FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-17321
HITOX CORPORATION OF AMERICA
(Name of small business issuer in its charter)
Delaware 74-2081929
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
722 Burleson Street 78402
Corpus Christi, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (361) 882-5175
Securities registered under Section 12(b) of the Act: None.
Securities registered under section 12(g) of the Act:
Common Stock, $0.25 par value
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
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
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State issuer's revenues for its most recent fiscal year: $11,747,034
State the aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as of
February 09, 1999, computed by reference to the closing sale price of the
registrant's Common Stock on The Nasdaq SmallCap Market tier of the Nasdaq
Stock Market on such date: $3,091,061.
Number of shares of the registrant's Common Stock outstanding as of February
09, 1999
4,657,487
Documents incorporated by reference:
1 Certain portions of the registrant's definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, in connection with the Annual Meeting of Stockholders of the
registrant to be held May 18, 1999, are incorporated by reference into
Part III of this report.
2. Certain portions of the registrant's S-1 registration statement (File No.
33-25354) exhibits are incorporated by reference into Part IV of this
report.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Hitox Corporation of America ("Hitox" or the "Company") is a specialty
chemical company engaged in the business of manufacturing and marketing
mineral products for use as pigments and pigment extenders used in the
manufacture of paints, industrial coatings and plastics. The Company's
principal product, HITOX (Registered trademark) (HIgh grade Titanium
diOXide), is a unique color pigment with a high titanium dioxide content.
Titanium dioxide is the primary pigment used by manufacturers of paints,
plastics and paper to impart opacity and durability to the finished product.
HITOX enjoys a unique marketing niche as a lower cost, high quality, buff
color pigment that can replace some of the other color pigments and some or
all of the white titanium dioxide in customer's formulations, providing
significant cost savings. HITOX is chemically inert and non-toxic. HITOX
accounted for 74% and 72% of net sales in 1998 and 1997, respectively. The
Company's strategy includes offering additional products to its HITOX
customers. To this end, Hitox also manufactures and sells a line of barium
sulfate pigment extenders under the brand name BARTEX (Registered trademark),
alumina trihydrate under the name HALTEX (Registered trademark) which is a
filler used in plastics for its flame retardant properties, and sells iron
oxide pigments under the name OSO (Registered trademark) which are used in
primers, color concentrates and other specialty coatings for its color
properties. The Company manufactures HITOX, BARTEX and HALTEX at its
manufacturing facility located in Corpus Christi, Texas, U.S.A.
The Company's products are currently marketed in the United States and
in approximately 35 other countries. The Company sells its products through
a network of direct sales representatives employed by the Company and
independent stocking distributors in the United States, as well as
distributors and agents overseas. The Company's former Spanish subsidiary
manufactures HITOX pigment under a licensing agreement and sells HITOX
primarily in Europe. The Company's sales representatives sell directly to
end users and provide marketing support and guidance for the Company's
independent distribution network. The Company has historically relied on an
independent distributor network to sell its products, supported by an in-
house sales staff.
The Company was organized by Benilite Corporation of America
("Benilite") in 1973. Benilite, which was incorporated in Delaware in 1969,
developed the then patented "Benilite process" for producing synthetic rutile
("SR"), the principal ingredient used in the manufacture of HITOX, from
ilmenite ore. Benilite licensed and helped design several synthetic rutile
plants located throughout the world which utilize this process (including a
plant located in Ipoh, Malaysia, which until September 21, 1994, was owned by
the Company, as discussed below). Benilite concluded that synthetic rutile
produced by the Benilite process could be further processed into a buff-
colored titanium dioxide pigment having many of the characteristics of
standard white titanium dioxide at a significant cost savings. These efforts
by Benilite were the beginning of the Company's business. In 1980, the
subsidiary of Benilite engaged in the development of HITOX was spun off by
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Benilite to its shareholders. In December 1988, the Company became a
publicly owned company after completing a public offering of 1.38 million
shares of its common stock.
The proceeds of the public offering in 1988 were used to purchase,
refurbish and operate a Malaysian synthetic rutile plant located in Ipoh,
Malaysia (the "Plant"). The Plant is owned and operated by Malaysian Titanium
Corporation Sdn. Bhd. ("MT"). The Company held a majority ownership position
in MT until September 21, 1994, when it sold its entire 78.27% ownership
interest to its minority partner, Airtrust International Corporation
("Airtrust") who simultaneously sold a majority interest to a Malaysian
company. The Company had acquired and refurbished the Plant in an attempt to
procure a long term, reliable, reasonably priced source of synthetic rutile,
the vital raw material for producing HITOX pigment. Though the effort to
refurbish the Plant was successful, the Plant output exceeded the Company's
needs for synthetic rutile to produce HITOX pigment. The financial burden of
supporting MT was not sustainable and the Company was forced to sell MT and
recorded a loss on the sale in 1994. As part of the sale transaction, the
Company entered into a supply agreement with MT, under which MT continues to
provide the Company with its vital raw material.
RAW MATERIALS
Titanium dioxide pigment can be produced using ilmenite, natural rutile
or synthetic rutile and titanium slag. Ilmenite is a black material found in
natural mineral deposits and typically has a titanium dioxide content ranging
from 44% to 60%. Ilmenite is found throughout the world, including China,
India, Australia and North America. In Malaysia, ilmenite historically has
been recovered incidental to tin mining, but as tin mining has decreased in
Malaysia, that source of ilmenite has been declining. Synthetic rutile is
produced from ilmenite and typically has a titanium dioxide content ranging
from 92% to 95%. There are ample sources of ilmenite and several producers
of synthetic rutile worldwide. Natural rutile, a mineral with a titanium
dioxide content in the range of 95%, is less prevalent than ilmenite and
existing reserves are being depleted.
HITOX, a light buff-colored titanium dioxide pigment, is made from
synthetic rutile. The Company currently purchases all of its synthetic
rutile from its former subsidiary MT. The Company sold its entire ownership
interest in MT in 1994 to its minority partner. As part of the sale
transaction, a supply agreement for the supply of synthetic rutile by MT to
the Company (the "Supply Agreement") became effective December 15, 1994. The
Supply Agreement has an initial term of five years, with automatic year to
year renewal unless terminated with twelve months notice by either party.
The Supply Agreement is a take or pay arrangement for a specified minimum
annual quantity ("Minimum Quantity"). Prices for the first two years were
fixed, with adjustment based on a formula for years three through five of the
Supply Agreement. The Supply Agreement provides that the Company will
purchase synthetic rutile primarily from MT during the term of the Supply
Agreement.
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The initial five year term of the Supply Agreement ends in December of
1999, and the Company has exercised its right to terminate the contract by
providing the required advance twelve months notice to MT. The Company
expects to have fulfilled all of its obligations under the Supply Agreement
in December of 1999 when the contract terminates. The Company believes that
it is in its best interest to secure a long term contract for the supply of
synthetic rutile to the Company. During 1999 the Company will pursue such a
contract from a supplier which can meet the Company's requirements for
quality, consistency and price.
BARTEX is produced from high grade barytes (barium sulfate) mined in
China, India, Turkey and Mexico. The Company has not experienced and does
not anticipate having difficulty in acquiring adequate supplies of this
material. Similarly, alumina trihydrate, the raw material used to
manufacture HALTEX is plentiful and is acquired domestically. The Company
also has an adequate supply of products purchased from other companies for
resale.
MANUFACTURING
HITOX Manufacturing Process
HITOX is manufactured from synthetic rutile in a process which
incorporates fluid energy milling. In this process, particles of synthetic
rutile mechanically abrade each other to form the end product, which after
other processing, including testing and quality control procedures, is
collected for bagging and shipping. The Company currently has seven fluid
energy milling lines in place at its Corpus Christi plant. One of these
production lines is also used to manufacture BARTEX.
The manufacturing process for producing HITOX is not simple and the
details of the process and the operating parameters of the systems are not
widely known. The HITOX manufacturing process is not patented.
Other Products
BARTEX is a pigment extender or filler line which is used to increase
the efficiency of titanium dioxide pigment required for a particular
application and because of its high specific gravity to add weight and
strength to the end product. The Company's best selling BARTEX product is
produced using the fluid energy milling process. HALTEX is a pigment filler
line that is used primarily for its flame retardant and smoke suppressant
properties in plastics and coatings. The HALTEX product line is being
expanded using some of the production technologies of the Company's other
products. OSO iron oxides are pigments that are used for applications such
as primers, pigment dispersions, color concentrates and other coatings. Iron
oxide pigments are primarily used for their color contribution and opacity.
The Company purchases OSO iron oxides from third parties for resale.
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RESEARCH AND DEVELOPMENT
A 5,000 square foot technical center was constructed at the Company's
plant location in Corpus Christi, Texas in 1992, that houses process control,
quality assurance, technical service, and research and development functions.
The technical services group was expanded in 1998 and focused on customer
service and development. The Company did not incur significant research and
development expense in 1998.
MANAGEMENT
Mr. Bernard Paulson, a director of the Company since 1992, was appointed
Acting Chief Executive Officer by the Board after the resignation of Thomas
A. Landshof on October 30, 1997. Mr. Paulson serves in that capacity on a
part-time basis. Mr. Kelso C. Brooks, Jr., the Company's Director of
Technology since 1994, was appointed to the newly created position of Acting
General Manager in late 1997, and was appointed Senior Vice President on
March 3, 1998. Mr. Brooks is responsible for day-to-day operations of the
Company, with primary emphasis on increasing the sales of HITOX pigments. He
works closely with sales and marketing personnel to direct and focus that
effort.
MARKETING AND CUSTOMERS
Sales and Marketing Department Organization
The Company's sales effort is directed from Corpus Christi, Texas, with
all personnel reporting to the Senior Vice President. The Company has four
regional sales managers who live and work in their respective territories,
which include the Eastern, Western, Southeastern and Southwestern United
States. A fifth regional sales manager who lives near Houston was
responsible for Asia until his retirement at the beginning of 1999. He will
continue to act as a consultant for the Company. The Company's Corpus
Christi sales and marketing department consists of a sales service
representative and a sales and marketing administrative coordinator. The
Company also has one sales agent whose territory includes the Central United
States and whose focus is the PVC pipe market.
