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, 1999
[ ] 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
<PAGE> 1
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
--- ---
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]
State issuer's revenues for its most recent fiscal year: $11,582,720
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 14, 2000, 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: $4,675,431
Number of shares of the registrant's Common Stock outstanding as of February
14, 2000
4,773,187
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 5, 2000,
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 Yes No X
Disclosure Format (check one): --- ---
<PAGE> 2
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% of net sales in both 1999 and 1998. 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 Malaysian subsidiary
manufactures HITOX pigment under a licensing agreement and sells HITOX
pigment in Asia and in Europe. Hitox receives royalties on sales made under
this license agrrangement. 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
<PAGE> 3
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 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, and MT continues to provide
the Company with its vital raw material. See "Subsequent Event" on page 11
for information regarding the Company's plans to reacquire MT.
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 had an initial term of five years and expired in December of
1999.
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A new five-year supply contract (the "New Supply Agreement") was executed
with the existing supplier on September 28, 1999, and became effective on
December 16, 1999. The New Supply Agreement has a take or pay arrangement
but reduces the quantity of material the Company is required to purchase and
continues with the pricing formula under the original Supply Agreement. The
New Supply Agreement provides that either party may terminate the agreement
with twelve months prior notice.
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. Alumina trihydrate, the raw material used to manufacture HALTEX is
acquired domestically. Some tightening of the supplies of alumina trihydrate
has occurred recently, though to this point the Company has not been
adversely affected. 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 uses five of its
seven fluid energy milling lines to manufacture HITOX pigment at its Corpus
Christi plant.
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 using one dedicated fluid energy milling line.
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. In 1999, one of the fluid
energy milling lines was dedicated to the production of a small particle size
HALTEX pigment.
<PAGE> 5
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.
New Licensee
A license agreement was executed in July of 1999 with MT for the
production by MT of HITOX pigment in Malaysia. One fluid energy milling line
was installed in Malaysia in 1999, with plans for a second line in 2000. The
Company receives royalty payments on sales of HITOX pigment produced and sold
by MT.
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 1999.
MANAGEMENT
Mr. Bernard Paulson, a director of the Company since 1992, was appointed
President and Chief Executive Officer by the Board on June 1, 1999. Mr.
Paulson had served as Acting Chief Executive Officer since November 1, 1998.
Mr. Richard L. Bowers was appointed to the position of Executive Vice
President/Director of Sales and Marketing on June 1, 1999. 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.
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 Executive Vice President/Director of Sales and
Marketing. The Company has five regional sales managers who live and work in
their respective territories, which include the Eastern, Western, Southern,
Southeastern and Southwestern United States. A sixth 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 sales efforts for Asia are now directed by its licensee in
Malaysia, MT.
<PAGE> 6
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 28% of
total net sales in 1999.
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. In 1997, the Company strengthened its relationship with its
former subsidiary by appointing MT master distributor for the Asia/Pacific
region, as well as Europe. 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. With the addition of a HITOX milling line in Malaysia in 1999 under
a new license agreement, MT will both produce and sell HITOX pigment.
Foreign sales through distributors accounted for approximately 4% of total
net sales in 1999 and 1998.
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 42% of total net sales in 1999 and 39% of
total sales in 1998. The direct foreign customers accounted for 10% of total
net sales in 1999 and 7% of total net sales in 1998. The Company has
historically maintained a relatively stable customer and distributor base.
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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 1999 1998
--------------------------------- -------- --------
(in thousands of dollars)
United States $ 9,956 $ 10,280
Canada & Mexico 1,329 1,186
South & Central America 86 2
Asia-Australia 181 79
Africa-Middle East 31 172
Europe -- 28
-------- --------
Total $ 11,583 $ 11,747
======== ========
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
<PAGE> 8
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.
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.
<PAGE> 9
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 14, 2000, 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. Efforts have also been made
to register trademarks in certain foreign countries.
EMPLOYEES
As of December 31, 1999, the Company had a total of 50 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.
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. 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. 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 has an agreement in
<PAGE> 10
principal with the Port to amend the current leases so that they expire no
earlier than the year 2027. As part of that agreement, the Company intends
to sell the parcel of land that it owns to the Port and enter into a new
lease for that property that expires in the same year as the existing two
leases.
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, 1999.
EXECUTIVE OFFICERS
The names of the members of the Company's executive officers at
December 31, 1999, each of whom is elected annually, are set forth below:
Name Age Position Hitox Since
---- --- -------- -----------
Bernard Paulson 71 President and Chief 1992
Executive Officer
Richard L. Bowers 57 Executive Vice President and 1999
Director of Sales and Marketing
Kelso C. Brooks, Jr. 52 Senior Vice President 1991
Craig Schkade 45 Chief Financial 1989
Officer and Treasurer
Elizabeth Morgan 58 Secretary 1988
<PAGE> 11
Bernard Paulson was appointed President and Chief Executive Officer by
the Board on June 1, 1999. He has been a director of the Company since 1992.
Mr. Paulson was 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.
Richard Bowers was appointed Executive Vice President/Director of Sales
and Marketing on June 1, 1999. He joined Benilite in 1969 and was stationed
in Singapore and Malaysia. In 1971 Mr. Bowers joined the staff of the Hitox
Division of Benilite in Corpus Christi and was employed until the spin-off of
the Company in 1980. From 1980 until 1994 he held positions of President,
Chief Executive Officer and Chairman of the Board of the Company. From 1994
to June 1999, Mr. Bowers was a Director and Owner of Environmental Analytics,
Inc., an environmental services business based in Houston, Texas. Mr. Bowers
has a Bachelors of Arts degree from Furman University.
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.
<PAGE> 12
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 or 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
------------- -------- ------- -------- -------
1999 High $ 2.188 $ 3.313 $ 2.375 $ 2.000
Low 1.438 2.000 2.000 1.375
1998 High 2.125 2.438 2.125 2.125
Low 1.469 1.688 1.000 1.250
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 Bank of America (formerly NationsBank, N.A.). (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, 1999 was 101. In addition, there are approximately 750
beneficial shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales: Net sales for 1999 were $11,582,720, a decrease of $164,314
or 1.4% compared with 1998 net sales of $11,747,034. Total 1999 sales of
HITOX pigment accounted for 73.9% or $8,556,122 of total sales in 1999, a
decrease of 2.1%, as compared with $8,736,653, or 74.4% of total sales in
1998. The decrease in HITOX pigment sales was partially offset by a 3%
increase in the sale of BARTEX pigments. The Company's financial performance
continues to be dependent on sales of the single product line, HITOX pigment.
<PAGE> 13
The Company's net sales in the U.S. decreased by 3.2%, to $9,955,616 in
1999 from $10,279,597 in 1998. Net sales for use in foreign countries
increased by $159,667 or 10.9% to $1,627,104 in 1999, from $1,467,437 in
1998. Sales increased in 1999 to Mexico, South America and Asia compared
with 1998.
Cost of Sales: Total cost of sales in 1999 decreased $194,822 or 2.4%
from 1998. Accompanying the lower 1999 sales volumes, production costs
decreased in 1999 due to higher production volumes and a corresponding
increase in finished goods inventory. Gross profit increased to 30.2% in
1999 compared with 29.6% for 1998.
General, Administrative and Selling Expenses: Total general,
administrative and selling expenses for 1999 were $2,606,791, an increase of
$201,725 or 8.4%, compared with 1998. This increase is due primarily to
higher selling expenses resulting from an increase in the number of sales and
marketing employees in 1999. As a percentage of sales, these expenses were
22.5% in 1999, and 20.5% in 1998. Bad debt expense has been insignificant
during both periods.
