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 June 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 July 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--
June 30, 1998 and December 31, 1997 3-4
Condensed Statements of Income--
six months ended June 30, 1998 and 1997 5
Condensed Statements of Cash Flows--
six months ended June 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 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(in thousands)
June 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,132 $ 1,720
Trade accounts receivable, net 1,499 1,095
Other receivables 11 10
Inventories:
Raw materials 4,541 3,919
Finished goods 656 906
Supplies 86 75
------------- -------------
Total inventories 5,283 4,900
Other current assets 117 31
------------- -------------
Total current assets 9,042 7,756
Property, plant and equipment 8,021 8,020
Accumulated depreciation (5,490) (5,327)
------------- -------------
2,531 2,693
Asset held for sale 651 771
Other assets 25 27
------------- -------------
Total assets $ 12,249 $ 11,247
============= =============
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(in thousands)
June 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,707 $ 775
Accrued expenses 491 367
Current maturities of long-term debt 346 405
------------- -------------
Total current liabilities 2,544 1,547
Other long-term debt, excluding
current maturities 184 626
------------- -------------
Total liabilities 2,728 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 (5,963) (6,410)
------------- -------------
9,564 9,117
Less: cost of treasury stock (43) (43)
------------- -------------
Total shareholders' equity 9,521 9,074
------------- -------------
$ 12,249 $ 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 Six Months
Ended Ended
June 30, June 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Net Sales $2,984 $3,318 $5,941 $6,169
Costs and expenses:
Cost of products sold 2,077 2,133 4,177 4,184
Selling, administrative and general 606 680 1,205 1,290
Adjustment of asset held for sale 120
------ ------ ------ ------
Operating income 301 505 439 695
Other income (expenses):
Interest income 22 18 42 36
Interest expense (12) (28) (31) (56)
Other, net 3 1 3 2
------ ------ ------ ------
Income before income tax 314 496 453 677
Provision for income tax 2 4 6 4
------ ------ ------ ------
NET INCOME $ 312 $ 492 $ 447 $ 673
====== ====== ====== ======
Earnings per common share:
Basic $ 0.07 $ 0.11 $ 0.10 $ 0.14
Diluted 0.07 0.11 0.10 0.14
Weighted average common shares
and equivalents outstanding:
Basic 4,657 4,657 4,657 4,657
Diluted 4,715 4,685 4,704 4,679
See Notes to Condensed Financial Statements
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HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
-------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 447 $ 673
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 279 294
Adjustment of asset held for sale 120
Other assets 2
Changes in working capital:
Receivables (405) (396)
Inventories (383) (1,413)
Other current assets (86) (82)
Accounts payable and accrued expenses 1,056 1,557
------- -------
Net cash provided by operating activities 1,030 633
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (117) (177)
------- -------
Net cash used in investing activities (117) (177)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (501) (183)
------- -------
Net cash used in financing activities (501) (183)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 412 273
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 1,720 1,509
------- -------
AT END OF PERIOD $ 2,132 $ 1,782
======= =======
Supplemental disclosure of cash flow information:
Interest income $ 42 $ 36
Interest expense 31 56
Income taxes paid 6 4
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.
<PAGE> 7
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3. 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 second 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 $530,000 at June 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.
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, 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 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. 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.
<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 Six Months
Ended Ended
June 30, June 30,
-------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
Numerator:
Net Income $ 312 $ 492 $ 447 $ 673
Numerator for basic earnings
per share - income available
to common stockholders 312 492 447 673
Effect of dilutive securities: -- -- -- --
------ ------ ------ ------
Numerator for diluted earnings
per share - income available
to common stockholders
after assumed conversions 312 492 447 673
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 58 16 47 12
Warrants -- 12 -- 10
------ ------ ------ ------
Dilutive potential common shares 58 28 47 22
Denominator for diluted earnings
per share -- weighted-average
shares and assumed conversions 4,715 4,685 4,704 4,679
Basic earnings per common share:
Net Income $ 0.07 $ 0.11 $ 0.10 $ 0.14
Diluted earnings per common share:
Net Income $ 0.07 $ 0.11 $ 0.10 $ 0.14
Options and warrants to purchase 1,345,486 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 second quarter of 1998 were $2,984,000 as
compared to $3,318,000 for the same quarter in 1997. Total net sales
for the six months ended June 30, 1998 were $5,941,000 compared with
$6,169,000 for the same period in 1997. Sales of both of the Company's
primary products, HITOXr and BARTEXr pigments were lower in 1998
compared with 1997. The decrease in BARTEX pigment sales is primarily
the result of the loss of business from a customer with cyclical
purchases.
