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, 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 October 20, 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--
September 30, 1998 and December 31, 1997 3-4
Condensed Statements of Income--
nine months ended September 30, 1998 and 1997 5
Condensed Statements of Cash Flows--
nine months ended September 30, 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 10-12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(in thousands)
September 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,840 $ 1,720
Trade accounts receivable, net 1,592 1,095
Other receivables 14 10
Inventories:
Raw materials 4,935 3,919
Finished goods 600 906
Supplies 72 75
------------- -------------
Total inventories 5,607 4,900
Other current assets 105 31
------------- -------------
Total current assets 9,158 7,756
Property, plant and equipment 8,153 8,020
Accumulated depreciation (5,588) (5,327)
------------- -------------
2,565 2,693
Asset held for sale 651 771
Other assets 25 27
------------- -------------
Total assets $ 12,399 $ 11,247
============= =============
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(in thousands)
September 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,630 $ 775
Accrued expenses 425 367
Current maturities of long-term debt 353 405
------------- -------------
Total current liabilities 2,408 1,547
Other long-term debt,
excluding current maturities 93 626
------------- -------------
Total liabilities 2,501 2,173
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 (5,586) (6,410)
------------- -------------
9,941 9,117
Less: cost of treasury stock (43) (43)
------------- -------------
Total shareholders' equity 9,898 9,074
------------- -------------
$ 12,399 $ 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 Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net Sales $ 3,090 $ 2,482 $ 9,031 $ 8,651
Costs and expenses:
Cost of products sold 2,117 1,712 6,294 5,896
Selling, administrative and general 607 474 1,812 1,764
Adjustment of asset held for sale -- -- 120 --
------- ------- ------- -------
Operating income 366 296 805 991
Other income (expenses):
Interest income 21 19 63 55
Interest expense (10) (25) (41) (81)
Other, net 3 3 6 5
------- ------- ------- -------
Income before income tax 380 293 833 970
Provision for income tax 3 5 9 9
------- ------- ------- -------
NET INCOME $ 377 $ 288 $ 824 $ 961
======= ======= ======= =======
Earnings per common share:
Basic $ 0.08 $ 0.06 $ 0.18 $ 0.21
Diluted $ 0.08 $ 0.06 $ 0.18 $ 0.20
Weighted average common shares
and equivalents outstanding:
Basic 4,657 4,657 4,657 4,657
Diluted 4,682 4,728 4,696 4,697
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 824 $ 961
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 398 442
Adjustment of asset held for sale 120 --
Other assets 2 --
Changes in working capital:
Receivables (501) (136)
Inventories (707) (1,241)
Other current assets (75) (46)
Accounts payable and accrued expenses 914 405
------- -------
Net cash provided by operating activities 975 385
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (270) (231)
------- -------
Net cash used in investing activities (270) (231)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (585) (277)
------- -------
Net cash used in financing activities (585) (277)
------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 120 (123)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 1,720 1,509
------- -------
AT END OF PERIOD $ 1,840 $ 1,386
======= =======
Supplemental disclosure of cash flow information:
Interest income received $ 63 $ 55
Interest expense paid 41 81
Income taxes paid 9 9
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. Debt
The Company has a loan agreement with NationsBank, N.A., (the "Bank"),
which provides the Company with a $2,000,000 line of credit. The Company
had no balance outstanding under the line of credit during the third
quarter of 1998. The loan agreement was renewed (the "Renewal") effective
July 17, 1998. The Renewal matures on April 30, 2000, and reduces the
interest rate from the Bank's prime rate plus 0.75% to the Bank's prime
rate. The Renewal includes one term loan which had a balance of $446,000
at September 30, 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
line of credit is secured by accounts receivable and inventory. The term
loan is unsecured.
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3. 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, was effective for orders
placed in 1997, the third year of the Supply Agreement. The second
negotiated price adjustment is effective for orders placed in 1998, the
fourth year of the Supply Agreement. The price adjustment resulted in a
price decrease for orders in 1998 compared with orders placed in 1997 due
to favorable adjustments under the supply agreement.