Technical Services Group Participation
The technical services group is located in Corpus Christi. The group
was expanded in 1998 and is involved in various aspects of customer service,
problem solving and product development, and actively participates in the
sales effort. The group has adapted by investing in advanced technologies
and equipment which allow the technical services staff to assist customers in
formulating the Company's products into their applications.
Domestic Distributors and Agents
The Company's products are currently marketed by 18 independent stocking
distributors and one agent located in 18 states with a combined sales force
of over 200 people. Domestic distributors accounted for approximately 30% of
total net sales in 1998.
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Foreign Distributors, Licensees and Agents
There are approximately 19 independent distributors selling the
Company's products abroad. The sales and marketing effort for all areas of
the world except Europe, Israel and the Asia/Pacific region is directed from
Corpus Christi, Texas. The Company's former Spanish subsidiary, Fluid
Minerals Espanola, S.A., is a non-exclusive licensee, and directs its sales
and marketing efforts in Europe and Israel. In 1997, the Company
strengthened its relationship with its former subsidiary Malaysian Titanium
Corporation ("MT"), by appointing MT master distributor for the Asia/Pacific
region. MT has established a sales team which is responsible for managing
the distributor relationships in individual countries in the region, as well
as directing the overall sales and marketing effort. Foreign sales through
distributors accounted for approximately 4.0% of total net sales in 1998 and
1997.
Customers
End use customers of the Company's products include, among others, such
companies as PPG, Uponor, Dunn Edwards, J-M Manufacturing Co., The Sherwin-
Williams Company, Morton International, and Formosa Plastics. The top 10
direct customers accounted for 39% of total net sales in 1998 and 42% of
total sales in 1997. The direct foreign customers accounted for 7.0% of
total net sales in 1998 and 10.0% of total net sales in 1997. The Company
has historically maintained a relatively stable customer and distributor
base.
Geographic Distribution
The Company sells its products in the United States and markets them to
customers located in approximately 35 foreign countries. The Company's
foreign sales are made in U.S. dollars to avoid foreign currency risks.
The Company maintains records reflecting the geographic distribution of
its products, regardless of whether the sale was made directly by the Company
or through its distributors from the Company's warehouse. The following
table reflects the estimated geographic distribution of the Company's
products for the periods shown. Sales of the Company's products purchased by
distributors for resale are expressed in terms of the price paid to the
Company for its products by the distributors.
Estimated Geographic Distribution 1998 1997
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(in thousands of dollars)
United States $ 10,280 $ 9,727
Canada & Mexico 1,186 1,172
South & Central America 2 70
Asia-Australia 79 152
Africa-Middle East 172 122
Europe 28 --
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Total $ 11,747 $ 11,243
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Competition
The Company experiences competition with respect to each of its
products. Each product sold by the Company is in direct competition in the
market with products which are similar. In order to maintain sales volumes,
the Company must rely on its ability to manufacture and distribute products
at competitive prices. The Company believes that quality, delivery on
schedule and price are the principal competitive factors.
Competitors range from large corporations with a full line of production
capabilities and products to small local firms specializing in one or two
products. A number of these competitors are owned and operated by large
diversified corporations. Many of these competitors, such as E.I. DuPont de
Nemours & Co., Inc., Millenium Chemical Inc., Kerr-McGee Chemical Corporation
and Kronos, Inc., have substantially greater financial and other resources
and their share of industry sales is substantially larger than the Company's.
The primary competition for HITOX is white titanium dioxide pigment.
However, HITOX historically has had a distinct price advantage compared to
white titanium dioxide pigments. The domestic white titanium dioxide list
price is approximately $1.01 per pound delivered while the truck load list
price of HITOX, FOB Corpus Christi is $0.68 per pound. HITOX is primarily
sold FOB plant and white titanium dioxide manufacturers sell on a freight
prepaid basis. Freight costs range from $0.01 to $0.05 per pound, depending
on destination. During 1992, an imported buff-colored product was introduced
in the domestic market by a domestic distributor. This direct competition is
not believed to have had a material adverse impact on sales of HITOX to
existing customers.
It is possible that one or more of the large, diversified companies
currently producing white titanium dioxide could at some future time endeavor
to enter the buff-colored titanium dioxide market. The Company believes that
it is unlikely that these companies would enter the buff-colored titanium
dioxide market since (i) none of them has done so to date; (ii) under current
market conditions, they can sell white titanium dioxide at prices
substantially above that for HITOX; (iii) in order to produce a buff-colored
titanium dioxide, they would have to incur the capital investment costs to
build a plant suitable to produce buff-colored titanium dioxide, since the
production process for the two products are very different; and (iv) this
would require them to divert their resources to a product competitive with
their white titanium dioxide, for which they have already made substantial
capital investments.
ENVIRONMENTAL REGULATIONS AND PRODUCT SAFETY
The Company's plant in Corpus Christi is subject to regulations
promulgated by the Federal Environmental Protection Agency ("EPA") and state
and local authorities with respect to the discharge of substances into the
environment. The Company believes that the Corpus Christi plant is in
compliance with all applicable federal, state and local laws and regulations
relating to the discharge of substances into the environment, and it does not
expect that any material capital expenditures for environmental control
facilities will be necessary in order to continue such compliance.
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HITOX and the ingredient from which it is produced, synthetic rutile,
are non-toxic and non-hazardous. HITOX complies with all applicable laws and
regulations enforced by the United States Food and Drug Administration (the
"FDA") and is an acceptable component of packaging materials used in direct
contact with meat, poultry and other food products; of paints used in
incidental contact with such products; and of other packaging materials, such
as paper and paperboard. HITOX also complies with current color additive
regulations promulgated by the FDA. In addition, HITOX has been tested for
compliance with the applicable standards promulgated by the National
Sanitation Foundation (the "NSF"), and the Company is authorized to use
applicable NSF seals and/or logos in connection with the marketing of HITOX.
This authorization is significant in that end users of titanium dioxide
pigments who wish their products to be NSF approved must use component
materials that also meet NSF standards.
BACKLOG
The Company normally manufactures its pigment products in anticipation
of, and not in response to, customer orders and generally fills orders within
a short time after receipt. Consequently, the Company seeks to maintain
adequate inventories of its pigment products in order to permit it to fill
orders promptly after receipt. As of February 16, 1999, the Company does not
have a significant backlog of customer orders.
SEASONALITY
The Company's pigment business has generally experienced higher sales
during the second and third calendar quarters. This is associated with
increased activity in construction and maintenance during warm weather which
increases demand for materials which use pigments such as paints and plastic
pipe.
PATENTS AND TRADEMARKS
The Company currently holds no patents on the processes for
manufacturing any of its products. Six of the Company's products, HITOX,
BARTEX, HALTEX, OSO, UTOX and TITOX are marketed under names which have been
registered with the United States Patent and Trademark Office.
EMPLOYEES
As of December 31, 1998, the Company had a total of 45 full-time
employees, all in the U.S. None of the Company's employees are currently
covered by a collective bargaining agreement with a union.
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ITEM 2. DESCRIPTION OF PROPERTY
From 1988 through 1997, the Company's corporate headquarters were
located in the Furman Plaza Building ("the Building") in downtown Corpus
Christi, Texas, U.S.A. The Company purchased the Building in 1988 for
$755,844. The Building is a fully-restored historic structure with five
stories containing approximately 22,465 square feet of office space attached
to a five story, 300 car parking garage. In December of 1997, the Board of
Directors approved a plan to sell the Building and move its personnel located
there to the Company's plant location. Effective February 2, 1998, the
Company consolidated all of its Corpus Christi personnel in renovated offices
at its plant location. This move has provided improved efficiency and
communication. The Company completed the sale of the Building on March 1,
1999, for approximately its carrying value.
The Company operates a plant in Corpus Christi, Texas which manufactures
HITOX, BARTEX, and HALTEX. The facility is located in the Rincon Industrial
Park on approximately 14.86 acres of land, with 12.86 acres leased from the
Port of Corpus Christi Authority (the "Port") and approximately two acres
owned by the Company. The first lease, which covers 10 acres of the plant
site, has a term of 30 years and expires in July 2017. The lease payment is
subject to adjustment every 5 years for what the Port calls the "equalization
valuation". This is used as a means of equalizing rentals on various Port
lands and is determined solely at the discretion of the Port. The second
lease with the Port, which covers 2.86 acres, was renewed for its final 5
year option term effective January 1, 1998.
The Company owns the improvements on the plant site, including a 3,400
square-foot office, a 5,000 square-foot laboratory building, a maintenance
shop and several manufacturing and warehousing buildings containing a total
of approximately 90,000 square feet of space. The leased premises include
approximately 350 lineal feet of bulkheaded industrial canal frontage, which
provides access to the Gulf of Mexico intercoastal waterway system through
the Corpus Christi ship channel. This property also is serviced by a
railroad spur which runs through the Company's property to the canal.
Management believes that all of the facilities and equipment of the
Company are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended December 31, 1998.
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EXECUTIVE OFFICERS
The names of the members of the Company's executive officers at March 3,
1999, each of whom is elected annually, are set forth below:
Name Age Position Hitox Since
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Bernard Paulson 70 Acting Chief Executive 1992
Officer
Kelso C. Brooks, Jr. 51 Senior Vice President 1991
Craig Schkade 44 Chief Financial Officer 1989
and Treasurer
Elizabeth Morgan 57 Secretary 1988
Bernard Paulson was appointed Acting Chief Executive Officer by the
Board after the resignation of Thomas A. Landshof on October 30, 1997. Mr.
Paulson has been a director of the Company since 1992. Mr. Paulson is Chief
Executive Officer of Inspection Group, Inc. and is retired President of Koch
Refining Company with over 40 years experience with other companies in the
refining and petrochemical industries, including Kerr-McGee Corporation.
Kelso C. Brooks, Jr., was appointed Senior Vice President on March 3,
1998. Mr. Brooks joined Hitox in 1991 and has served as Director of
Technology since 1994. Prior to joining Hitox, Mr. Brooks has served as
Operations Manager, Process Control Manager, Plant Manager, and in other
managerial positions with Cities Service Company and Columbian Chemicals
Company. He received his Bachelor of Chemical Engineering from the
University of Arkansas.
