-----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,
KCD9ULVYgaNEi9i6qxZyMGzaq/chjg+AGM8m1Ef/D8RUSb5YLvv1lUGqEZzGfnQk
kBmHm4UjlWHf8iM3RKcZoA==
charset=windows-1252" 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 For the quarterly period ended March 31, 2003 OR [__] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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) Delaware 74-2081929 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
____________________________
722 Burleson Street, Corpus Christi, Texas 78402
(Address of principal executive offices)
(361) 883-5591
(Registrant's telephone number, including area code)
____________________________
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 April 30, 2003 |
Common Stock, $0.25 par value |
7,085,587 |
Transitional Small Business Disclosure Format (check one):
Yes [__] |
No [ X ] |
1
|
Table of Contents |
|
|
Part I - Financial Information |
|
|
|
Page No. |
Item 1. |
Condensed Consolidated Financial Statements (Unaudited) |
|
|
Condensed Consolidated Balance Sheets -- |
|
|
Condensed Consolidated Statements of Operations -- |
|
|
Condensed Consolidated Statements of Cash Flows -- |
|
|
Notes to Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13 |
|
|
|
Item 3. |
Controls and Procedures |
16 |
|
|
|
|
|
|
Item 5. |
Other Information |
16 |
Item 6. |
Exhibits and Reports on Form 8-K |
17 |
Signatures |
|
17 |
|
|
|
Certifications |
Chief Executive Officer |
18 |
|
Principal Accounting Officer |
19 |
|
|
|
2
TOR Minerals International, Inc.
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(in thousands)
|
|
March 31, |
|
December 31, |
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
169 |
$ |
121 |
Trade accounts receivable, net |
|
2,780 |
|
2,348 |
Other receivables |
|
91 |
|
279 |
Inventories |
|
3,932 |
|
4,615 |
Other current assets |
|
361 |
|
254 |
Total current assets |
|
7,333 |
|
7,617 |
Property, plant, and equipment |
|
26,198 |
|
25,501 |
Accumulated depreciation |
|
(13,278) |
|
(13,045) |
Property, plant, and equipment, net |
|
12,920 |
|
12,456 |
Goodwill, net |
|
1,283 |
|
1,283 |
Other assets |
|
117 |
|
141 |
|
$ |
21,653 |
$ |
21,497 |
LIABILITIES AND SHAREHOLDER'S EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable, trade |
$ |
1,291 |
$ |
1,245 |
Accounts payable, other |
|
64 |
|
246 |
Accrued expenses |
|
259 |
|
397 |
Notes payable - Line of Credit |
|
921 |
|
780 |
Export credit refinancing facility |
|
3,490 |
|
3,124 |
Current maturities of long-term debt |
|
555 |
|
589 |
Total current liabilities |
|
6,580 |
|
6,381 |
Long term debt, excluding current maturities |
|
538 |
|
651 |
Related party debt - Paulson Ranch |
|
231 |
|
236 |
Other long-term debt, convertible debentures |
|
360 |
|
360 |
Total liabilities |
|
7,709 |
|
7,628 |
Commitments and Contingencies |
|
-- |
|
-- |
Shareholder's equity: |
|
|
|
|
Common stock $0.25 par value; authorized, 10,000 shares; |
|
1,721 |
|
1,721 |
Additional paid-in capital |
|
17,447 |
|
17,447 |
Additional paid-in capital - Stock Options |
|
9 |
|
|
Accumulated deficit |
|
(5,262) |
|
(5,368) |
Other Comprehensive Income |
|
29 |
|
69 |
Shareholder's equity |
|
13,944 |
|
13,869 |
|
$ |
21,653 |
$ |
21,497 |
See Notes to Consolidated Financial Statements
3
TOR Minerals International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
|
|
Three Months Ended |
|
||
|
|
2003 |
|
2002 |
|
Net sales |
$ |
4,396 |
$ |
3,984 |
|
Costs and expenses: |
|
|
|
|
|
Cost of products sold |
|
3,286 |
|
2,876 |
|
Gross profit |
|
1,110 |
|
1,108 |
|
Selling, administrative and general |
|
946 |
|
895 |
|
Operating income |
|
