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Proc-Type: 2001,MIC-CLEAR
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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 September 30, 2004 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.) ____________________________ 722 Burleson Street, Corpus Christi, Texas 78402 (Address of principal executive offices) (361) 883-5591 (Issuer'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 15, 2004 Common Stock, $0.25 par value 7,781,353 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 Income Statements -- Condensed Consolidated Statements of Comprehensive Income -- Condensed Consolidated Statements of Cash Flows -- Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Controls and Procedures 24 Item 6. Exhibits 25 Signatures 25 2 TOR Minerals International, Inc. September 30, December 31, 2004 2003 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 759 $ 381 Trade accounts receivable, net 6,383 5,072 Inventories 6,752 4,895 Other current assets 586 399 Total current assets 14,480 10,747 Property, plant, and equipment 31,144 27,639 Accumulated depreciation (15,067) (14,169) Property, plant, and equipment, net 16,077 13,470 Goodwill 1,815 1,283 Other assets 199 42 Total Assets $ 32,571 $ 25,542 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 2,627 $ 2,738 Accrued expenses 1,163 744 Notes payable - Line of Credit 81 3,416 Export credit refinancing facility 3,923 840 Current maturities of long-term debt - Financial Institutions 433 240 Current maturities of long-term debt - Related Parties 500 -- Total current liabilities 8,727 7,978 Long term debt, excluding current maturities - Related Parties -- 1,231 Deferred tax liability 123 -- Total liabilities 10,459 9,620 Commitments and Contingencies Shareholders' equity: Convertible preferred stock $0.01 par value; authorized, Common stock $0.25 par value; authorized, 10,000 shares; Additional paid-in capital 21,969 18,164 Accumulated Other Comprehensive Income 1,396 79 Accumulated deficit (3,200) (4,104) Shareholder's equity 22,112 15,922 Total Liabilities and Shareholders' Equity $ 32,571 $ 25,542 See Notes to Condensed Consolidated Financial Statements 3 TOR Minerals International, Inc. Three Months Ended Nine Months Ended 2004 2003 2004 2003 _______ _______ _______ _______ NET SALES $ 9,444 $ 7,057 $ 21,834 $ 16,959 Cost of sales 7,683 5,318 16,916 12,607 _______ _______ _______ _______ GROSS MARGIN 1,761 1,739 4,918 4,352 General, administrative and _______ _______ _______ _______ OPERATING INCOME 610 676 1,237 1,253 OTHER INCOME (EXPENSE): Interest expense, net (78) (83) (155) (205) Other, net 2 28 (31) 26 INCOME BEFORE INCOME TAX 534 621 1,051 1,074 Income tax expense 61 9 147 27 NET INCOME $ 473 $ 612 $ 904 $ 1,047 Preferred Stock Dividends (15) -- (41) -- _______ _______ _______ _______ Income Available to ====== ====== ====== ====== Income per common shareholder: Basic $ 0.06 $ 0.09 $ 0.11 $ 0.15 Diluted $ 0.06 $ 0.08 $ 0.11 $ 0.15 Weighted average common shares Basic 7,779 7,119 7,719 7,036 Diluted 8,052 (1) 7,450 8,013 (2) 7,193 (1) 168,000 common shares related to the 200,000 convertible preferred shares outstanding were excluded in the computation of diluted earnings per share as the effect would be antidilutive (2) 153,000 common shares related to the 200,000 convertible preferred shares outstanding were excluded in the computation of diluted earnings per share as the effect would be antidilutive See Notes to Condensed Consolidated Financial Statements 4 TOR Minerals International, Inc. Three Months Ended Nine Months Ended 2004 2003 2004 2003 _______ _______ _______ _______ NET INCOME $ 473 $ 612 $ 904 $ 1,047 OTHER COMPREHENSIVE INCOME Net gain on derivative instruments designated and qualifying as cash flow hedges, net of tax: Net gain arising during the period 20 4 45 49 Net (gain) reclassified to income (21) (1) (104) (99) Currency translation adjustment 103 -- 1,376 -- _______ _______ _______ _______ Net change in other 102 3 1,317 (50) _______ _______ _______ _______ COMPREHENSIVE INCOME $ 575 $ 615 $ 2,221 $ 997 ====== ====== ====== ====== See Notes to Condensed Consolidated Financial Statements 5 TOR Minerals International, Inc. Nine Months Ended 2004 2003 _________ _________ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 904 $ 1,047 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 814 804 Amortization 58 74 Compensation - Stock Options 395 288 Gain on sale of assets (3) -- Deferred tax liability 123 -- Changes in working capital: Receivables (1,311) (2,865) Inventories (1,856) (448) Other current assets (246) (179) Accounts payable and accrued expenses 298 1,313 _________ _________ Net cash provided by (used in) operating activities (824) 34 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (2,600) (1,587) Other assets (restricted cash) (199) -- Proceeds from disposal of assets 12 -- _________ _________ Net cash used in investing activities (2,787) (1,587) CASH FLOWS FROM FINANCING ACTIVITIES: Domestic financing activities: Proceeds from long-term bank debt 783 -- Payments on long-term bank debt (722) (127) Proceeds from bank line of credit 1,025 4,755 Payments on bank line of credit (3,850) (2,480) Payments on related party long-term debt (731) -- Payments on other long-term debt -- (5) Foreign financing activities: Proceeds from long-term bank debt 1,402 -- Payments on long-term bank debt (113) (315) Proceeds from bank line of credit 451 3,489 Payments on bank line of credit (946) (3,293) Proceeds from export credit refinancing facility 7,692 7,451 Payments on export credit refinancing facility (4,609) (8,077) Other financing activities: Proceeds from the issuance of preferred stock, common Preferred stock dividends paid (26) -- _________ _________ Net cash provided by financing activities 3,971 1,455 Effect of exchange rate fluctuations on cash 18 -- _________ _________ Net increase in cash and cash equivalents 378 (98) Cash and cash equivalents at beginning of year 381 121 _________ _________ Cash and cash equivalents at end of period $ 759 $ 23 ======== ======== Supplemental cash flow disclosures: Interest paid $ 158 $ 201 Taxes paid $ 45 $ 35 Non-cash financing activities: Conversion of long-term debt to common stock $ -- $ 360 See Notes to Condensed Consolidated Financial Statements 6 TOR MINERALS INTERNATIONAL, INC. 1. Accounting Policies Basis of Presentation and Use of Estimates The condensed consolidated 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, results of operations and cash flows. All adjustments are of a normal and recurring nature other than an adjustment to reduce interest expense in the first quarter of 2004 by $33,000, which represented a refund of excess interest payments made in 2003. 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 2003 Annual Report on Form 10-KSB. The condensed 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. In the first quarter 2004, the Company changed TP&T's functional currency from U.S. dollar (USD) functional to Euro functional currency primarily as a result in a shift of a substantial majority of TP&T's sales contracts to Euro based contracts. In 2003, a substantial majority (approximately 64%) of TP&T's sales were USD denominated. Gains and losses resulting from translating the Balance Sheet from Euros to US dollars (including long-term Intercompany investments which are considered part of the net-investment in TP&T) are now recorded as cumulative translation adjustments (which are included in accumulated other comprehensive income, a separate component of shareholders' equity) on the Consolidated Balance Sheet. As a result of this change in functional currency, non-monetary assets and liabilities that had previously been accounted for using historical exchange rates between the Euro and USD have been translated at current exchange rates. Had the Company not made thi
s change, year to date pretax income would have increased approximately $40,000. As of September 30, 2004, the cumulative translation adjustment related to the change in functional currency totaled $1,376,000. Such adjustment had an effect on the following balance sheet items: Property plant & equipment, net $ 963,000 Goodwill 532,000 Other, net (119,000) ________ Total $ 1,376,000 =======
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
September 30, 2004 and December 31, 2003
3
Three-months and nine-months ended September 30, 2004 and 2003
4
Three-months and nine-months ended September 30, 2004 and 2003
5
Nine-months ended September 30, 2004 and 2003
6
16
Part II - Other Information
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
(in thousands)
_____________
_____________
_____________
_____________
_____________
_____________
_____________
_____________
============
============
_____________
_____________
- - Financial Institutions
1,609
411
_____________
_____________
5,000 shares; 200 shares outstanding at September 30, 2004
2
- --
7,781 shares outstanding at September 30, 2004 and 7,133 at
December 31, 2003
1,945
1,783
_____________
_____________
_____________
_____________
============
============
Condensed Consolidated Income Statements
(Unaudited)
(in thousands, except per share amounts)
September 30,
____________________
September 30,
____________________
selling expense
1,151
1,063
3,681
3,099
Common Shareholders
$
458
$
612
$
863
$
1,047
and equivalents outstanding
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
September 30,
____________________
September 30,
____________________
comprehensive income
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
September 30,
_____________________
stock and exercise of common stock options
3,615
57
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
Due to the utilization of operating loss carry-forwards, the Company recorded only state income tax expense during the first nine-months of 2003 totaling $27,000. During the first nine-months of 2004, the Company recorded state income tax expense of $24,000 and Malaysian income tax expense of $123,000. Taxes are applied based on an estimated annualized effective rate, which assumes continued ability to offset US federal income taxes through the utilization of net operating loss carry-forwards.