Craig Schkade was named Treasurer in 1993 and Chief Financial Officer in
January of 1994. Mr. Schkade joined Hitox in 1989, and served as Controller
until transferring to the Company's Malaysian subsidiary in 1990, where he
was General Manager. He returned to Corpus Christi in 1991, and became
Director of Corporate Development. Prior to joining Hitox, he was Chief
Accountant at the Port of Corpus Christi, and prior to that, worked in public
accounting with KPMG Peat Marwick. Mr. Schkade holds a Master of Business
Administration degree from Texas A&M University-Corpus Christi and Bachelor
of Business Administration degrees from the University of Texas at Austin and
the University of Texas at Tyler. He is a Certified Public Accountant.
Elizabeth Morgan has served as Secretary since November 1988 and as
Assistant to the President since September 1988. Prior to joining the
Company, she served as Administrative Assistant to the President of Carl Oil
& Gas Co., an independent oil and gas exploration company based in Corpus
Christi, Texas.
No executive officer of the Company has any family relationship with any
other director or executive officer of the Company.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company became a publicly owned company in December, 1988. Prior to
that time, the Company's stock was not listed nor traded on any stock
exchange. From February 7, 1989, to February 10, 1995, the Company's common
stock was listed and traded on the National Market System of the National
Association of Securities Dealers Automated Quotation System (Nasdaq)
(symbol: HTXA), and since February 10, 1995, has been listed and traded on
the Nasdaq SmallCap Market System. The table below sets forth the high and
low closing sales price of the Company's common stock for the periods
indicated, according to published sources.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
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1998 High $ 2.125 $ 2.438 $ 2.125 $ 2.125
Low 1.469 1.688 1.000 1.250
1997 High 3.375 3.875 4.000 3.375
Low 2.500 2.375 2.938 1.563
The reduction in net tangible assets occasioned by the sale of the
Company's two foreign operating subsidiaries, MT and FME, along with annual
net losses, required the Company's securities to be moved from the Nasdaq
National Market System to the Nasdaq SmallCap Market System effective
February 10, 1995.
No cash dividends have ever been paid on the Company's Common Stock.
The Company is prohibited from paying cash dividends under its loan agreement
with NationsBank. (See Note 5 of Notes to Financial Statements.)
The approximate number of holders of record of the Company's Common
Stock as of December 31, 1998 was 109. In addition, there are approximately
800 beneficial shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales: Net sales for 1998 were $11,747,034, an increase of $504,444
or 4.5% compared with 1997 net sales of $11,242,590. Total 1998 sales of
HITOX pigment increased 8.2% to $8,736,653, which accounted for 74.4% of
total sales in 1998, as compared with $8,077,701, or 71.9% of total sales in
1997. The increase in HITOX pigment sales more than offset a decrease in
sales volumes of BARTEX pigment resulting from the loss of business from a
customer with cyclical purchases. The Company's financial performance
continues to be dependent on sales of the single product line, HITOX pigment.
The Company's net sales in the U.S. increased by 5.7%, to $10,279,597 in
1998 from $9,726,543 in 1997. Net sales for use in foreign countries
decreased by $48,610, or 3.2% to $1,467,437 in 1998, from $1,516,047 in 1997.
Sales decreased in 1998 to both South America and Asia compared with 1997.
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Cost of Sales: Total cost of sales in 1998 increased $434,343 or 5.5%
from 1997, accompanying the higher 1998 sales volumes. Production costs
increased in 1998 primarily associated with higher maintenance expense, which
resulted in a decrease in gross profit to 29.6% in 1998 compared with 30.3%
for 1997.
General, Administrative and Selling Expenses: Total general,
administrative and selling expenses for 1998 were $2,405,066, an increase of
$76,700, or 3.3%, compared with 1997. This increase is due primarily to
higher selling expenses in 1998. As a percentage of sales, these expenses
were 20.5% in 1998, and 20.7% in 1997. Bad debt expense has been
insignificant during both periods.
Adjustment of Asset Held for Sale to Fair Market Value: The Company
recorded a $90,600 charge in the fourth quarter of 1997 to reduce the
Company's former corporate headquarters building to fair value based on an
appraisal. The Company consolidated all of its Corpus Christi personnel at
its plant location and placed its former corporate headquarters building
located in downtown Corpus Christi for sale. The Company recorded an
additional charge of $120,000 in the first quarter of 1998 based on an offer
it accepted for purchase of the building. After several extensions, the
contract for sale of the building expired in December of 1998. The Company
received an offer from a different buyer which the Company accepted and an
earnest money contract was executed on January 4, 1999. The sale of the
building was completed on March 1, 1999, for approximately its carrying
value.
Interest Income: Interest income was $78,904 in 1998 compared with
$75,165 in 1997, an increase of 5.0% which resulted from higher daily cash
balances in 1998 available for investment.
Interest Expense: Interest expense in 1998 decreased $54,160 compared
with 1997. The decrease was primarily the result of pre-paying the mortgage
note on the Company's former headquarters building in the first quarter of
1998.
Income Taxes: The Company has net operating loss and other
carryforwards available to offset the Company's regular taxable income.
However, the Company is subject to alternative minimum tax, and a provision
for income tax of $13,000 was recorded for both 1998 and 1997.
Cash and Cash Equivalents: The balance in cash and cash equivalents
increased $17,757 from the end of 1997 to the end of 1998. This increase was
the result of positive cash flow from operations, net of cash used in
investing and financing activities.
Inventories: Inventories increased $404,778 from the end of 1997 to the
end of 1998. The primary reason for the increase was required raw material
purchases under a supply agreement with the Company's former subsidiary,
Malaysian Titanium Corporation.
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Accounts Payable: The accounts payable balance at year end 1998 was
essentially unchanged from the balance at the end of 1997 and consists
primarily of raw material accounts payable.
Notes Payable to Banks: There was no outstanding balance under the
Company's bank line of credit at the end of 1997 or 1998.
Accrued Expenses: The increase in accrued expenses of $29,620 from the
end of 1997 to the end of 1998 is primarily the result of an increase in
accrued inventory costs.
Current Maturities of Long-term Debt: The Company prepaid one of its two
term loans in the first quarter of 1998. The remaining term note was to
mature at the end of 1999. The Company prepaid its remaining term note
effective January 15, 1999, leaving the Company debt free.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet strengthened during 1998 as cash was
maintained and current assets increased while liabilities were reduced. The
Company had working capital of $6,865,567 at December 31, 1998 compared with
$6,208,653 at December 31, 1997. In 1998, cash increased $17,757, with
operating activities providing $990,139, while $329,953 was used in investing
activities, and $642,429 was used in financing activities.
The Company on an ongoing basis will finance its operations principally
through cash flow 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, and a negotiated
price adjustment in the last three years of the contract term. The fourth
year purchase commitment will be completed with the first shipment in the
first quarter of 1999, as mutually agreed between the Company and MT. The
third price adjustment under the Supply Agreement will be effective for
orders placed in the fifth year of the Supply Agreement. The price
adjustment will result in a price decrease compared with orders placed in
1998 due to favorable exchange rates and other adjustments.
The initial five year term of the Supply Agreement ends in December of
1999, and the Company has exercised its right to terminate the contract by
providing the required advance twelve months notice to MT. The Company
expects to have fulfilled all of its obligations under the Supply Agreement
in December of 1999 when the contract terminates. The Company believes that
it is in its best interest to secure a long term contract for the supply of
synthetic rutile to the Company. During 1999 the Company will pursue such a
contract from a supplier which can meet the Company's requirements for
quality, consistency and price.
<PAGE> 14
<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 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 line of credit is
secured by accounts receivable and inventory. The Renewal includes one term
loan which had a balance of $389,249 at December 31, 1998, an interest rate
of 8.17%, and monthly payments of $31,415. The term loan was scheduled to
mature in January 31, 2000, but was prepaid effective January 15, 1999. The
Company had an additional term loan until March 4, 1998, when it prepaid the
remaining $326,617 principal balance on the Company's former corporate
headquarters.
OTHER MATTERS
Inflation
Inflation has not had a significant impact on the Company's business,
and it is not expected to have a major impact in the foreseeable future.
Change in Management
Mr. Bernard Paulson was appointed Acting Chief Executive Officer after
the resignation of Thomas A. Landshof on October 30, 1997. Mr. Paulson
serves in that capacity on a part-time basis. Mr. Kelso C. Brooks, Jr., the
Company's Director of Technology since 1994, was appointed to the newly
created position of Acting General Manager in late 1997, and was appointed
Senior Vice President on March 3, 1998. Mr. Brooks is responsible for day-to-
day operations of the Company, with primary emphasis on turning around the
sale of HITOX pigments. He works closely with sales and marketing personnel
to direct and focus that effort.
Several changes have been made under Mr. Paulson, including
consolidation of all corporate and finance personnel at the Company's plant
location in early 1998 to provide better efficiency and communication. The
Company's former corporate headquarters building was listed for sale. After
being on the market for over a year, the building was sold on March 1, 1999,
for approximately its carrying value.
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.
<PAGE> 15
<PAGE>
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
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. That process is ongoing and 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 an effective program in place to resolve the
year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the year 2000 program. Although no
assurances can be given as to the Company's compliance, particularly as it
relates to third parties, including governmental entities, based upon the
progress to date, the Company does not expect that the future costs of
modification 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
<PAGE> 16
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are set out in this annual report on Form 10-
KSB commencing on page 21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
financial statements or during any subsequent interim period.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information which will be contained under the caption "Election of
Directors" in the Company's Definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders is incorporated by reference in response to this Item
9. See Item 4, Part I of this Form 10-KSB for the caption "Executive
Officers" for information concerning executive officers.
ITEM 10. EXECUTIVE COMPENSATION
Information under the caption "Executive Compensation", which will be
contained in the Company's Definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information under the caption "Executive Compensation - Security
Ownership of Management", which will be contained in the Company's Definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders, is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the caption "Certain Transactions", which will be
contained in the Company's Definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, is incorporated herein by reference.
<PAGE> 17
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are being filed as part of this annual report
on Form 10-KSB:
1. Financial Statements - The financial statements filed as part of
this report are listed in the "Index to Financial Statements" on
page F-1 hereof.
