United States
Securities and Exchange Commission
Washington, D C 20549
____________________________
FORM 10-QSB
____________________________
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[__] 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
____________________________
TOR MINERALS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
____________________________
722 Burleson Street, Corpus Christi, Texas 78402
(Address of principal executive offices)
(361) 883-5591
(Registrant's telephone number, including area code)
____________________________
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] |
No [__] |
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Class |
Shares Outstanding as of October 31, 2001 |
Common Stock, $0.25 par value |
5,580,187 |
Transitional Small Business Disclosure Format (check one):
Yes [__] |
No [ X ] |
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Table of Contents |
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Part I - Financial Information |
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Page No. |
Item 1. |
Consolidated Condensed Financial Statements (Unaudited) |
|
|
Consolidated Condensed Balance Sheets -- |
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|
Consolidated Condensed Statements of Operations -- |
|
|
Consolidated Condensed Statements of Cash Flows -- |
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|
Notes to Consolidated Condensed Financial Statements |
7 |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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|
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Item 6. |
Exhibits and Reports on Form 8-K |
18 |
Signatures |
|
18 |
TOR Minerals International, Inc.
Consolidated Condensed Balance Sheets
September 30, 2001 and December 31, 2000
(in thousands)
|
|
September 30, |
|
December 31, |
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
218 |
$ |
128 |
Trade accounts receivable, net |
|
2,199 |
|
1,936 |
Other receivables |
|
118 |
|
85 |
Inventories |
|
4,169 |
|
5,570 |
Other current assets |
|
180 |
|
125 |
Total current assets |
|
6,884 |
|
7,844 |
|
|
|
|
|
Property, plant, and equipment, net |
|
12,790 |
|
10,367 |
Goodwill, net |
|
1,284 |
|
-- |
Other assets |
|
267 |
|
12 |
|
$ |
21,225 |
$ |
18,223 |
|
|
|
|
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable, trade |
$ |
700 |
$ |
566 |
Accounts payable, other |
|
145 |
|
177 |
Accrued expenses |
|
425 |
|
609 |
Notes payable - Line of Credit |
|
1,040 |
|
608 |
Export credit refinancing facility |
|
1,422 |
|
1,470 |
Current maturities of long-term debt |
|
2,457 |
|
2,245 |
Total current liabilities |
|
6,189 |
|
5,675 |
Long term debt, excluding current maturities |
|
960 |
|
1,129 |
Other long-term debt, convertible debentures |
|
2,709 |
|
-- |
Total liabilities |
|
9,858 |
|
6,804 |
Commitments and Contingencies |
|
-- |
|
-- |
Shareholder's equity: |
|
|
|
|
Common stock $0.25 par value; authorized, 10,000 shares; |
|
1,395 |
|
1,320 |
Additional paid-in capital |
|
15,424 |
|
15,198 |
Accumulated deficit |
|
(5,452) |
|
(5,099) |
Shareholder's equity |
|
11,367 |
|
11,419 |
|
$ |
21,225 |
$ |
18,223 |
|
|
|
|
|
See Notes to Consolidated Financial Statements |
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|
|
|
TOR Minerals International, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
NET SALES |
$ |
3,787 |
$ |
3,850 |
$ |
11,359 |
$ |
11,387 |
|
COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
2,707 |
|
3,118 |
|
8,901 |
|
8,701 |
|
GROSS PROFIT |
1,080 |
732 |
2,458 |
2,686 |
|||||
Selling, administrative and general |
844 |
886 |
2,522 |
2,726 |
|||||
OPERATING INCOME (LOSS) |
|
236 |
|
(154) |
|
(64) |
|
(40) |
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
|
Interest income |
|
1 |
|
11 |
|
18 |
|
49 |
|
Interest expense |
|
(112) |
|
(139) |
|
(312) |
|
(336) |
|
Other, net |
|
3 |
|
(11) |
|
5 |
|
(14) |
|
INCOME (LOSS) BEFORE INCOME TAX |
|
128 |
|
(293) |
|
(353) |
|
(341) |
|
Provision for income tax |
|
-- |
|
-- |
|
-- |
|
-- |
|
NET INCOME (LOSS) |
$ |
128 |
$ |
(293) |
$ |
(353) |
$ |
(341) |
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.02 |
$ |
(0.06) |
$ |
(0.06) |
$ |
(0.07) |
|
Diluted |
$ |
0.02 |
$ |
(0.06) |
$ |
(0.06) |
$ |
(0.07) |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding |
|
|
|
|
|
|
|
|
|
Basic |
|
5,580 |
|
5,279 |
|
5,481 |
|
5,166 |
|
Diluted |
|
5,603 |
|
5,279 |
(1) |
5,481 |
(1) |
5,166 |
(1) |
(1) |
No shares were added to the number of basic shares in the computation of diluted earnings per share because the effect would be antidilutive. |
See Notes to Consolidated Financial Statements
TOR Minerals International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
Nine Months Ended |
||
|
|
2001 |
|
2000 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net Loss |
$ |
(353) |
$ |
(341) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
Depreciation |
|
537 |
|
487 |
Amortization |
|
53 |
|
37 |
Loss on sale of asset(s) |
|
-- |
|
5 |
Other assets |
|
12 |
|
21 |
