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, 1999
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
(State or other jurisdiction of
incorporation or organization)
722 Burleson Street, Corpus Christi, Texas 78402
(Address of principal executive offices)
Issuer's telephone number: (361) 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 4,773,187
(Class) (Outstanding as of November 1, 1999)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
HITOX CORPORATION OF AMERICA
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
September 30, 1999 and December 31, 1998 3-4
Condensed Statements of Income--
nine months ended September 30, 1999 and 1998 5
Condensed Statements of Cash Flows--
nine months ended September 30, 1999 and 1998 6
Notes to Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands, except par value)
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,323 $ 1,737
Trade accounts receivable, net 1,388 1,311
Other receivables 57 40
Inventories:
Raw materials 4,869 4,695
Finished goods 1,024 507
Supplies 106 103
---------- ----------
Total inventories 5,999 5,305
Other current assets 76 45
---------- ----------
Total current assets 9,843 8,438
Property, plant and equipment 8,825 8,197
Accumulated depreciation (6,064) (5,694)
---------- ----------
2,761 2,503
Asset held for sale -- 651
Other assets 25 25
---------- ----------
Total assets $ 12,629 $ 11,617
========== ==========
See Notes to Condensed Financial Statements
HITOX CORPORATION OF AMERICA
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands, except par value)
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,242 $ 787
Accrued expenses 431 396
Current maturities of long-term debt -- 389
---------- ----------
Total current liabilities 1,673 1,572
Other long-term debt, excluding current maturities -- --
---------- ----------
Total liabilities 1,673 1,572
Shareholders' equity:
Preferred stock $.01 par value: authorized,
5,000 shares; no shares outstanding -- --
Common stock $.25 par value: authorized,
10,000 shares; 4,773 shares outstanding in 1999
and 4,673 shares outstanding in 1988 after
deducting 88 shares held in treasury 1,193 1,186
Additional paid-in capital 14,315 14,341
Accumulated deficit (4,552) (5,439)
---------- ----------
10,956 10,088
Less: cost of treasury stock -- (43)
---------- ----------
Total shareholders' equity 10,956 10,045
---------- ----------
$ 12,629 $ 11,617
========== ==========
See Notes to Condensed Financial Statements
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,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Sales $ 2,850 $ 3,090 $ 8,888 $ 9,031
Costs and expenses:
Cost of products sold 2,017 2,117 6,115 6,294
Selling, administrative and general 615 607 1,947 1,812
Adjustment of asset held for sale -- -- -- 120
------- ------- ------- -------
Operating income 218 366 826 805
Other income (expenses):
Interest income 27 21 60 63
Interest expense -- (10) (4) (41)
Other, net 5 3 21 6
------- ------- ------- -------
Income before income tax 250 380 903 833
Provision for income tax 1 3 16 9
------- ------- ------- -------
NET INCOME $ 249 $ 377 $ 887 $ 824
======= ======= ======= =======
Earnings per common share:
Basic $ 0.05 $ 0.08 $ 0.19 $ 0.18
Diluted $ 0.05 $ 0.08 $ 0.19 $ 0.18
Weighted average common shares
and equivalents outstanding:
Basic 4,773 4,657 4,700 4,657
Diluted 4,828 4,682 4,756 4,696
See Notes to Condensed Financial Statements
HITOX CORPORATION OF AMERICA
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-----------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 887 $ 824
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 373 398
Gain on sale/disposal of asset(s) (10) --
Adjustment of asset held for sale -- 120
Other assets -- 2
Changes in working capital:
Receivables (94) (501)
Inventories (694) (707)
Other current assets (31) (75)
Accounts payable and accrued expenses 491 914
------- -------
Net cash provided by operating activities 922 975
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (637) (270)
Proceeds from sale of asset(s) 666 --
------- -------
Net cash provided by (used in) investing activities 29 (270)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (389) (585)
Proceeds from the issuance of common stock 24 --
------- -------
Net cash used in financing activities (365) (585)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 586 120
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 1,737 1,720
------- -------
AT END OF PERIOD $ 2,323 $ 1,840
======= =======
Supplemental disclosure of cash flow information:
Income taxes paid $ 16 $ 9
Interest paid 4 41
See Notes to Condensed Financial Statements
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 1998 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
1998 Form 10-KSB.
2. 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
credit with an interest rate of the Bank's prime rate. The loan agreement
expires on April 30, 2000. The Company had no balance outstanding under the
line of credit during the third quarter of 1999. The loan agreement includes
one term loan. The Company prepaid the remaining $389,000 principal balance of
the term loan on January 15, 1999.