2. Exhibits - The Exhibits listed below are filed as part of, or
incorporated by reference into, this report.
Exhibit No. Description
- ----------- -----------
3.1(1) Certificate of Incorporation of the Company as amended through
January 28, 1988
3.2(2) Certificate of Amendment to the Company's Certificate of
Incorporation, filed May 28, 1991
3.3(1) By-laws of the Company
3.4(4) Amendment to the By-laws of the Company dated June 1, 1994
3.5(7) Amendment to the By-laws of the Company dated February 28, 1995
4.1(1) Form of Common Stock Certificate
4.2(3) Form of Convertible Subordinated Debenture of the Company dated
June 15, 1992 and related purchase agreements
4.3(4) Form of First Amendment to the Note Purchase Agreement covering
the Convertible Subordinated Debenture of the Company dated
September 30, 1994
4.4(5) Form of Second Amendment to the Note Purchase Agreement covering
the Convertible Subordinated Debenture of the Company dated
February 28, 1995
4.5(5) Form of Warrant Agreement for issuance of 50,000 warrants dated
September 30, 1994
4.6(5) Form of Warrant Agreement for issuance of 50,000 warrants dated
February 28, 1995
4.7(5) Form of Warrant Agreement for issuance of 1,111,111 warrants
dated February 28, 1995
10.1(6) Loan Agreement with NationsBank dated August 31, 1995
10.2(8) First Amendment to Loan Agreement dated July 31, 1996
10.3(1) Lease from Port of Corpus Christi Authority dated April 14, 1987
10.4(1) Lease from Port of Corpus Christi Authority dated January 12,
1988 as amended on December 24, 1992
10.5 Second Amendment to Loan Agreement with NationsBank
dated July 17, 1998
10.6(1) Summary Plan Description for the Hitox Profit Sharing Plan
& Trust
21 Subsidiaries of Registrant: No significant subsidiaries
23 Consent of Ernst & Young LLP
<PAGE> 18
<PAGE>
_________________________________
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 33-25354) filed November 3,
1988, which registration statement became effective December 14, 1988.
(2) Incorporated by reference to the 1991 Form 10-K.
(3) Incorporated by reference to the Form 8-K dated June 15, 1992.
(4) Incorporated by reference to the 1994 Form 10-KSB.
(5) Incorporated by reference to the March 31, 1995 Form 10-QSB.
(6) Incorporated by reference to the September 30, 1995 Form 10-QSB.
(7) Incorporated by reference to the 1995 Form 10-KSB.
(8) Incorporated by reference to the June 30, 1996 Form 10-QSB.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1998.
<PAGE> 19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By BERNARD A. PAULSON
--------------------------------
(Bernard A. Paulson, Acting CEO)
Date: March 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Capacity with the Company Date
--------- ------------------------- ----
BERNARD A. PAULSON Acting Chief Executive Officer March 5, 1999
- ------------------------ Director
(Bernard A. Paulson)
CRAIG SCHKADE Chief Financial Officer March 5, 1999
- ------------------------ and Treasurer
(Craig Schkade) (Principal Financial and Accounting Officer)
WILLIAM B. HAYES Chairman of the Board March 5, 1999
- ------------------------
(William B. Hayes)
ROBERT J. CRESCI Director March 5, 1999
- ------------------------
(Robert J. Cresci)
KEVIN S. MOORE Director March 5, 1999
- ------------------------
(Kevin S. Moore)
MICHAEL A. NICOLAIS Director March 5, 1999
- ------------------------
(Michael A. Nicolais)
CHRISTOPHER J. McGOUGAN Director March 5, 1999
- ------------------------
(Christopher J. McGougan)
<PAGE> 20
<PAGE>
HITOX CORPORATION OF AMERICA
ANNUAL REPORT ON FORM 10-KSB
ITEM 7
INDEX TO FINANCIAL STATEMENTS
Page
----
Hitox Corporation of America
Report of Independent Auditors 22
Balance Sheets - December 31, 1998 and 1997 23
Statements of Income - Years ended December 31, 1998 and 1997 25
Statements of Shareholders' Equity - Years ended
December 31, 1998 and 1997 26
Statements of Cash Flows - Years ended December 31, 1998 and 1997 27
Notes to Financial Statements 28
<PAGE> 21
<PAGE>
Report of Ernst & Young Independent Auditors
Board of Directors and Shareholders
Hitox Corporation of America
Corpus Christi, Texas
We have audited the accompanying balance sheets of Hitox Corporation of
America as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hitox Corporation
of America at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
February 19, 1999 except for Note 4, as to which the date is
March 1, 1999
<PAGE> 22
<PAGE>
HITOX CORPORATION OF AMERICA
BALANCE SHEETS
December 31,
-------------------------------
1998 1997
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,737,399 $ 1,719,642
Receivables:
Trade accounts receivable; no
allowance for doubtful accounts
considered necessary 1,310,663 1,094,864
Other 40,258 10,457
-------------- --------------
Total Receivables 1,350,921 1,105,321
Inventories 5,304,350 4,899,572
Other current assets 44,869 30,962
-------------- --------------
Total current assets 8,437,539 7,755,497
PROPERTY, PLANT AND EQUIPMENT, net 2,502,748 2,693,333
ASSET HELD FOR SALE 651,055 771,055
OTHER ASSETS 25,175 27,584
-------------- --------------
$ 11,616,517 $ 11,247,469
============== ==============
See accompanying notes
<PAGE> 23
<PAGE>
HITOX CORPORATION OF AMERICA
BALANCE SHEETS
December 31,
-------------------------------
1998 1997
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 196,123 $ 124,834
Accounts payable - MT 590,235 649,800
Accrued expenses 396,365 366,745
Current maturities of long-term debt 389,249 405,465
-------------- --------------
Total current liabilities 1,571,972 1,546,844
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES -- 626,213
-------------- --------------
Total liabilities 1,571,972 2,173,057
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value:
Authorized, 5,000,000 shares;
No shares outstanding -- --
Common stock $.25 par value:
Authorized, 10,000,000 shares;
4,657,487 shares outstanding
After deducting 88,240 shares
Held in treasury 1,186,432 1,186,432
Additional paid-in capital 14,341,193 14,341,193
Accumulated deficit (5,440,125) (6,410,258)
-------------- --------------
10,087,500 9,117,367
Less: cost of treasury stock (42,955) (42,955)
-------------- --------------
Total shareholders' equity 10,044,545 9,074,412
-------------- --------------
$ 11,616,517 $ 11,247,469
============== ==============
See accompanying notes
<PAGE> 24
<PAGE>
HITOX CORPORATION OF AMERICA
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------
1998 1997
----------- -----------
NET SALES $11,747,034 $11,242,590
COSTS AND EXPENSES:
Cost of sales 8,275,705 7,841,362
General, administrative
and selling expenses 2,405,066 2,328,366
Adjustment of asset held for sale
To fair market value 120,000 90,600
----------- -----------
OPERATING INCOME 946,263 982,262
OTHER (EXPENSE) INCOME:
Interest expense (49,762) (103,922)
Interest income 78,904 75,165
Other, net 7,728 4,650
----------- -----------
INCOME BEFORE INCOME TAX 983,133 958,155
Current income tax expense 13,000 13,000
----------- -----------
NET INCOME $ 970,133 $ 945,155
=========== ===========
Earnings per Common Share
Basic $ 0.21 $ 0.20
Diluted $ 0.21 $ 0.20
Weighted average common shares
and equivalents outstanding
Basic 4,657,487 4,657,487
=========== ===========
Diluted 4,688,374 4,670,381
=========== ===========
See accompanying notes
<PAGE> 25
<PAGE>
<TABLE>
HITOX CORPORATION OF AMERICA
STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN ACCUMULATED ----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
--------- ---------- ------------ ------------ ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1997 4,745,727 $1,186,432 $ 14,341,193 $(7,355,413) 88,240 $(42,955) $ 8,129,257
Net Income -- -- -- 945,155 -- -- 945,155
--------- ---------- ------------ ------------ ------ --------- -----------
BALANCE AT
DECEMBER 31, 1997 4,745,727 1,186,432 14,341,193 (6,410,258) 88,240 (42,955) 9,074,412
Net Income -- -- -- 970,133 -- -- 970,133
--------- ---------- ------------ ------------ ------ --------- -----------
BALANCE AT
DECEMBER 31, 1998 4,745,727 $1,186,432 $ 14,341,193 $(5,440,125) 88,240 $(42,955) $10,044,545
========= ========== ============ ============ ====== ========= ===========
</TABLE>
See accompanying notes
<PAGE> 26
<PAGE>
HITOX CORPORATION OF AMERICA
STATEMENTS OF CASH FLOW
Years Ended December 31,
------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 970,133 $ 945,155
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation 522,337 590,125
Gain on sale of property, plant and equipment (1,799) --
Adjustment of asset held for sale 120,000 90,600
Other assets 2,409 --
Changes in working capital:
Receivables (245,600) 65,856
Inventories (404,778) (1,182,908)
Other current assets (13,907) (388)
Accounts payable and accrued expenses 41,344 302,031
---------- ----------
Net cash provided by operating activities 990,139 810,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (332,078) (226,617)
Proceeds from sales of property,
plant and equipment 2,125 --
---------- ----------
Net cash used in investing activities (329,953) (226,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (642,429) (373,259)
---------- ----------
Net cash used in financing activities (642,429) (373,259)
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,757 210,595
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,719,642 1,509,047
---------- ----------
CASH AND CASH EQUIVALENTS END OF YEAR $1,737,399 $1,719,642
========== ==========
Supplemental cash flow disclosures:
Interest paid $ 49,762 $ 103,922
Income taxes paid 13,000 13,000
See accompanying notes
<PAGE> 27
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Hitox Corporation of America ("Hitox" or the "Company"), a Delaware
Corporation, is engaged in a single industry, the manufacture and sale of
mineral products for use as pigments and extenders, primarily in the
manufacture of paints, industrial coatings and plastics. Until their sale in
September 1994, the Company's subsidiaries included Malaysian Titanium
Corporation Sdn. Bhd ("MT") and Fluid Minerals Espanola, S.A. ("FME"). MT,
located in Ipoh, Malaysia, manufactures synthetic rutile which is sold to the
Company as a raw material for the manufacture of its principal product. MT
is also a distributor for HITOX pigment in the Pacific Rim. FME, located in
Bunuel, Spain, manufactures and sells HITOX pigment mainly in Europe under a
license agreement with the Company.