7
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. 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 utilized the "Modified Prospective Method" of transition as provided for in FASB Statement 148. Under the Modified Prospective Method, the Company recorded compensation expense for the quarters ended September 30, 2004 and 2003 of approximately $65,000 and $75,000. For the nine-month periods ended September 30, 2004 and 2003, the Company recorded compensations expense related to stock options of approximately $395,000 and $288,000, respectively, reducing diluted earnings per share by $0.05 and $0.04, respectively.
Accounting for Consolidation of Variable Interest Entities
On January 1, 2004, the Company adopted the Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 addresses consolidation of business enterprises of variable interest entities. The Company has not acquired any variable interest entities, therefore, the adoption of FIN 46 did not materially impact the Company's financial position or results of operation.
Reclassifications
Certain 2003 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 15.5% shareholder, through Paulson Ranch, Ltd. Paulson Ranch made a loan to the Company in the amount of $600,000 with an interest rate of 10.0%. On February 6, 2004, the Company paid the outstanding principal balance of $230,735 to Paulson Ranch.
On December 12, 2003, the Company entered into a loan and security agreement with the Company's Chairman of the Board, Bernard Paulson through the Paulson Ranch, Ltd., under which Paulson Ranch made a loan to the Company in the amount $500,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". Principal is due and payable on or before February 15, 2005. Accrued interest is paid monthly. The principal balance outstanding on September 30, 2004 was $500,000. The loan proceeds were used for working capital.
On December 12, 2003, the Company entered into a loan and security agreement with David Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the D & C H Trust, under which the D &C H Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $250,000 and accrued interest to the D & C H Trust on February 6, 2004.
On December 12, 2003, the Company entered into a loan and security agreement with Douglas Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the Douglas MacDonald Hartman Family Irrevocable Trust (the "Trust"), under which the Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $250,000 and accrued interest to the Trust on February 6, 2004.