3. Adjustment of Asset Held for Sale
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. The sale of the building was completed on March 1, 1999, at a nominal
gain of $10,000.
4. 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,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Net Income $ 249 $ 377 $ 887 $ 824
Numerator for basic earnings
per share - income available
to common stockholders 249 377 887 824
------- ------- ------- -------
Effect of dilutive securities: -- -- -- --
------- ------- ------- -------
Numerator for diluted earnings
per share - income available
to common stockholders
After assumed conversions $ 249 $ 377 $ 887 $ 824
Denominator:
Denominator for basic earnings per
Share - weighted-average shares 4,773 4,657 4,700 4,657
Effect of dilutive securities:
Employee stock options 55 25 56 39
Warrants -- -- -- --
------- ------- ------- -------
Dilutive potential common shares 55 25 56 39
------- ------- ------- -------
Denominator for diluted earnings
per share - weighted-average
Shares and assumed conversions 4,828 4,682 4,756 4,696
======= ======= ======= =======
Basic earnings per common share:
Net Income $ 0.05 $ 0.08 $ 0.19 $ 0.18
======= ======= ======= =======
Diluted earnings per common share:
Net Income $ 0.05 $ 0.08 $ 0.19 $ 0.18
======= ======= ======= =======
Options and warrants to purchase 237,000 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.
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 Company has
negotiated a price decrease for orders placed in 1999, the final year of the
supply agreement.
The initial five-year term of the Supply Agreement ends in December of
1999, and the Company has exercised the right to terminate the contract by
providing the required twelve months notice. A new five-year supply contract
(the "New Supply Agreement") was executed with the existing supplier on
September 28, 1999, and will become effective on December 16, 1999. The New
Supply Agreement reduces the quantity of material the Company is required to
purchase and continues with the pricing formula under the current Supply
Agreement.
6. Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Because of the
Company's minimal use of derivatives, instruments or hedging activities, the
adoption of Statement No. 133 on January 1, 1999 did not have a significant
effect on earnings or the financial position of the Company.
7. Costs of Computer Software
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires the Company
to expense training costs incurred in connection with developing or obtaining
internal use software. The adoption of this SOP on January 1, 1999 did not
have an effect on net income or earnings per share for the nine months ended
September 30, 1999.
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 1999 were $2,850,000 as compared with
$3,090,000 for the same quarter of 1998, a decrease of $240,000 or 7.8%. The
decrease is primarily the result of lower sales volumes of the Company's
primary product, HITOX pigments. For the first nine months of 1999, sales were
$8,888,000 compared with $9,031,000 in 1998, a decrease of $143,000 or 1.6%.
Most of that decrease is the result of lower sales volumes of iron oxide
pigments in 1999.
Gross Profit:
Gross profit for the third quarter of 1999 was $833,000 as compared with
$973,000 for the third quarter of 1998, a decrease of $140,000, due primarily
to lower sales in 1999. Gross profit as a percentage of sales was 29.2% in the
third quarter this year as compared with 31.5% in the same quarter last year.
The lower gross profit percentage is primarily the result of reduced sales of
the higher margin product, HITOX pigment, in 1999. The year to date gross
profit for the nine months ended September 30, 1999 was $2,773,000 or 31.2% of
net sales compared with $2,737,000 or 30.3% of net sales for the same period of
1998. The improvement in the year to date gross profit percentage compared
with the same period of 1998 is primarily the result of better production
efficiency in 1999. Better production efficiency was achieved mainly through
higher capacity utilization as finished goods inventory was replenished from
its year-end low.
Expenses:
Total selling, administrative and general expenses increased from $607,000
during the third quarter of 1998, to $615,000 for the third quarter of 1999, an
increase of 1.3%. Total selling, administrative and general expenses increased
from $1,812,000 during the nine months ended September 30, 1998 to $1,947,000
for the same period of 1999, representing an increase of 7.5%. The increase in
expenses from 1998 to 1999 is primarily the result of one-time costs such as
attorney's fees and special Board meetings associated with corporate control
issues.
In the first quarter of 1998 a non-cash charge of $120,000 was recorded to
write-down the Company's former headquarters building to fair value. The
building was sold effective March 1, 1999 at a nominal gain of $10,000, which
was recorded as Other Income in the first quarter of 1999.