164 |
|
213 |
|
Other income (expenses): |
|
|
|
|
|
Interest expense |
|
(57) |
|
(80) |
|
Other, net |
|
(1) |
|
3 |
|
Income before income tax |
|
106 |
|
136 |
|
Provision for income tax |
|
-- |
|
-- |
|
Net income |
|
106 |
|
136 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
Change in fair value of cash flow hedges |
|
(40) |
|
-- |
|
Comprehensive income |
$ |
66 |
$ |
136 |
|
Earnings per common share: |
|
|
|
|
|
Basic |
$ |
0.02 |
$ |
0.02 |
|
Diluted |
$ |
0.01 |
$ |
0.02 |
|
Weighted average common shares and equivalents outstanding |
|
|
|
|
|
Basic |
|
6,886 |
|
5,595 |
|
Diluted |
|
7,134 |
|
7,088 |
|
See Notes to Consolidated Financial Statements
4
TOR Minerals International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
Three Months Ended |
||
|
|
2003 |
|
2002 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net Income |
$ |
106 |
$ |
136 |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
Depreciation |
|
233 |
|
190 |
Amortization |
|
24 |
|
25 |
Compensation - Stock Options |
|
9 |
|
-- |
Changes in working capital: |
|
|
|
|
Receivables |
|
(244) |
|
(909) |
Inventories |
|
683 |
|
518 |
Other current assets |
|
(147) |
|
(200) |
Accounts payable and accrued expenses |
|
(274) |
|
52 |
Net cash provided by (used in) operating activities |
|
390 |
|
(188) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Additions to property, plant and equipment |
|
(697) |
|
(63) |
Net cash used in investing activities |
|
(697) |
|
(63) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Domestic financing activities: |
|
|
|
|
Payments on long-term bank debt |
|
(43) |
|
(50) |
Proceeds from bank line of credit |
|
705 |
|
1,275 |
Payments on bank line of credit |
|
(605) |
|
(575) |
Payments on other long-term debt |
|
(5) |
|
(279) |
Foreign financing activities: |
|
|
|
|
Payments on long-term bank debt |
|
(104) |
|
(106) |
Proceeds from bank line of credit |
|
570 |
|
568 |
Payments on bank line of credit |
|
(529) |
|
(273) |
Proceeds from export credit refinancing facility |
|
2,405 |
|
1,660 |
Payments on export credit refinancing facility |
|
(2,039) |
|
(2,002) |
Net cash provided by financing activities |
|
355 |
|
218 |
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
48 |
|
(33) |
Cash and cash equivalents at beginning of year |
|
121 |
|
204 |
Cash and cash equivalents at end of period |
$ |
169 |
|
171 |
Supplemental cash flow disclosures: |
|
|
|
|
Interest paid |
$ |
56 |
$ |
272 |
See Notes to Consolidated Financial Statements
5
TOR MINERALS INTERNATIONAL, INC.
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 2002 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 which is also the functional currency. 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 the Malaysian government will maintain the currency fixed rate of exchange.
TP&T 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 any Euro denominated transactions are recorded on the Company's consolidated 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.
Income Tax
The Company has not recorded any income tax expense during 2003 as it expects to utilize net operating loss carry-forwards to offset substantially all taxable income.
Accounting for Stock-Based Compensation - Transition and Disclosure
On January 1, 2003, the Company adopted FASB Statement 148, Accounting for Stock Based Compensation - Transition and Disclosure. Statement 148 amends FASB Statement 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend Statement 123 to require companies to account for stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intri nsic value method of Opinion 25.