Adjustment of Asset Held for Sale to Fair Market Value: In 1998 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 a charge of $90,600
in the fourth quarter of 1997 to reduce the building to fair value. An
additional charge of $120,000 was recorded in the first quarter of 1998 based
on an offer it accepted for purchase of the building. The sale of the
building was completed on March 1, 1999, for approximately its carrying
value.
Interest Income: Interest income was $88,745 in 1999 compared with
$78,904 in 1998, an increase of 12.5% which resulted from higher daily cash
balances in 1999 available for investment.
Interest Expense: Interest expense in 1999 decreased $45,909 compared
with 1998. The decrease was the result of pre-paying the Company's term note
in the first quarter of 1999.
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 $17,000 was recorded in 1999 and $13,000 in 1998.
Cash and Cash Equivalents: The balance in cash and cash equivalents
increased $592,478 from the end of 1998 to the end of 1999. This increase
was the result of positive cash flow from operations, net of cash used in
investing and financing activities.
<PAGE> 14
Inventories: Inventories increased $1,185,490 from the end of 1998 to
the end of 1999. The primary reason for the increase was required raw
material purchases under a supply agreement with the Company's former
subsidiary, Malaysian Titanium Corporation. Also contributing to the
increase was planned higher finished goods inventory at year end 1999 as a
precaution against year 2000 related production problems.
Accounts Payable: The accounts payable increased $602,786 from the end
of 1998 to the end of 1999. The increase is due primarily to an increase in
raw material accounts payable for goods in transit.
Notes Payable to Banks: There was no outstanding balance under the
Company's bank line of credit at the end of 1998 or 1999.
Accrued Expenses: The increase in accrued expenses of $51,671 from the
end of 1998 to the end of 1999 is primarily the result of an increase in
accrued inventory costs, primarily for ocean freight.
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 this remaining term note
effective January 15, 1999, leaving the Company debt free.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a strong balance sheet at the end of 1999, with
significant cash and no debt. Working capital increased $1,440,939 or 21% to
$8,306,506 at December 31, 1999 compared with $6,865,567 at December 31,
1998. In 1999, cash increased $592,478, with operating activities providing
$1,009,378, while $51,688 was used in investing activities, and $365,212 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
purchased under a supply agreement (the "Supply Agreement") with its former
subsidiary, Malaysian Titanium Corporation. The Supply Agreement, which had
an initial term of five years, expired in December 1999. A shipment is
planned in the first quarter of year 2000 that will fullfill the Company's
purchase obligations under the Supply Agreement.
A new five-year supply contract (the "New Supply Agreement") was executed
with the existing supplier on September 28, 1999, and became effective on
December 16, 1999, with the same pricing formula as the original Supply
Agreement. The New Supply Agreement is a take or pay arrangement but reduces
the quantity of material the Company is required to purchase. The New
Supply Agreement can be terminated by either party with one years prior
notice.
<PAGE> 15
As discussed in the section titled "Subsequent Events" below, the Company
may acquire a controlling ownership interest in MT, and up to 100% ownership
of MT. Such a transaction could affect the purchases under the New Supply
Agreement. MT's liquidity is dependent upon the purchases of SR by the
Company. Any adjustment in the terms of the New Supply Agreement would
consider the liquidity needs and resources of both MT and the Company, and
would attempt to balance the needs of both companies.
The Company has a loan agreement with Bank of America (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 1999. The loan agreement
was renewed (the "Renewal") effective July 17, 1998, and reduced 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
included 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 Renewal expires on April 30, 2000 and the Company
believes that a new agreement will be reached with the Bank or another bank
on terms at least as favorable as the expiring agreement.
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 President and Chief Executive Officer
by the Board on June 1, 1999. Prior to this appointment, Mr. Paulson had
served in a part-time capacity as Acting Chief Executive Offcier since
November 1, 1997. Mr. Richard L. Bowers was appointed Executive Vice
President/Director of Sales and Marketing on June 1, 1999. 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.
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.
<PAGE> 16
Impact of the Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. The Company's primary computer system and
most other peripheral equipment was substantially Year 2000 ready by the end
of 1998. In 1999, the Company completed the testing of its systems. As a
result of those planning and implementation efforts, the Company experienced
no significant disruptions in mission critical information technology and non-
information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company did not incur any
material expense in 1999 in connection with remediating its systems. The
Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Forward Looking Information
Certain portions of this report contain forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties
including, without limitation, changes in demand for the Company's products,
changes in competition, economic conditions, fluctuations in market price for
TiO2 pigments, interest rate fluctuations, changes in the capital markets,
changes in tax and other laws and governmental rules and regulations
applicable to the Company's business, and other risks indicated in the
Company's filing with the Security and Exchange Commission. These risks and
uncertainties are beyond the ability of the Company to control, and, in many
cases, the Company cannot predict all of the risks and uncertainties that
could cause its actual results to differ materially from those indicated by
the forward-looking statements. When used in this report, the words
"believes," "estimates," "plans," "expects," "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
Subsequent Events
On January 3, 2000, the Company signed a Memorandum of Understanding
(Letter of Intent) with Megamin Ventures Sdn. Bhd. to acquire a controlling
interest (up to 100% of the shares) in the Malaysian Titanium Corporation
("MT"), subject to completion of a satisfactory due diligence review,
negotiation and execution of a definitive acquisition agreement between the
parties, receipt of regulatory approvals and receipt of an appropriate
fairness opinion. The parties are continuing efforts towards negotiating the
terms of a definitive acquisition agreement.
<PAGE> 17
MT is the Company's sole supplier of Synthetic Rutile, the raw material
for the Company's proprietary titanium pigment HITOXr. MT is also producing
and selling HITOX pigment in Asia under a license from the Company.
MT was previously a subsidiary of Hitox Corporation and was sold to
Megamin Ventures Sdn Bhd and other investors in 1994. The acquisition
provides the opportunity to control the raw material supply for the Company's
primary product, HITOX pigment, and represents both a low cost production
site for HITOX pigment and marketing opportunities outside the U.S. market.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are set out in this annual report on Form 10-KSB
commencing on page F-1.
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 2000 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 2000 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 2000 Annual Meeting of Shareholders, is incorporated
herein by reference.
<PAGE> 18
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 2000 Annual
Meeting of Shareholders, is incorporated herein by reference.
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
<PAGE> 19
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(9) 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
24 Supply Agreement with Malaysian Titanium Corporation
Sdn. Bhd. dated September 28, 1999
_________________________________
(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.
(9) Incorporated by reference to the 1998 Form 10-KSB.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1999.
<PAGE> 20
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
-------------------------------------
Date: February 25, 2000 (Bernard A. Paulson, President & CEO)
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.