Changes in working capital: |
|
|
|
|
Receivables |
|
(296) |
|
491 |
Inventories |
|
1,401 |
|
1,519 |
Other current assets |
|
(55) |
|
(30) |
Accounts payable and accrued expenses |
|
(82) |
|
(1,396) |
Net cash provided by operating activities |
|
1,217 |
|
793 |
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Acquisition of TMM, net of cash acquired |
|
-- |
|
(3,893) |
Acquisition of TP&T's assets from RBG |
|
(2,782) |
|
-- |
Additions to property, plant and equipment |
|
(947) |
|
(407) |
Proceeds from sale of property, plant and equipment |
|
-- |
|
37 |
Net cash used in investing activities |
|
(3,729) |
|
(4,263) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Domestic financing activities: |
|
|
|
|
Proceeds from long-term bank debt |
|
1,000 |
|
3,500 |
Payments on long-term bank debt |
|
(1,350) |
|
(1,200) |
Proceeds from bank line of credit |
|
1,550 |
|
354 |
Payments on bank line of credit |
|
(1,550) |
|
(354) |
Proceeds from other long-term debt |
|
600 |
|
-- |
Payments on other long-term debt |
|
(706) |
|
(231) |
Foreign financing activities: |
|
|
|
|
Proceeds from long-term bank debt |
|
1,351 |
|
-- |
Payments on long-term bank debt |
|
(1,687) |
|
(184) |
Proceeds from bank line of credit |
|
977 |
|
509 |
Payments on bank line of credit |
|
(545) |
|
(1,021) |
Proceeds from export credit refinancing facility |
|
1,149 |
|
1,597 |
Payments on export credit refinancing facility |
|
(1,197) |
|
(1,548) |
Other financing activities: |
|
|
|
|
Proceeds from issuance of convertible debentures |
|
2,709 |
|
-- |
Proceeds from issuance of common stock and exercise of common stock options |
|
301 |
|
9 |
Net cash provided by financing activities |
|
2,602 |
|
1,431 |
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
90 |
|
(2,039) |
Cash and cash equivalents at beginning of year |
|
128 |
|
2,330 |
Cash and cash equivalents at end of period |
$ |
218 |
$ |
291 |
|
|
|
|
|
See Notes to Consolidated Financial Statements |
|
|
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|
TOR Minerals International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
Nine Months Ended |
||
|
|
2001 |
|
2000 |
|
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
|
Interest paid |
$ |
272 |
$ |
306 |
Interest income |
|
18 |
|
49 |
|
|
|
|
|
Non-cash investing activities: |
|
|
|
|
Fair value of assets acquired |
$ |
2,013 |
$ |
9,885 |
Goodwill acquired |
|
1,304 |
|
-- |
Non-compete agreement acquired |
|
300 |
|
-- |
Debt assumed |
|
-- |
|
(4,000) |
Debt issued |
|
(835) |
|
(950) |
Common stock issued |
|
-- |
|
(1,000) |
Cash paid for acquisition |
$ |
2,782 |
$ |
3,935 |
|
|
|
|
|
See Notes to Consolidated Financial Statements |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Basis of Presentation and Use of Estimates
The interim financial statements of TOR Minerals International, Inc. (the "Company") are unaudited, but include all adjustments which the Company deems necessary for a fair presentation of its financial position and results of operations. All adjustments are of a normal and recurring nature. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. All significant accounting policies conform to those previously set forth in the Company's fiscal 2000 Annual Report on Form 10-KSB.
The consolidated financial statements include accounts of TOR Minerals International, Inc. and its wholly owned subsidiaries, TOR Minerals Malaysia, Sdn. Bhd. (TMM) and TOR Processing & Trade BV (TP&T). All significant inter-company transactions are eliminated in the consolidation process.
TMM measures and records its transactions in terms of the local Malaysian currency, the ringgit. Malaysia imposed capital controls and fixed its ringgit currency at 3.8 ringgits per 1 U.S. dollar in September 1998. The Malaysian government has not changed the fixed exchange rate since that time; however, there can be no assurance that it will maintain the currency's fixed rate of exchange.
TP&T measures and records its transactions in terms of the Euro and uses the U.S. dollar as its functional currency. As a result of the changes in the exchange rate, gains and losses due to fluctuations in the value of the Euro are recorded on the Company's consolidated condensed statement of operations.
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company has accounted for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no compensation expense for the stock option grants. The Company did not adopt FASB Statement No. 123, Accounting for Stock-Based Compensation, and will continue to account for stock option grants in accordance with APB Opinion No. 25. FASB Statement 123 requires certain disclosures about stock-based compensation plans for all companies regardless of the method used to account for them. Effective in 1996 calendar year-end financial statements, companies that continue to apply APB 25 are required to disclose pro forma information as if the measurement provisions of Statement 123 had been adopted in their entirety. Such pro forma information was included in the Company's 2000 Form 10-KSB.