Upon adoption of Statement 148, the Company elected to change its method of accounting for stock options from the intrinsic value method of Opinion 25 to the fair value method of Statement 123. The Company will utilize the "Modified Prospective Method" of transition as provided for in Statement 148. Under the Modified Prospective Method, the Company has recorded compensation expense of $9,500 related to all options outstanding through March 31, 2003.
6
Pro forma information regarding net income and earnings per share is required by Statement 148, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model.
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 for the quarter ending March 31, 2002 follows:
|
|
March 31, 2002 |
Net income, as reported |
$ |
136,000 |
Deduct: |
|
|
Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects |
|
|
Pro forma net income |
$ |
124,000 |
Earnings per share: |
|
|
Basic - as reported |
$ |
0.02 |
Basic - pro forma |
$ |
0.02 |
Diluted - as reported |
$ |
0.02 |
Diluted - pro forma |
$ |
0.02 |
Exercise prices on options outstanding at March 31, 2003, ranged from $0.92 to $4.25 per share. The weighted-average remaining contractual life of the options is 5.39 years. The number of options exercisable at March 31, 2003 and 2002 was 383,400 and 432,300, respectively.
Reclassifications
Certain 2002 balances have been reclassified for comparative purposes.
2. |
Related Party Transactions |
The Company entered into a loan and security agreement on April 5, 2001 with the Company's Chairman of the Board, Bernard Paulson a 17.0% shareholder, through Paulson Ranch, Ltd. under which Paulson Ranch made a loan to the Company in the amount of $600,000. The principal balance outstanding on March 31, 2003 was $231,000. The new loan agreement with the bank limits the payment of principal and interest on the loan with Paulson Ranch.
7
Long Term Debt and Notes Payable to Banks |
A summary of long-term debt follows:
|
|
March 31, |
|
December 31, |
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 |
$ |
360 |
$ |
360 |
Variable rate term note payable to a US bank, with an interest rate of bank prime plus 1.0% due May 1, 2007 |
|
707 |
|
750 |
Variable rate term note payable to a Malaysian offshore bank, with an interest rate of 4.3% at March 31, 2003 due February, 2004 |
|
193 |
|
245 |
Variable rate term note payable to a Malaysian offshore bank, with an interest rate of 3.9% at March 31, 2003 due February, 2004 |
|
193 |
|
245 |
Other indebtedness, payable to Paulson Ranch, a related party, with an interest rate 10.0%, due April, 2005 |
|
231 |
|
236 |
Total |
|
1,684 |
|
1,836 |
Less current maturities |
|
555 |
|
589 |
Total long-term debt |
$ |
1,129 |
$ |
1,247 |
The majority of the Company's non-related party debt is either floating rate or has been recently negotiated and carrying value approximates fair value.
US Bank Credit Facility
During 2002, the Company entered into a new loan agreement and various amendments with Bank of America, N.A. (the "Bank"). The Agreement amended and restated the loan agreement between the Bank and the Company dated May 1, 2002. The Agreement, which matures on August 31, 2003, increased the Company's line of credit (the "Line") from $1,300,000 to $3,000,000 and extends the Company's term loan. The interest rate on the Line is the Bank's prime. The amount of credit available to the Company under the Line is limited to the lesser of (a) $3,000,000 or (b) 80% of eligible accounts receivable and 50% of eligible inventory. At March 31, 2003, the Company had $600,000 outstanding on the Line and $2,400,000 was available to the Company on that date. The Company anticipates accessing the maximum available funds from the Line during the second quarter of 2003 to fund the purchase of raw materials.
The Agreement, which prohibits the Company from paying dividends without the prior approval of the Bank, contains covenants that, among other things, require maintenance of certain financial ratios based on the results of both the stand-alone US operations and the consolidated operations. The covenants are calculated at the end of each quarter. For the quarter ending March 31, 2003, the Company was in compliance with all of the covenants contained in the amended Agreement. Under the terms of the Agreement, payment of the Line and the term loan are secured by the Company's property, plant and equipment, as well as inventory and accounts receivable.
