-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MkfqFYVSwrnx8JGkYIaDtcbqqpB2BS6wUMwFZfL7hF1gV6mWj73Ms05rdeiiQzYt 1ez0Y9T5grmBKilyPWldTg== 0000842295-98-000006.txt : 19980330 0000842295-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000842295-98-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HITOX CORPORATION OF AMERICA CENTRAL INDEX KEY: 0000842295 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 742081929 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-17321 FILM NUMBER: 98576290 BUSINESS ADDRESS: STREET 1: P.O. BOX 2544 CITY: CORPUS CHRISTI STATE: TX ZIP: 78401 BUSINESS PHONE: 5128825175 MAIL ADDRESS: STREET 1: P.O. BOX 2544 CITY: CORPUS CHRISTI STATE: TX ZIP: 78403 10KSB 1 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, 1997 [ ] 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: (512) 882-5175 Securities registered under Section 12(b) of the Act: None. Securities registered under section 12(g) of the Act: Common Stock, $0.25 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 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: $11,242,590 1 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 17, 1998, 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: $4,385,002. Number of shares of the registrant's Common Stock outstanding as of February 17, 1998 4,657,487 Documents incorporated by reference: 1. Certain portions of the registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Annual Meeting of Stockholders of the registrant to be held May 19, 1998, are incorporated by reference into Part III of this report. 2. Certain portions of the registrant's S-1 registration statement (File No. 33-25354) exhibits are incorporated by reference into Part IV of this report. Transitional Small Business Disclosure Format (check one): Yes No X --- --- 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 72% and 75% of net sales in 1997 and 1996, respectively. The Company's strategy includes offering additional products to its HITOX customers. To this end, Hitox also manufactures and sells a line of barium sulfate pigment extenders under the brand name BARTEX (Registered trademark), alumina trihydrate under the name HALTEX (Registered trademark) which is a filler used in plastics for its flame retardant properties, and sells iron oxide pigments under the name OSO (Registered trademark) which are used in primers, color concentrates and other specialty coatings for its color properties. The Company manufactures HITOX, BARTEX and HALTEX at its manufacturing facility located in Corpus Christi, Texas, U.S.A. The Company's products are currently marketed in the United States and in approximately 35 other countries. The Company sells its products through a network of direct sales representatives employed by the Company and independent stocking distributors in the United States, as well as distributors and agents overseas. The Company's former Spanish subsidiary manufactures HITOX pigment under a licensing agreement and sells HITOX primarily in Europe. The Company's sales representatives sell directly to end users and provide marketing support and guidance for the Company's independent distribution network. The Company has historically relied on an independent distributor network to sell its products, supported by an in-house sales staff. The Company was organized by Benilite Corporation of America ("Benilite") in 1973. Benilite, which was incorporated in Delaware in 1969, developed the then patented "Benilite process" for producing synthetic rutile ("SR"), the principal ingredient used in the manufacture of HITOX, from ilmenite ore. Benilite licensed and helped design several synthetic rutile plants located throughout the world which utilize this process (including a plant located in Ipoh, Malaysia, which until September 21, 1994, was owned by the Company, as discussed below). Benilite concluded that synthetic rutile produced by the Benilite process could be further processed into a buff-colored titanium dioxide pigment having many of the characteristics of standard white titanium dioxide at a significant cost savings. These efforts by Benilite were the beginning of the Company's business. In 1980, the subsidiary of Benilite engaged in the development of HITOX was spun off by 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. 3 The proceeds of the public offering in 1988 were used to purchase, refurbish and operate a Malaysian synthetic rutile plant located in Ipoh, Malaysia (the "Plant"). The Plant is owned and operated by Malaysian Titanium Corporation Sdn. Bhd. ("MT"). The Company held a majority ownership position in MT until September 21, 1994, when it sold its entire 78.27% ownership interest to its minority partner, Airtrust International Corporation ("Airtrust") who simultaneously sold a majority interest to a Malaysian company. The Company had acquired and refurbished the Plant in an attempt to procure a long term, reliable, reasonably priced source of synthetic rutile, the vital raw material for producing HITOX pigment. Though the effort to refurbish the Plant was successful, the Plant output exceeded the Company's needs for synthetic rutile to produce HITOX pigment. The financial burden of supporting MT was not sustainable and the Company was forced to sell MT and recorded a loss on the sale in 1994. As part of the sale transaction, the Company entered into a supply agreement with MT, under which MT continues to provide the Company with its vital raw material. Until September 30, 1994, the Company owned Fluid Minerals Espanola, S.A. ("FME"), a Spanish company which owns a manufacturing facility in Bunuel, Spain. While the Spanish facility is capable of producing HITOX for sale in the European market, the expected sales of HITOX in Europe did not materialize in 1992 or 1993, and by mid-1993, HITOX production was suspended at the plant in Bunuel. During 1993 and continuing into 1994, the Company attempted to sell FME, but was unable to find a buyer. On September 30, 1994, the Company sold all of the Company's shares of FME to Richard L. Bowers, the Company's former Chairman of the Board, President and Chief Executive Officer, to relieve the Company from the continuing burden of supporting FME. As part of the transaction, the Company signed a license agreement with FME permitting the manufacture and sale of HITOX in Europe. The agreement provides, among other things, for the payment of a royalty by FME to the Company which is a graduated percentage of net revenues from HITOX pigment sold by FME, based on the quantity of those sales. 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 described above. As part of the sale 4 transaction, a supply agreement for the supply of synthetic rutile by MT to the Company (the "Supply Agreement") became effective December 15, 1994. The Supply Agreement has an initial term of five years, with automatic year to year renewal unless terminated with twelve months notice by either party. The Supply Agreement is a take or pay arrangement for a specified minimum annual quantity ("Minimum Quantity"). Prices for the first two years were fixed, with adjustment based on a formula for years three through five of the Supply Agreement. The Supply Agreement provides that the Company will purchase synthetic rutile primarily from MT during the term of the Supply Agreement. For quantities above the Minimum Quantity, the Company may seek alternative sources and price quotes, which MT will have the right to supply on a meet or release basis. The Supply Agreement provides for payment of damages in the event that MT is not able to supply the Minimum Quantity of synthetic rutile to the Company. The corporate shareholders of MT have provided guarantees that MT will perform under the Supply Agreement. BARTEX is produced from high grade barytes (barium sulfate) mined in China, India, Turkey and Mexico. The Company has not experienced and does not anticipate having difficulty in acquiring adequate supplies of this material. Similarly, alumina trihydrate, the raw material used to manufacture HALTEX is plentiful and is acquired domestically. The Company also has an adequate supply of products purchased from other companies for resale. MANUFACTURING HITOX Manufacturing Process HITOX is manufactured from synthetic rutile in a process which incorporates fluid energy milling. In this process, particles of synthetic rutile mechanically abrade each other to form the end product, which after other processing, including testing and quality control procedures, is collected for bagging and shipping. The Company currently has seven production lines for HITOX in place at its Corpus Christi plant. One of these production lines is also used to manufacture BARTEX. The manufacturing process for producing HITOX is not simple and the details of the process and the operating parameters of the systems are not widely known. The HITOX manufacturing process is not patented. Other Products BARTEX is a pigment extender or filler 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. HALTEX is a pigment filler that is used primarily for its flame retardant and smoke suppressant properties in plastics and coatings. 