Basis of Presentation and Use of Estimates
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments readily convertible
to known cash amounts and with a maturity of three months or less at the date
of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market; cost being
determined principally by use of the average-cost method, which approximates
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is based on the estimated useful lives of
depreciable assets, ranging from 5 to 35 years, and is generally provided
using the straight-line method. Maintenance and repair costs are charged to
expense as incurred.
Assets 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. 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
<PAGE> 28
<PAGE>
period. In addition, depreciation is not recorded during the period(s) in
which the assets are being held for disposal. For further discussion on
assets held for sale and the impact of Statement 121, see Note 4 of Notes to
the Financial Statements.
Revenue Recognition
Sales are recognized when the product is shipped and customers have no
right of return. The Company's pigment business has generally experienced
higher sales during the second and third calendar quarters, due to increased
activity in construction and maintenance during warm weather and the
associated increase in demand for materials which use pigments such as paints
and plastic pipe. The Company's principal product line, HITOX pigments,
accounted for 74.4% and 71.9% of total sales in 1998 and 1997, respectively.
Income Taxes
The Company records income taxes under Financial Accounting Standards
Board Statement No. 109, using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
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 will continue to account for stock option grants under
APB Opinion No. 25, while applying the requirements of FASB Statement No.
123, Accounting for Stock Based Compensation. See Note 7 of Notes to
Financial Statements.
Reclassifications
Certain 1997 balances have been reclassified for comparative purposes.
Earnings Per Share
The Company adopted the Financial Accounting Standards Board Statement
No. 128, Earnings per Share, in December 1997. Statement 128 replaces the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is based on the
weighted average number of shares outstanding and excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. As required by Statement 128, the earnings per share amounts have
been restated for all periods presented. For further discussion on earnings
per share and the impact of Statement No. 128, see Note 8 of the Notes to the
Financial Statements.
<PAGE> 29
<PAGE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income. Statement 130 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 adoption of this
Statement had no material effect on the financial statements.
Segments and Related Information
Also in June 1997, the Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement 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. Because the
Company is in a single line of business, it was not affected by the adoption
of this Statement.
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 that the adoption of the new Statement will
have a significant effect on earnings or the financial position of the
Company.
Impact of Statement of Position 98-1
In March 1998, the AICPA issued Statement of Position 98-1, Accounting
for Costs of Computer Software Developed For or Obtained for Internal use.
The Company plans to adopt the SOP on January 1, 1999. The SOP will require
the expensing of training costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The
adoption of this SOP is not anticipated to have a material effect on the
financial statements.
2. INVENTORIES
A summary of inventories follows:
December 31,
--------------------------
1998 1997
----------- -----------
Raw materials $ 4,694,575 $ 3,919,043
Work in progress 72,627 --
Finished goods 434,650 906,281
Supplies 102,498 74,248
----------- -----------
Total Inventories $ 5,304,350 $ 4,899,572
=========== ===========
<PAGE> 30
<PAGE>
At December 31, 1998, the finished goods inventory of the Company's
principal product, HITOX, is 70% material cost and 30% production cost. At
December 31, 1997, those percentages were 65% material cost and 35%
production cost. See Note 10 regarding purchase commitments for synthetic
rutile.
3. PROPERTY, PLANT AND EQUIPMENT
Major classifications and expected lives of property, plant and
equipment are summarized below:
December 31,
-------------------------
Expected Life 1998 1997
------------------ ----------- -----------
Land and Office building 35 years $ 42,922 $ 15,988
Production facilities 10, 20 years 3,383,687 3,262,261
Machinery and equipment 5, 7 years 4,103,420 4,138,852
Furniture and fixtures 7, 10, 20 years 666,289 603,143
----------- -----------
Total 8,196,318 8,020,244
Less accumulated depreciation (5,693,570) (5,326,911)
----------- -----------
Property, Plant and Equipment, net $ 2,502,748 $ 2,693,333
=========== ===========
During the fourth quarter of 1997, the Company put its corporate
headquarters up for sale resulting in a reduction in the land and office
building classification of $1,264,132 and reduction of accumulated
depreciation of $402,477. In accordance with Statement No. 121, the asset
was reclassified at its fair value less cost to sell.
The amounts of depreciation expense calculated on the Company's
property, plant and equipment for the years ending December 31, 1998 and
December 31, 1997 were $522,337, and $590,125, respectively.
4. ADJUSTMENT OF ASSETS FOR SALE TO FAIR VALUE
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of, effective January 1, 1995. This Statement addresses the
accounting for the impairment of long-lived assets and long-lived assets to
be disposed of. The Statement requires that the carrying amount of assets
held for sale be reduced to the fair value of the asset less the cost to
sell.
During the fourth quarter of 1997, management designed and implemented a
restructuring plan to aggressively improve the Company's cost structure,
streamline operations and divest itself of the corporate headquarters. As
part of this plan, the Company consolidated all of its Corpus Christi based
personnel at the plant site and put the corporate headquarters building up
for sale. The Company recorded an adjustment of $90,600 in the fourth
quarter of 1997 to reduce the asset to fair value based on an appraisal. The
Company recorded an additional charge of $120,000 in the first quarter of
1998 based on an offer it accepted for purchase of the building. The
<PAGE> 31
<PAGE>
potential buyer did not perform under the terms of the earnest money contract
and the contract expired in December of 1998. Another earnest money contract
was executed with a different potential buyer on January 4, 1999. The sale
of the building was completed on March 1, 1999, for approximately its
carrying value.
5. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
A summary of long-term debt follows:
December 31,
---------------------------
1998 1997
----------- -----------
8.17% term note payable to a U.S. bank,
incorporated into the Loan
Due January 31, 2000, principal
balance prepaid January 15, 1999 $ 389,349 $ 693,244
9.0% term note payable to a U.S. bank,
incorporated into the Loan
Due February 28, 2002, principal
balance prepaid March 4, 1998 -- 338,434
----------- -----------
Total 389,249 1,031,678
Less current maturities 389,249 405,465
----------- ----------
Total long-term debt $ -- $ 626,213
=========== ===========
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 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 Banks prime
rate plus 0.75% to the Bank's prime rate. The line of credit is secured by
accounts receivable and inventory. The Renewal includes one term loan, which
had a balance of $389,249 at December 31, 1998, an interest rate of 8.17%,
and monthly payments of $31,415. The term loan was scheduled to mature on
January 31, 2000, but was prepaid effective January 15, 1999. The Company
had an additional term loan until March 4, 1998, when it prepaid the
remaining $326,617 principal balance on the Company's former corporate
headquarters. The Company is prohibited from paying dividends without prior
approval of the Bank.
<PAGE> 32
<PAGE>
6. INCOME TAXES
A reconciliation between the Company's effective tax rate and the
Federal statutory rate on earnings is as follows:
Years Ended December 31,
---------------------------
1998 1997
----------- ------------
Expense computed at statutory rates $ 334,265 $ 325,773
Other, net 4,986 (46,457)
Change in valuation allowance (326,251) (266,316)
----------- -----------
$ 13,000 $ 13,000
=========== ===========
Deferred income taxes reflect the effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset as of December 31, 1998
and 1997 are as follows:
Years Ended December 31,
---------------------------
1998 1997
Rounded Rounded
------------ ------------
Deferred Tax Liabilities:
Book - tax difference of U.S.
property,plant and equipment $ 156,300 $ 162,000
------------ ------------
Total deferred liabilities 156,300 162,000
------------ ------------
Deferred Tax Assets:
Net operating loss carryforwards 3,743,600 4,137,000
Alternative minimum tax
credit carryforward 58,300 42,000
Other deferred assets 84,900 40,000
------------ ------------
Total deferred assets 3,886,800 4,219,000
------------ ------------
Net deferred tax assets before
valuation allowance 3,730,500 4,057,000
------------ ------------
Valuation allowance (3,730,300) (4,057,000)
------------ ------------
Net deferred tax liability $ -- $ --
============ ============
As of December 31, 1998, the Company has a net operating loss
carryforward of $11,010,600, which expires in 2009.
<PAGE> 33
<PAGE>
7. STOCK OPTIONS AND WARRANTS
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company's 1990 Incentive Plan for Hitox Corporation of America (the
"Plan") provides for the award of a variety of incentive compensation
arrangements to such employees and directors as may be determined by a
Committee of the Board (the "Committee"). The original Plan provided that
options or awards for as many as 175,000 shares of the Company's common stock
may be granted by the Committee. In 1995, the Board of Directors approved an
amendment to the Plan increasing the number of shares available to grant
thereunder to 625,000. The Plan also provides for the automatic granting
annually of options for 2,500 shares of common stock to non-employee
directors of the Company. Options must be exercised within ten years from
the date of grant or forfeited. All options are issued at an exercise price
equal to the stock's market value on the date of grant. Options may be
issued subject to a vesting schedule at the discretion of the Board of
Directors' Compensation Committee.
In addition, during 1991, 75,000 non-qualified stock options were
granted to the officers of the Company at an exercise price of $9.75 per
share and expired during 1998. There also were 3,000 non-qualified stock
options granted in 1989 at $9.00, which expired in 1996. During 1995,
another 50,000 options were issued outside the plan at an exercise price of
$2.625.
Exercise prices on options outstanding at December 31, 1998 ranged from
$1.531 to $10.625 per share. The weighted-average remaining contractual life
of those options is 7.5 years. The number of options exercisable at December
31, 1998 and December 31, 1997 was 219,475 and 317,595, respectively. In
1998 the Board of Directors offered employees the opportunity to have their
existing options reissued at a lower price in order to restore the incentive
represented by the options. The options were reissued at the market price of
$1.513 on March 3, 1998. Most employees who chose to have their options
repriced forfeited options which were immediately exercisable in exchange for
options subject to a multi-year vesting schedule. Of the total of 223,500
options shown granted in 1998 in the table below, 196,400 were forfeited by
employees and then reissued effective March 3, 1998.