The Company has one term loan with the Bank. The loan proceeds of $850,000 were used to refinance the Company's term loan that was due to mature on June 1, 2002. The interest rate for the loan is the Bank's prime rate plus 1% per annum. Monthly principal payments of $14,167 plus interest commenced on June 1, 2002 and continue through May 1, 2007. At March 31, 2003, the balance on the term loan was $707,000.
8
Convertible Debentures
In April 2001, the Company raised $3,010,000 in a private placement of common stock and convertible debentures. In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. At March 31, 2003, a total of 200,000 debentures with a carrying value of $360,000 were outstanding. On April 3, 2003, the Renaissance Group exercised its option to convert the remaining 200,000 debentures for common stock at the $1.80 per share conversion rate.
Malaysian Bank Credit Facility
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 $5,921,000. At March 31, 2003, TMM had utilized $3,567,000 of that facility, including $77,000 on the line of credit and $3,490,000 outstanding under the ECR. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 180 days or less against customers' purchase orders. The borrowings under the short-term credit facility are subject to a demand provision which is customary in Malaysia regarding short-term banking facilities. The facility is subject to annual review and renewal.
TMM has two term loans with HSBC Bank Labuan and RHB Bank Labuan. At March 31, 2003, the outstanding principal balance on each of the two term loans was $193,000 for total outstanding borrowings of $386,000. The loans are secured by TMM's inventory, accounts receivable, and property, plant and equipment and are payable in monthly payments of $17,500 each, plus interest. The term loans are subject to certain subjective acceleration covenants based on the judgement of the banks. Additionally, if repayment of the short-term credit facilities are demanded, these term loans would also become due immediately.
Netherlands Bank Credit Facility
The Company's subsidiary, TP&T, has a loan agreement with a bank in The Netherlands, Rabobank, which provides a total short-term credit facility of $250,000. The credit facility is secured by TP&T's inventory and accounts receivable. At March 31, 2003, TP&T had utilized $244,000 of that facility. TP&T's borrowings are also subject to a demand provision.
Liquidity
Management believes that it has adequate liquidity for fiscal year 2003 and expects to maintain compliance with all financial covenants throughout 2003. However, if material shortfalls in anticipated results of the Company's performance cause a violation in its covenants, the Company may be required to seek further amendments to its credit agreements or alternative sources of financing or to limit capital expenditures.
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.
4. |
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.
9
5. |
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.
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 |
|
||
|
|
2003 |
|
2002 |
|
Numerator: |
|
|
|
|
|
Net Income |
$ |
106 |
$ |
136 |
|
Numerator for basic earnings per share |
|
|
|
|
|
Effect of dilutive securities: |
|
-- |
|
-- |
|
Numerator for diluted earnings per share |
|
|
|
|
|
Denominator: |
|
|
|
|
|
Denominator for basic earnings per share |
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
Convertible debentures |
|
200 |
|
1,490 |
|
Dilutive potential common shares |
|
248 |
|
1,493 |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
Net Income |
$ |
0.02 |
$ |
0.02 |
|
Diluted earnings per common share: |
|
|
|
|
|
Net Income |
$ |
0.01 |
$ |
0.02 |
|
Excluded from the calculation of diluted earnings per share were a total of 168,000 options at March 31, 2003 and 377,000 options at March 31, 2002. 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.