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. 5 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 focused on customer service and development in 1997, and did not incur significant research and development expense in 1997. MANAGEMENT Mr. Bernard Paulson was appointed Acting Chief Executive Officer by the Board after the resignation of Thomas A. Landshof on October 30, 1997. Mr. Paulson serves in that capacity on a part-time basis. Mr. Kelso C. Brooks, Jr., the Company's Director of Technology since 1994, was appointed to the newly created position of Acting General Manager in late 1997, and was appointed Senior Vice President on March 3, 1998. Mr. Brooks is responsible for day-to-day operations of the Company, with primary emphasis on increasing the sale of HITOX pigments. He works closely with sales and marketing personnel to direct and focus that effort. MARKETING AND CUSTOMERS Sales and Marketing Department Organization The Company's sales effort is directed from Corpus Christi, Texas, with all personnel reporting to the national sales manager and acting general manager. The Company has four regional sales managers. Three of the regional sales managers live and work in their respective territories, which include the Eastern, Western and Mid-Western United States. A fourth regional sales manager is responsible for Asia and operates from the Houston area. The Company's Corpus Christi sales and marketing department consists of a sales assistant, a customer service coordinator, 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 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 32% of total net sales in 1997. 6 Foreign Distributors, Licensees and Agents There are approximately 26 independent distributors and 10 agents 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. FME, the Company's former Spanish subsidiary, is now a licensee, and directs the sales and marketing efforts in Europe and Israel. In 1997, the Company strengthened its relationship with its former subsidiary Malaysian Titanium Corporation ("MT"), by appointing MT master distributor for the Asia/Pacific region. MT has established a sales team which is responsible for managing the distributor relationships in individual countries in the region, as well as directing the overall sales and marketing effort. Foreign sales through distributors accounted for approximately 4.0% of total net sales in 1997 and 1996. 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 both 1997 and 1996. The direct foreign customers accounted for 10.0% of total net sales in 1997 and 8.0% of total net sales in 1996. The Company has historically maintained a relatively stable customer and distributor base. Geographic Distribution The Company sells its products in the United States and markets its product 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 1997 1996 --------------------------------- ------- ------- (in thousands of dollars) United States $ 9,727 $ 9,931 Canada & Mexico 1,172 1,078 South & Central America 70 127 Asia-Australia 152 102 Africa-Middle East 122 89 ------- ------- Total $11,243 $11,327 ======= ======= 7 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 $0.98 per pound delivered while the truck load list price of HITOX, FOB Corpus Christi is $0.68 per pound. HITOX is primarily sold FOB plant and white titanium dioxide manufacturers sell on a freight prepaid basis. Freight costs range from $0.01 to $0.04 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. 8 HITOX and the ingredient from which it is produced, synthetic rutile, are non-toxic and non-hazardous. HITOX complies with all applicable laws and regulations enforced by the United States Food and Drug Administration (the "FDA") and is an acceptable component of packaging materials used in direct contact with meat, poultry and other food products; of paints used in incidental contact with such products; and of other packaging materials, such as paper and paperboard. HITOX also complies with current color additive regulations promulgated by the FDA. In addition, HITOX has been tested for compliance with the applicable standards promulgated by the National Sanitation Foundation (the "NSF"), and the Company is authorized to use applicable NSF seals and/or logos in connection with the marketing of HITOX. This authorization is significant in that end users of titanium dioxide pigments who wish their products to be NSF approved must use component materials that also meet NSF standards. BACKLOG The Company normally manufactures its pigment products in anticipation of, and not in response to, customer orders and generally fills orders within a short time after receipt. Consequently, the Company seeks to maintain adequate inventories of its pigment products in order to permit it to fill orders promptly after receipt. As of February 16, 1998, the Company does not have a significant backlog of customer orders. SEASONALITY The Company's pigment business has generally experienced higher sales during the second and third calendar quarters. This is associated with increased activity in construction and maintenance during warm weather which increases demand for materials which use pigments such as paints and plastic pipe. PATENTS AND TRADEMARKS The Company currently holds no patents on the processes for manufacturing any of its products. Six of the Company's products, HITOX, BARTEX, HALTEX, OSO, UTOX and TITOX are marketed under names which have been registered with the United States Patent and Trademark Office. EMPLOYEES As of December 31, 1997, the Company had a total of 45 full-time employees, all in the U.S. None of the Company's employees are currently covered by a collective bargaining agreement with a union. 9 ITEM 2. DESCRIPTION OF PROPERTY From 1988 through 1997, the Company's corporate headquarters were located in the Furman Plaza Building ("the Building") in downtown Corpus Christi, Texas, U.S.A. The Company purchased the Building in 1988 for $755,844. The Building is a fully-restored historic structure with five stories containing approximately 22,465 square feet of office space attached to a five story, 300 car parking garage. In December of 1997, the Board of Directors approved a plan to sell the Building and move its personnel located there to the Company's plant location. Effective February 2, 1998, the Company consolidated all of its Corpus Christi personnel in renovated offices at its plant location. This move will provide improved efficiency and communication. The Company has listed the Building for sale with a commercial real estate firm, and retained that firm to manage the Building and tenant leases. At February 2, 1998, about 67.5% of the office space was leased to tenants, with the space recently vacated by Hitox comprising approximately 18% of total rentable space. 