<PAGE> 34
<PAGE>
The following table summarizes certain information regarding stock options
granted:
Options
------------------------------------------
Weighted
Average
Total Exercise Range of
Reserved Outstanding Price Exercise Prices
--------- ----------- --------- ----------------
Balances at
December 31, 1996 720,900 573,775 $4.524 $2.625 - $10.625
Granted -- 33,000 $2.750 $1.750 - $3.500
Forfeited -- (180,500) $2.750 $2.625 - $4.125
--------- ---------
Balances at
December 31, 1997 720,900 426,275 $5.041 $1.750 - $10.625
Granted -- 223,500 $1.567 $1.531 - $2.063
Forfeited (45,900) (279,500) $5.570 $1.513 - $9.750
--------- ----------
Balances at
December 31, 1998 675,000 370,275 $2.530 $1.531 - $10.625
========= =========
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1997 and 1998, respectively: risk-free interest
rates of 6.16% and 5.73%; a dividend yield of zero; volatility factors of the
expected market price of the Company's common stock of .588 and .576; and a
weighted-average expected life of the option of 5 years for both 1997 and
1998. The weighted-average fair value of options granted or repriced during
1998 was $0.87.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility and expected lives. Because the Company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<PAGE> 35
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1998 1997
---- ----
Pro forma net income $ 822,605 $ 867,557
Pro forma earnings per share
Basic $ 0.18 $ 0.19
Diluted $ 0.18 $ 0.19
Stock Warrants
On June 15, 1992, the Company executed a note purchase agreement (the
"Note Purchase Agreement"), under which the Company issued $5,000,000 of
10.5% convertible subordinated debentures (the "Debentures"), due June 15,
1998. These Debentures were convertible into 555,555 common shares at $9.00
per share at the discretion of holder, subject to adjustment for earnings
targets. On February 28, 1995, the Note Purchase Agreement was amended to
eliminate the conversion feature and the earnings targets from the
Debentures. Also on that date, the Debenture holders were issued 1,111,111
warrants at an exercise price of $4.50 per share, which expire on June 15,
2000. The amendment also postponed the beginning of principal repayments by
one year to September 15, 1997, and extended the due date one year to June
15, 1999. The entire $5,000,000 principal balance was prepaid in 1996 using
$4,000,000 in proceeds from the sale of the Company's common stock and a
$1,000,000 term loan from the Bank.
The Company has also granted the Debenture holders additional warrants
to purchase common stock from the Company in consideration of their
agreements, waivers and forbearance, as follows:
* Warrants to purchase 50,000 shares at $2.50 per share were granted on
February 28, 1995, and expire September 30, 1999. Based on the market price
on the grant date of $2.625, the Company recorded an expense of $6,250 in the
first quarter of 1995 related to these warrants.
* Warrants to purchase 50,000 shares at $2.50 per share were granted on
September 30, 1994, and expire September 30, 1999. Based on the market price
on the grant date of $3.25, the Company recorded an expense of $37,500
related to the warrants during the third quarter of 1994.
In connection with all of the Company's stock options and warrants,
1,929,011 shares of the Company's common stock have been reserved.
<PAGE> 36
<PAGE>
8. 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 970,133 945,155
Numerator for basic earnings per share -
income available to common stockholders 970,133 945,155
---------- ----------
Effect of dilutive securities -- --
---------- ----------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions 970,133 945,155
Denominator:
Denominator for basic earnings per share -
weighted-average shares 4,657,487 4,657,487
Effect of dilutive securities
Employee stock options 30,887 3,212
Warrants - 9,682
---------- ----------
Dilutive potential common shares 30,887 12,894
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversions 4,688,374 4,670,381
========== ==========
Earnings per common share:
Basic $ 0.21 $ 0.20
====== ======
Diluted $ 0.21 $ 0.20
====== ======
Excluded from the calculation of diluted earnings per share were a total
of 1,360,486 options and warrants in 1998 and 1,454,386 in 1997. The options
and warrants 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.
9. PROFIT SHARING PLAN
The Company has a profit sharing plan that covers all employees.
Contributions to the plan are determined by the Board of Directors and are
limited to the maximum amount deductible by the Company for Federal income
tax purposes. For the year ended December 31, 1998, the Company contributed
$51,183 to the profit sharing plan. There were no contributions to the plan
for the year ended December 31, 1997.
<PAGE> 37
<PAGE>
The Company also offers a 401(k) savings plan administered by a bank.
Employees are eligible to participate in the plan after completing six months
of service with the Company. The Company matches contributions up to $400
per year per employee. Total Company contributions to the 401(k) plan for
the years ended December 31, 1998 and 1997 were $14,795 and $15,659
respectively.
10. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company sold its entire ownership interest in its Malaysian
subsidiary in 1994. As part of that transaction, the Company entered into an
agreement for the supply of synthetic rutile by MT to the Company (the
"Supply Agreement") which became effective December 15, 1994. The Supply
Agreement has an initial term of five years, with on-going automatic year to
year renewal unless terminated with twelve months notice by either party.
The Supply Agreement is a take or pay arrangement for a specified minimum
annual quantity ("Minimum Quantity"). The fourth year purchase commitment
will be completed with the first shipment in 1999, as mutually agreed between
the Company and MT, thereby satisfying the 1998 purchase requirement of
$4,310,773. The Company's 1997 purchases from MT totaled $4,332,000.
The second negotiated price adjustment under the Supply agreement,
effective for orders placed in 1998, resulted in a price decrease compared
with orders placed in 1997 due to favorable exchange rates and other
adjustments. The Company has negotiated an additional price decrease which
will be effective for orders placed in 1999, the final year of the supply
agreement.
Should quantities of synthetic rutile above the Minimum Quantity be
required, the Company may seek alternative sources and price quotes. MT will
have the right to supply the additional requirement on a meet or release
basis. The Supply Agreement provides for the payment of damages in the event
that MT is not able to supply the Minimum Quantity of synthetic rutile, and
likewise, in the event that the Company does not take the Minimum Quantity
and MT cannot sell the shortfall of synthetic rutile on the open market at a
comparable price.
The initial five year term of the Supply Agreement ends in December of
1999, and the Company has exercised its right to terminate the contract by
providing the required advance twelve months notice to MT. The Company
expects to have fulfilled all of its obligations under the Supply Agreement
in December of 1999 when the contract terminates. The Company believes that
it is in its best interest to secure a long term contract for the supply of
synthetic rutile to the Company. During 1999 the Company will pursue such a
contract from a supplier which can meet the Company's requirements for
quality, consistency and price.
<PAGE> 38
<PAGE>
Leases
The Company operates a plant in Corpus Christi, Texas. The facility is
located in the Rincon Industrial Park on approximately 13 acres of land
leased under non-cancelable operating leases from the Port of Corpus Christi
Authority (the "Port"). The first lease, which covers 10 acres of the plant
site, has a term of 30 years and expires in July 2017. The lease payment is
subject to adjustment every 5 years for what the Port calls the "equalization
valuation". This is used as a means of equalizing rentals on various Port
lands and is determined solely at the discretion of the Port. The second
lease with the Port, which covers 2.86 acres, was renewed for its final 5
year option term effective January 1, 1998.
Minimum future rental payments under these leases as of December 31,
1998 are as follows:
Years Ending December 31,
1999 $ 53,400
2000 53,400
2001 53,400
2002 53,400
2003 24,000
Later years 324,000
---------
Total minimum lease payments $ 561,600
=========
Rent expense under these leases was $53,400 per year during 1998 and
1997. It is expected that as these leases expire, the Company will renew or
replace them with leases on similar assets, at potentially higher rates.
The Company leases office space in its former corporate headquarters
building (See Note 4) under noncancellable operating leases to third parties.
Total rental income received pursuant to these leases in 1998 and 1997,
amounted to approximately $143,285 and $138,800, respectively.
Contingencies
The Company believes that the Corpus Christi plant is in compliance with
all applicable federal, state and local laws and regulations relating to the
discharge of substances into the environment, and it does not expect that any
material capital expenditures for environmental control facilities will be
necessary in order to continue such compliance.
<PAGE> 39
<PAGE>
11. PRINCIPAL CUSTOMER INFORMATION AND EXPORT SALES
One customer provided 16% of total revenue during the years ended
December 31, 1998 and 1997. No other customer provided 10% or more of total
revenue during those years.
Revenues from export sales were as follows:
Years Ended December 31,
-----------------------------
Geographic Region 1998 1997
- ----------------- ------------ ------------
Canada $ 934,980 $ 912,896
South and Central America and Mexico 252,930 328,970
Asia 54,542 139,692
Other Regions 224,985 134,489
------------ ------------
Total $ 1,467,437 $ 1,516,047
============ ============
The Company sells its products both directly to end-users and to
distributors. The top 10 direct customers accounted for 39% of total net
sales in 1998 and 42% in 1997. Domestic distributors accounted for
approximately 30% of total net sales in 1998 and 35% in 1997.
<PAGE> 40
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Item PAGE
- ---------- ---- ----
10.5 Second Amendment to Loan Agreement
with NationsBank dated July 17, 1998 42
23 Consent of Ernst & Young LLP 52
27 Financial Data Schedule 53
<PAGE> 41
<PAGE>
EXHIBIT 10.5
SECOND AMNDMENT TO LOAN AGREEMENT
This is a Second Amendment to a Loan Agreement by and among Hitox
Corporation of America, Inc., a Delaware corporation ("Borrower") and
NationsBank, N.A., a national banking association which is the successor in
interest by merger to NationsBank of Texas, N.A. ("NationsBank ").
Borrower has entered into a Loan Agreement with NationsBank dated August
31, 1995 which has been amended by a First Amendment to Loan Agreement dated
July 31, 1996 (which Loan Agreement as amended from time to time is referred
to herein as the "Loan Agreement"). Words which are capitalized herein which
are defined in the Loan Agreement shall have the same meanings as in the Loan
Agreement. Borrower has requested NationsBank to modify the Revolving Note.