10
7. |
Business Location 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:
|
|
|
|
|
|
|
|
Adjustments |
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
March 31, 2003 |
|
|
|
|
|
|
|
|
|
|
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
Customer sales |
$ |
3,509 |
$ |
307 |
$ |
580 |
$ |
-- |
$ |
4,396 |
Intercompany sales |
|
-- |
|
503 |
|
137 |
|
(640) |
|
-- |
Total Sales Revenue |
$ |
3,509 |
$ |
810 |
$ |
717 |
$ |
(640) |
$ |
4,396 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization |
|
128 |
|
53 |
|
84 |
|
(8) |
|
257 |
Interest income |
|
68 |
|
-- |
|
-- |
|
(68) |
|
-- |
Interest expense |
|
18 |
|
73 |
|
33 |
|
(68) |
|
56 |
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
$ |
52 |
$ |
(56) |
$ |
(116) |
$ |
226 |
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
$ |
19,978 |
$ |
4,164 |
$ |
15,108 |
$ |
(17,606) |
$ |
21,644 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2002 |
|
|
|
|
|
|
|
|
|
|
Sales Revenue: |
|
|
|
|
|
|
|
|
|
|
Customer sales |
$ |
3,231 |
$ |
297 |
$ |
456 |
$ |
-- |
$ |
3,984 |
Intercompany sales |
|
-- |
|
-- |
945 |
|
(945) |
-- |
||
Total Sales Revenue |
$ |
3,231 |
$ |
297 |
$ |
1,401 |
$ |
(945) |
$ |
3,984 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization |
|
119 |
|
52 |
|
54 |
|
(10) |
|
215 |
Interest income |
|
68 |
|
-- |
|
-- |
|
(68) |
|
-- |
Interest expense |
|
45 |
|
68 |
|
36 |
|
(68) |
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) |
$ |
41 |
$ |
(254) |
$ |
258 |
$ |
91 |
$ |
136 |
|
|
|
|
|
|
|
|
|
||
Segment assets |
$ |
20,126 |
$ |
3,890 |
$ |
14,594 |
$ |
(16,734) |
$ |
21,876 |
Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consist of Synthetic Rutile, HITOX and ALUPREM.
11
8. |
Intangible Assets and Goodwill |
Definite-lived Intangible Assets
The Company adopted the provisions of SFAS 141 effective January 1, 2002. In connection with the Company's purchase of assets from the Royal Begemann Group, the Company recorded intangible assets related to non-compete agreements in the amount of $300,000. These intangible assets will be amortized over three (3) years. As of March 31, 2003, the Company had accumulated amortization of $183,000. The Company will record amortization of $8,333 per month through May 2004.
Indefinite-lived Intangible Assets
The Company has no indefinite-lived intangible assets.
Goodwill
The Company adopted the provisions of SFAS 142 effective January 1, 2002. Under the provisions of SFAS, the value of the Company's goodwill (with a carrying value of $1,283,000) is no longer subject to amortization but will be reviewed at least annually for impairment or more frequently if impairment indicators exist. The Company completed the first annual impairment test October 1, 2002, and concluded that there was no impairment of recorded goodwill, as the fair value of the reporting units exceeded the carrying amount as of October 1, 2002. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings.
9. |
Derivatives and Hedging Activities |
Natural Gas Hedge
To protect against the increase in the cost of natural gas used in the manufacturing process, the Company has instituted a natural gas hedging program. The Company hedges portions of its forecasted natural gas purchases with forward contracts. When the price of natural gas increases, its cost is offset by the gains in the value of the forward contracts designated as hedges. Conversely, when the price of natural gas declines, the decrease in the cash flows on natural gas purchases is offset by losses in the value of the forward contract.
During the first quarter 2002, the Company had a swap agreement with Coral Energy Holdings, LP ("Coral Energy") to exchange monthly payments on notional quantities amounting to 57,000 MM Btu's. This contract was a derivative that had not been designated as a hedge. Under the swap agreement, the Company paid fixed prices averaging $4.6265 per MM Btu. For the year ended December 31, 2001, the Company marked the gas contract to market, recording a loss of $113,000. The Company recorded the loss as a component of "Cost of Goods Sold" on the income statement. The Company settled this swap agreement during the first quarter 2002, by paying cash of $136,000, recording an additional loss of $23,000.