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 13.86 acres of land, with 12.86 acres leased from the Port of Corpus Christi Authority (the "Port") and one acre owned by the Company. The first lease, which covers 10 acres of the plant site, has a term of 30 years and expires in July 2017. The lease payment is subject to adjustment every 5 years for what the Port calls the "equalization valuation". This is used as a means of equalizing rentals on various Port lands and is determined solely at the discretion of the Port. The second lease with the Port, which covers 2.86 acres, was renewed for its final 5 year option term effective January 1, 1998. The Company owns the improvements on the plant site, including a 3,400 square-foot office, a 5,000 square-foot laboratory building, a maintenance shop and several manufacturing and warehousing buildings containing a total of approximately 90,000 square feet of space. The leased premises include approximately 350 lineal feet of bulkheaded industrial canal frontage, which provides access to the Gulf of Mexico inter-coastal 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, 1997. 10 EXECUTIVE OFFICERS The names of the members of the Company's executive officers at March 3, 1998, each of whom is elected annually, are set forth below: Name Age Position Hitox Since ---- --- -------- ----------- Bernard Paulson 69 Acting Chief Executive 1992 Officer Kelso C. Brooks, Jr. 50 Senior Vice President 1991 Craig Schkade 43 Chief Financial Officer 1989 and Treasurer Elizabeth Morgan 56 Secretary 1988 Bernard Paulson was appointed Acting Chief Executive Office by the Board after the resignation of Thomas A. Landshof on October 30, 1997. Mr. Paulson has been a director of the Company since 1992. Mr. Paulson is Chief Executive Officer of Inspection Group, Inc. and is retired President of Koch Refining Company with over 40 years experience with other companies in the refining and petrochemical industries, including Kerr-McGee Corporation. Kelso C. Brooks, Jr., was appointed Senior Vice President on March 3, 1998. Mr. Brooks joined Hitox in 1991 and has served as Director of Technology since 1994. Prior to joining Hitox, Mr. Brooks has served as Operations Manager, Process Control Manager, Plant Manager, and in other managerial positions with Cities Service Company and Columbian Chemicals Company. He received his Bachelor of Chemical Engineering from the University of Arkansas. Craig Schkade was named Treasurer in 1993 and Chief Financial Officer in January of 1994. Mr. Schkade joined Hitox in 1989, and served as Controller until transferring to the Company's Malaysian subsidiary in 1990. He served as General Manager of Malaysian Titanium Corporation and assisted in organizing the administrative functions of MT during the refurbishment effort. 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. 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company became a publicly owned company in December, 1988. Prior to that time, the Company's stock was not listed nor traded on any stock exchange. From February 7, 1989, to February 10, 1995, the Company's common stock was listed and traded on the National Market System of the National Association of Securities Dealers Automated Quotation System (Nasdaq) (symbol: HTXA), and since February 10, 1995, has been listed and traded on the Nasdaq SmallCap Market System. The table below sets forth the high and low closing sales price of the Company's common stock for the periods indicated, according to published sources. Quarter Ended March 31 June 30 Sept. 30 Dec. 31 ------------- -------- ------- -------- ------- 1997 High 3.375 3.875 4.000 3.375 Low 2.500 2.375 2.938 1.563 1996 High 3.50 4.75 4.25 3.250 Low 3.00 3.00 3.00 2.375 The reduction in net tangible assets occasioned by the sale of the Company's two foreign operating subsidiaries, MT and FME, along with annual net losses, required the Company's securities to be moved from the Nasdaq National Market System to the Nasdaq SmallCap Market System effective February 10, 1995. No cash dividends have ever been paid on the Company's Common Stock. The Company is prohibited from paying cash dividends under its loan agreement with NationsBank. (See Note 5 of Notes to Financial Statements.) The approximate number of holders of record of the Company's Common Stock as of December 31, 1997 was 113. In addition, there are approximately 800 beneficial shareholders. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Sales: Net sales for 1997 were $11,242,590, a decrease of $84,855 or 0.7% compared with 1996 net sales of $11,327,445. Total 1997 sales of HITOX pigment were $8,077,701, which accounted for 71.9% of total sales in 1997, as compared with $8,478,426, or 74.8% of total sales in 1996. Sales of the Company's other pigment products almost offset the decrease in HITOX pigment sales. The Company's financial performance continues to be dependent on sales of the single product line, HITOX pigment. The Company's net sales in the U.S. decreased by 2.1%, to $9,726,543 in 1997 from $9,931,674 in 1996. Net sales for use in foreign countries increased by $120,276, or 8.6% to $1,516,047 in 1997, from $1,395,771 in 1996. The only foreign sales area to show a decrease in 1997 was South & Central America. 12 Cost of Sales: Total cost of sales in 1997 decreased $102,742 or 1.3% from 1996, accompanying the lower 1997 sales volumes. Raw material costs were lower in 1997 than in 1996, which resulted in an increase in gross profit from 29.9% for 1996 to 30.3% for 1997. General, Administrative and Selling Expenses: Total general, administrative and selling expenses for 1997 were $2,328,366, an increase of $119,564, or 5.4%, compared with 1996. This increase is due primarily to severance costs related to the resignation of the Company's former Chief Executive Officer in October of 1997. As a percentage of sales, these expenses were 20.7% in 1997, and 19.5% in 1996. Bad debt expense has been insignificant during both periods. Adjustment of asset held for sale to fair market value: The Company recorded a $90,600 charge in the fourth quarter of 1997 to reduce the Company's former corporate headquarters building to fair value. 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. Interest Income: Interest income was $75,165 in 1997 compared with $29,188 in 1996, an increase of $45,977. The increase is the result of higher daily cash balances in 1997 available for investment. Interest Expense: Interest expense in 1997 decreased $244,780 compared with 1996. The decrease was primarily the result of pre-paying $5,000,000 in subordinated debt (the "Debentures") in July of 1996, using the $4,000,000 proceeds from the private placement of the Company's common stock and a new $1,000,000 bank term loan with a lower interest rate. Income taxes: The Company has net operating loss and other carryforwards available to offset the Company's regular taxable income. However, the Company is subject to alternative minimum tax, and a provision for income tax of $13,000 and $9,000 was recorded for 1997 and 1996, respectively. Extraordinary Item: During July of 1996, the Company prepaid the outstanding $5,000,000 principal balance on the Debentures, using the proceeds of a $1,000,000 term note under an amended loan agreement with the Company's bank, and the $4,000,000 proceeds from the sale of common stock. The prepayment made it necessary to accelerate the amortization of unamortized debenture origination fees, and resulted in an extraordinary charge of $112,000 in the third quarter of 1996. No income tax effect was recognized from the extraordinary charge because the Company has an operating loss carryforward. There were no extraordinary items in 1997. Cash and cash equivalents: The balance in cash and cash equivalents increased $210,595 from the end of 1996 to the end of 1997. This increase was the result of positive cash flow from operations, net of cash used in investing and financing activities. 