Reclassifications
Certain reclassifications have been made in prior quarters' financial statements to conform to classifications used in the current quarter.
2. Acquisition of TOR Minerals Malaysia, Sdn. Bhd.
Effective March 1, 2000 the Company acquired all the outstanding shares of TMM from Megamin Ventures, Sdn. Bhd. ("Megamin") the Company's largest stockholder. Pursuant to the terms of the agreement, the Company paid $3,775,000 in cash and issued 500,000 shares of its common stock in exchange for 100% of the outstanding shares of TMM. The Company's shares closed at $2.00 on the effective date of the agreement. The Company also agreed to pay Megamin a total of $1,000,000 in four equal semi-annual payments beginning July 1, 2000. The discounted present value of those payments is approximately $950,000. Transaction costs totaled $160,000. The Company recorded the transaction as a purchase, with a cost of approximately $5,885,000, plus the assumption of TMM's bank debt of approximately $4,000,000.
TMM is the Company's sole supplier of Synthetic Rutile, the raw material for the Company's proprietary titanium pigment HITOX
®. TMM is also producing HITOX pigment in Malaysia under a license from the Company and is selling HITOX pigment in Asia and Europe. To take advantage of lower manufacturing costs in Malaysia, TMM began shipping HITOX to the West Coast of the United States in September 2000 and to the Company's Corpus Christi location in July 2001.TMM was previously a subsidiary of the Company and was sold to Megamin 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.
3. Acquisition of Assets from the Royal Begemann Group
On May 16, 2001, the Company finalized an asset purchase agreement (the "Agreement") with the Royal Begemann Group (RBG), a Netherlands holding company, to acquire designated assets of Terminor Processing & Trade BV, Ceramic Design International Holding BV, and Thermal Insulation Manufacturers BV. Pursuant to the terms of the Agreement, the Company paid $2,300,000 and agreed to pay RBG an additional $900,000 in three (3) equal installments beginning January 31, 2002. The discounted present value of the payments is approximately $835,000. The Company recorded the transaction as a purchase with a cost of approximately $3,300,000 of which $1,304,000 was goodwill which will be amortized using straight line over 20 years. In a separate agreement, the Company paid RBG $300,000 for a non-compete agreement which will be amortized over three years. The purchase price allocation is preliminary. The Company raised $3,010,000 for the acquisition through a private placement of common stock and convertible debentures. (see note 4)
This acquisition of assets, consisting primarily of plant and equipment of Terminor Processing & Trade BV and Ceramic Design International Holding BV, located in Hattem, The Netherlands, enabled the Company to expand operations through its new subsidiary, TOR Processing and Trade BV (TP&T). Using the acquired plant and equipment, TP&T will manufacture very high quality specialty aluminas for the use in chips, cast polymers, bulk molding compounds, as well as, wire and cable applications. The Dutch plant also has the capability of manufacturing Boehmite which is used in the petroleum industry as a carrier for catalysts. Dr. Olaf Karasch, a mineralogist with 20 years experience in alumina processing, is TP&T's Managing Director and is based in Hattem.
In addition, certain equipment acquired from the closed Norwegian plant of Thermal Insulation Manufacturers BV is to be used in the Company's plants in Corpus Christi, Texas and Ipoh, Malaysia, to apply certain process technology to its titanium pigment. The Company paid $500,000 for the equipment acquired from the Norwegian plant.
4. Related Party Transactions
In April 2001 the Company raised $3,010,000 in a private placement of common stock and convertible debentures. The Company used the proceeds to purchase certain assets from the RBG, a Netherlands holding company.
In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. Each purchaser in the private placement acquired a combination of common stock and convertible debentures. The terms of the private placement were agreed to in arms length negotiations with two lead investors who had no previous investment in or relationship to the Company but invested approximately 2/3 of the total amount raised. An additional outside investor and five officers and directors of the Company purchased the remaining 1/3 of the stock and convertible debentures on the same terms as those agreed to with the lead investor.
The common stock was priced in the private placement at $1.00 per share (slightly above the previous closing price), and the conversion price for the shares of common stock issuable upon conversion of the debentures is $1.80. The debentures bear no interest for 2 years, and are secured by security interests in substantially all of the Company's assets, and will be automatically converted into 5 year secured term notes bearing interest at the rate of 10% per annum, unless the holders of the debentures exercise the option to convert them into common stock at the $1.80 per share conversion rate.
The lead investors are affiliates of Hartman & Associates, Inc. of Austin, Texas. Under the terms of their investments, Hartman & Associates was permitted to designate two persons as directors of the Company, and David A. Hartman and Douglas M. Hartman were so designated, and joined the Company's Board of Directors at a subsequent board meeting.
The Board of Directors unanimously approved the terms of the private placement after thoroughly considering all of the terms in comparison with other potential methods of financing the asset acquisition. In particular, the Company considered raising all or a substantial portion of the funds required through a secured loan from a commercial bank, but the Board of Directors concluded that the financing costs and risks associated with bank financing were less favorable to the Company than the terms of the private placement.