Signatures Capacity with the Company Date
---------- ------------------------- ----
BERNARD A. PAULSON President and February 25, 2000
- -------------------------- Chief Executive Officer
(Bernard A. Paulson) Director
CRAIG SCHKADE Chief Financial Officer February 25, 2000
- -------------------------- and Treasurer
(Craig Schkade) (Principal Financial and
Accounting Officer)
CHRISTOPHER J. McGOUGAN Chairman of the Board February 25, 2000
- --------------------------
(Christopher J. McGougan)
RICHARD L. BOWERS Executive Vice President February 25, 2000
- -------------------------- and Director
(Richard L. Bowers)
W. CRAIG EPPERSON Director February 25, 2000
- --------------------------
(W. Craig Epperson)
THOMAS W. PAUKEN Director February 25, 2000
- --------------------------
(Thomas W. Pauken)
<PAGE> 21
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 23
Balance Sheets - December 31, 1999 and 1998 24
Statements of Income - Years ended December 31, 1999 and 1998 26
Statements of Shareholders' Equity-Years ended
December 31, 1999 and 1998 27
Statements of Cash Flows-Years ended December 31, 1999 and 1998 28
Notes to Financial Statements 29
<PAGE> 22
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, 1999 and 1998, 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
San Antonio, Texas
February 18, 2000
<PAGE> 23
HITOX CORPORATION OF AMERICA
BALANCE SHEETS
December 31,
----------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,329,877 $ 1,737,399
Receivables:
Trade accounts receivable; no
allowance for doubtful accounts
considered necessary 1,333,680 1,310,663
Other 11,802 40,258
------------ ------------
Total Receivables 1,345,482 1,350,921
Inventories 6,489,840 5,304,350
Other current assets 41,937 44,869
------------ ------------
Total current assets 10,207,136 8,437,539
PROPERTY, PLANT AND EQUIPMENT, net 2,709,868 2,502,748
ASSET HELD FOR SALE -- 651,055
OTHER ASSETS 43,200 25,175
------------ ------------
$ 12,960,204 $ 11,616,517
============ ============
See accompanying notes
<PAGE> 24
HITOX CORPORATION OF AMERICA
BALANCE SHEETS
December 31,
----------------------------
1999 1998
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 578,224 $ 196,123
Accounts payable - MT 810,920 590,235
Accrued expenses 511,486 396,365
Current maturities of long-term debt -- 389,249
------------ ------------
Total current liabilities 1,900,630 1,571,972
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;
4,773,187 shares outstanding at
12/31/99; and 4,657,487 shares
outstanding after deducting 88,240
shares held in treasury at 12/31/98 1,193,297 1,186,432
Additional paid-in capital 14,315,410 14,341,193
Accumulated deficit (4,449,133) (5,440,125)
------------ ------------
11,059,574 10,087,500
Less: cost of treasury stock -- (42,955)
------------ ------------
Total shareholders' equity 11,059,574 10,044,545
------------ ------------
$ 12,960,204 $ 11,616,517
============ ============
See accompanying notes
<PAGE> 25
HITOX CORPORATION OF AMERICA
STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------
1999 1998
------------- -------------
NET SALES $ 11,582,720 $ 11,747,034
COSTS AND EXPENSES:
Cost of sales 8,080,883 8,275,705
General, administrative
and selling expenses 2,606,791 2,405,066
Adjustment of asset held for sale
to fair market value -- 120,000
------------- -------------
OPERATING INCOME 895,046 946,263
OTHER INCOME (EXPENSE):
Interest expense (3,853) (49,762)
Interest income 88,745 78,904
Other, net 28,054 7,728
------------- -------------
INCOME BEFORE INCOME TAX 1,007,992 983,133
Current income tax expense 17,000 13,000
------------- -------------
NET INCOME $ 990,992 $ 970,133
============= =============
Earnings per Common Share
Basic $ 0.21 $ 0.21
============= =============
Diluted $ 0.21 $ 0.21
============= =============
Weighted average common shares and
equivalents outstanding
Basic 4,718,093 4,657,487
============= =============
Diluted 4,765,002 4,688,374
============= =============
See accompanying notes
<PAGE> 26
<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, 1998 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
Issuance of shares
in exchange
for warrants 11,760 2,940 (2,940) -- -- -- --
Issuance of treasury
stock in exchange
for warrants -- -- (42,955) -- (88,240) 42,955 --
Exercise of
stock options 15,700 3,925 20,112 -- -- -- 24,037
Net Income -- -- -- 990,992 -- -- 990,992
--------- ---------- ----------- ----------- ------- ------- -----------
BALANCE AT
DECEMBER 31, 1999 4,773,187 $1,193,297 $14,315,410 $(4,449,133) -- $ -- $11,059,574
========= ========== =========== =========== ======= ======= ===========
</TABLE>
See accompanying notes
<PAGE> 27
HITOX CORPORATION OF AMERICA
STATEMENTS OF CASH FLOW
Years Ended December 31,
----------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 990,992 $ 970,133
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 505,877 522,337
Gain on sale of property,
plant and equipment (10,255) (1,799)
Adjustment of asset held for sale
from cost to fair market value -- 120,000
Other assets (18,025) 2,409
Changes in working capital:
Receivables 5,439 (245,600)
Inventories (1,185,490) (404,778)
Other current assets 2,932 (13,907)
Accounts payable and accrued expenses 717,907 41,344
----------- -----------
Net cash provided by
operating activities 1,009,377 990,139
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (718,076) (332,078)
Proceeds from sales of property,
plant and equipment 666,389 2,125
----------- -----------
Net cash used in investing activities (51,687) (329,953)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (389,249) (642,429)
Proceeds from the issuance of common stock
and exercise of common stock options 24,037 --
----------- -----------
Net cash used in financing activities (365,212) (642,429)
NET INCREASE IN CASH AND CASH EQUIVALENTS 592,478 17,757
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,737,399 1,719,642
----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR $ 2,329,877 $ 1,737,399
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 17,000 $ 13,000
Interest paid 3,853 49,762
See accompanying notes
<PAGE> 28
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 master distributor for HITOX pigment in the Asia/Pacific region, as
well as Europe. 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. In 1999, MT and
the Company entered into a license agreement under which MT will produce
HITOX pigment using the fluid energy milling process. MT began producing
HITOX pigment in the third quarter of 1999.
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 3 to 35 years, and is generally provided
using the straight-line method. Maintenance and repair costs are charged to
expense as incurred.
<PAGE> 29
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
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 73.9% and 74.4% of total sales in 1999 and 1998, 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.
<PAGE> 30
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 reflects the effect
of all dilutive items.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in
earnings. Because of the Company's minimal use of derivatives, instruments
or hedging activities, the adoption of Statement No. 133 on January 1, 1999
did not have a significant effect on earnings or the financial position of
the company.
Cost of Computer Software
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, Accounting for Costs of Computer Software
Developed For or Obtained for Internal use. SOP 98-1 requires the Company to
expense training costs incurred in connection with developing or obtaining
internal software. The adoption of this SOP on January 1, 1999 did not have
an effect on the net income or earnings per share for the twelve months ended
December 31, 1999.
2. INVENTORIES
A summary of inventories follows:
December 31,
--------------------------
1999 1998
----------- -----------
Raw materials $ 5,229,330 $ 4,694,575
Work in progress 92,044 72,627
Finished goods 1,085,238 434,650
Supplies 83,228 102,498
----------- -----------
Total Inventories $ 6,489,840 $ 5,304,350
=========== ===========
See Note 10 regarding purchase commitments for synthetic rutile.
<PAGE> 31
3. PROPERTY, PLANT AND EQUIPMENT
Major classifications and expected lives of property, plant and equipment
are summarized below:
December 31,
Expected -----------------------
Life 1999 1998
------------ ---------- ----------
Land and Office building 35 years $ 42,922 $ 42,922
Production facilities 10, 20 years 3,943,342 3,383,687
Machinery and equipment 5, 7 years 4,182,094 4,103,420
Furniture and fixtures 3, 5, 7, 10, 20 years 738,170 666,289
---------- ----------
Total 8,906,528 8,196,318
Less accumulated depreciation (6,196,660) (5,693,570)
---------- ----------
Property, Plant and Equipment, net $2,709,868 $2,502,748
========== ==========
The amounts of depreciation expense calculated on the Company's property,
plant and equipment for the years ending December 31, 1999 and December 31,
1998 were $505,877, and $522,337, 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.