On September 3, 2002, the Company entered into a natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. The Company designated the contract as a cash flow hedge, with the expectation that it will be highly effective in helping the Company meet its cash flow objectives. The contract will be settled based on natural gas market prices from January 1, 2003 through April 30, 2003. The Company will pay fixed prices averaging $3.90 per MM Btu on notional quantities amounting to 60,000 MM Btu's. For the quarter ended March 31, 2003, the Company marked the gas contract to market, recording the fair value of the hedge of $20,000 as a component of "Other Comprehensive Income" and also recorded it as an asset on the balance sheet at March 31, 2003. The fair value of the hedge decreased $36,000 from December 31, 2002 to March 31, 2003 due to both the settlement of certain hedged transactions as well as changes in the fair value of outstanding hedge transaction s. The recognition of this gain had no effect on the Company's cash flow.
12
Foreign Currency Forward Contracts
To protect its exposure to foreign exchange risks, TMM enters into foreign currency forwards contracts. Gains and losses on foreign exchange contracts, designated as hedges of identified exposure, are offset against the foreign currency exchange gains and losses on the hedged financial assets and liabilities. Where the instrument is used to hedge against anticipated future transactions, gains and losses are not recognized until the transaction occurs. For the quarter ended March 31, 2003, the Company marked the foreign currency forwards contracts to market, recording the fair value of the hedge of $9,000 as a component of "Other Comprehensive Income" and also recorded it as an asset on the balance sheet at March 31, 2003. The fair value of the hedge decreased $4,000 from December 31, 2002 to March 31, 2003 due to both the settlement of certain hedged transactions as well as changes in the fair value of outstanding hedge transactions. The recognition of this gain had no effect o n the Company's cash flow.
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
Sales:
Consolidated net sales for the first quarter 2003 were $4,396,000, an increase of $412,000 or 10.3% compared with the same period last year of $3,984,000. Net sales at the Corpus Christi location increased $278,000 or 8.6% during the three-month period ending March 31, 2003. TMM's net sales to third party customers increased $124,000 or 27.2% and TP&T's sales to third party customers increased $10,000 or 3.4%.
Sales by product for the first quarter 2003 as compared to the same period 2002 are presented below.
|
|
|
|
|
|
$ |
|
% |
HITOX |
$ |
2,773,000 |
$ |
2,601,000 |
$ |
172,000 |
|
6.6% |
BARTEX |
|
579,000 |
|
688,000 |
|
(109,000) |
|
(15.8%) |
HALTEX |
|
237,000 |
|
217,000 |
|
20,000 |
|
9.2% |
ALUPREM |
|
649,000 |
|
297,000 |
|
352,000 |
|
118.5% |
OTHER |
|
158,000 |
|
181,000 |
|
(23,000) |
|
(12.7%) |
Total Sales |
$ |
4,396,000 |
$ |
3,984,000 |
$ |
412,000 |
|
10.3% |
Cost of Sales:
Cost of sales for the quarter ending March 31, 2003, increased 14.3% or $410,000 on higher sales volume. Cost of sales represented 74.7% of sales this quarter as compared 72.2% for the same period 2002. The consolidated gross profit increased $2,000 or 0.2% from $1,108,000 for the quarter ending March 31, 2002 to $1,110,000 for the same period 2003.
Significant factors affecting the gross profit are as follows: (1) Natural gas, the primary source of energy at the Corpus Christi plant, increased $97,000 or 96.9% in the first quarter 2003 as compared to the same period 2002. (2) TMM's production was less during the first quarter 2003 as compared to the same period 2002 as a result of plant upgrades taking place in 2003 resulting in unabsorbed costs of $80,000.
13
General, Administrative and Selling Expenses:
Total general, administrative and selling expenses ("SG&A") increased from $895,000 during the first quarter of 2002 to $946,000 for the same period 2003, an increase of $51,000 or 5.7%. SG&A for the Corpus Christi operation, which includes the expenses for the Company's corporate headquarters, increased $109,000 or 18.6% compared to the first quarter 2002. Factors contributing to the increase include: (1) increase in building and contents insurance; (2) increase in accounting fees; (3) additional travel by salesmen; (4) participation in trade shows focusing on both HITOX and ALUPREM; and (5) increased investor relations expenses. SG&A for The Netherlands operation decreased $58,000 or 33.1%
Interest Income:
The Company did not recognize any interest income during the first quarter 2003 or 2002.