NOW, THEREFORE, for valuable consideration, Borrower and NationsBank mutually
agree that the Loan Agreement shall be, and is hereby, amended as follows:
1. REVOLVING LINE OF CREDIT.
a. MATURITY AND RATE. Paragraph 1.1 of the Loan Agreement is amended
to change "April 30, 19980 in the fourth line to "April 30, 2000," and to
substitute the promissory note which is attached as Exhibit A hereunto, as
the "Revolving Note" referred to in the Loan Agreement.
b. BORROWING BASE. Paragraph 1.1 of the Loan Agreement is amended to
change the reference to "$1,000,000" in line 11 to "$2,000,000", such that
the second sentence of Paragraph 1.1 shall read as follows:
The total amount of all loans and letters of credit outstanding under the
Revolving Note may vary from time to time, but shall not exceed in the
aggregate at any one time the lesser of (a) $2,000,000 or (b) the sum of (i)
80% of Borrower's Eligible Accounts Receivable, and (ii) the lesser of
$2,000,000 or 50% of Borrower's Eligible Inventory.
The last sentence of Paragraph 1.1 is amended to read as follows:
Also, for purposes of this calculation only, "Eligible Inventory" shall mean
Borrower's inventory, valued at the lower of cost or fair market value,
excluding (i) items which are notactually in Borrower's possession (unless
the goods are in transit, fully insured under insurance listing NationsBank
as loss payee, as its interest may appear, and with the title documents in
the possession of Hitox) and paid for, (ii) work in progress, (iii) inventory
which is consigned to others for sale and (iv) inventory which is obsolete.
c. BORROWING BASE CERTIFICATE. Exhibit B attached hereto is
substituted for Exhibit B attached to the Loan Agreement.
2. TERM LOAN IS UNSECURED. The parties amend the Loan Agreement and the
other Loan Documents to provide that the Term Loan, including the Term Note,
is unsecured.
<PAGE> 42
<PAGE>
3. ADDITIONAL DEBT. Capital Acquisitions. Paragraph 4.10 of the Loan
Agreement is amended to read as follows:
Borrower agrees that it will not incur, assume, guaranty or become
contingently liable for the payment of any indebtedness or liability
(including capitalized leases), other than (a) the Loans, (b) open account
trade indebtednesses which are incurred in the ordinary course of business
(which shall be paid when due), (c) existing indebtednesses disclosed to
NationsBank in writing and acknowledged by NationsBank prior to the date
hereof, (d) funds borrowed for the purpose of acquiring new equipment, and
(e) tax obligations (which shall be paid when due). Borrower agrees that it
will not expend any funds for capital acquisitions in excess of $1,250,000,
without the prior written approval of NationsBank, whose consent shall not be
unreasonably withheld.
4. WORKING CAPITAL DELETED. Paragraph 4.17 Working Capital of the Loan
Agreement is deleted in its entirety.
5. TANGIBLE NET WORTH REQUIREMENT DELETED. Paragraph 4.18 Tangible Net
Worth of the Loan Agreement is deleted in its entirety.
6. RATIO OF TOTAL LIABILITIES TO NET WORTH. Paragraph 4.20 Ratio of
Total Debt to Capital Funds is delete in its entirety and replaced with the
following new Paragraph 4.20:
4.20 Ratio of Total Liabilities to Net Worth. Borrower agrees that it will
maintain a ratio of total liabilities to tangible net worth of not more than
.75 to 1.0 on each March 31, June 30, September 30 and December 31. For
purposes of this calculation, Borrower's total liabilities shall mean all of
its liabilities other than its Subordinated Debt, and Borrower's tangible net
worth shall mean all of Borrower's assets less any good will and other
intangible assets, minus all of Borrower's liabilities (including
Subordinated Debt).
7. FIXED CHARGE COVERAGE. Paragraph 4.21 of the Loan Agreement is
amended to change "1.50 in the second line to "1.25" and Paragraph 4.21 as
amended reads as follows:
4.21. Fixed Charge Coverage. Borrower agrees that it will maintain a fixed
charge coverage ratio of at least 1.25 to 1.0 on each March 31, June 30,
September 30 and December 31 based on the four immediately preceding
quarters. For purposes of this calculation, Borrower's fixed charge coverage
shall mean that ratio of Borrower's cash flow to Borrower's fixed charges.
Borrower's cash flow shall include its net income after taxes on a book basis
(a) plus (i) interest expense, (ii) depreciation and amortization, (iii)
other non-cash expenses and (iv) lease expenses, (b) less gains on the sale
of assets and cash dividends, and Borrower's fixed charges shall include all
scheduled principal and interest payments on all promissory notes and capital
lease obligations.
<PAGE> 43
<PAGE>
8. FINANCIAL STATEMENTS; LITIGATION. Borrower represents to NationsBank
that all financial statements which have been furnished to NationsBank are
correct and complete in all material respects, and fairly represent the
financial condition of Borrower on the dates thereof or for the periods
specified therein, and that no material adverse change has occurred since the
date of the latest of such financial statements. No litigation, arbitration
proceedings or governmental or regulatory proceedings are pending or
threatened against Borrower which, if adversely determined, would be likely
to adversely affect Borrower's financial condition or the legality, validity
or enforceability of the Loan Agreement, Notes or Security Documents.
9. PRIOR DOCUMENTS. Borrower ratifies and confirms that all of the
representations and warranties, covenants, events of default and other
provisions of the Loan Agreement are true and correct and remain in full
force and effect, as of the date hereof. Borrower further ratifies and
confirms that all of the Security Documents shall also remain in full force
and effect until the Notes are paid in full.
10. RELEASE. For valuable consideration received to the full satisfaction
of Borrower, Borrower waives and releases any and all causes of action
against NationsBank, its agents and employees, for all acts and omissions
which have occurred prior to the signing of this Second Amendment to Loan
Agreement, including but not limited to all causes of action for claims of
usury, fraud, deceit, misrepresentation, conspiracy, unconscionability,
duress, economic duress, defamation, control, interference with corporate
governance, tortious interference with contractual and business
relationships, conflicts of interest, misuse of insider information,
concealment, disclosure, secrecy, misuse of collateral, wrongful release of
collateral, failure to inspect, environmental due diligence, negligent loan
processing and administration, wrongful setoff, violations of statutes and
regulations of governmental entities and agencies (both civil and criminal),
racketeering activities, security and antitrust violations, tying
arrangements, deceptive trade practices (to the maximum extent permitted by
law), and breach or abuse of any alleged fiduciary duty, special
relationship, course of conduct and/or obligation of good faith and fair
dealing. NationsBank and Borrower further agree that the amount of their
damages in all causes of action, including causes of action arising after the
date hereof, shall be limited to exclude all (i) punitive and exemplary
damages, (ii) damages attributable to lost profits or opportunity, (iii)
damages attributable to mental anguish and (iv) damages attributable to pain
and suffering, and the parties do hereby waive and release all such damages
with respect to any and all causes of action which may arise at any time
against any other party, their agents and employees.
11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT,
SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES
OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF
J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF (11J.A.M.S."), AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES
<PAGE> 44
<PAGE>
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY
COURT RAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR
DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO
COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT
APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(1) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL
60 DAYS.
(2) RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (1) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
INSTRUMENT, AGREE NT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE
PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY
EQUIVALENT STATE LAW; OR (111) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE
SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A
COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO)
INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK
MAY E. RCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN
SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY
OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT
OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION
OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY
REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE
CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR
CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
12. COMPLETE AGREEMENT. THE WRITTEN LOAN AGREEMENT AS AMENDED, THE NOTES
AND ALL CURRENTLY AND PREVIOUSLY EXECUTED SECURITY DOCUMENTS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Dated: July 17, 1998.
BORROWER: Hitox Corporation of America, Inc.
By: CRAIG SCHKADE
-----------------
Craig Schkade,Chief Financial Officer and Treasurer
NATIONSBANK: NationsBank, N.A.
BY: WILLIAM HULSEY
------------------
William Hulsey, Vice President
<PAGE> 45
<PAGE>
EXHIBIT A OF EXHIBIT 10.5
NationsBank, N.A.
PROMISSORY NOTE
DATE: July 17, 1998 New [ ] Renewal [X] Amount $2,000,000
MATURITY DATE: April 30, 2000
BORROWER: Hitox Corporation of America, Inc.
418 Peoples Street
Corpus Christi, Texas 78469
(Name and street address, including county)
BANK: NationsBank, N.A. which is the successor in interest
by merger to NationsBank of Texas, N.A.
Banking Center:
Corpus Christi Downtown
500 North Shoreline Blvd.
Nueces County
Corpus Christi, Texas 78471
(Street address including county)
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank,
the principal amount of Two Million and No/00 Dollars ($2,000,000), or so
much thereof as may be advanced from time to time in immediately available
funds, together with interest computed daily on the outstanding principal
balance hereunder, at an annual interest rate, and in accordance with the
payment schedule, indicated below.
1. RATE.
Prime Rate. The Rate shall be the Prime Rate per annum. The "Prime Rate"
is the fluctuating rate of interest established by Bank from time to time, at
its discretion, whether or not such rate shall be otherwise published. The
Prime Rate is established by Bank as an index and may or may not at any time
be the best or lowest rate charged by Bank on any loan.
Notwithstanding any provision of this Note, Bank does not intend to charge
and Borrower shall not be required to pay any amount of interest or other
charges in excess of the maximum permitted by applicable law. Borrower agrees
that during the full term hereof, the maximum lawful interest rate for this
Note as determined under Texas law shall be the indicated rate ceiling as
specified in Article 5069-1.04 of VATS. Further, to the extent that any other
lawful rate ceiling exceeds the rate ceiling so determined then the higher
rate ceiling shall apply. Any payment in excess of such maximum shall be
refunded to Borrower or credited against principal, at the option of Bank.
<PAGE> 46
<PAGE>
2. ACCRUAL METHOD. Unless otherwise indicated, interest at the Rate set forth
above will be calculated based on an actual year of 365 or 366 days.
3. RATE CHANGE DATE. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the
index or base rate changes.
In the event any index is discontinued, Bank shall substitute an index
determined by Bank to be comparable, in its sole discretion.
4. PAYMENT SCHEDULE. All payments received hereunder shall be applied first
to the payment of any expense or charges payable hereunder or under any other
loan documents executed in connection with this Note, then to interest due
and payable, with the balance applied to principal, or in such other order as
Bank shall determine at its option.