In 1998 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 a charge
of $90,600 in the fourth quarter of 1997 to reduce the building to fair
value. An additional charge of $120,000 was recorded in the first quarter of
1998 based on an offer it accepted for purchase of the building. The sale of
the building was completed on March 1, 1999, for approximately its carrying
value.
<PAGE> 32
5. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
A summary of long-term debt follows:
December 31,
-----------------------
1999 1998
--------- ---------
8.17% term note payable to a U.S. bank,
incorporated into the Loan
Due January 31, 2000, principal balance
prepaid January 15, 1999 $ -- $ 389,249
--------- ---------
Total -- 389,249
Less current maturities -- 389,249
--------- ---------
Total long-term debt $ -- $ --
========= =========
The Company has a loan agreement with Bank of America, (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 1999. The loan
agreement was renewed (the "Renewal") effective July 17, 1998. The Renewal
matures on April 30, 2000, with an interest rate of the Bank's prime rate.
The line of credit is secured by accounts receivable and inventory. The
Renewal included 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 is prohibited from paying dividends
without the prior approval of the Bank.
6. INCOME TAXES
A reconciliation between the Company's effective tax rate and the Federal
statutory rate on earnings is as follows:
December 31,
----------------------
1999 1998
--------- ---------
Expense computed at statutory rates $ 342,717 $ 334,265
Other, net 7,790 4,986
Change in valuation allowance ( 333,507) ( 326,251)
--------- ---------
$ 17,000 $ 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)
<PAGE> 33
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax asset as of December 31, 1999
and 1998 are as follows:
December 31,
------------------------
1999 1998
Rounded Rounded
----------- -----------
Deferred Tax Liabilities:
- ------------------------
Book - tax difference of U.S. property,
plant & equipment $ 136,400 $ 156,300
---------- ----------
Total deferred liabilities 136,400 156,300
---------- ----------
Deferred Tax Assets:
- -------------------
Net operating loss carryforwards 3,430,300 3,743,600
Alternative minimum tax credit carryforward 64,700 58,300
Other deferred assets 38,200 84,900
---------- ----------
Total deferred assets 3,533,200 3,886,800
---------- ----------
Net deferred tax assets before
valuation allowance 3,396,800 3,730,500
---------- ----------
Valuation allowance (3,396,800) (3,730,300)
---------- ----------
Net deferred tax liability $ -- $ --
========== ==========
As of December 31, 1999, the Company has a net operating loss
carryforward of $10,100,000, which expires in 2009.
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.
<PAGE> 34
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 which
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. In 1999
an additional 75,000 options were issued outside the Plan at an exercise
price of $2.125.
Exercise prices on options outstanding at December 31, 1999 ranged from
$1.531 to $10.625 per share. The weighted-average remaining contractual life
of those options is 8.25 years. The number of options exercisable at
December 31, 1999 and December 31, 1998 was 277,000 and 219,475,
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 $1.531 on March 3, 1998. Most employees who
chose to have their options reissued 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> 35
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, 1997 675,000 426,275 $5.041 $1.750 - $10.625
Granted -- 223,500 $1.567 $1.531 - $ 2.063
Forfeited -- (279,500) $5.570 $1.531 - $ 9.750
------- -------
Balances at
December 31, 1998 675,000 370,275 $2.530 $1.531 - $10.625
Granted 75,000 257,200 $2.264 $2.000 - $ 2.921
Exercised -- (15,700) $1.531 $1.531
Forfeited -- (110,375) $4.047 $1.531 - $10.625
------- -------
Balances at
December 31, 1999 750,000 501,400 $2.095 $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 1998 and 1999, respectively: risk-free interest
rates of 5.73% and 5.88%; a dividend yield of zero; volatility factors of the
expected market price of the Company's common stock of .576 and .596; and a
weighted-average expected life of the option of 5 years in 1998 and in 1999.
The weighted-average fair value of options granted during 1999 was $1.54.
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> 36
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:
1999 1998
--------- ---------
Pro forma net income $ 802,481 $ 822,605
Pro forma earnings per share
Basic $ 0.17 $ 0.18
Diluted $ 0.17 $ 0.18
Stock Warrants
During the year, warrants to purchase 100,000 shares of common stock
expired. In addition, the Company issued 100,000 shares of it common stock
in exchange for the 1,111,111 outstanding warrants which were scheduled to
expire on June 15, 2000. The shares issued included 88,240 shares which were
held in Treasury.
In connection with all of the Company's stock options, 750,000 shares of
the Company's common stock have been reserved.
8. 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, 1999, the Company contributed
$51,356 to the profit sharing plan and $51,183 for the year ended December
31, 1998.
The Company also offers a 401(k) savings plan administered by an
investment services company. Employees are eligible to participate in the
plan after completing six months of service with the Company. The Company
matches contributions up to 2% of the employee's eligible earnings or $400
per year, which ever is greater. Total Company contributions to the 401(k)
plan for the years ended December 31, 1999 and 1998 were $32,354 and $14,795,
respectively.
<PAGE> 37
9. CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998
--------- ---------
NUMERATOR:
Net Income $ 990,992 $ 970,133
Numerator for basic earnings per share -
income available to common stockholders 990,992 970,133
--------- ---------
Effect of dilutive securities -- --
--------- ---------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 990,992 $ 970,133
========= =========
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 4,718,093 4,657,487
Effect of dilutive securities
Employee stock options 46,909 30,887
--------- ---------
Dilutive potential common shares 46,909 30,887
--------- ---------
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversions 4,765,002 4,688,374
========= =========
EARNINGS PER COMMON SHARE:
Basic $ 0.21 $ 0.21
========= =========
Diluted $ 0.21 $ 0.21
========= =========
Excluded from the calculation of diluted earnings per share were a total
of 317,200 options and warrants in 1999 and 1,360,486 in 1998. 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.
<PAGE> 38
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 expired in December of 1999. The fifth year purchase commitment
will be completed with the first shipment in 2000, as mutually agreed between
the Company and MT, thereby satisfying the 1999 purchase requirement of
$4,257,330. The Company's 1998 purchases from MT totaled $4,310,773.
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. For orders placed in 1999, the final year of the Supply
Agreement, the Company negotiated an additional price decrease.
A new five-year supply contract (the "New Supply Agreement") was executed
with the existing supplier on September 28, 1999, and became effective on
December 16, 1999 and continues with the pricing formula used under the
original contract. The New Supply Agreement has a take or pay arrangement
but reduces the quantity of material the Company is required to purchase
compared with the agreement that expired.
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.
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. The Company has an agreement in
principal with the Port to amend the current leases so that they expire no
earlier than the year 2027. As part of the agreement, the Company intends to
<PAGE> 39
sell the parcel of land that it owns to the Port and enter into a new lease
for that property that expires in the same year as the existing leases.
Minimum future rental payments under these leases as of December 31, 1999
are as follows:
Years Ending December 31,
------------------------
2000 $ 53,400
2001 53,400
2002 53,400
2003 24,000
2004 24,000
Later years 300,000
---------
Total minimum lease payments $ 508,200
=========
Rent expense under these leases was $53,400 per year during 1999 and
1998. It is expected that as these leases expire, the Company will renew or
replace them with leases on similar assets, at potentially higher rates.