Interest Expense:
Interest expense decreased $23,000 in the first quarter of 2003 as compared with the same quarter last year. The reduction in interest expense was the result of a reduction in long-term debt at the Corpus Christi operation and the elimination of short-term debt to the Royal Begemann Group.
Provision for Income Tax:
Due to the utilization of operating loss carry-forwards, the Company recorded no income tax expense during the first quarters of 2003 or 2002.
Liquidity and Capital Resources
During the first quarter 2003, working capital decreased from $1,236,000 at December 31, 2002 to $753,000 at March 31, 2003. Accounts receivable increased $244,000 due to higher sales in the first quarter 2003 compared to the fourth quarter 2002. Inventory decreased $683,000 due primarily to a reduction in the level of inventory maintained at the Corpus Christi Operation. Accounts payable and accrued expenses decreased $274,000 due to the timing of inventory purchases at both the Corpus Christi and The Netherlands operations.
Cash increased $48,000 from $121,000 at December 31, 2002 to $169,000 at March 31, 2003. During the three-month period ended March 31, 2003, operating activities provided $390,000, resulting from changes in working capital, with the largest change being the decrease in inventory. The Company used $697,000 in investing activities for the purchase of production equipment. Financing activities provided $355,000 primarily from TMM's export credit refinancing facility.
US Bank Credit Facility
During 2002, the Company entered into a new loan agreement and various amendments with Bank of America, N.A. (the "Bank"). The Agreement amended and restated the loan agreement between the Bank and the Company dated May 1, 2002. The Agreement, which matures on August 31, 2003, increased the Company's line of credit (the"Line") from $1,300,000 to $3,000,000 and extends the Company's term loan. The interest rate on the Line is the Bank's prime. The amount of credit available to the Company under the Line is limited to the lesser of (a) $3,000,000 or (b) 80% of eligible accounts receivable and 50% of eligible inventory. At March 31, 2003, the Company had $600,000 outstanding on the Line and $2,400,000 was available to the Company on that date. The Company anticipates accessing the maximum available funds from the Line during the second quarter of 2003 to fund the purchase of raw materials.
The Agreement, which prohibits the Company from paying dividends without the prior approval of the Bank, contains covenants that, among other things, require maintenance of certain financial ratios based on the results of both the US operations and the consolidated operations. The covenants are calculated at the end of each quarter. For the quarter ending March 31, 2003, the Company was in compliance with all of the covenants contained in the amended Agreement. Under the terms of the Agreement, payment of the Line and the term loan are secured by the Company's property, plant and equipment, as well as inventory and accounts receivable.
14
The Company has one term loan with the Bank. The loan proceeds of $850,000 were used to refinance the Company's term loan that was due to mature on June 1, 2002. The interest rate for the loan is the Bank's prime rate plus 1% per annum. Monthly principal payments of $14,167 plus interest commenced on June 1, 2002 and continue through May 1, 2007. At March 31, 2003, the balance on the term loan was $707,000.
Convertible Debentures
In April 2001, the Company raised $3,010,000 in a private placement of common stock and convertible debentures. In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. At March 31, 2003, a total of 200,000 debentures with a carrying value of $360,000 were outstanding. On April 3, 2003, the Renaissance Group exercised its option to convert the remaining 200,000 debentures for common stock at the $1.80 per share conversion rate.
Malaysian Bank Credit Facility
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 $5,921,000. At March 31, 2003, TMM had utilized $3,567,000 of that facility, including $77,000 on the line of credit and $3,490,000 outstanding under the ECR. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 180 days or less against customers' purchase orders. The borrowings under the short-term credit facility are subject to a demand provision which is customary in Malaysia regarding short-term banking facilities. The facility is subject to annual review and renewal.