Interest Income:
During the third quarter of 1999, excess funds were deposited in short-
term interest bearing investments resulting in interest income of $27,000
compared to $21,000 for the same quarter last year. For the nine months ended
September 30, 1999, interest income was $60,000 compared to $63,000 for the
corresponding period in 1998. This decrease is the result of lower cash
balances available for investment during the first nine months of 1999 as
compared to the same period last year, as well as lower interest rates in 1999.
Interest Expense:
Interest expense decreased $10,000 in the third quarter of 1999 as
compared with the same quarter last year. For the nine-month period ended
September 30, 1999, interest expense decreased $37,000 compared with 1998.
Interest expense is lower in 1999 than in 1998 due to the prepayment of the
Company's only term loan in January 1999.
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 $16,000 for the
nine-month period ended September 30, 1999.
Liquidity and Capital Resources
The Company's balance sheet is strong at September 30, 1999. Working
capital increased from $6,866,000 at December 31, 1998 to $8,170,000 at
September 30, 1999. Cash increased from $1,737,000 at December 31, 1998 to
$2,323,000 at September 30, 1999. During the nine-month period, cash provided
by operating activities totaled $922,000, resulting from changes in working
capital, with the largest change being an increase in inventory. A net of
$29,000 was provided by investing activities, resulting from the sale of the
Company's former headquarters' building, offset by additions to property, plant
and equipment. Cash was used to pre-pay the Company's remaining term debt in
January totaling $389,000, and $24,000 was provided by the issuance of common
stock from employee options exercised during the second quarter of 1999.
Accounts receivable increased at September 30, 1999 compared with December
31, 1998, due to higher sales volume during the third quarter of 1999 compared
to the last quarter of 1998. Inventories increased in the third quarter of
1999 due primarily to raw material purchases. The increase in accounts payable
and accrued expenses is primarily due to the timing of raw material purchases.
The Company had no outstanding borrowings on its line of credit at September
30, 1999, 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 initial five-year term of the Supply Agreement ends in December of
1999, and the Company has exercised the right to terminate the contract by
providing the required twelve months notice. A new five-year supply contract
(the "New Supply Agreement") was executed with the existing supplier on
September 28, 1999, and will become effective on December 16, 1999. The New
Supply Agreement reduces the quantity of material the Company is required to
purchase and continues with the pricing formula under the current Supply
Agreement.
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. The Company had no
balance outstanding under the line of credit during the first nine months of
1999. The loan agreement includes one term loan, which was scheduled to mature
in January 2000. The Company prepaid the remaining $389,000 principal balance
of the term loan on January 15, 1999.
Other Matters
Impact of the Year 2000
The Company's primary computer system was written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activity.
The Company assessed its year 2000 readiness in 1996 and determined that
neither its primary computer hardware nor 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 that is year 2000 compliant. In July of
1998, the Company began operating with a new manufacturing/accounting software
package that 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 internal
operations. The software installation and conversion cost approximately
$96,000 and is virtually complete. The Company also reviewed the software and
hardware used in production and manufacturing systems and these are not
expected to be affected by the year 2000 issue.
The Company has also taken steps to determine the Year 2000 readiness of
its mission critical business partners. Based on responses received to date,
it appears that most of those companies have addressed the Year 2000 issue and
are diligently working to ensure that it does not adversely affect their
business. Should the Company determine that a mission critical business
partner will be adversely affected by a Year 2000 problem, the Company will
seek alternatives to the product or services provided by such business partner.
The Company believes it has taken the necessary steps, that are within its
control, to resolve the year 2000 issue in a timely manner. Although no
assurances can be given as to the Company's compliance, particularly as it
relates to third parties, including governmental entities, the Company does not
expect that the future costs of modifications or the consequences of any
unsuccessful modifications will have a material adverse impact on the Company's
financial position or results of operations. Accordingly, the Company believes
the most reasonably likely worst case year 2000 scenario would not have a
material adverse impact on the Company's financial position or results of
operations.
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.
PART II
Item 6. Exhibits and Reports on Form 8K
Page No.
(a) Exhibits Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K The Company filed a Form 8-K
Current Report dated July 1, 1999 reporting an
agreement to acquire and cancel outstanding
warrants in exchange for shares of its common stock
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 12, 1999 BERNARD A. PAULSON
----------------- ------------------
Bernard A. Paulson, President and CEO
Date: November 12, 1999 CRAIG SCHKADE
----------------- ------------------
Craig Schkade, Chief Financial Officer
(Principal Financial and Accounting Officer)
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