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.
11. PRINCIPAL CUSTOMER INFORMATION AND EXPORT SALES
One customer provided 18.6% and 16% of total revenue during the years
ended December 31, 1999 and 1998, respectively. 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 1999 1998
----------------- ------------ ------------
Canada and Mexico $ 1,328,573 $ 1,186,335
South and Central America 86,540 1,575
Asia- Australia 180,796 78,690
Africa-Middle East 31,195 172,356
Europe -- 28,481
------------ ------------
Total $ 1,627,104 $ 1,467,437
============ ============
<PAGE> 40
The Company sells its products both directly to end-users and to
distributors. The top 10 direct customers accounted for 42% of total net
sales in 1999 and 39% in 1998. Domestic distributors accounted for
approximately 28% of total net sales in 1999 and 30% in 1998.
12. SUBSEQUENT EVENTS
On January 3, 2000, the Company signed a Memorandum of Understanding
(Letter of Intent) with Megamin Ventures Sdn. Bhd. to acquire a controlling
interest (up to 100% of the shares) in the Malaysian Titanium Corporation
("MT"), subject to completion of a satisfactory due diligence review,
negotiation and execution of a definitive acquisition agreement between the
parties, receipt of regulatory approvals and receipt of an appropriate
fairness opinion. The parties are continuing efforts towards negotiating the
terms of a definitive acquisition agreement.
MT is the Company's sole supplier of Synthetic Rutile, the raw material
for the Company's proprietary titanium pigment HITOXr. MTC is also producing
and selling HITOX pigment in Asia under a license from the Company.
MT was previously a subsidiary of Hitox Corporation and was sold to
Megamin Ventures Sdn Bhd and other investors in 1994. The acquisition
provides the opportunity to control the raw material supply for the Company's
primary product, HITOX pigment, and represents both a low cost production
site for HITOX pigment and marketing opportunities outside the U.S. market.
<PAGE> 41
INDEX TO EXHIBITS
Exhibit No. Item Page
----------- ---- ----
23 Consent of Ernst & Young LLP 43
24 New Supply Agreement with Malaysian Titanium 44
Corporation Sdn. Bhd. Dated September 28, 1999
27 Financial Data Schedule 59
<PAGE> 42
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
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 18, 2000, with respect to
the financial statements of Hitox Corporation of America included in the Form
10-KSB for the year ended December 31, 1999.
ERNST & YOUNG LLP
San Antonio, Texas
February 25, 2000
<PAGE> 43
SUPPLY AGREEMENT
THIS AGREEMENT is made the 28th day of September, 1999.
Between
HITOX CORPORATION OF AMERICA, a company incorporated under the laws of
Delaware, United States of America and having its business address at 722
Burleson Street, Corpus Christi, Texas 78402, United States of America
(hereinafter called the "Purchaser") of the one part;
And
MALAYSIAN TITANTIUM CORPORATION SDN BHD, a company incorporated in Malaysia
and having its business address at 4-1/2Mile Jalan Lahat, 30200 Ipoh in the
State of Perak, Malaysia (hereinafter called the "Seller") of the other part.
WHEREAS
(1) The Seller is in the business of manufacturing synthetic rutile
(hereinafter referred to as the "Product") at its plant located at 4-1/2
Mile Jalan Lahat, 30200 Ipoh, Perak, Malaysia (hereinafter referred to
as the "Plant").
(2) The Purchaser is in the business of manufacturing, inter alia, a buff
colored titanium dioxide pigment called HITOX (Registered trademark),
and requires the Product in its manufacturing process.
(3) The Purchaser desires to purchase the Product from the Seller and the
Seller has agreed to sell the same subject to and upon the terms and
conditions hereinafter appearing.
NOW IT IS HEREBY AGREED as follows:
1. CONSIDERATION
In consideration of the sum of One United States Dollar (USD1.00) only now
paid by the Seller to the Purchaser (the receipt of which the Purchaser
hereby acknowledges) the Seller hereby agrees to sell and the Purchaser
hereby agrees to purchase from the Seller, the Product subject to and upon
the terms and conditions set out herein for a period of five (5) years
(hereinafter referred to as the "Principal Period") commencing from December
16, 1999, and thereafter from year to yar unless terminated in accordance
with Clause 14 hereof. The Purchaser or Seller may terminate this Supply
Agreement at any time during the Term of the Agreement with twelve (12)
months' written notice.
<PAGE> 44
2. PURCHASER'S COVENANT TO BUY
During the subsistence of this Agreement, the Purchaser shall purchase the
Product exclusively from the Seller for the term of this Agreement provided
always that the Purchaser shall be entitled to purchase test quantities of
synthetic rutile from third parties for sampling and testing purposes. The
Purchaser agrees to share with the Seller pertinent information learned from
such purchases so long as it does not breach any confidentiality agreements.
3. SPECIFICATIONS
The Product shall be manufactured in accordance with the specifications set
by the Purchaser, details of which are set out in the First Schedule hereto.
Product to be pre-approved by Purchaser before shipment.
4. QUANTITIES
4.1 The Purchaser guarantees that it shall purchase the minimum quantity of
6,000 MT per annum from the Seller during Principal Period of this
Agreement (hereinafter the minimum amount required to be purchased by
the Purchaser under this Agreement shall be referred to as the
"Purchaser's minimum annual quantity").
4.2 During the subsistence of this Agreement, the Seller guarantees that it
shall have available for sale to the Purchaser a minimum quantity of
12,000 MT per annum (hereinafter referred to as the "Seller's minimum
annual quantity") commencing from the date of this Agreement and shall
not be required to supply more than the Seller's minimum annual quantity
unless the Seller at its sole and absolute discretion opts to do
otherwise.
The parties hereto agree that the Purchaser's minimum quantity of the Product
referred to in Clause 4.1 hereof shall be in the approximate proportion of
90% "Standard" grade and 10% "Ultralight" grade. The Purchaser may change
the proportion of the "Standard" versus "Ultralight" grades by giving notice
in sufficient time to the Seller to enable the Seller to produce the required
quantities provided that such change in the proportion shall be mutually
agreed upon.
In the event that that the Purchaser shall wish to purchase a quantity in
excess of the Purchaser's minimum annual quantity during the term of this
Agreement, the Purchaser shall purchase the excess amount from the Seller at
prices to be mutually agreed upon provided that the obligation of the
Purchaser to purchase from the Seller any amount in excess of the Purchaser's
minimum annual quantity shall be on a "meet or release" basis, that is to say
if the Purchaser is able to obtain an offer from a third party to purchase
synthetic rutile similar in quality (in terms of the Purchaser's ability to
use the alternative synthetic rutile in place of the Product) in quantities
at least equal to the amount required by the Purchaser at a price lower than
that offered by the Seller and otherwise on terms not less favorable than
<PAGE> 45
those of the Seller hereunder, and if the Purchaser notifies the Seller of
its interest in such offer and produces satisfactory evidence thereof, the
Seller shall meet such lower price or will release the Purchaser from its
obligations to purchase the Product exclusively from the Seller during the
term of the offer.
5. SUPPLY PRICE
5.1 The supply price of the Product on f.o.b. (Incoterms 1994) Malaysian
port basis in this Agreement shall be determined annually using the
formula set out in the Second Schedule hereto. The Seller hereby
undertakes to give the Purchaser a minimum of four (4) weeks' written
notification of any revised supply price before implementation of the
same.
