited) 1997
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,190 $ 1,720
Trade accounts receivable; no
allowance for doubtful accounts
considered necessary 1,712 1,095
Other receivables 27 10
Inventories:
Raw materials 3,101 3,919
Finished goods 781 906
Supplies 73 75
--------------- ---------------
Total inventories 3,955 4,900
Other current assets 125 31
--------------- ---------------
Total current assets 7,009 7,756
Property, plant and equipment 8,099 8,020
Accumulated depreciation (5,467) (5,327)
--------------- ---------------
2,632 2,693
Asset held for sale 651 771
Other assets 25 27
--------------- ---------------
Total assets $ 10,317 $ 11,247
=============== ===============
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
March 31, 1998 December 31,
(Unaudited) 1997
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216 $ 775
Accrued expenses 280 367
Current maturities of long-term debt 339 405
--------------- ---------------
Total current liabilities 835 1,547
Other long-term debt, excluding current
maturities 273 626
--------------- ---------------
Total liabilities 1,108 2,173
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value:
authorized, 5000 shares; no share
outstanding -- --
Common stock $.25 par value:
authorized, 10,000 shares,
4,657 outstanding after deducting
88 shares held in treasury 1,186 1,186
Additional paid-in capital 14,341 14,341
Accumulated deficit (6,275) (6,410)
--------------- ---------------
9,252 9,117
Less: cost of treasury stock (43) (43)
--------------- ---------------
Total shareholders' equity 9,209 9,074
--------------- ---------------
$ 10,317 $ 11,247
=============== ===============
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------------
1998 1997
--------------- ---------------
Net Sales $ 2,957 $ 2,851
Costs and expenses:
Cost of products sold 2,100 2,051
Selling, administrative and general 599 610
Adjustment of asset held for sale 120 --
--------------- ---------------
Operating income 138 190
Other income (expenses):
Interest income 20 18
Interest expense (19) (28)
Other, net -- 1
--------------- ---------------
Income before income tax 139 181
Provision for income tax 4 --
--------------- ---------------
NET INCOME $ 135 $ 181
=============== ===============
Income per common share:
Basic $ 0.03 $ 0.04
Diluted $ 0.03 $ 0.04
Weighted average common shares and
equivalents outstanding:
Basic 4,657 4,657
Diluted 4,690 4,675
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
-----------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 135 $ 181
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 140 146
Adjustment of asset held for sale to fair
market value 120 --
Changes in working capital:
Receivables (634) (184)
Inventories 945 (654)
Other assets (92) (102)
Accounts payable and accrued expenses (646) 1,217
------------- -------------
Net cash provided by (used in)
operating activities (32) 604
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (79) (84)
------------- -------------
Net cash used in investing activities (79) (84)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (419) (91)
------------- -------------
Net cash used in financing activities (419) (91)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (530) 429
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 1,720 1,509
------------- -------------
AT END OF PERIOD $ 1,190 $ 1,938
============= =============
Supplemental disclosure of cash flow information:
Interest income $ 20 $ 18
Interest expense 19 28
See Notes to Condensed Financial Statements
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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 1997 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 1997 Form 10-KSB.
2. Prepayment of Mortgage
On March 4, 1998, the Company prepaid the remaining $326,617 principal
balance on the Company's former corporate headquarters. The mortgage was
included in a loan agreement with the Company's bank (see Note 3).
3. Debt
The Company has a loan agreement with NationsBank of Texas, N.A., (the
"Bank"). The loan agreement provides the Company with a $2,000,000 line of
<PAGE> 7
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credit with an interest rate of the Bank's prime rate plus 0.75%. The
Company had no balance outstanding under the line of credit during the
first quarter of 1998. The loan agreement includes two term loans. One
term loan, a mortgage on the Company's former headquarters building, was
prepaid by the Company on March 4, 1998. The second term loan had a
balance of $612,000 at March 31, 1998, an interest rate of 8.17%, and
monthly payments of $31,415. The term loan is scheduled to mature on
January 31, 2000.
The Bank's commitment under the line of credit was scheduled to expire
on April 30, 1998. The Company received a 90-day extension of the maturing
line of credit until July 30, 1998. The Company is negotiating with
several banks and expects to have a new credit facility in place before
July 30, 1998.
4. 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. The second negotiated
price adjustment will be effective for orders placed in 1998, the fourth
year of the Supply Agreement. The price adjustment is expected to result
in a price decrease for orders in 1998 compared with orders placed in 1997
due to favorable exchange rates and other adjustments.
5. Adjustment of Assets Held for Sale to Fair Value
The Company records the value of assets held for sale under Financial
Accounting Standards Board Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The
Company adopted Statement 121 effective January 1, 1995. Statement 121
requires that assets held for disposal be valued at the lower of carrying
amount or fair value less cost to sell. Following the initial write-down
of an asset to fair value less cost to sell, the Statement requires
subsequent revisions to the carrying amount of the asset to be disposed of
if the estimate of fair value less the cost to sell changes during the
holding period. Such a revision was necessary because the Company entered
into a verbal agreement to sell its former headquarters building in April
of 1998. The resulting adjustment of $120,000 to reduce the asset to fair
value was recorded in the first quarter of 1998.