A portion of the purchase price for the assets was deferred and is payable in installments, each in the amount of $300,000; payable on January 31, March 31, and May 31, 2002. The Company has not yet decided how it will finance the future installments. In that regard, the Company granted a right of first refusal to its largest stockholder, Megamin, to invest up to $900,000 on the same terms as the common stock and debentures that were issued in the private placement (Megamin did not invest in the private placement). However, the Company may elect to fund a portion of the amounts required for the installment payments out of its working capital or through a bank loan, and the Company has not been informed whether Megamin intends to exercise its right of first refusal. The Company expects to consider available financing methods in light of market conditions later this year, and may utilize a combination of internal funds, bank financing and/or an additional private placement in order to fund the remaining installments.
The Company entered into a loan and security agreement with the Company's Chairman of the Board through Paulson Ranch, Ltd. The loan, with an interest rate of 10.0%, is amortized over 60 months with monthly principal and interest payments of $12,750. As of September 30, 2001 the Company has reduced the principal balance approximately $235,000. The principal balance outstanding on September 30, 2001 was approximately $365,000.
5. Long-term Debt and Notes Payable to Banks
A summary of long-term debt follows: |
|
September 30, |
|
December 31, |
LIBOR based rate term note payable to a U.S. bank, with an effective interest rate of 7.91% at March 31, 2001 due October 5, 2001 |
$ |
-- |
$ |
1,300,000 |
Variable rate term note payable to a Malaysian bank, with an effective rate of 8.8% at December 31, 2000 due October, 2004 |
|
-- |
|
1,052,632 |
Variable rate term note payable to a Malaysian bank, with an effective rate of 8.8% at December 31, 2000 due September, 2004 |
|
-- |
|
297,856 |
Variable rate term note payable to a U.S. bank, with an effective interest rate of 7.75% at September 30, 2001 amortized over 60 months with monthly principal payments of $16,667; matures March 31, 2002 |
|
950,000 |
|
-- |
Convertible subordinated debentures issued in a private placement on April 5, 2001, convert into 5-year term loans at 10% interest if not presented for conversion to Company's common stock by April 5, 2003 |
|
2,709,000 |
|
-- |
Variable rate term note payable to a Malaysian offshore bank, with an effective rate of 5.0% at September 30, 2001 due February, 2004 |
|
507,473 |
|
-- |
Variable rate term note payable to a Malaysian offshore bank, with an effective rate of 4.917% at September 30, 2001 due February, 2004 |
|
507,473 |
|
-- |
Other indebtedness, payable to the Royal Begemann Group with an effective interest rate of 10.0%, due in three equal payments beginning January 1, 2002 |
|
835,265 |
|
-- |
Other indebtedness, payable to Paulson Ranch, a related party, with an effective interest rate 10.0%, amortized over 60 months with monthly payments of $12,750, due April, 2005 |
|
365,007 |
|
-- |
Other indebtedness, payable to Megamin with an effective interest rate of 9.0%, due January 1, 2002 |
|
251,890 |
|
723,678 |
Total |
|
6,126,108 |
|
3,374,166 |
Less current maturities |
|
2,457,133 |
|
2,245,473 |
Total long-term debt |
$ |
3,668,975 |
$ |
1,128,693 |
On June 30, 2001 the Company entered into the Fifth Amendment (the "Amendment") to its Loan Agreement with the Bank of America (the "Bank"). The Amendment reduced the Company's line of credit (the "Line"), revised the computation of Funded Debt Coverage, extended the maturity date of the term loan and expanded the collateral to include property, plant and equipment.
The Company's Line with Bank of America expires April 30, 2002. The Amendment reduced the Line from $2,000,000 to $1,350,000. The interest rate for the Line is the Bank's prime rate plus 1% per annum. The amount of credit available to the Company under the Line is limited to the lesser of $1,350,000 or 80% of eligible accounts receivable. At September 30, 2001, $1,066,000 was available to the Company under the Line and the Company had no outstanding borrowings under the Line on that date. The Company anticipates having to access funds from the Line during the fourth quarter of 2001.
The Company has one term loan with the Bank. The loan proceeds of $3,500,000 were used to finance the purchase of TMM in March 2000. The Amendment extended the maturity date of the loan from October 5, 2001 to March 31, 2002. The interest rate for the loan is the Bank's prime rate plus 1% per annum. The Amendment required the outstanding principal balance to be reduced from $1,200,000 to $1,000,000. Principal and interest payments are scheduled monthly commencing July 3, 2001, and continuing on the third (3rd) day of each calendar month thereafter until the stated maturity date of March 31, 2002 when remaining principal and unpaid interest thereon shall be paid. The monthly payment, based on a 60-month straight-line amortization, includes principal of $16,666.67, plus unpaid interest as of the date of payment. At September 30, 2001 the outstanding principal balance on the term loan was $950,000. The Company believes that it will not be able to pay off the term loan in its entirety when it matures March 31, 2002. Therefore, the Company plans to renegotiate the unpaid amount when it matures.