4. 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. The Company entered into a verbal agreement to sell its
former headquarters building in April of 1998. As a result of the
agreement, an adjustment of $120,000 was recorded in the first quarter of
1998 to reduce the asset to fair value.
5. Impact of Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after June
15, 1999. Because of the Company's minimal use of derivatives, instruments
or hedging activities, management does not anticipate the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company.
<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:
(in thousands, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Numerator:
Net Income $ 377 $ 288 $ 824 $ 961
Numerator for basic earnings
per share - income available
to common stockholders 377 288 824 961
Effect of dilutive securities: -- -- -- --
------- ------- ------- -------
Numerator for diluted earnings
per share - income available
to common stockholders
after assumed conversions 377 288 824 961
Denominator:
Denominator for basic earnings per
share - weighted-average shares 4,657 4,657 4,657 4,657
Effect of dilutive securities:
Employee stock options 25 46 39 24
Warrants -- 25 -- 16
------- ------- ------- -------
Dilutive potential common shares 25 71 39 40
Denominator for diluted earnings
per share - weighted-average
shares and assumed conversions 4,682 4,728 4,696 4,697
Basic earnings per common share:
Net Income $ 0.08 $ 0.06 $ 0.18 $ 0.21
Diluted earnings per common share:
Net Income $ 0.08 $ 0.06 $ 0.18 $ 0.20
Options and warrants to purchase 1,360,486 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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Sales:
Net sales for the third quarter of 1998 were $3,090,000 as compared to
$2,482,000 for the same quarter in 1997, an increase of $608,000 or 24.5%.
Total net sales for the nine months ended September 30, 1998 were
$9,031,000 compared with $8,651,000 for the same period in 1997. The sales
improvement was the result of higher sales volumes of the Company's primary
product HITOX pigment. The overall sales increase was achieved in spite
of decreased sales volumes of BARTEX pigment resulting from the loss of
business from a customer with cyclical purchases.
Gross Profit:
Gross profit for the third quarter of 1998 was $973,000 as compared
with $770,000 for the third quarter of 1997, an increase of $203,000.
Gross profit as a percentage of sales was 31.5% in the third quarter this
year as compared to 31.0% in the same quarter last year. The year to date
gross profit for the nine months ended September 30, 1998 was $2,737,000 or
30.3% of net sales compared with $2,755,000 or 31.8% of net sales for the
same period of 1997. The Company's year to date gross profit is lower in
1998 than 1997 due to higher production costs in 1998, primarily related to
higher maintenance costs.
Expenses:
During the third quarter, selling, administrative and general expenses
increased from $474,000 in 1997, to $607,000 in 1998. Total selling,
administrative and general expenses increased from $1,764,000 during the
nine months ended September 30, 1997, to $1,812,000 for the same period of
1998, representing approximately a 2.7% increase. The increase from 1997
to 1998 is primarily the result of higher benefit expenses and selling
expenses.
The Company recorded a charge of $120,000 in the first quarter of 1998
to write-down to fair value its former headquarters building based on a
verbal agreement to sell the building. The Company has subsequently
entered into a contract to sell the building. The sale was not finalized
within the time period specified in the contract and the potential buyer
has requested an extension of the closing date. The extension request has
been granted by the Company.
<PAGE> 10
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Interest Income:
During the third quarter of 1998, excess funds were deposited in short-
term interest bearing investments resulting in interest income of $21,000
compared to $19,000 for the same quarter last year. For the nine months
ended September 30, 1998, interest income was $63,000 compared to $55,000
for the corresponding period in 1997. The increased amount of interest
income is due to higher cash balances available for investment in 1998.
Interest Expense:
Interest expense decreased $15,000 in the third quarter of 1998 as
compared with the same quarter last year. For the nine month period ended
September 30, 1998, interest expense decreased $40,000, compared with 1997.
Interest expense was lower in 1998 because on March 4, 1998, the Company
prepaid the remaining $326,617 principal balance on the Company's former
corporate headquarters.