13 Inventories: Inventories increased $1,182,908 from the end of 1996 to the end of 1997. The primary reason for the increase was required raw material purchases under a supply agreement with the Company's former subsidiary, Malaysian Titanium Corporation. Accounts payable: The accounts payable increase of $192,124 from the end of 1996 to 1997 is primarily the result of the difference in raw material in transit at the respective year ends. Notes payable to banks: There was no outstanding balance under the Company's bank line of credit at the end of 1996 or 1997. Accrued expenses: The increase in accrued expenses of $109,907 from the end of 1996 to the end of 1997 is primarily the result of an increase in accrued inventory costs. Current maturities of long-term debt: The Company's capital structure did not change during 1997. The current maturities of long-term debt outstanding at the end of 1997 and 1996 represent payments due on the Company's two outstanding loans, a mortgage loan on the Company's former corporate headquarters and a term loan. LIQUIDITY AND CAPITAL RESOURCES The Company's balance sheet is healthy at the end of 1997. The Company had working capital of $6,208,653 at December 31, 1997 compared with $5,217,227 at December 31, 1996. In 1997, cash increased $210,595, with operating activities providing $810,471, while $226,617 was used in investing activities, and $373,259 was used in financing activities. The Company on an ongoing basis will finance its operations principally through cash flows generated by operations, through bank financing and through cash on hand. The Company has a continuing need for working capital to finance raw material purchases, primarily synthetic rutile, which is now purchased under a supply agreement (the "Supply Agreement") with its former subsidiary, Malaysian Titanium Corporation. The Supply Agreement contains a take or pay arrangement for specified quantities on a yearly basis, with a fixed price for the first two years of its five year term, and a negotiated price adjustment in the last three years of the contract term. The third year purchase commitment will be completed with the first shipment in the first quarter of 1998, as mutually agreed between the Company and MT. The second price adjustment under the Supply Agreement will be effective for orders placed in the fourth year of the Supply Agreement. The price adjustment is expected to result in a price decrease compared with orders placed in 1997 due to favorable exchange rates and other adjustments. On July 31, 1996, the Company executed an amended loan agreement with the Bank (the "Amended Loan Agreement"). The Amended Loan Agreement provides a new $1,000,000 term loan (the "Term Loan") to the Company, with an interest rate of 8.17% per annum. The repayment terms of the Term Loan provided for monthly 14 payments of interest only until December 31, 1996; monthly payments of principal and interest of $31,415 began January 31, 1997, with the final payment due on January 31, 2000. The proceeds of the Term Loan were used to prepay the remaining $1,000,000 principal balance on the Debentures on July 31, 1996. Also, as part of the Amended Loan Agreement, the expiration date of the Company's line of credit was extended from April 30, 1997 to April 30, 1998, and the interest rate was reduced from the Bank's prime rate plus 1.0% to the Bank's prime rate plus 0.75%. The Company had no outstanding balance under its line of credit at December 31, 1997. The Amended Loan Agreement also reduces the interest rate on the mortgage note on the building which includes the Company's former corporate headquarters from 9.5% to 9.0%. OTHER MATTERS Inflation Inflation has not had a significant impact on the Company's business, and it is not expected to have a major impact in the foreseeable future. Change in Management Mr. Bernard Paulson was appointed Acting Chief Executive Officer after the resignation of Thomas A. Landshof on October 30, 1997. Mr. Paulson serves in that capacity on a part-time basis. Mr. Kelso C. Brooks, Jr., the Company's Director of Technology since 1994, was appointed to the newly created position of Acting General Manager in late 1997, and was appointed Senior Vice President on March 3, 1998. Mr. Brooks is responsible for day-to-day operations of the Company, with primary emphasis on turning around the sale of HITOX pigments. He works closely with sales and marketing personnel to direct and focus that effort. Several changes have been made under Mr. Paulson, including consolidation of all corporate and finance personnel at the Company's plant location to provide better efficiency and communication. The Company's former corporate headquarters, the Furman Plaza Building, is for sale and the Company has retained a real estate management firm to manage the property, while a buyer is sought. Impact of the Year 2000 The Company's primary computer system was written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activity. 15 The Company has completed an assessment and has chosen to replace its legacy mainframe computer and custom software with a PC based client/server computer network and compatible year 2000 compliant software. The PC network is in place and functioning while the software installation and conversion is scheduled for completion by the end of 1998. The cost of the software and installation is estimated at $100,000. The Company believes that with the conversion to new software, the year 2000 issue will not pose significant operational problems for its computer system. However, if the conversion is not made, or is not completed timely, the year 2000 issue could have a material impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete new software conversion are based on management's best estimates. 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. 16 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 1998 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 1998 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 1998 Annual Meeting of Shareholders, is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The discussion under the caption "Certain Transactions", which will be contained in the Company's Definitive Proxy Statement for its 1998 Annual Meeting of Shareholders, is incorporated herein by reference. 17 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are being filed as part of this annual report on Form 10-KSB: 1. Financial Statements - The financial statements filed as part of this report are listed in the "Index to Financial Statements" on page F-1 hereof. 2. Exhibits - The Exhibits listed below are filed as part of, or incorporated by reference into, this report. Exhibit No. Description - ----------- ----------- 3.1(1) Certificate of Incorporation of the Company as amended through January 28, 1988 3.2(2) Certificate of Amendment to the Company's Certificate of Incorporation, filed May 28, 1991 3.3(1) By-laws of the Company 3.4(4) Amendment to the By-laws of the Company dated June 1, 1994 3.5(7) Amendment to the By-laws of the Company dated February 28, 1995 4.1(1) Form of Common Stock Certificate 4.2(3) Form of Convertible Subordinated Debenture of the Company dated June 15, 1992 and related purchase agreements 4.3(4) Form of First Amendment to the Note Purchase Agreement covering the Convertible Subordinated Debenture of the Company dated September 30, 1994 4.4(5) Form of Second Amendment to the Note Purchase Agreement covering the Convertible Subordinated Debenture of the Company dated February 28, 1995 4.5(5) Form of Warrant Agreement for issuance of 50,000 warrants dated September 30, 1994 4.6(5) Form of Warrant Agreement for issuance of 50,000 warrants dated February 28, 1995 4.7(5) Form of Warrant Agreement for issuance of 1,111,111 warrants dated February 28, 1995 10.1(6) Loan Agreement with NationsBank dated August 31, 1995 10.2(8) First Amendment to Loan Agreement dated July 31, 1996 10.3(1) Lease from Port of Corpus Christi Authority dated April 14, 1987 10.4(1) Lease from Port of Corpus Christi Authority dated January 12, 1988 as amended on December 24, 1992 10.6(1) Summary Plan Description for the Hitox Profit Sharing Plan & Trust 21 Subsidiaries of Registrant: No significant subsidiaries 23 Consent of Ernst & Young LLP 18 _________________________________ (1) Incorporated by reference to the exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-25354) filed November 3, 1988, which registration statement became effective December 14, 1988. (2) Incorporated by reference to the 1991 Form 10-K. (3) Incorporated by reference to the Form 8-K dated June 15, 1992. (4) Incorporated by reference to the 1994 Form 10-KSB. (5) Incorporated by reference to the March 31, 1995 Form 10-QSB. (6) Incorporated by reference to the September 30, 1995 Form 10-QSB. (7) Incorporated by reference to the 1995 Form 10-KSB. (8) Incorporated by reference to the June 30, 1996 Form 10-QSB. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1997. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HITOX CORPORATION OF AMERICA (Registrant) By BERNARD A.PAULSON -------------------------------- (Bernard A. Paulson, Acting CEO) Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Capacity with the Company Date --------- ------------------------- ---- BERNARD A. PAULSON Acting Chief Executive Officer March 27, 1998 - --------------------- Director (Bernard A. Paulson) CRAIG SCHKADE Chief Financial Officer March 27, 1998 - --------------------- and Treasurer (Craig Schkade) (Principal Financial and Accounting Officer) WILLIAM B. HAYES Chairman of the Board March 27, 1998 - --------------------- (William B. Hayes) ROBERT J. CRESCI Director March 27, 1998 - --------------------- (Robert J. Cresci) KEVIN S. MOORE Director March 27, 1998 - --------------------- (Kevin S. Moore) MICHAEL A. NICOLAIS Director March 27, 1998 - --------------------- (Michael A. Nicolais) KENG KAY LIM Director March 27, 1998 - --------------------- (Keng Kay Lim) 20 HITOX CORPORATION OF AMERICA ANNUAL REPORT ON FORM 10-KSB ITEM 7 INDEX TO FINANCIAL STATEMENTS Page ---- Hitox Corporation of America Report of Ernst & Young Independent Auditors 22 Balance Sheets - December 31, 1997 and 1996 23 Statements of Income - Years ended December 31, 1997 and 1996 24 Statements of Shareholders' Equity-Years ended December 31, 1997 and 1996 25 Statements of Cash Flows-Years ended December 31, 1997 and 1996 26 Notes to Financial Statements 27 21 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, 1997 and 1996, and the related statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hitox Corporation of America at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Antonio, Texas January 28, 1998 22 HITOX CORPORATION OF AMERICA BALANCE SHEETS
December 31, --------------------------- 1997 1996 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,719,642 $ 1,509,047 Receivables: Trade accounts receivable; no allowance for doubtful accounts considered necessary 1,094,864 1,101,326 Other 10,457 69,851 ----------- ----------- Total Receivables 1,105,321 1,171,177 Inventories 4,899,572 3,716,664 Other current assets 30,962 32,833 ----------- ----------- Total current assets 7,755,497 6,429,721 PROPERTY, PLANT AND EQUIPMENT, net 2,693,333 3,918,496 ASSET HELD FOR SALE 771,055 -- OTHER ASSETS 27,584 25,325 ----------- ----------- $11,247,469 $10,373,542 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 124,834 $ 164,510 Accounts payable - MT 649,800 418,000 Accrued expenses 366,745 256,838 Current maturities of long-term debt 405,465 373,146 ----------- ----------- Total current liabilities 1,546,844 1,212,494 LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 626,213 1,031,791 ----------- ----------- Total liabilities 2,173,057 2,244,285 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock $.01 par value: authorized, 5,000,000 shares; no shares outstanding -- -- Common stock $.25 par value: authorized, 10,000,000 shares; 4,657,487 shares outstanding after deducting 88,240 shares held in treasury 1,186,432 1,186,432 Additional paid-in capital 14,341,193 14,341,193 Accumulated deficit (6,410,258) (7,355,413) ----------- ----------- 9,117,367 8,172,212 Less: cost of treasury stock (42,955) (42,955) ----------- ----------- Total shareholders' equity 9,074,412 8,129,257 ----------- ----------- $11,247,469 $10,373,542 =========== ===========
See accompanying notes. 23 HITOX CORPORATION OF AMERICA STATEMENTS OF INCOME
Years Ended December 31, --------------------------- 1997 1996 ----------- ----------- NET SALES $11,242,590 $11,327,445 COSTS AND EXPENSES: Cost of sales 7,841,362 7,944,104 General, administrative and selling expenses 2,328,366 2,208,802 Adjustment of asset held for sale to fair market value 90,600 -- ----------- ----------- OPERATING INCOME 982,262 1,174,539 OTHER (EXPENSE) INCOME: Interest expense (103,922) (348,702) Interest income 75,165 29,188 Other, net 4,650 (20,776) ----------- ----------- INCOME BEFORE INCOME TAX AND EXTRAORDINARY ITEM 958,155 834,249 Current income tax expense 13,000 9,000 ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM 945,155 825,249 Extraordinary item, early extinguishment of debt -- (112,310) ----------- ----------- NET INCOME $ 945,155 $ 712,939 =========== =========== Basic Earnings per Common Share: Income before extraordinary item $ 0.20 $ 0.20 Extraordinary item -- (0.03) ----------- ----------- Net income $ 0.20 $ 0.17 =========== =========== Diluted Earnings per Common Share: Income before extraordinary item $ 0.20 $ 0.19 Extraordinary item -- (0.02) ----------- ----------- Net income $ 0.20 $ 0.17 =========== =========== Weighted average common shares and equivalents outstanding Basic 4,657,487 4,172,555 =========== =========== Dilutive 4,670,381 4,233,435 =========== ===========
See accompanying notes. 24 HITOX CORPORATION OF AMERICA STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK ---------------------- PAID-IN ACCUMULATED ---------------- SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL --------- ---------- ----------- ----------- ------ -------- ---------- BALANCE AT JANUARY 1, 1996 3,745,727 $ 936,432 $10,603,488 $(8,068,352) 88,240 $(42,955) $3,428,613 Net Income -- -- -- 712,939 -- -- 712,939 Issuance of stock 1,000,000 250,000 3,737,705 -- -- -- 3,987,705 --------- ---------- ----------- ----------- ------ -------- ---------- BALANCE AT DECEMBER 31, 1996 4,745,727 1,186,432 $14,341,193 $(7,355,413) 88,240 $(42,955) $8,129,257 Net Income -- -- -- 945,155 -- -- 945,155 --------- ---------- ----------- ----------- ------ -------- ---------- BALANCE AT DECEMBER 31, 1997 4,745,727 $1,186,432 $14,341,193 $(6,410,258) 88,240 $(42,955) $9,074,412 ========= ========== =========== =========== ====== ======== ==========
See accompanying notes. 25 HITOX CORPORATION OF AMERICA STATEMENTS OF CASH FLOWS
Years Ended December 31, --------------------------- 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 945,155 $ 712,939 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 590,125 623,959 Loss on sale of property, plant and equipment -- 166 Adjustment for asset held for sale from cost to fair value 90,600 -- Extraordinary item -- 112,310 Changes in working capital: Receivables 65,856 (13,215) Inventories (1,182,908) 437,576 Other assets (388) 2,819 Accounts payable and accrued expenses 302,031 (952,693) ----------- ----------- Net cash provided by operating activities 810,471 923,861 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment, net of retirements (226,617) (171,312) Proceeds from sales of property, plant and equipment -- 100 ----------- ----------- Net cash used in investing activities (226,617) (171,212) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (373,259) (5,059,300) Proceeds from long-term debt -- 1,000,000 Proceeds from the issuance of common stock and exercise of common stock options -- 3,987,705 ----------- ----------- Net cash used in financing activities (373,259) (71,595) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 210,595 681,054 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,509,047 827,993 ----------- ----------- CASH AND CASH EQUIVALENTS END OF YEAR $ 1,719,642 $ 1,509,047 =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 13,000 $ 9,000 Interest paid 103,922 351,469