Both the Line and the term loan with the Bank are secured by the Company's property, plant, and equipment, as well as inventory and accounts receivable. The loan agreement contains covenants that, among other things, require maintenance of certain financial ratios. The covenants are calculated at the end of each quarter. For the quarter ended September 30, 2001, the Company was in compliance with all of the covenants. The terms of the Agreement also prohibited the Company from paying dividends without the prior approval of the Bank.
As part of the purchase agreement with RBG, a portion of the purchase price for the assets was deferred and is payable in three installments, each in the amount of $300,000; payable on January 31, March 31, and May 31, 2002. The Company has not yet decided how it will finance the future installments. In that regard, the Company granted a right of first refusal to its largest stockholder, Megamin, to invest up to $900,000 on the same terms as the common stock and debentures that were issued in the private placement (Megamin did not invest in the private placement). However, the Company may elect to fund a portion of the amounts required for the installment payments out of its working capital or through a bank loan, and the Company has not been informed whether Megamin intends to exercise its right of first refusal. The Company expects to consider available financing methods in light of market conditions later this year, and may utilize a combination of internal funds, bank financing and/or an additional private placement in order to fund the remaining installments. For information regarding the private placement of common stock and convertible debentures, see note 4.
The Company entered into a loan and security agreement with the Company's Chairman of the Board through Paulson Ranch, Ltd. The loan, with an interest rate of 10.0%, is amortized over 60 months with monthly principal and interest payments of $12,750. As of September 30, 2001 the Company has reduced the principal balance approximately $235,000. The principal balance outstanding on September 30, 2001 was approximately $365,000.
The Company's subsidiary, TMM, has loan agreements with two banks in Malaysia, HSBC Bank Malaysia Berhad and RHB Bank Berhad, which provide a total short term credit facility of $6,447,000. At September 30, 2001 TMM had utilized $2,462,000 of that facility, including $1,040,000 on the line of credit and $1,422,000 outstanding under an export credit refinancing facility (ECR). ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 120 days against customers' purchase orders. During the first quarter 2001, TMM refinanced its two term loans with offshore banks. The loan agreements are with HSBC Bank Labuan and RHB Bank Labuan. At September 30, 2001 the outstanding principal balance of each term loan was approximately $507,000. Both loans have a variable interest rate. The effective interest rate at September 30, 2001 for the loan with RHB Bank was 5.0% per annum and 4.917% with HSBC Bank. The credit facilities are secured by TMM's inventory, accounts receivable and property, plant and equipment.
The Company's subsidiary, TP&T, located in the Netherlands is currently negotiating a credit facility with a Bank in the Netherlands.
In the past year, the Company has significantly increased its level of borrowings. Such debt was incurred to finance the acquisition of TMM and the assets used to form TP&T, as well as debt associated with the operations of TMM. As such, the Company is subject to all the risks associated with liabilities for borrowed money, including the risk that the Company will not be able to renew or extend indebtedness of $2,457,000 that matures in 2002. If the Company were unable to renew or extend such debt, the Company's financial position would be adversely affected. Further, the terms of the Company's borrowings contain restrictions and covenants, including covenants based on the performance of the Company, and the failure of the Company to comply with such restrictions and covenants could also adversely affect the Company's financial position.
6. Calculation of Basic and Diluted Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except per share amounts) |
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net Income |
$ |
128 |
$ |
(293) |
$ |
(353) |
$ |
(341) |
|
Numerator for basic earnings per share |
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
-- |
|
-- |
|
-- |
|
-- |
|
Numerator for diluted earnings per share - income available to common stockholders after assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share |
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
23 |
|
-- |
(1) |
-- |
(1) |
-- |
(1) |
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
Net Income |
$ |
0.02 |
$ |
(0.06) |
$ |
(0.06) |
$ |
(0.07) |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
Net Income |
$ |
0.02 |
$ |
(0.06) |
$ |
(0.06) |
$ |
(0.07) |
|
___________________________________________
(1) |
No shares were added to the number of basic shares in the computation of diluted earnings per share because the effect would be antidilutive. |
Excluded from the calculation of diluted earnings per share were a total of 362,900 options at September 30, 2001 and 535,600 options at September 30, 2000. The options 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.