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. The provision for income tax was
$9,000 for the nine month period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet is strong at September 30, 1998. Working
capital increased from $6,209,000 at December 31, 1997 to $6,750,000 at
September 30, 1998. Cash increased from $1,720,000 at December 31, 1997 to
$1,840,000 at September 30, 1998. During the nine month period ended
September 30, 1998, cash provided by operating activities totaled $975,000,
while $270,000 was used in investing activities and $585,000 was used in
financing activities. Accounts receivable increased from $1,095,000 at
December 31, 1997 to $1,592,000 at September 30, 1998 due primarily to
higher sales volumes in the quarter ended September 30, 1998, compared with
the last quarter of 1997. Inventories and accounts payable have increased
primarily due to the timing of raw material purchases. The Company had no
outstanding borrowings on its line of credit at September 30, 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 is effective for
orders placed in 1998, the fourth year of the Supply Agreement. The price
adjustment resulted in a price decrease compared with orders placed in 1997
due to favorable adjustments under the supply agreement.
<PAGE> 11
<PAGE>
The Company has a loan agreement with NationsBank, N.A., (the "Bank"),
which provides the Company with a $2,000,000 line of credit. The Company
had no balance outstanding under the line of credit during the third
quarter of 1998. The loan agreement was renewed (the "Renewal") effective
July 17, 1998. The Renewal matures on April 30, 2000, and reduces the
interest rate from the Bank's prime rate plus 0.75% to the Bank's prime
rate. The Renewal includes one term loan which had a balance of $446,000
at September 30, 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
line of credit is secured by accounts receivable and inventory. The term
loan is unsecured.
OTHER MATTERS
Year 2000 Readiness
The Company assessed its year 2000 readiness in 1996 and determined
that neither its primary computer hardware or software was year 2000
compliant. As a result, in 1997 the Company replaced its legacy mainframe
computer with a PC based client/server computer network which is year 2000
compliant. In July of 1998, the Company began operating with a new
manufacturing/accounting software package which is year 2000 compliant.
The Company believes that with the conversion to new hardware and software,
the year 2000 issue will not pose significant operational problems for its
computer system, or its operations. Most of the costs associated with the
Company's year 2000 readiness efforts have already been incurred.
Forward Looking Information
Certain portions of this report contain forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties
including, without limitation, changes in demand for the Company's products,
changes in competition, economic conditions, fluctuations in market price
for TiO2 pigments, interest rate fluctuations, changes in the capital markets,
changes in tax and other laws and governmental rules and regulations
applicable to the Company's business, and other risks indicated in the
Company's filing with the Security and Exchange Commission. These risks and
uncertainties are beyond the ability of the Company to control, and, in many
cases, the Company cannot predict all of the risks and uncertainties that
could cause its actual results to differ materially from those indicated by
the forward-looking statements. When used in this report, the words
"believes," "estimates," "plans," "expects," "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
<PAGE> 12
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
Page No.
--------
(a) Exhibits None
(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: October 29, 1998 BERNARD A. PAULSON
---------------- ----------------------------
Bernard A. Paulson,
Acting Chief Executive Officer
Date: October 29, 1998 CRAIG A. SCHKADE
---------------- ----------------------------
Craig A. Schkade, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE> 13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $1,840
<SECURITIES> 0
<RECEIVABLES> 1,592
<ALLOWANCES> 0
<INVENTORY> 5,607
<CURRENT-ASSETS> 9,158
<PP&E> 8,153
<DEPRECIATION> (5,588)
<TOTAL-ASSETS> $12,399
<CURRENT-LIABILITIES> 2,408
<BONDS> 93
0
0
<COMMON> 1,186
<OTHER-SE> 8,712
<TOTAL-LIABILITY-AND-EQUITY> $12,399
<SALES> $9,031
<TOTAL-REVENUES> 9,100
<CGS> 6,294
<TOTAL-COSTS> 8,106
<OTHER-EXPENSES> 120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 833
<INCOME-TAX> 9
<INCOME-CONTINUING> 824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 824
<EPS-PRIMARY> $0.18
<EPS-DILUTED> $0.18
</TABLE>