See accompanying notes. 26 HITOX CORPORATION OF AMERICA NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description Hitox Corporation of America ("Hitox" or the "Company"), a Delaware Corporation, is engaged in a single industry, the manufacture and sale of mineral products for use as pigments and extenders, primarily in the manufacture of paints, industrial coatings and plastics. Until their sale in September 1994, the Company's subsidiaries included Malaysian Titanium Corporation Sdn. Bhd ("MT") and Fluid Minerals Espanola, S.A. ("FME"). MT, located in Ipoh, Malaysia, manufactures synthetic rutile which is sold to the Company as a raw material for the manufacture of its principal product. MT is also a distributor for HITOX pigment in the Pacific Rim. FME, located in Bunuel, Spain, manufactures and sells HITOX pigment mainly in Europe under a license agreement with the Company. Basis of Presentation and Use of Estimates The financial statements are prepared in accordance with generally accepted accounting principles. 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 (determined on a first-in, first-out basis) or market. 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. 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 27 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 71.9% and 74.8% of total sales in 1997 and 1996, respectively. Income Taxes The Company records income taxes under Financial Accounting Standards Board Statement No. 109, using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company has accounted for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no compensation expense for the stock option grants. The Company will continue to account for stock option grants under APB Opinion No. 25, while applying the requirements of FASB Statement No. 123, Accounting for Stock Based Compensation. See Note 7 of Notes to Financial Statements. Reclassifications Certain 1996 balances have been reclassified for comparative purposes. Earnings Per Share The Company adopted the Financial Accounting Standards Board Statement No. 128, Earnings per Share, in December 1997. Statement 128 replaces the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is based on the weighted 28 average number of shares outstanding and excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. As required by Statement 128, the earnings per share amounts have been restated for all periods presented. For further discussion on earnings per share and the impact of Statement No. 128, see Note 8 of the Notes to the Financial Statements. Capital Structure In February 1997, the Financial Accounting Standards Board issued Statement No. 129, Disclosure of Information about Capital Structure. Statement 129 consolidates the existing guidance in the authoritative literature relating to the Company's capital structure. Capital structure disclosures required by Statement 128 include liquidation preferences of preferred stock, information about the pertinent rights and privileges of the outstanding equity securities, and the redemption amounts for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates. Because the Company already made the disclosures required by this Statement, the adoption had no impact. Impact of Statement of Financial Accounting Standards No. 130 In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. This Statement establishes standards for the reporting and display of comprehensive income and its components in the full set of financial statements, and does not address recognition or measurement of comprehensive income and its components. The adoption of this Statement will not have a material effect on the financial statements. Statement No. 130 will become effective in 1998, however, earlier adoption is allowed. Impact of Statement of Financial Accounting Standards No. 131 Also in June 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131 establishes standards for the reporting of financial information from operating segments in annual and interim financial statements. This Statement requires that financial information be reported on the basis that it is reported internally for evaluating segment performance and deciding how to allocate resources to segments. Statement No. 131 will become effective in 1998. Because the Company is in a single line of business, it will not be affected by this Statement. 29 2. INVENTORIES A summary of inventories follows: December 31, -------------------------- 1997 1996 ----------- ----------- Raw materials $ 3,919,043 $ 2,665,840 Finished goods 906,281 975,757 Supplies 74,248 75,067 ----------- ----------- Total Inventories $ 4,899,572 $ 3,716,664 =========== =========== At December 31, 1997, the finished goods inventory of the Company's principal product, HITOX, is 65% material cost and 35% production cost. At December 31, 1996, those percentages were 64% material cost and 36% production cost. See Note 10 regarding purchase commitments for synthetic rutile. 3. PROPERTY, PLANT AND EQUIPMENT Major classifications and expected lives of property, plant and equipment are summarized below: December 31, -------------------------- Expected Life 1997 1996 --------------- ----------- ----------- Land and Office building 35 years $ 15,988 $ 1,269,537 Production facilities 10, 20 years 3,262,261 3,185,129 Machinery and equipment 5, 7 years 4,138,852 4,048,388 Furniture and fixtures 7, 10, 20 years 603,143 620,009 ----------- ----------- Total 8,020,244 9,123,063 Less accumulated depreciation (5,326,911) (5,204,567) ----------- ----------- Property, Plant and Equipment, net $ 2,693,333 $ 3,918,496 =========== =========== During the fourth quarter of 1997, the Company put its corporate headquarters up for sale resulting in a reduction in the land and office building classification of $1,264,132; and accumulated depreciation of $402,477. In accordance with Statement No. 121, the asset has been reclassified at its fair value less cost to sell. The amount of depreciation expense calculated on the Company's fixed assets for the years ending December 31, 1997 and December 31, 1996 was $590,125, and $590,359, respectively. 30 4. ADJUSTMENT OF ASSETS FOR SALE TO FAIR VALUE The Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, effective January 1, 1995. This Statement addresses the accounting for the impairment of long-lived assets and long-lived assets to be disposed of. The Statement requires that the carrying amount of assets held for sale be reduced to the fair value of the asset less the cost to sell. During the fourth quarter of 1997, management designed and implemented a restructuring plan to aggressively improve the company's cost structure, streamline operations and divest itself of the corporate headquarters. As part of this plan, the Company consolidated all of its Corpus Christi based personnel at the plant site and put the corporate headquarters building up for sale. The Company expects the sale of the building to be beyond one year. The carrying value of the asset held for sale was reduced to fair value based on estimates of sales proceeds less costs to sell. The resulting adjustment of $90,600 to reduce the asset held for sale to fair value was recorded in the fourth quarter of 1997. 5. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS A summary of long-term debt follows: December 31, -------------------------- 1997 1996 ----------- ----------- 10.5% subordinated debentures, issued in a private placement $ -- $ -- (See (a) below) 8.17% term note payable to a U.S. bank, incorporated into the Loan Agreement as described in (b) below, due January 31, 2000 693,244 1,000,000 9.0% term note payable to a U.S. bank, incorporated into the Loan Agreement as described in (b) below, due February 28, 2002 338,434 404,937 ----------- ----------- Total 1,031,678 1,404,937 Less current maturities 405,465 373,146 ----------- ----------- Total long-term debt $ 626,213 $ 1,031,791 =========== =========== (a) On June 15, 1992, the Company executed a note purchase agreement (the "Note Purchase Agreement"), under which the Company issued $5,000,000 of 10.5% convertible subordinated debentures (the "Debentures"), due June 15, 1998, interest payable semi-annually, $500,000 of principal due quarterly to commence on September 15, 1996. $3,500,000 of the Debentures are held by NAP & Co., formerly Delaware State Employee's Retirement Fund, $822,000 by Northman & Co., formerly the Trust for Defined Benefit Plan of ICI American Holdings, Inc. and 31 $678,000 by Fuelship & Co., formerly Zeneca Holdings, Inc. These Debentures were convertible into 555,555 common shares at $9.00 per share at discretion of holder, subject to adjustment for earnings targets. On February 28, 1995, the Note Purchase Agreement was amended to eliminate the conversion feature and the earnings targets from the Debentures. Also on that date, the Debenture holders were issued 1,111,111 warrants at an exercise price of $4.50 per share. The amendment also postponed the beginning of principal repayments by one year to September 15, 1997, and extended the due date one year to June 15, 1999. In addition, the amendment changed the interest payments from semi-annual to monthly. On June 26, 1996, the Company completed the sale of 1,000,000 shares of common stock at $4.00 per share to Megamin Ventures Sdn. Bhd., formerly Syarikat Megawati Sdn. Bhd. The $4,000,000 proceeds from the sale were used to prepay $4,000,000 of the outstanding principal balance of the Debentures on July 1, 1996. On July 31, 1996, the Company executed an amended loan agreement (the "Amended Loan Agreement") with NationsBank of Texas, N.A., (the "Bank"), which provided a new $1,000,000 term loan (the "Term Loan") to the Company. The proceeds of the Term Loan were used to prepay the remaining $1,000,000 principal balance on the Debentures on July 31, 1996. Debenture origination fees paid in 1992 (consisting of legal and placement fees) were $347,510. These fees were capitalized and reflected in other assets in the balance sheet and have been amortized over the term of the Debentures. The remaining unamortized fees were expensed at the time the Debentures were completely paid off, resulting in an extraordinary charge of $112,310 in the third quarter of 1996. (b) On August 31, 1995, the Company entered into a new loan agreement (the "Loan Agreement") with the Bank. The Loan Agreement extended the maturity of a mortgage note on the Company's headquarters building which had a principal balance of $486,849 on August 31, 1995. The Loan Agreement required the mortgage note to be paid in 77 equal monthly installments of $8,390 each, including principal and interest, at an interest rate of 9.5%. The Loan Agreement also increased the amount of the Company's revolving line of credit from $1,400,000 to $2,000,000, and extended the maturity date until April 30, 1997. The line of credit provided for monthly interest payments on any outstanding principal balance at an interest rate of the Bank's prime plus 1%. The Amended Loan Agreement, executed on July 31, 1996, established repayment terms for the 8.17% Term Loan requiring monthly payments of interest only until December 31, 1996, with monthly payments of principal and interest of $31,415 beginning January 31, 1997, with the final payment due on January 31, 2000. Under the Amended Loan Agreement, the interest rate on the mortgage note on the Company's headquarters building was reduced from 9.5% to 9.0%. Also as part of the Amended Loan Agreement, the interest rate for borrowings on the Company's line of credit was reduced from 1% to 0.75% over the Bank's prime rate and the maturity date was extended to April 30, 1998. Maximum advances under the line of credit are restricted by the amount of specified percentages of certain of the Company's inventories and accounts receivable. The Company only accessed the line of credit briefly during the first and second quarters of 1996. Both 32 the line of credit and the term notes are secured by the office building, inventory and accounts receivable. The Amended Loan Agreement contains covenants which, among other things, require maintenance of certain financial ratios. The covenants are required to be calculated at the end of each quarter. The Company was in compliance with all covenants at the end of each quarter in 1997. The Company is prohibited from paying dividends without the prior approval of the Bank. The carrying amounts of the Company's long term debt approximate their fair value. The loans were renegotiated in July 1996. Market interest rates and the Company's credit standing have not changed significantly since then. The following is a summary of maturities of long-term debt as of December 31, 1997: Year Ending December 31, ------------------------ 1998 $ 405,465 1999 440,328 2000 87,331 2001 95,612 2002 2,942 ----------- Total $ 1,031,678 =========== 6. INCOME TAXES A reconciliation between the Company's effective tax rate and the Federal statutory rate on earnings is as follows: Years Ended December 31, -------------------------- 1997 1996 ----------- ----------- Expense computed at statutory rates $ 325,773 $ 245,459 Other, net (46,457) 60,541 Change in valuation allowance (266,316) (297,000) ----------- ----------- $ 13,000 $ 9,000 =========== =========== Deferred income taxes reflect the effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset as of December 31, 1997 and 1996 are as follows: 33 Years Ended December 31, -------------------------- 1997 1996 Rounded Rounded ----------- ----------- Deferred Tax Liabilities: Book - tax difference of U.S. property, plant and equipment $ 162,000 $ 177,000 ----------- ----------- Total deferred liabilities 162,000 177,000 ----------- ----------- Deferred Tax Assets: Net operating loss carryforwards 4,137,000 4,434,000 Alternative minimum tax credit carryforward 42,000 18,000 Other deferred assets 40,000 48,000 ----------- ----------- Total deferred assets 4,219,000 4,500,000 ----------- ----------- Net deferred tax assets before valuation allowance 4,057,000 4,323,000 ----------- ----------- Valuation allowance (4,057,000) (4,323,000) ----------- ----------- Net deferred tax liability $ -- $ -- =========== =========== As of December 31, 1997, the Company has a net operating loss carryforward of $12,167,000 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. 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 34 stock's market value on the date of grant. Options may be issued subject to a vesting schedule at the discretion of the Board of Directors' Compensation Committee. In addition, during 1991, 75,000 non-qualified stock options were granted to the officers of the Company at an exercise price of $9.75 per share and expire during 1998. There also were 3,000 non-qualified stock options granted in 1989 at $9.00, which expired in 1996. During 1995, another 50,000 options were issued outside the plan at an exercise price of $2.625. Exercise prices on options outstanding at December 31, 1997 ranged from $1.750 to $10.625 per share. The weighted-average remaining contractual life of those options is 6 years. The number of options exercisable at December 31, 1997 and December 31, 1996 was 317,595 and 388,235, respectively. The following table summarizes certain information regarding stock options granted: Options ----------------------------------------------------
Total Weighted Average Range of Reserved Outstanding Exercise Prices Exercise Prices -------- ----------- ---------------- ---------------- Balances at December 31, 1994 221,600 197,075 $7.125 $3.250 - $10.625 Additional options authorized 500,000 -- -- -- Granted -- 391,000 $3.367 $2.625 - $4.25 Exercised (700) (700) $4.125 $4.125 Forfeited -- (10,400) $4.588 $4.125 - $5.50 -------- --------- Balances at December 31, 1995 720,900 576,975 $4.628 $2.625 - $10.625 Granted -- 12,500 $3.500 $3.50 Forfeited -- (15,700) $7.525 $3.250 - $10.625 -------- --------- Balances at December 31, 1996 720,900 573,775 $4.524 $2.625 - $10.625 Granted -- 33,000 $2.750 $1.75 - $3.50 Forfeited -- (180,500) $2.750 $2.625 - $4.125 -------- --------- Balances at December 31, 1997 720,900 426,275 $5.041 $1.750 - $10.625 ======== =========