8
Long Term Debt and Notes Payable to Banks |
A summary of long-term debt follows:
(In Thousands) |
September 30, |
December 31, |
||
2004 |
2003 |
|||
Variable rate term note payable to a US bank, with an interest rate of bank prime plus 1.0%, 6.25%. Paid in full on January 13, 2004 |
$ |
-- |
$ |
581 |
Variable rate term note payable to a Malaysian offshore bank, with an interest rate of 4.3%. Paid in full on February 26, 2004 |
-- |
35 |
||
Variable rate term note payable to a Malaysian offshore bank, with an interest rate of 3.9%. Paid in full on February 26, 2004 |
-- |
35 |
||
Other indebtedness, payable to Paulson Ranch, a related party, with an effective interest rate 10.0%. Paid in full on February 6, 2004 |
-- |
231 |
||
Other indebtedness, payable to Paulson Ranch/D&CH Trust/Douglas MacDonald Hartman Family Irrevocable Trust, related parties, with an effective interest rate of 8.75% at September 30, 2004, due February, 2005 |
500 |
1,000 |
||
Fixed rate term note payable to a US bank, with an interest rate of 5.2% at September 30, 2004, due May 1, 2007. |
642 |
-- |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at September 30, 2004, due June 1, 2009. (642,000 Euro at September 30, 2004 exchange rate of 1.2436) |
799 |
-- |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.2% at September 30, 2004, due July 1, 2029. (483,000 Euro at September 30, 2004 exchange rate of 1.2436) |
601 |
-- |
||
_____ |
_____ |
|||
Total |
2,542 |
1,882 |
||
Less current maturities |
933 |
240 |
||
_____ |
_____ |
|||
Total long-term debt |
$ |
1,609 |
$ |
1,642 |
==== |
==== |
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
The Company entered into a loan agreement (the "Agreement") with Bank of America, N.A. (the "Bank") on August 23, 2002, which amended and restated the loan agreement between the Bank and the Company dated May 1, 2002, as amended. The Agreement provides the Company with a revolving line of credit (the "Line") and a term loan. On May 13, 2003, the Company and the Bank entered into the Second Amendment to the Agreement which increased the Company's Line from $3,000,000 to $3,500,000 and extended the Line from August 31, 2003 to August 31, 2004. On December 13, 2003, the Company and the Bank entered into the Third Amendment to the Agreement which extended the Line from August 31, 2004 to August 31, 2005. The amendment also authorized the Company to borrow up to $1,000,000 from its Directors. The Company entered into the Fourth Amendment to the Agreement with the Bank on January 13, 2004, which increased the Line to $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000. The interest rate on the Line is the Bank's prime, 4.75% at September 30, 2004. The Company did not have any outstanding borrowings on the Line and $3,682,316 was available to the Company on September 30, 2004, based on eligible accounts receivable and inventory borrowing limitations.
The Company entered into the Fifth Amendment to the Agreement on February 2, 2004, which increased the term loan to $782,500. The loan proceeds were used to refinance the Company's term loan, with a balance of $580,833, that was due to mature on May 1, 2007, and pay the balance outstanding on the Company's loan with the Company's Chairman of the Board, Bernard Paulson, a 15.5% shareholder, through Paulson Ranch Ltd., a related party, that was due to mature on April 5, 2005. The interest rate for the loan is fixed until maturity at 5.2%. Monthly principal and interest payments commenced on March 1, 2004 and will continue through May 1, 2007. The monthly principal payment is $20,064. At September 30, 2004 the loan balance was $642,000.
9
The Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants, which are calculated at the end of each quarter, are as follows:
As noted above, as of and for the four quarters ended September 30, 2004, the Company was in compliance with all financial ratios contained in the amended Agreement and expects to be in compliance for a period of twelve-months beyond September 30, 2004. In addition to the covenants described above, the loan agreements covering both the revolving line of credit and the term loan include subjective acceleration clauses that allow the Bank to accelerate payment if, in the judgment of the Bank, there are adverse changes in the Company's business. 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.
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 $5,394,737. At September 30, 2004, TMM had utilized $3,923,029 of that facility under the ECR, with a weighted average interest rate of 3.5%. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 150 days or less against customers' and inter-company purchase orders. The borrowings under the short-term credit facility are subject to a demand provision and include subjective acceleration clauses that allow the Bank to accelerate payment if in the judgment of the Bank, there are adverse changes in the Company's business, which the Company believes is customary for Malaysian short-term banking facilities. The credit facility with HSBC Bank also prohibits loans to related parties and prohibits TMM from paying dividends without prior c onsent of the bank. In the event dividends are declared, the payment would be subject to a 28% Malaysian income tax. The facility is subject to annual review and renewal.
At December 31, 2003, TMM had two term loans with HSBC Bank Labuan and RHB Bank Labuan with an outstanding principal balance on each of the two term loans of $34,998 for total outstanding borrowings of $69,996. The loans were secured by TMM's inventory, accounts receivable, and property, plant and equipment. These loans were fully paid on February 26, 2004.