7. Business Segment Information
The Company and its subsidiaries operate in one reportable segment of pigment manufacturing and related products. All United States manufacturing is done at the facility located in Corpus Christi, Texas. Foreign manufacturing is done by the Company's wholly owned subsidiaries located in Malaysia and the Netherlands. A summary of the Company's manufacturing operations by geographic area is presented below:
(In thousands) |
|
|
|
|
|
|
|
Adjustments and Eliminations |
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended: |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2001 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Customer sales |
$ |
2,904 |
$ |
557 |
$ |
326 |
$ |
-- |
$ |
3,787 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Intercompany sales |
|
-- |
|
663 |
|
-- |
|
(663) |
|
-- |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Total Sales Revenue |
$ |
2,904 |
$ |
1,220 |
$ |
326 |
$ |
(663) |
$ |
3,787 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Segment profit (loss) |
$ |
98 |
$ |
211 |
$ |
(196) |
$ |
15 |
$ |
128 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2000 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Customer sales |
$ |
3,359 |
$ |
491 |
$ |
-- |
$ |
-- |
$ |
3,850 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Intercompany sales |
|
-- |
|
145 |
|
|
(145) |
-- |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Sales Revenue |
$ |
3,359 |
$ |
636 |
$ |
-- |
$ |
(145) |
$ |
3,850 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment profit (loss) |
$ |
(143) |
$ |
(122) |
$ |
-- |
$ |
(28) |
$ |
(293) |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Nine months ended: |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2001 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Customer sales |
$ |
9,433 |
$ |
1,461 |
$ |
465 |
$ |
-- |
$ |
11,359 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Intercompany sales |
|
-- |
|
1,349 |
|
-- |
|
(1,349) |
|
-- |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Total Sales Revenue |
$ |
9,433 |
$ |
2,810 |
$ |
465 |
$ |
(1,349) |
$ |
11,359 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Segment profit (loss) |
$ |
(206) |
$ |
111 |
$ |
(274) |
$ |
16 |
$ |
(353) |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Segment assets |
$ |
18,805 |
$ |
13,563 |
$ |
4,018 |
$ |
(15,161) |
$ |
21,225 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2000 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
Customer sales |
$ |
10,317 |
$ |
1,070 |
$ |
-- |
$ |
-- |
$ |
11,387 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Intercompany sales |
|
-- |
|
956 |
|
|
(956) |
-- |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Sales Revenue |
$ |
10,317 |
$ |
2,026 |
$ |
-- |
$ |
(956) |
$ |
11,387 |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment profit (loss) |
$ |
48 |
$ |
(131) |
$ |
-- |
$ |
(258) |
$ |
(341) |
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment assets |
$ |
15,960 |
$ |
13,525 |
$ |
-- |
$ |
(11,262) |
$ |
18,223 |
_______________________________________________
Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products or based on contractual arrangements that existed prior to the Company's acquisition of TMM. |
|
8. Pro Forma Financial Information
The results of operations for the nine-month period ended September 30, 2000 includes the operations of TMM from the acquisition date of March 1, 2000 (see Note 2). Assuming the acquisition of TMM had occurred at January 1, 2000, unaudited pro forma consolidated results of operations for the nine months ended September 30, 2000 would have been as follows:
Pro Forma (Unaudited) |
Net revenue |
$ |
12,903 |
Net income (loss) |
$ |
467 |
Net income (loss) per share: |
|
|
Basic |
$ |
0.09 |
Diluted |
$ |
0.09 |
The pro forma information above is presented in response to applicable accounting rules relating to business acquisitions. It is not necessarily indicative of the actual results that would have been achieved had the acquisition of TMM occurred at the beginning of 2000, nor is it indicative of future results of operations.
9. Foreign Currency Risk
The Company has direct operations in The Netherlands and Malaysia. The Company's foreign operations are measured in their local currencies. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company has operations.
10. Contingencies
There are claims arising in the normal course of business that are pending against the Company. While it is not feasible to predict or determine the outcome of any case, it is the opinion of management that the ultimate dispositions will have no material effect on the financial statements of the Company.
The Company believes that the plants in Corpus Christi, Texas, Ipoh, Malaysia and Hattem, The Netherlands are in compliance with all applicable federal, state, and local laws and regulations relating to the discharge of substances into the environment. The Company does not expect that any material capital expenditures for environmental control facilities will be necessary in order to continue such compliance.
11. Impact of Financial Accounting Standards No. 141 and No. 142
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company will adopt both statements on January 1, 2002 and is currently evaluating the impact of these statements. The Company has not yet quantified the impact of these pronouncements; however, existing goodwill amortization expense was approximately $15,000 in the third quarter and $20,000 for the first nine months of 2001. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Any impairment resulting from the initial application of the statements will be recorded as a cumulative effect of accounting change as of January 1, 2002.
Item 2. |
Management's Discussion and Analysis of Financial Condition |
Results of Operations
Sales:
Net sales decreased $63,000 to $3,787,000 in the third quarter of 2001 compared with $3,850,000 in the same quarter last year. For the nine months ended September 30, 2001, net sales decreased $28,000 to $11,359,000 compared with $11,387,000 for the same period last year.
Gross Profit:
Gross profit increased $348,000 to $1,080,000 for the third quarter of 2001 compared to $732,000 for the same quarter last year. The increase in gross profit was primarily the result of the Company realizing the benefit of inventory purchases from it supplier, TMM, which was acquired by the Company in 2000. Year to date, gross profit decreased $228,000 from $2,686,000 for the first nine months of 2000 to $2,458,000 for the same period of 2001. The year to date decrease in gross profit is primarily the result of higher cost for natural gas during the first six months of 2001 compared to the same period of 2000. In an effort to reduce the cost of natural gas at the Corpus Christi Operations, the Company entered into a nine-month supply agreement (effective July 1, 2001 through March 31, 2002) with its natural gas supplier. The Company is hopeful that the agreement will have a positive impact on the gross profit. In addition, the Corpus Christi Operations reduced its middle level of management during the second quarter of 2001.