35 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 1996 and 1997, respectively: risk-free interest rates of 6.58% and 6.16%; a dividend yield of zero; volatility factors of the expected market price of the Company's common stock of .588 and .572; and a weighted-average expected life of the option of 5 years for both 1997 and 1996. The weighted- average fair value of options granted during 1997 was $1.22. 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. 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: 1997 1996 --------- --------- Pro forma net income $ 867,557 $ 549,920 Pro forma earnings per share Basic $0.19 $0.13 Diluted $0.19 $0.13 Stock Warrants The Company and the Debenture trustee amended the Note Purchase Agreement to accommodate changes which recognize the Company's new structure and financial condition, as well as the waivers and forbearance granted to the Company by the Debenture holders. The changes to the Note Purchase Agreement eliminated the conversion feature. The Company issued warrants to the Debenture holders to purchase an aggregate of 1,111,111 shares of the Company's common stock, at a conversion price of $4.50 per share. The Company has also granted the Debenture holders additional warrants to purchase common stock from the Company in consideration of their agreements, waivers and forbearance, as follows: Warrants to purchase 50,000 shares at $2.50 per share were granted on February 28, 1995, and expire February 28, 2000. Based on the market price on the grant date of $2.625, the Company recorded an expense of $6,250 in the first quarter of 1995 related to these warrants. 36 Warrants to purchase 50,000 shares at $2.50 per share were granted on September 30, 1994, and expire September 30, 1999. Based on the market price on the grant date of $3.25, the Company recorded an expense of $37,500 related to the warrants during the third quarter of 1994. In connection with all of the Company's stock options and warrants, 1,929,011 shares of the Company's common stock have been reserved. 8. CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 1997 1996 ----------- ----------- Numerator: - --------- Income before extraordinary item $ 945,155 $ 825,249 Extraordinary item, early extinguishment of debt -- (112,310) ----------- ----------- Net Income 945,155 712,939 Numerator for basic earnings per share - income available to common stockholders 945,155 712,939 ----------- ----------- Effect of dilutive securities: -- -- ----------- ----------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $ 945,155 $ 712,939 Denominator: - ----------- Denominator for basic earnings per share - weighted-average shares 4,657,487 4,172,555 Effect of dilutive securities: Employee stock options 3,212 38,016 Warrants 9,682 22,864 ----------- ----------- Dilutive potential common shares 12,894 60,880 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 4,670,381 4,233,435 Basic earnings per common share: Income before extraordinary item $ 0.20 $ 0.20 Extraordinary item, early extinguishment of debt -- (0.03) ----------- ----------- Net Income $ 0.20 $ 0.17 Diluted earnings per common share: Income before extraordinary item $ 0.20 $ 0.19 Extraordinary item, early extinguishment of debt -- (0.02) ----------- ----------- Net Income $ 0.20 $ 0.17 37 Options and warrants to purchase 1,454,386 shares of common stock were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 9. PROFIT SHARING PLAN The Company has a profit sharing plan that covers all employees. Contributions to the plan are determined by the Board of Directors and are limited to the maximum amount deductible by the Company for Federal income tax purposes. For the years ended December 31, 1997 and 1996, there were no contributions to the plan. The Company also offers a 401(k) savings plan administered by a bank. Employees are eligible to participate in the plan after completing six months of service with the Company. The Company matches contributions up to $400 per year per employee. Total Company contributions to the 401(k) plan for the years ended December 31, 1997 and 1996 were $15,659 and $15,823 respectively. 10. COMMITMENTS AND CONTINGENCIES Purchase Commitments The Company sold its entire ownership interest in its Malaysian subsidiary in 1994. As part of that transaction, the Company entered into an agreement for the supply of synthetic rutile by MT to the Company (the "Supply Agreement") which became effective December 15, 1994. The Supply Agreement has an initial term of five years, with on-going automatic year to year renewal unless terminated with twelve months notice by either party. The Supply Agreement is a take or pay arrangement for a specified minimum annual quantity ("Minimum Quantity"). The third year purchase commitment will be completed with the first shipment in 1998, as mutually agreed between the Company and MT, thereby satisfying the 1997 purchase requirement of $4,332,000. The Company's 1996 purchases from MT totaled $4,296,050. Prices for the first two years of the Supply Agreement were fixed. The first negotiated price adjustment under the Supply Agreement was effective for orders placed in 1997, the third year of the Supply Agreement, and resulted in a 3.6% price increase compared with orders placed in the second year of the Supply Agreement. The second negotiated price adjustment under the Supply agreement will be effective for orders placed in 1998, the fourth year of the supply agreement. The price adjustment is expected to result in a price decrease compared with orders placed in 1997 due to favorable exchange rates and other adjustments. 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, 38 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. Minimum future rental payments under these leases as of December 31, 1997 are as follows: Years Ending December 31, ------------------------- 1998 $ 53,400 1999 53,400 2000 53,400 2001 53,400 2002 53,400 Later years 377,400 ---------- Total minimum lease payments $ 644,400 ========== Rent expense under these leases was $53,400 per year during 1997 and 1996. It is expected that as these leases expire, the Company will renew or replace them with leases on similar assets, at potentially higher rates. The Company leases office space in its office building under noncancellable operating leases to third parties. Total rental income received pursuant to these leases in 1997 and 1996, amounted to approximately $138,800 and $137,400, respectively. Minimum future rentals receivable under these leases as of December 31, 1997 are as follows: Year Ending December 31, ------------------------ 1998 $ 148,204 1999 147,029 2000 147,029 2001 147,029 2002 -- ---------- Total $ 589,291 ========== 39 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 16% and 15% of total revenue during the years ended December 31, 1997 and 1996, 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 1997 1996 ----------------- ----------- ----------- Canada $ 912,896 $ 836,783 South and Central America and Mexico 328,970 368,800 Asia 139,692 84,296 Other Regions 134,489 105,892 ----------- ----------- Total $ 1,516,047 $ 1,395,771 =========== =========== 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 both 1997 and 1996. Domestic distributors accounted for approximately 35% of total net sales in 1997 and in 1996. 40 INDEX TO EXHIBITS Exhibit No. Item Page - ----------- ---- ---- 23 Consent of Ernst & Young LLP 42 27 Financial Data Schedule 43 41 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-39755) pertaining to the 1990 Incentive Plan for Hitox Corporation of America of our report dated January 28, 1998, with respect to 10-KSB for the year ended December 31, 1997. ERNST & YOUNG LPP San Antonio, Texas March 27, 1998 42 EX-27 2
5 1000 YEAR DEC-31-1997 DEC-31-1997 $1720 0 1095 0 4900 7755 8020 5327 11247 1547 626 0 0 1186 7888 11247 11243 11243 7841 7841 0 0 104 958 13 945 0 0 0 945 $0.20 $0.20
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