Netherlands Bank Credit Facility
On July 7, 2004, the Company's subsidiary, TP&T, entered into a new loan agreement with Rabobank in the Netherlands. The agreement increased TP&T's line of credit from Euro 650,000 to Euro 760,000 ($945,136 at September 30, 2004) for the purpose of funding the refundable portion of VAT tax on the operation's building expansion. The increase in TP&T's line of credit will be in effect until March 31, 2005. The credit facility is secured by TP&T's inventory and accounts receivable. The Company has guaranteed this credit facility. At September 30, 2004, TP&T had utilized Euro 65,114 ($80,976) of their short-term credit facility with an interest rate of Bank prime plus 2% (6.75% at September 30, 2004).
On July 7, 2004, TP&T entered into a mortgage loan with Rabobank. The mortgage, in the amount of Euro 485,000 ($603,146 at September 30, 2004), will be repaid over 25 years with interest fixed at 5.2% per year for the first four years. TP&T utilized Euro 325,000 ($404,170 at September 30, 2004) of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the building. The balance of the loan proceeds, Euro 160,000 ($199,507 at September 30, 2004), will be used for expansion of TP&T's existing building. These funds have been placed in a restricted account for the building expansion and will remain in the restricted account until the Company has invested Euro 470,000 ($584,492 at September 30, 2004) in the expansion of TP&T's current plant facility. Monthly principal and interest payments commenced on September 1, 2004, and will continue through July 1, 2029. The monthly principal payment is Euro 1,616 ($2,010 at September 30, 2004). The loan balance at September 30, 2004 was Euro 483,384 ($601,136).
10
On April 2, 2004, TP&T, entered into a new loan agreement with Rabobank. The new loan agreement with Rabobank funded a term loan in the amount of Euro 676,000 ($840,374 at September 30, 2004). The proceeds of the term loan were used to reduce the credit facility and reduce inter-company payables to Corpus Christi. The term loan, which is secured by TP&T's assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%. The Company has guaranteed this term loan. Monthly principal and interest payments commenced on July 1, 2004, and will continue through June 1, 2009. The monthly principal payment is Euro 11,266 ($14,010 at September 30, 2004). The loan balance at September 30, 2004 was Euro 642,202 ($798,642).
Rabobank has also made a commitment to loan TP&T an additional Euro 470,000 for the purchase of the 10,000 square foot warehouse with loading dock which is scheduled to close in January 2005. The loan will be repaid over 25 years and the interest rate will be based on Rabobank's prime rate plus 1.75% at the time of funding.
TP&T's loan agreement covering both the credit facility the term loan include subjective acceleration clauses that allow the Rabobank to accelerate payment if in the judgment of the bank, there are adverse changes in the Company's business.
Interest Expense
Year to date 2004, interest expense includes a correction of a bank over-charge of interest and principal totaling approximately $33,000 relating to fiscal year 2003. While the correction is not expected to materially affect fiscal year 2004 earnings, the correction increased net income by approximately $33,000 or 3.7% for the nine-month period ended September 30, 2004 which did not have a significant impact on basic or diluted earnings per share for this nine-month period.
Liquidity
Management believes that it has adequate liquidity for fiscal year 2004 and expects to maintain compliance with all financial covenants for a period of twelve-months beyond September 30, 2004.
TOR's financial position may be "adversely affected" if TOR fails to comply with the restrictions and covenants in the terms of TOR's loan agreements. The terms of the various loan documents include subjective acceleration provisions available to the lending institution as a remedy, if based on the judgment of the bank, TOR fails to comply with covenants or if there are adverse changes in TOR's business. If demand is made by the lending institutions, TOR may require additional debt or equity financing to meet its working capital and operational requirements or, if required, to refinance maturing or demanded indebtedness. If additional funds are raised through the issuance of equity securities or through alternative debt financing that provides for the issuance of equity securities, TOR's stockholders may experience significant dilution. Furthermore, there can be no assurance that any additional funds will be available when needed, or that if available, such financing will inc lude favorable terms.