Expenses:
Total selling, administrative and general expenses ("SG&A expense") decreased from $886,000 during the third quarter of 2000, to $844,000 for the third quarter of 2001, a decrease of $42,000 or 4.7%. For the year, SG&A expense decreased $204,000 or 7.5% from $2,726,000 in 2000 to $2,522,000 in 2001. Approximately $141,000 or 69.1% of the decrease is the result of the Corpus Christi Operations reduction in force.
Interest Income:
During the third quarter, excess funds were deposited in short-term interest bearing investments resulting in interest income of $1,000 for the third quarter of 2001 compared to $11,000 for the same quarter last year. For the year, interest income decreased from $49,000 in 2000 to $18,000 in 2001. The year to date decrease is the result of lower cash balances available for investment during the first nine months of 2001.
Interest Expense:
Interest expense decreased $27,000 in the third quarter of 2001 from $139,000 in the third quarter of 2000 to $112,000 for the third quarter of 2001. For the nine-month period ended September 30, 2001 interest expense was $312,000 compared to $336,000 for the same period in 2000. The decrease in interest expense is due to lower interest rates during the first nine months of 2001 as compared to the same period last year.
Provision for Income Tax:
Due to the utilization of operating loss carry-forwards and other tax benefits both in the US and in Malaysia, the Company recorded no income tax expense during the third quarter of 2001.
Liquidity and Capital Resources
During the third quarter 2001, working capital decreased from $2,169,000 at December 31, 2000 to $695,000 at September 30, 2001. For the nine-month period ended September 30, 2001 inventories decreased $1,401,000 or 25.2% from $5,570,000 at December 31, 2000 to $4,169,000 at September 30, 2001.
Cash increased from $128,000 at December 31, 2000 to $218,000 at September 30, 2001. During the nine-month period, operating activities provided cash totaling $1,217,000 due to a significant decrease in inventory. Net cash used in investing activities totaled $3,729,000 which consisted primarily of the acquisition of TP&T's assets from RBG and manufacturing equipment purchased from Thermal Insulation Manufacturers BV in Norway. Financing activities provided net cash of $2,602,000. The most significant financing activities during the nine-month period included the issuance of convertible subordinate debentures, the issuance of common stock, and loan proceeds from the Company's Chairman of the Board.
On June 30, 2001 the Company entered into the Fifth Amendment (the "Amendment") to its Loan Agreement with the Bank of America (the "Bank"). The Amendment reduced the Company's line of credit (the "Line"), revised the computation of Funded Debt Coverage, extended the maturity date of the term loan and expanded the collateral to include property, plant and equipment.
The Company's Line with Bank of America expires April 30, 2002. The Amendment reduced the Line from $2,000,000 to $1,350,000. The interest rate for the Line is the Bank's prime rate plus 1% per annum. The amount of credit available to the Company under the Line is limited to the lesser of $1,350,000 or 80% of eligible accounts receivable. At September 30, 2001, $1,066,000 was available to the Company under the Line and the Company had no outstanding borrowings under the Line on that date. The Company anticipates having to access funds from the Line during the fourth quarter of 2001.
The Company has one term loan with the Bank. The loan proceeds of $3,500,000 were used to finance the purchase of TMM in March 2000. The Amendment extended the maturity date of the loan from October 5, 2001 to March 31, 2002. The interest rate for the loan is the Bank's prime rate plus 1% per annum. The Amendment required the outstanding principal balance to be reduced from $1,200,000 to $1,000,000. Principal and interest payments are scheduled monthly commencing July 3, 2001, and continuing on the third (3rd) day of each calendar month thereafter until the stated maturity date of March 31, 2002 when remaining principal and unpaid interest thereon shall be paid. The monthly payment, based on a 60-month straight-line amortization, includes principal of $16,666.67, plus unpaid interest as of the date of payment. At September 30, 2001 the outstanding principal balance on the term loan was $950,000. The Company believes that it will not be able to pay off the term loan in its entirety when it matures March 31, 2002. Therefore, the Company plans to renegotiate the unpaid amount when it matures.
Both the Line and the term loan with the Bank are secured by the Company's property, plant, and equipment, as well as inventory and accounts receivable. The loan agreement contains covenants that, among other things, require maintenance of certain financial ratios. The covenants are calculated at the end of each quarter. For the quarter ended September 30, 2001, the Company was in compliance with all of the covenants. The terms of the Agreement also prohibited the Company from paying dividends without the prior approval of the Bank.