5.2 In the event that the Purchaser shall require quantities in excess of
the Purchaser's minimum quantity of the Product referred to in Clause
4.1 in this Agreement, the Purchaser shall give the Seller eight (8)
weeks notice of its requirements for such excess amount provided that
the supply price shall be determined in the following manner:
5.2.1 During the Principal Period, the supply price for the said excess
amount of the Product shall be separately negotiated and agreed to
between the parties hereto provided that such supply price agreed upon
shall apply only in respect of the said excess amount; and
5.2.2 For the years subsequent to the Principal Period, the supply price for
the entire quantity of the Product shall be negotiated and agreed to
between the parties hereto.
6. DELIVERY/INSPECTION PRIOR TO SHIPMENT
6.1 The Purchaser shall forward to the Seller every Year a forecast master
schedule with the preestimates of the supply of the Product required
from the Seller for the year which schedule shall be updated by the
Purchaser from time to time. To ensure to the extent feasible that
delivery of the Product shall result in an even flow of deliveries of
the Product consistent with the Seller's production schedules, the
Purchaser shall confirm on or before the tenth (10th) day bimonthly
(once every two months) and shall furnish written shipping instructions
for the quantity required during the next succeeding months provided
always that the Purchaser shall not order more than 2,500 MT each
bimonthly period unless otherwise agreed to between the parties. The
parties hereto agree that shipments of the Product shall be in bulk and
the Purchaser need not take delivery of the Product bimonthly provided
that where the Purchaser has confirmed the amount required but has not
taken delivery, any storage costs incurred by the Seller shall be borne
by the Purchaser. It is hereby agreed between the parties that if the
Purchaser fails to take any such bimonthly amount its total purchase
obligation shall not be reduced unless the Seller elects to cancel the
<PAGE> 46
quantity not taken. Upon agreement by Purchaser and Seller, a bulk
shipment of about 3,000 MT to 5,000 MT in the "hold" of a ship may be
scheduled from time to time.
6.2 Prior to issuing the Quality Certificates in respect of each consignment
of the Product to be shipped to the Purchaser, the Seller shall courier
to the Purchaser or the Purchaser's representative samples of the
Product to enable the Purchaser to test and confirm that the Product is
in order prior to shipment but in no case shall the samples be later
than fourteen (14) days prior to the scheduled date of shipment. Prior
to the scheduled date of shipment, the Purchaser shall inform the Seller
of the results or as soon as possible after the receipt of the samples,
in any case, no later than seven (7) days after receipt. If the Product
does not meet Purchaser's specifications, then Seller shall not ship the
Product but shall properly remedy the Product to meet Purchaser's
required specifications at Seller's expense.
6.3 The Seller shall issue the Quality Certificates for each shipment
confirming that the Product is in accordance with the Specifications as
set out in First Schedule.
7. FAILURE TO PURCHASE GUARANTEED QUANTITIES
7.1 In the event that the Purchaser's offtake shall fail to meet the minimum
quantity as stated in Clause 3.1 hereof, the Purchaser shall be liable
to pay as agreed liquidated damages to the Seller, and the quantum of
damages shall be calculated as follows:
7.1.1 in the event that the Seller is forced to sell the quantity of the
shortfall of the Purchaser's minimum quantity to a third party at a
lower price than the supply price as setforth under the provisions of
Clause 5 hereof (having made all reasonable attempts to sell the same
at a higher price), the measure of damages shall be the difference
between the supply price specified in Clause 5 and the sale price to
the third party multiplied by the quantity of the shortfall (or a part
thereof) sold to the third party;
7.1.2 in the event that the Seller is unable, having made all reasonable
attempts to do so, to sell the quantity of the shortfall (or a part
thereof) to a third party, the measure of damages shall be the supply
price (as determined under the provisions of Clause 5 hereof)
multiplied by the quantity of the shortfall.
8. FAILURE TO SUPPLY GUARANTEED QUANTITIES
8.1. In the event that the Seller fails to supply the minimum quantity of the
Products for which the supply price has been agreed to, the Seller shall
be liable to pay as agreed liquidated damages to the Purchaser and the
quantum of damages shall be calculated as follows:
<PAGE> 47
8.1.1 in the event that the Purchaser is forced to purchase the quantity of
the shortfall of the quantity required by the Purchaser from a third
party at a higher price than the supply price as determined under the
provisions of this Agreement (having made all reasonable attempts to
purchase at a favorable price), the measure of damages shall be the
difference multiplied by the shortfall plus the difference between the
normal charges associated with shipment from the Seller and the actual
freight charges incurred by the Purchaser (if any).
8.1.2 in the event that the Purchaser is unable, having made all reasonable
attempts to do so, to purchase the quantity of the shortfall (or a
part thereof) from a third party, the measure of damages shall be the
difference between the supply price (as determined under the
provisions of this Agreement) plus freight charges to the Purchaser's
premises and the average price of comparable unit of the Purchaser's
HITOX pigment calculated for the 30-day period just prior to the
default multiplied by the quantity of the shortfall.
9. PAYMENT
Unless otherwise agreed between the parties hereto, payment for each
consignment of the Product supplied hereunder shall be made by wire
transfer sixty (60) days after the bill of lading date. All amounts
payable by the Purchaser to the Seller shall be in the currency of the
United States of America.
10. SELLER NOT LIABLE FOR LOSSES/SPECIFICATIONS
10.1 Save that the Product shall conform with the specifications set out in
the First Schedule hereto the Seller makes no warranties or
representations that the Product shall be merchantable or suitable for
any particular purpose or for use under any specific conditions
notwithstanding that such purpose or condition may be known or made
known to the Seller.
10.2 Subject to Clause 10.1, the Seller shall not be liable for any loss or
damage of any kind whatsoever (including but without limiting the
generality of the foregoing all incidental and consequential loss and
damage) however caused inter alia directly or indirectly by or arising
wholly or partly out of or in connection with:
10.2.1 unsuitability for any purpose of the Product; and/or
10.2.2 any claim or demand by any third party at any time out of or otherwise
in connection with the manufacture supply or use of the Product or
things in which the Product is a component of part.
<PAGE> 48
11. WEIGHT READING
With each shipment or vessel loading, the Seller shall contract with a
reputable independent surveyor to view the loading of the Product and to
provide a cargo and draft survey that will be deemed conclusive evidence
of the quantity of the cargo.
12. CORPORATE GUARANTEE
The Seller shall procure such parties acceptable to the Purchaser, to
issue a corporate/personal guarantee to the Purchaser guaranteeing
continuous supply of the contracted quantities of the Product by the
Seller in form acceptable to both parties. The Seller undertakes that
any successors in title and any subsequent major shareholder(s) of the
Seller shall provide a similar guarantee to the Purchaser.
13. FORCE MAJEURE
13.1 Neither party hereto shall have any right of action whatsoever against
the other in respect of any loss whatsoever occurring to such party by
reason of any non-performance under this Agreement occasioned by major
plant breakdowns or delays in transit or delays caused by accidents,
strikes or force majeure. For the purposes of this clause, a force
majeure event includes (without limiting the generality of the
foregoing), inter alia, enemy action, riots, civil commotions,
accidents, fire, major plant breakdowns, interferences by labor or
strikes or lockout of employees, Acts of God or any restrictions,
regulations, orders, acts or omissions or operations by any local or
municipal authority or government department or any causes beyond the
control of the party concerned.