4. |
Private Placement of Common Stock and Series A Convertible Preferred Stock |
In January 2004, the Company raised approximately $2,500,000 through the placement of 526,316 shares of common stock at a price of $4.75 per share to existing shareholders and new institutional holders. The Company also raised $1,000,000 through the placement of 200,000 shares of convertible preferred stock at $5.00 per share. The convertible preferred stock has a 6.0% coupon rate, and each preferred share is convertible into 0.84 shares of common stock and is redeemable at the option of the Company after two years. The securities were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The transactions were privately negotiated without any general solicitation or advertising. The purchasers are "sophisticated investors" within the meaning of the Securities Act of 1933 and have access to all information concerning the Company needed to make an informed decision regarding the transaction. At the date of issue, the common and preferred sha res were not registered under the Securities Act of 1933 and, therefore, could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company filed a registration statement with the Securities and Exchange Commission covering the resale of the common shares, which was declared effective on October 12, 2004. The Company used $3,200,000 of the proceeds to pay amounts owed under the Company's domestic line of credit and related party loans from David Hartman and Douglas Hartman. The balance of the proceeds was used for working capital purposes.
11
5. |
Series A Convertible Preferred Stock Dividend |
On September 5, 2004, the Company declared a dividend, in the amount of $15,000, for the quarterly period ended September 30, 2004, payable on October 1, 2004, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on September 5, 2004.
6. |
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.
7. |
Commitments and Contingencies |
On July 20, 2004, the Company announced that TP&T has committed to the purchase of a 10,000 square foot warehouse with a loading dock located adjacent to TP&T's existing production facility for Euro 470,000. TP&T has made a commitment to purchase this property in January 2005.
The Company entered into a lease agreement schedule (the "Schedule") dated September 27, 2004, effective September 29, 2004, with Banc of America Leasing & Capital, LLC ("BALC") for equipment related to the Hitox plant expansion. The amount of the lease, $694,205, has a term of 84 months with equal installments of $8,792. At the end of the least term, we can either: 1) return the equipment; 2) extend the lease for a period to be agreed upon by the Company and BALC for an amount equal to the equipment's fair market rental value as determined by BALC, or 3) purchase the equipment at the then fair market value of the equipment. The schedule contains an early buyout provision that grants the Company the option of purchasing the equipment after payment of the 72nd installment for $172,302. The schedule is part of a master lease agreement entered into with BALC dated August 9, 2004, effective August 13, 2004, for an amount not to exceed $1,200,000. The lat est date for any funding shall be December 31, 2004.
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.
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 in May 2001, the Company recorded intangible assets related to a non-compete agreement in the amount of $300,000. This intangible asset was fully amortized as of May 2004.
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 approximately Euro 1,460,000 or $1,815,000 based on exchange rate at September 30, 2004) 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 annual impairment test in October 2002 and in October 2003 and concluded that there was no impairment of recorded goodwill, as the fair value of the reporting units exceeded the carrying amount as of the respective dates. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings.
12
9. |
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 |
|||
2004 |
2003 |
2004 |
2003 |
Numerator: |
|||||
Net Income |
$ 473 |
$ 612 |
$ 904 |
$ 1,047 |
|
Preferred Stock Dividends |
(15) |
-- |
(41) |
-- |
|
_____ |
_____ |
_____ |
_____ |
||
Numerator for basic earnings per |
|
|
|
|
|
_____ |
_____ |
_____ |
_____ |
||
Effect of dilutive securities: |
-- |
-- |
-- |
-- |
|
_____ |
_____ |
_____ |
_____ |
||
Numerator for diluted earnings per |
|
|
|
|
|
Denominator: |
|||||
Denominator for basic earnings per share |
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
_____ |
_____ |
_____ |
_____ |
||
Dilutive potential common shares |
273 |
331 |
294 |
157 |
|
_____ |
_____ |
_____ |
_____ |
||
Denominator for diluted earnings per |
|
|
|
|
|
===== |
===== |
===== |
===== |
||
Basic earnings per common share: |
|||||
Net Income |
$ 0.06 |
$ 0.09 |
$ 0.11 |
$ 0.15 |
|
===== |
===== |
===== |
===== |
||
Diluted earnings per common share: |
|||||
Net Income |
$ 0.06 |
$ 0.08 |
$ 0.11 |
$ 0.15 |
|
===== |
===== |
===== |
===== |
Excluded from the calculation of diluted earnings per share were a total of 168,000 common shares issuable upon conversion of the 200,000 convertible preferred shares for the quarter ending September 30, 2004, and 153,000 for the nine-month period ending September 30, 2004. The convertible preferred shares were not included in the computation of diluted earnings per share as the effect would be antidilutive. Also excluded from the diluted earnings per share were 194,900 options for the quarter ending September 30, 2004 and 400 for the quarter ending September 30, 2003. For the nine-month periods ending September 30, 2004 and 2003, options excluded from the diluted earnings per share were 103,400 and 15,400 respectively. The options were excluded from 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.