Gross Profit:
Gross profit for the second quarter of 1998 was $907,000 as
compared with $1,185,000 for the second quarter of 1997, a decrease of
$278,000. Gross profit as a percentage of sales was 30.4% in the
second quarter this year as compared to 35.7% in the same quarter last
year. The year to date gross profit for the six months ended June 30,
1998 was $1,764,000 or 29.7% of net sales compared with $1,985,000 or
32.2% of net sales for the same period of 1997. The decrease in the
1998 second quarter and year to date gross profit percentages compared
with the same period of 1997 is primarily the result of higher
production costs.
Expenses:
Total selling, administrative and general expenses decreased from
$680,000 during the second quarter of 1997, to $606,000 for the second
quarter of 1998, representing a decrease of $74,000. Total selling,
administrative and general expenses decreased from $1,290,000 during
the six months ended June 30, 1997, to $1,205,000 for the same period
of 1998, representing approximately a 6.6% or $85,000 decrease. The
decrease from the 1997 to 1998 is primarily the result of lower salary
and benefit 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 and the
potential buyer is conducting inspections and feasibility studies
within the time period specified in the contract.
<PAGE> 10
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Interest Income:
During the second quarter of 1998, excess funds were deposited in
short-term interest bearing investments resulting in interest income of
$22,000 compared to $18,000 for the same quarter last year. For the
six months ended June 30, 1998, interest income was $42,000 compared to
$36,000 for the corresponding period in 1997. The increased amount of
interest income is due to higher cash balances available for investment
in 1998 as well as a higher average interest rate.
Interest Expense:
Interest expense decreased $16,000 in the second quarter of 1998
as compared with the same quarter last year. For the six month period
ended June 30, 1998, interest expense decreased $25,000, 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 $6,000 for the six month period ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet is strong at June 30, 1998. Working
capital increased from $6,209,000 at December 31, 1997 to $6,498,000 at
June 30, 1998. Cash increased from $1,720,000 at December 31, 1997 to
$2,132,000 at June 30, 1998. During the six month period ended June
30, 1998, cash provided by operating activities totaled $1,030,000,
while $117,000 was used in investing activities and $501,000 was used
in financing activities. Accounts receivable increased from $1,095,000
at December 31, 1997 to $1,499,000 at June 30, 1998 due primarily to
higher sales volumes in the quarter ended June 30, 1998, compared with
the last quarter of 1997. Inventories, as well as accounts payable and
accrued expenses, have increased primarily due to the timing of raw
material purchases. The Company had no outstanding borrowings on its
line of credit at June 30, 1998, which has a limit of $2,000,000.
<PAGE> 11
<PAGE>
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 exchange
rates and other adjustments.
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 second 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 $530,000 at June 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.
<PAGE> 12
<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, assumed the duties of CEO on an interim basis.
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: July 28, 1998 BERNARD A. PAULSON
------------------- ---------------------------------
Bernard A. Paulson,
Acting Chief Executive Officer
Date: July 28, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> $2,132
<SECURITIES> 0
<RECEIVABLES> 1,499
<ALLOWANCES> 0
<INVENTORY> 5,283
<CURRENT-ASSETS> 9,042
<PP&E> 8,021
<DEPRECIATION> (5,490)
<TOTAL-ASSETS> $12,249
<CURRENT-LIABILITIES> 2,544
<BONDS> 184
0
0
<COMMON> 1,186
<OTHER-SE> 8,335
<TOTAL-LIABILITY-AND-EQUITY> $12,249
<SALES> $5,941
<TOTAL-REVENUES> 5,986
<CGS> 4,177
<TOTAL-COSTS> 5,382
<OTHER-EXPENSES> 120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 453
<INCOME-TAX> 6
<INCOME-CONTINUING> 447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447
<EPS-PRIMARY> $0.10
<EPS-DILUTED> $0.10
</TABLE>