The Company's subsidiary, TMM, has loan agreements with two banks in Malaysia, HSBC Bank Malaysia Berhad and RHB Bank Berhad, which provide a total short term credit facility of $6,447,000. At September 30, 2001 TMM had utilized $2,462 ,000 of that facility, including $1,040,000 on the line of credit and $1,422,000 outstanding under an export credit refinancing facility (ECR). ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 120 days against customers' purchase orders. During the first quarter 2001, TMM refinanced its two term loans with offshore banks. The loan agreements are with HSBC Bank Labuan and RHB Bank Labuan. At September 30, 2001 the outstanding principal balance of each term loan was approximately $507,000. Both loans have a variable interest rate. The effective interest rate at September 30, 2001 for the loan with RHB Bank was 5.0% per annum and 4.917% with HSBC Bank. The credit facilities are secured by TMM's inventory, accounts receivable and property, plant and equipment.
The Company's subsidiary, TP&T, located in the Netherlands is currently negotiating a credit facility with a Bank in the Netherlands.
In April 2001 the Company raised $3,010,000 in a private placement of common stock and convertible debentures. The Company used the proceeds to purchase certain assets from the RBG, a Netherlands holding company.
In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. Each purchaser in the private placement acquired a combination of common stock and convertible debentures. The terms of the private placement were agreed to in arms length negotiations with two lead investors who had no previous investment in or relationship to the Company but invested approximately 2/3 of the total amount raised. An additional outside investor and five officers and directors of the Company purchased the remaining 1/3 of the stock and convertible debentures on the same terms as those agreed to with the lead investor.
The common stock was priced in the private placement at $1.00 per share (slightly above the previous closing price), and the conversion price for the shares of common stock issuable upon conversion of the debentures is $1.80. The debentures bear no interest for 2 years, and are secured by security interests in substantially all of the Company's assets, and will be automatically converted into 5 year secured term notes bearing interest at the rate of 10% per annum, unless the holders of the debentures exercise the option to convert them into common stock at the $1.80 per share conversion rate.
The lead investors are affiliates of Hartman & Associates, Inc. of Austin, Texas. Under the terms of their investments, Hartman & Associates was permitted to designate two persons as directors of the Company, and David A. Hartman and Douglas M. Hartman were so designated, and joined the Company's Board of Directors at a subsequent board meeting.
The Board of Directors unanimously approved the terms of the private placement after thoroughly considering all of the terms in comparison with other potential methods of financing the asset acquisition. In particular, the Company considered raising all or a substantial portion of the funds required through a secured loan from a commercial bank, but the Board of Directors concluded that the financing costs and risks associated with bank financing were less favorable to the Company than the terms of the private placement.
A portion of the purchase price for the assets was deferred and is payable in installments, each in the amount of $300,000; payable on January 31, March 31, and May 31, 2002. The Company has not yet decided how it will finance the future installments. In that regard, the Company granted a right of first refusal to its largest stockholder, Megamin, to invest up to $900,000 on the same terms as the common stock and debentures that were issued in the private placement (Megamin did not invest in the private placement). However, the Company may elect to fund a portion of the amounts required for the installment payments out of its working capital or through a bank loan, and the Company has not been informed whether Megamin intends to exercise its right of first refusal. The Company expects to consider available financing methods in light of market conditions later this year, and may utilize a combination of internal funds, bank financing and/or an additional private placement in order to fund the remaining installments.
The Company entered into a loan and security agreement with the Company's Chairman of the Board through Paulson Ranch, Ltd. The loan, with an interest rate of 10.0%, is amortized over 60 months with monthly principal and interest payments of $12,750. As of September 30, 2001 the Company has reduced the principal balance approximately $235,000. The principal balance outstanding on September 30, 2001 was approximately $365,000.
In the past year, the Company has significantly increased its level of borrowings. Such debt was incurred to finance the acquisition of TMM and the assets used to form TP&T, as well as debt associated with the operations of TMM. As such, the Company is subject to all the risks associated with liabilities for borrowed money, including the risk that the Company will not be able to renew or extend indebtedness of $2,457,000 that matures in 2002. If the Company were unable to renew or extend such debt, the Company's financial position would be adversely affected. Further, the terms of the Company's borrowings contain restrictions and covenants, including covenants based on the performance of the Company, and the failure of the Company to comply with such restrictions and covenants could also adversely affect the Company's financial position.
Other Matters
Impact of Financial Accounting Standards No. 141 and No. 142
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets are deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company will adopt both statements on January 1, 2002 and is currently evaluating the impact of these statements. The Company has not yet quantified the impact of these pronouncements; however, existing goodwill amortization expense of approximately $15,000 in the third quarter and $20,000 for the first nine months of 2001. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Any impairment resulting from the initial application of the statements will be recorded as a cumulative effect of accounting change as of January 1, 2002.
Forward Looking Information
Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company's products, changes in competition, economic conditions, fluctuations in market price for TiO2 pigments, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company's business, and other risks indicated in the Company's filing with the Security and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) |
Exhibits |
None |
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(b) |
Reports on Form 8-K |
The Company filed an 8-K with a current date of October 3, 2001 in accordance with 601 of Regulation S-K: 99.1 Press Release. |
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Signatures:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TOR Minerals International, Inc. |
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(Registrant) |
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Date: |
November 1, 2001 |
RICHARD L. BOWERS |
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Richard L. Bowers
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Date: |
November 1, 2001 |
BARBARA RUSSELL |
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Barbara Russell |