13
10. |
Segment Information |
The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments. 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:
|
United States (Corpus Christi) |
|
|
Eliminations |
|
|||||
Three-months ended: |
||||||||||
September 30, 2004 |
||||||||||
Sales Revenue: |
||||||||||
Customer sales |
$ |
5,393 |
$ |
533 |
$ |
3,518 |
$ |
-- |
$ |
9,444 |
Inter-company sales |
-- |
1,220 |
-- |
(1,220) |
-- |
|||||
_______ |
_______ |
_______ |
_______ |
_______ |
||||||
Total Sales Revenue |
$ |
5,393 |
$ |
1,753 |
$ |
3,518 |
$ |
(1,220) |
$ |
9,444 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment profit (loss) |
$ |
(245) |
$ |
231 |
$ |
188 |
$ |
299 |
$ |
473 |
====== |
====== |
====== |
====== |
====== |
||||||
September 30, 2003 |
||||||||||
Sales Revenue: |
||||||||||
Customer sales |
$ |
3,952 |
$ |
357 |
$ |
2,748 |
$ |
-- |
$ |
7,057 |
Inter-company sales |
-- |
780 |
33 |
(813) |
-- |
|||||
_______ |
_______ |
_______ |
_______ |
_______ |
||||||
Total Sales Revenue |
$ |
3,952 |
$ |
1,137 |
$ |
2,781 |
$ |
(813) |
$ |
7,057 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment profit (loss) |
$ |
(138) |
$ |
(50) |
$ |
93 |
$ |
707 |
$ |
612 |
====== |
====== |
====== |
====== |
====== |
||||||
Nine-months ended: |
||||||||||
September 30, 2004 |
||||||||||
Sales Revenue: |
||||||||||
Customer sales |
$ |
15,047 |
$ |
1,427 |
$ |
5,360 |
$ |
-- |
$ |
21,834 |
Inter-company sales |
-- |
3,065 |
2,766 |
(5,831) |
-- |
|||||
_______ |
_______ |
_______ |
_______ |
_______ |
||||||
Total Sales Revenue |
$ |
15,047 |
$ |
4,492 |
$ |
8,126 |
$ |
(5,831) |
$ |
21,834 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment profit (loss) |
$ |
(910) |
$ |
370 |
$ |
961 |
$ |
483 |
$ |
904 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment assets |
$ |
22,353 |
$ |
7,638 |
$ |
19,549 |
$ |
(16,969) |
$ |
32,571 |
====== |
====== |
====== |
====== |
====== |
||||||
September 30, 2003 |
||||||||||
Sales Revenue: |
||||||||||
Customer sales |
$ |
11,341 |
$ |
1,117 |
$ |
4,501 |
$ |
-- |
$ |
16,959 |
Inter-company sales |
-- |
1,777 |
2,377 |
(4,154) |
-- |
|||||
_______ |
_______ |
_______ |
_______ |
_______ |
||||||
Total Sales Revenue |
$ |
11,341 |
$ |
2,894 |
$ |
6,878 |
$ |
(4,154) |
$ |
16,959 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment profit (loss) |
$ |
(315) |
$ |
(96) |
$ |
960 |
$ |
498 |
$ |
1,047 |
====== |
====== |
====== |
====== |
====== |
||||||
Segment assets |
$ |
21,696 |
$ |
4,866 |
$ |
16,871 |
$ |
(17,883) |
$ |
25,550 |
====== |
====== |
====== |
====== |
====== |
14
Product sales of inventory from TMM and TP&T to Corpus Christi are based on inter-company pricing, which includes an inter-company profit margin. In the geographic segment information, the location profit (loss) from all locations is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments. Such presentation is consistent with the internal reporting reviewed by TOR's chief operating decision maker. The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period. To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.