Single Principal Payment. Principal shall be paid in full in a single
payment on April 30, 2000. Interest thereon shall be paid monthly, commencing
on July 31, 1998, and continuing on the last day of each successive month,
thereafter, with a final payment of all unpaid interest at the stated
maturity of this Note.
5. REVOLVING FEATURE.
Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the principal
amount of this Note, provided that Borrower is not in default under any
provision of this Note, any other documents executed in connection with this
Note, or any other note or other loan documents now or hereafter executed in
connection with any other obligation of Borrower to Bank, and provided that
the borrowings hereunder do not exceed any borrowing base or other limitation
on borrowings by Borrower. Bank shall incur no liability for its refusal to
advance funds based upon its determination that any conditions of such
further advances have not been met. Bank records of the amounts borrowed from
time to time shall be conclusive proof thereof.
6. REPRESENTATIONS., COVENANTS, WAIVERS AND CONSENTS. Borrower and
NationsBank of Texas, N.A. have entered into a Loan Agreement dated August
31, 1995, which has been amended by a First Amendment to Loan Agreement and a
Second Amendment to Loan Agreement (now and as hereafter amended, the "Loan
Agreement"). Borrower represents that all of the covenants in the Loan
Agreement are true and correct. Borrower covenants that it will keep all of
the covenants and agreements set forth in the Loan Agreement. . No waiver,
consent, modification or amendment with respect to this Promissory Note shall
be effective without compliance with the provisions of Paragraph 6.4 of the
Loan Agreement.
7. PREPAYMENTS. Prepayments may be made in whole or in part at any time on
any loan for which the Rate is based on the Prime Rate. All prepayments of
principal shall be applied in the inverse order of maturity, or in such other
order as Bank shall determine in its sole discretion. No prepayment of any
other loan shall be permitted without the prior written consent of Bank.
Notwithstanding such prohibition, if there is a prepayment of any such loan,
whether by consent of Bank, or because of acceleration or otherwise, Borrower
<PAGE> 47
<PAGE>
shall, within 15 days of any request by Bank, pay to Bank any loss or expense
which Bank may incur or sustain as a result of such prepayment. For the
purposes of calculating the amounts owed only, it shall be assumed that Bank
actually funded or committed to fund the loan through the purchase of an
underlying deposit in an amount and for a term comparable to the loan, and
such determination by Bank shall be conclusive, absent a manifest error in
computation.
8. EVENTS OF DEFAULT. The occurrence of any Event of Default specified in
Paragraph 5.1 of the Loan Agreement, unless cured within the time specified
therein, shall constitute an Event of Default under this Promissory Note.
9. REMEDIES UPON DEFAULT. The effect of the occurrence of any Event of
Default under this Promissory Note shall be as specified in Paragraph 5.2 of
the Loan Agreement. In addition, upon the occurrence of an Event of Default
which is not cured within the time specified therein, the Rate of Interest on
this Promissory Note shall be increased, from and after such date, to the
Prime Rate plus three percent (3.0%) per annum, not to exceed the maximum
rate allowed by law (the "Default Rate"). At Bank's option, any accrued and
unpaid interest, fees or charges may, for purposes of computing and accruing
interest on a daily basis after the due date of the Note or any installment
thereof, shall be deemed to be a part of the principal balance, and interest
shall accrue on a daily compounded basis after such date at the Default Rate
provided in this Note until the entire outstanding balance of principal and
interest is paid in full.
10. NON-WAIVER. The failure at any time of Bank to exercise any of its
options or any other rights hereunder shall not constitute a waiver thereof,
nor shall it be a bar to the exercise of any of its options or rights at a
later date. All rights and remedies of Bank shall be cumulative and may be
pursued singly, successively or together, at the option of Bank. The
acceptance by Bank of any partial payment shall not constitute a waiver of
any default or of any of Bank's rights under this Note. No waiver of any of
its rights hereunder, and no modification or amendment of this Note, shall be
deemed to be made by Bank unless the same shall be in writing, duly signed on
behalf of Bank; each such waiver shall apply only with respect to the
specific instance involved, and shall in no way impair the rights of Bank or
the obligations of Borrower to Bank in any other respect at any other time.
11. APPLICABLE LAW, VENUE AND JURISDICTION. This Promissory Note shall be
subject to all of the provisions of the Loan Agreement relating to applicable
law, venue and jurisdiction, including but not limited to Paragraphs 6.11
through 6.14 thereof.
12. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision
of this Note shall not affect the enforceability or validity of any other
provision herein and the invalidity or unenforceability of any provision of
this Note or of the Loan Documents to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to
other persons or circumstances.
13. BINDING EFFECT. This Note shall be binding upon and inure to the benefit
of Borrower, Borrower and Bank and their respective successors, assigns,
heirs and personal representatives, provided, however, that no obligations of
Borrower or Borrower hereunder can be assigned without prior written consent
of Bank.
<PAGE> 48
<PAGE>
14. CONTROLLING DOCUMENT. To the extent that this Note conflicts with or is
in anyway incompatible with any other document related specifically to the
loan evidenced by this Note, the Loan Agreement shall control over any other
such document, and if the Loan Agreement does not address an issue, then this
Note and such other document shall control to the extent that it deals most
specifically with an issue.
15. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT,
SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES
OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF
J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL
RULES" THERETO, PURSUANT TO THE PROVISIONS OF PARAGRAPH 6.2 OF THE LOAN
AGREEMENT. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY
BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN
ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by, all terms
and conditions of this Note.
NOTICE OF FINAL AGREEMENT:
THE WRITTEN LOAN AGREEMENT, THIS PROMISSORY NOTE AND ALL OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Bank: Borrower:
NATIONSBANK, N.A. HITOX CORPORATION OF AMERICA, INC.
By: WILLIAM HULSEY By: CRAIG SCHKADE
- ------------------- -------------------------------------
William Hulsey Craig Schkade
Vice President Chief Financial Officer and Treasurer
<PAGE> 49
<PAGE>
EXHIBIT B OF EXHIBIT 10.5
BORROWING BASE CERTIFICATE
This Borrowing Base Certificate is delivered pursuant to Paragraph 1.2
of the Loan Agreement which agreement as amended is called herein the "Loan
Agreement") dated August 31, 1995 between Hitox Corporation of America, Inc.
("Borrower") and NationsBank of Texas, N.A. as amended by a First Amendment
to Loan Agreement and by a Second Amendment to Loan Agreement executed by
Borrower and by NationsBank, N.A., successor in interest by merger to
NationsBank of Texas, N.A. ("NationsBank"). Words which are capitalized
herein which are defined in said Loan Agreement shall have the same meanings
specified in the Loan Agreement. The undersigned hereby certifies that the
following amounts and statements are true and correct, as of
_________________________, 19___.
1. Eligible Accounts Receivable ($__________x 80%) $______________
2. Eligible Inventory ($___________x 50%)
(Not to Exceed $2,000,000) +______________
3. Borrowing Base Amount (Total of lines 1
and 2, not to exceed $2,000,000) $______________
4. Less the amount of all advances presently
outstanding under the Revolving Note -______________
5. Less the amount of all Letter of Credit
Obligations outstanding under the
Revolving Note -______________
6. Amount available for additional advances
under the Revolving Note $______________
[If an advance is being requested herewith] Borrower requests an advance of
$______________ under the Revolving Note.
I hereby certify that all of the information contained in this Borrowing
Base Certificate is true and correct as of the date shown above, that the
balance sheet, profit and loss statement, inventory list and aged list of
accounts receivable attached hereunto are true and correct as of said date,
that no material adverse change in the financial condition of Borrower has
occurred, and that no Event of Default specified in our Loan Agreement with
NationsBank has occurred.
Hitox Corporation of America, Inc.
By: CRAIG SCHKADE
-------------
Craig Schkade, Chief Financial Officer and Treasurer
<PAGE> 50
<PAGE>
COMPLIANCE CERTIFICATE
This Compliance Certificate is delivered pursuant to Section 4.4 of the
Loan Agreement dated as of August 31, 1995 (together with all amendments and
modifications, if any, from time to time made thereto, the "Loan Agreement"),
between Hitox Corporation of America, Inc. ("Borrower") and NationsBank of
Texas, N.A. as amended by a First Amendment to Loan Agreement and by a Second
Amendment to Loan Agreement executed by Borrower and by NationsBank, N.A.,
successor in interest by merger to NationsBank of Texas, N.A. ("NationsBank")
. Unless otherwise defined, terms used herein (including the attachments
hereto) shall have the meanings provided in the Loan Agreement.
The undersigned, on behalf of the Borrower, hereby certifies and
warrants pursuant to Paragraphs 4.17 through 4.21 of the Loan Agreement, as
follows:
1. The undersigned is authorized to make this certificate on behalf of the
Borrower.
2. As of ____________________, 19__
(a) NO DEFAULT. Borrower was not in default of any of the provisions of
the Loan Agreement during the three month period to which this Compliance
Certificate relates;
(b) SECTION 4.20. Borrower's Ratio of Total Liabilities to Net Worth was
______ to 1.0 for the twelve months ending on said date, computed as set
forth on Attachment One; and
(c) SECTION 4.21. Borrower's Ratio of Cash Flow to Fixed Charges (i.e.
Borrower's Fixed Charge Coverage) was ______ to 1.0 on said date, computed as
set forth on Attachment Two.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
certificate to NationsBank this ______day of ________________, 19___.
Hitox Corporation of America, Inc.
By: CRAIG SCHKADE
-------------
Craig Schkade, Chief Financial Officer and Treasurer
<PAGE> 51
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-39755) pertaining to the 1990 Incentive Plan for Hitox
Corporation of America of our report dated February 19, 1999, with respect to
the financial statements of Hitox Corporation of America included in the Form
10-KSB for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Antonio, Texas
March 3, 1999
<PAGE> 52
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $1737
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<RECEIVABLES> 1311
<ALLOWANCES> 0
<INVENTORY> 5304
<CURRENT-ASSETS> 8438
<PP&E> 8196
<DEPRECIATION> 5694
<TOTAL-ASSETS> 11617
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<COMMON> 1186
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<SALES> 11747
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<CGS> 8276
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