<PAGE> 8
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6. Calculation of Basic and Diluted Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997
----------- -----------
Numerator:
Net Income 135,000 181,000
Numerator for basic earnings per share
- income available to common
stockholders 135,000 181,000
Effect of dilutive securities: -- --
----------- -----------
Numerator for diluted earnings per share
- income available to common
stockholders after assumed conversions 135,000 181,000
Denominator:
Denominator for basic earnings per share
- weighted-average shares 4,657,487 4,657,487
Effect of dilutive securities:
Employee stock options 32,129 8,624
Warrants -- 8,868
----------- -----------
Dilutive potential common shares 32,129 17,492
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 4,689,616 4,674,979
Basic earnings per common share:
Net Income $ 0.03 $ 0.04
Diluted earnings per common share:
Net Income $ 0.03 $ 0.04
Options and warrants to purchase 1,422,986 shares of common stock were
not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
<PAGE> 9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Sales:
Net sales for the first quarter of 1998 were $2,957,000 as compared to
$2,851,000 for the same quarter in 1997. Sales of BARTEX pigment decreased
in the first quarter of 1998 compared with the first quarter of 1997, but
were more than offset by higher sales of the Company's primary product,
HITOX pigment.
Gross Profit:
Gross profit for the first quarter of 1998 was $857,000, as compared
with $800,000 for the first quarter of 1997, an increase of $57,000. Gross
profit as a percentage of sales was 29.0% in the first quarter this year as
compared to 28.0% in the same quarter last year. The improvement in the
1998 first quarter gross profit percentage compared with the first quarter
of 1997 is primarily the result of the change in product mix to more sales
of higher margin products.
Expenses:
Total selling, administrative and general expenses decreased from
$610,000 during the first quarter of 1997, to $599,000 for the first
quarter of 1998, representing a decrease of $11,000. The Company entered
into a verbal agreement to sell its former headquarters building in April
of 1998. As a result, a non-cash charge of $120,000 was recorded in the
first quarter of 1998 to write-down the Company's former headquarters
building to fair value.
Interest Income:
During the first quarter of 1998, excess funds were deposited in short-
term interest bearing investments resulting in interest income of $20,000
compared to $18,000 for the same quarter last year. This increase is the
result of higher cash balances available for investment during the first
quarter of 1998 as well as a higher average interest rate.
Interest Expense:
Interest expense decreased $9,000 in the first quarter of 1998 as
compared with the same quarter last year, because of lower principal
balances on term loans in 1998.
Provision for Income Tax:
The Company's provision for income tax was $4,000 for the first
quarter of 1998, which is lower than the statutory amount primarily due to
the utilization of operating loss carryforwards.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet is strong at March 31, 1998. Working
capital decreased from $6,209,000 at December 31, 1997 to $6,174,000 at
March 31, 1998. Cash decreased from $1,720,000 at December 31, 1997 to
$1,190,000 at March 31, 1998. During the three month period, cash used in
operating activities totaled $32,000, while $79,000 was used in investing
activities and $419,000 was used in financing activities. Most of the
decrease in cash during the first quarter was the result of prepaying the
principal balance due on the Company's former corporate headquarters.
Accounts receivable increased at March 31, 1998 compared with December 31,
1997, due to higher sales volume. Inventories, as well as accounts payable
and accrued expenses, have decreased primarily due to the timing of raw
material purchases. The Company had no outstanding borrowings on its line
of credit at March 31, 1998, 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
("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 first price adjustment, a 3.6%
increase, was effective for orders placed in 1997, the third year of the
Supply Agreement. The second negotiated price adjustment will be effective
for orders placed in 1998, the fourth year of the Supply Agreement. The
price adjustment is expected to result in a price decrease compared with
orders placed in 1997 due to favorable exchange rates and other
adjustments.
The Company has a loan agreement with NationsBank of Texas, N.A., (the
"Bank"). The loan agreement provides the Company with a $2,000,000 line of
credit with an interest rate of the Bank's prime rate plus 0.75%. The
Company had no balance outstanding under the line of credit during the
first quarter of 1998. The loan agreement includes two term loans. One
term loan, a mortgage on the Company's former headquarters building, was
prepaid by the Company on March 4, 1998. The second term loan had a
balance of $612,000 at March 31, 1998, an interest rate of 8.17%, and
monthly payments of $31,415. The term loan is scheduled to mature on
January 31, 2000.
The Bank's commitment under the line of credit was scheduled to expire
on April 30, 1998. The Company received a 90-day extension of the maturing
line of credit until July 30, 1998. The Company is negotiating with
several banks and expects to have a new credit facility in place before
July 30, 1998.
<PAGE> 11
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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, assumed the duties of CEO on an interim basis.
Item 6. Exhibits and Reports on Form 8-K
Page No.
--------
(a) Exhibit 27 - Financial Data Schedule 13
(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: May 14, 1998 BERNARD A. PAULSON
---------------- ---------------------------------
Bernard A. Paulson,
Acting Chief Executive Officer
Date: May 14, 1998 CRAIG A. SCHKADE
---------------- ---------------------------------
Craig A. Schkade, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE> 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> $1,190
<SECURITIES> 0
<RECEIVABLES> 1,712
<ALLOWANCES> 0
<INVENTORY> 3,955
<CURRENT-ASSETS> 7,009
<PP&E> 8,099
<DEPRECIATION> (5,467)
<TOTAL-ASSETS> $10,317
<CURRENT-LIABILITIES> $835
<BONDS> 273
0
0
<COMMON> 1,186
<OTHER-SE> 8,023
<TOTAL-LIABILITY-AND-EQUITY> $10,317
<SALES> $2,957
<TOTAL-REVENUES> 2,977
<CGS> 2,100
<TOTAL-COSTS> 2,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 139
<INCOME-TAX> 4
<INCOME-CONTINUING> 135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135
<EPS-PRIMARY> $0.03
<EPS-DILUTED> $0.03
</TABLE>