TMM has two term loans with HSBC Bank Labuan and RHB Bank Labuan. At March 31, 2003, the outstanding principal balance on each of the two term loans was $193,000 for total outstanding borrowings of $386,000. The loans are secured by TMM's inventory, accounts receivable, and property, plant and equipment and are payable in monthly payments of $17,500 each, plus interest. The term loans are subject to certain subjective acceleration covenants based on the judgement of the banks. Additionally, if repayment of the short-term credit facilities are demanded, these term loans would also become due immediately.
Netherlands Bank Credit Facility
The Company's subsidiary, TP&T, has a loan agreement with a bank in The Netherlands, Rabobank, which provides a total short-term credit facility of $250,000. The credit facility is secured by TP&T's inventory and accounts receivable. At March 31, 2003, TP&T had utilized $244,000 of that facility. TP&T's borrowings are also subject to a demand provision.
Liquidity
Management believes that it has adequate liquidity for fiscal year 2003 and expects to maintain compliance with all financial covenants throughout 2003. However, if material shortfalls in anticipated results of the Company's performance cause a violation in its covenants, the Company may be required to seek further amendments to its credit agreements or alternative sources of financing or to limit capital expenditures.
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.
15
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 Securities 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 forw ard-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
Item 3. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14 under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing of this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission.
Changes in Internal Controls
During the period covered by this report, there were no significant changes in the Company's internal controls or, to management's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Part II - Other Information
Item 5. |
Other Information |
In April 2001, the Company raised $3,010,000 in a private placement of common stock and convertible debentures. In the private placement, the Company issued 301,000 shares of its common stock and $2,709,000 principal amount of convertible debentures. A total of 200,000 debentures with a carrying value of $360,000 were outstanding at March 31, 2003. On April 3, 2003, the Renaissance Group exercised its option to convert the remaining 200,000 debentures for common stock at the $1.80 per share conversion rate. (See Note 3)
16
Item 6. |
Exhibits and Reports on Form 8-K |
(a) |
Exhibits |
|
|
Exhibit 99.1 |
Certification of Chief Executive Officer |
|
Exhibit 99.2 |
Certification of Principal Accounting Officer |
|
|
|
(b) |
Reports on Form 8-K |
Press Release - January 6, 2003 |
|
|
Press Release - February 24, 2003 |
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.
|
TOR Minerals International, Inc. |
||
____________ |
|||
(Registrant) |
|||
Date: |
May 14, 2003 |
RICHARD L. BOWERS President and CEO |
|
Date: |
May 14, 2003 |
BARBARA RUSSELL Controller and Treasurer (Principal Accounting Officer) |
17
Certifications
I, Richard L. Bowers, President and Chief Executive Officer of TOR Minerals International, Inc. (the "Company"), certify that:
|
RICHARD L. BOWERS Richard L. Bowers President and Chief Executive Officer May 14, 2003 |
18
I, Barbara Russell, Controller, Treasurer and Principal Accounting Officer of TOR Minerals International, Inc. (the "Company"), certify that:
|
BARBARA RUSSELL Controller and Treasurer (Principal Accounting Officer) May 14, 2003 |
19
Exhibit 99.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Tor Minerals, Inc. ("Registrant") for the quarter ended March 31, 2003 (the "Report") as filed with the Securities and Exchange Commission, the undersigned Chief Executive Officer of the Registrant hereby certifies, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
RICHARD L. BOWERS
Richard L. Bowers
President and Chief Executive Officer
Exhibit 99.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Tor Minerals, Inc. ("Registrant") for the quarter ended March 31, 2003 (the "Report") as filed with the Securities and Exchange Commission, the undersigned Chief Executive Officer of the Registrant hereby certifies, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
BARBARA RUSSELL
Barbara Russell
Controller and Treasurer
(Principal Financial Officer)