13.2 If at any time during the continuance of this Agreement either party
shall be hindered or prevented from performing its obligations hereunder
by the occurrence of an event set out in Clause 13.1 hereof, this
Agreement shall be suspended during the period the aforesaid event
continues to operate and such party shall not be liable to the other
party for any loss or damage whatsoever suffered by that party by virtue
of the delay or failure to perform its obligations hereunder. Upon the
aforesaid event ceasing to operate, performance of this Agreement shall
resume.
13.3 The parties hereto hereby agree that in the event that any change in the
statutory law, by-law, rule or regulation (hereinafter collectively
referred to as the "laws") of the state or country where a party resides
in affects the party (hereinafter referred to as the "affected party")
in such a way that the Agreement cannot be carried on without infringing
or breaching the laws, the other party shall be given reasonable period
of time to try and accommodate the change in the law in such a way as to
enable the Agreement to be carried on without the affected party being
in breach of the laws. What constitutes a "reasonable period of time"
<PAGE> 49
shall be as determined by the parties but shall not in any event be less
than sixty (60) days provided always that this Agreement shall be
suspended during this said period of time. In the event that the other
party cannot, after the said period of time given, accommodate the
change in the laws then any monies owing by either party shall be paid
forthwith to the other and thereafter this Agreement shall terminate and
be null and void and of no legal effect and neither party shall have any
claim whatsoever against the other in connection with or arising out of
this Agreement save for any antecedent breaches thereof.
14. TERMINATION/LIQUIDATED DAMAGES
14.1 Without prejudice to any other remedies which either party hereto may
have against the other, either party hereto shall have the right at any
time to terminate this Agreement forthwith if the other party commits a
material breach of any of the terms of this Agreement, and, in the case
of a material breach capable of remedy, fails to remedy the same within
fourteen (14) days after receipt of a written notice giving full
particulars of the material breach and requiring it to be remedied. For
the purposes of this Clause 14.1, a material breach shall be considered
capable of being remedied if the party in breach can comply with the
provision in questions in all respects other than as to the time of
performance (provided that time of performance is not of the essence).
14.2 Upon the expiry of the Principal Period of this Agreement, this
Agreement shall automatically be renewed each year provided that
notwithstanding there has been no breach or default by either party
hereto of its obligations under this Agreement, either party hereto may
terminate this Agreement without having to give any reason therefor by
giving twelve (12) months prior notice in writing to the other of its
intention to terminate this Agreement. Upon expiry of such twelve-month
period, this Agreement shall be terminated and be null and void of no
legal effect and neither party hereto shall have any claim whatsoever
against the other in connection with or arising out of this Agreement
save for any antecedent breaches thereof.
14.3 In the event that a party (hereinafter referred to as the "defaulting
party") shall commit a breach of any of the terms of this Agreement at
any time during the Principal Period of this Agreement and the other
party (hereinafter referred to as the "non-defaulting party") exercises
its right of termination of this Agreement in accordance with Clause
14.1 hereof, the defaulting party will:
14.3.1 (if the non-defaulting party is the Seller) be at liberty to sell the
Product in any such way as it deems fit to such person or persons as
it shall think fit without being liable to account to the Purchaser
for any profit made on such sale;
<PAGE> 50
14.3.2 (if the non-defaulting party is the Purchaser) be at liberty to
purchase synthetic rutile from any party as it deems fit without
being liable to account to the Seller in any way whatsoever.
15. TIME
Time wherever mentioned herein is of the essence of this Agreement.
16. ARBITRATION
16.1 Any dispute, difference or question which may arise at any time
hereafter touching the true construction of this Agreement or the rights
and liabilities of the parties hereto shall unless otherwise herein
expressly provided be settled by the parties hereto amicably, failing
which all questions or differences whatsoever must be referred by the
parties to be determined by arbitration under the UNCITRAL (United
Nations Commission on International Trade Law) Arbitration Rules as
interpreted by the Kuala Lumpur Regional Arbitration Centre by a single
arbitrator mutually appointed by the parties hereto in accordance with
the said rules. The arbitration is to be conducted in Malaysia. An
award given by the arbitrator is final and binding, and judgment on it
may be entered in any court having jurisdiction in relation to the
subject matter of the arbitration. The costs and expenses in appointing
the arbitrator shall be jointly borne by the parties.
16.2 Any notice of proceedings or other notices in connection with or which
would give effect to any such proceedings may without prejudice to any
other method of service be served on any party in accordance with Clause
21.
17. INDULGENCE
No relaxation forbearance delay or indulgence by either party hereto in
enforcing any of the terms and conditions of this Agreement or the
granting of time by either party to the other shall prejudice affect or
restrict the rights and powers either party hereunder nor shall any
waiver by either party of any breach hereof operate as a waiver of any
subsequent or any continuing breach hereof.
18. KNOWLEDGE OR ACQUIESCENCE
Knowledge or acquiescence by either party of or in any breach of any of
the conditions or covenants herein contained shall not operate as or be
deemed to be waiver of such conditions or covenants or any of them and
notwithstanding such knowledge or acquiescence each party shall be
entitled to exercise its respective rights under this Agreement and to
require strict performance by the other of the terms and conditions
herein.
<PAGE> 51
19. NO ASSIGNMENT
19.1 Neither party to this Agreement shall assign or purport to assign this
Agreement or any of its rights under this Agreement without the prior
written consent of the other party.
19.2 In the event that one party consents to the assignment of this Agreement
by the other party the terms, provisions, covenants, undertakings,
agreements, obligations and conditions of this Agreement shall be
binding upon and shall inure to the benefit of the assignee of the other
party as if the assignee was an original party to this Agreement.
Notwithstanding such assignment, the other party shall continue to be
bound by the terms and conditions of this Agreement jointly and
severally with the assignee.
20. GOVERNING LAW AND JURISDICTION
This Agreement takes effect, is governed by and shall be construed, in
accordance wit the laws from time to time in force in Malaysia and the
parties hereto expressly agree that the courts of Malaysia shall have
sole jurisdiction in respect thereof.
21. NOTICES
21.1 All notices hereunder shall be in writing and be given by express
courier service, or facsimile to be served addressed as follows:
SELLER: Malaysian Titanium Corporation Sdn Bhd
4-1/2 Miles, Jalan Lahat
30200 Ipoh, Perak Darul Ridzuan
Fax (605) 322-2535
PURCHASER: Hitox Corporation of America
722 Burleson Street
P. O. Box 2544
Corpus Christi, TX 78403 USA
Attn: President
Fax (361) 888-8279
Such notices so addressed to the recipient shall be deemed to be
received.
21.1.1 in the case of express courier service, five (5) days after the
notice has been sent regardless of whether the same is actually
received or not; and
21.1.2 in the case of facsimile, at the time of transmission provided that a
confirmation copy thereof is sent by express courier within twenty-
four (24) hours of the transmission.
<PAGE> 52
22. SCHEDULES
The Schedules hereto shall be taken, read and construed as an essential
part of this Agreement.
23. HEADINGS
The captions an headings to the Clauses of this Agreement are for
reference only and do not affect the interpretation and/or enforcement
of the provisions of this Agreement.
24. GOOD FAITH
In entering this Agreement, the parties hereto recognize that it is
impracticable to make provision for every contingency that may arise in
the course of performance thereof. Accordingly the parties hereto
hereby declare it to be their intention that this Agreement shall
operate between them with fairness and if in the course of performance
of this Agreement, there are any disagreements or disputes arising from
situations which were not anticipated by either parties, then ten the
parties hereto shall use their best endeavours to agree upon such course
of action as may be necessary and equitable to both parties to settle
the disputes or disagreements.
25. INTERPRETATION
25.1 Wherever used in this Agreement unless the context shall otherwise
require, the following expressions shall have the following meanings:
25.1.1 the "Seller" includes its successors-in-title and permitted assigns
and when there are two or more persons included in the term "the
Seller" their liabilities under this Agreement shall be joint and
several;
25.1.2 "Year" means the period of twelve months from the date of this
Agreement and each consecutive period of twelve months thereafter
during the period of this Agreement;
25.1.3 the "Purchaser" includes its successors-in-title and permitted
assigns and when there are two or more persons included in the term
"the Purchaser" their liabilities under this Agreement shall be joint
and several;
25.1.4 words importing the masculine gender shall be deemed and taken to
include the feminine and neuter genders and vice versa;
25.1.5 words importing the singular number only include the plural and vice
versa; and
25.1.6 words importing persons include corporations.
<PAGE> 53
26. AGREEMENT BINDING UPON SUCCESSORS-IN-TITLE
This Agreement shall be binding upon the successors-in-title and
permitted assigns of the parties hereto.
IN WITNESS WHEREOF the parties hereto have set their hands.
For and on behalf of the Purchaser the said
HITOX CORPORATION OF AMERICA
BERNARD A. PAULSON
------------------------------
Signed By: Bernard A. Paulson
For and on behalf of the Seller the said
MALAYSIAN TITANIUM CORPORATION SDN BHD
LEE HEE CHEW
------------------------------
Signed By: Lee Hee Chew
<PAGE> 54
FIRST SCHEDULE
Specification of Product
Synthetic Rutile, Rutile Crystal Structure, Specific Gravity 4.1
Ti02 content Min. 94.50% Sulfur content Max. 900 ppm
Fe203 Max. 2.00 Chloride Max. 260 ppm
Si02 Max. 1.50 Phosphorus Max. 0.10%
A1203 Max. 0.50 Uranium Max. 90 ppm
Cr203 Max. 0.10 Thorium Max. 150 ppm
V205 Max. 0.20
Nb205 Max. 0.70
Mg0 Max. 0.10
Ca0 Max. 0.10
Mn0 Max. 0.10
Zr02 Max. 0.20
Sn02 Max. 0.10
As203 Max. 260 ppm
No Black float when slurried with water, by Test Method JT-36.
No natural Rutile to be added to ilmenite feedstock.
Magnetic particles - Max. 0.03% by hand magnet, by Test Method JT-35
pH - 6.0 - 7.0
Moisture - Max. 0.5%
Conductivity - Max. 200 micromhoes (siemens)
Free from foreign contaminants
Ti02 Analysis is by ASTM D1394
Screen Analysis
U.S. Standard Sieve, range %
+35 Mesh 0 - 4
+45 4 - 12
+70 55-72
+100 15-28
+140 1 - 7
+200 0 - 2
-200 0.1
Grindability
Standard SR - Min. equal to MTC-23 by Test Method JOET-34.
Ultralight SR - Min. equal to MTC-23 by Test Method JOET-34.
<PAGE> 55
Color: Aqueous ball mill color evaluation.
In order to evaluate the color of the synthetic rutile, MTC will use the
following synthetic rutile granule, ball mill color evaluation method:
Formula A:
Grind Paste grams
----------- -----
Water 2793.00
Triton X-100 26.60
Tamol 731 129.01
Colloid 681-F 13.30
Dowcil 75 13.30
ER 4400 53.20
KTPP 6.65
-------
3035.06
(121 grams of grind is weighed into lacquer lined cans and set aside for
testing).
Formula B:
Let Down grams
-------- -----
Water 89.99
Ammonia 26% 5.99
Propylene Glycol 461.36
Texanol 107.85
Colloid 681-F 11.98
Ac 507-46% 2828.09
-------
3505.15
(105 grams of let down is weighed into lacquer lined cans and set aside for
testing)
Procedure: Ball Milling of Synthetic Rutile
1. Weigh 200 grams of Synthetic Rutile under analysis into a pre-prepared
pint can containing 121 grams of "grind paste" (Formula A).
2. Pour solution of Synthetic Rutile and grind paste into a 1.8 Liter Ball
Mill and secure the ball mill lid.
3. Place the ball mill on a ring roller and grind solution for 24 hours.
<PAGE> 56
4. After the 24 hours have elapsed, remove the ball mill and pour 75.0 g
of the milled solution into a pre-prepared 1/2 pint can containing 105.0
grams of Let Down (Formula B).
5. Stir for 5 minutes at low speed using a laboratory mixer to uniform
consistency.
6. Make a drawdown of the paint on an opacity chart using a 10 mil
drawdown blade.
7. Allow paint to air dry for approximately 24 hours, and then evaluate
color.
A. Standard SR Maximum Delta E of 1.0 from the color standard
coordinates which are:
L* 80.95 a* 3.28 b* 21.69
B. Ultralight SR Maximum Delta E of 1.0 from the color standard
coordinates which are:
L*83.01 a* 2.19 b* 21.70
C. Color Uniformity Maximum Delta E of 0.5 color variation from sample
to sample taken within an SR shipment.
8. Both parties will work diligently to achieve delta E of 0.5.
Supplier shall not significantly change their process, manufacturing
methods, manufacturing sites, or substitute raw materials, or changes made
in the physical or chemical properties of this material without the due
notification in writing to Hitox Corporation in advance.
<PAGE> 57
SECOND SCHEDULE
Price Revision Formula
Base Price (P) = USD550 per MT (f.o.b. Malaysian Port)
New Supply Price (PN) in USD/MT
(PN) = (1.02N x P) + [1.75 (IN - IO) + 0.75 (FN - FO) + 700 (EN - EO)]
Where:-
N = 4, 5, 6, 7, and 8 for each year of the Supply Agreement
IN = Average ilmenite price in USD/MT (60% Ti02 basis)
over 3-month period prior to price adjustment
IO = Ilmenite price of USD59/MT (60% Ti02 basis)]
FN = Average fuel oil price in USD/MT over 3 month
period prior to price adjustment
FO = Fuel oil price of USD124/MT (being the current
fuel oil price)
EN = Average electricity price in USD/Kwh over 3-month
period prior to price adjustment
EO = USD0.063/Kwh (being the current electricity price)
Both parties agree to negotiate the benefit of improvements in production
efficiencies and possible increased throughput in good faith and reflect
them in the supply price accordingly.
The exchange rate used to convert the price of the ilmenite, fuel oil and
electricity from Malaysian Ringgit (RM) to United States Dollars (USD)
shall be the exchange rate as quoted by Malayan Banking Berhad for the 3-
month period prior to the commencement of the Year in question.
<PAGE> 58
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> $2330
<SECURITIES> 0
<RECEIVABLES> 1334
<ALLOWANCES> 0
<INVENTORY> 6490
<CURRENT-ASSETS> 10207
<PP&E> 8907
<DEPRECIATION> 6197
<TOTAL-ASSETS> 12960
<CURRENT-LIABILITIES> 1901
<BONDS> 0
0
0
<COMMON> 1193
<OTHER-SE> 9866
<TOTAL-LIABILITY-AND-EQUITY> 12960
<SALES> 11583
<TOTAL-REVENUES> 11583
<CGS> 8081
<TOTAL-COSTS> 8081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 1008
<INCOME-TAX> 17
<INCOME-CONTINUING> 991
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 991
<EPS-BASIC> $0.21
<EPS-DILUTED> $0.21
</TABLE>