11. |
Derivatives and Hedging Activities |
Natural Gas Contracts
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.
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. The contract was settled based on natural gas market prices for January 1, 2003 through April 30, 2003. The Company paid fixed prices averaging $3.90 per MM Btu on notional quantities amounting to 60,000 MM Btu's. The fair value of the hedge decreased $36,000 from December 31, 2002 to April 30, 2003 due to the settlement of the hedge. The recognition of this gain had no effect on the Company's cash flow.
On September 16, 2003, the Company entered into a new 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 would be highly effective in offsetting the price of natural gas. The contract was settled based on natural gas market prices from January 1, 2004 through April 30, 2004. The Company paid fixed prices averaging $5.26 per MM Btu on notional quantities amounting to 80,000 MM Btu's. The fair value of the hedge decreased $73,000 from December 31, 2003 to April 30, 2004 due to the settlement of the hedge. The recognition of this gain had no effect on the Company's cash flow.
Foreign Currency Forward Contracts
To protect its exposure to foreign exchange risks, TMM enters into foreign currency forward contracts. Gains and losses on foreign exchange contracts designated as hedges of identified exposure are offset against the foreign 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. At September 30, 2004, TMM marked the contracts to market, recording a gain of approximately $20,000 as a component of "Other Comprehensive Income" and also recorded it as an asset on the balance sheet at September 30, 2004. The recognition of this gain had no effect on the Company's cash flow.
12. |
Stock Options and Equity Compensation Plan |
The following table provides information as of September 30, 2004, about the Company's Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company's existing equity compensation plans (including individual arrangements):
15
|
Number of securities to be |
Weighted-average |
Number of securities remaining |
Equity compensation plans approved by security holders |
862,550 |
$ 2.756 |
258,200 |
Equity compensation plans not approved by security holders |
-- |
-- |
|
_______ |
_______ |
||
Total |
862,550 |
$ 2.756 |
258,200 |
====== |
====== |
The Company's 1990 Incentive Plan for TOR Minerals International, Inc. (the "Plan") provided for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. The ability to issue new options under the Plan expired in February of 2000, with options to acquire 372,200 shares of common stock still outstanding. For the nine-month period ending September 30, 2004, a total of 12,300 options were exercised and the Plan had 158,550 options outstanding.
On February 21, 2000, the Company's Board of Directors approved the adoption of the 2000 Incentive Plan for TOR Minerals International (the "2000 Plan"). The 2000 Plan provides for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. The maximum number of shares of the Company's common stock initially authorized to be sold or issued under the 2000 Plan was 750,000. In the Annual Shareholders' meeting on May 14, 2004, the maximum number of shares of the Company's common stock that may be sold or issued under the 2000 Plan was increased 300,000 shares from 750,000 shares to 1,050,000 shares subject to certain adjustments upon recapitalization, stock splits and combinations, merger, stock dividend and similar events. For the nine-month period ending September 30, 2004, a total of 84,300 options were exercised.
In 1999, an additional 75,000 options were issued outside the Plan at an exercise price of $2.125. Of the options issued outside the Plan, 25,000 were exercised in January 2004.
Both the 1990 Plan and the 2000 Plan provide for the award of a variety of incentive compensation arrangements, including restricted stock awards, performance units or other non-option awards.
Exercise prices on options outstanding at September 30, 2004, ranged from $0.92 to $5.41 per share. The weighted-average remaining contractual life of those options is 7.32 years. The number of options exercisable at September 30, 2004 and 2003 was 457,550 and 431,100, respectively.
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
Sales:
Consolidated net sales for the third quarter 2004 were $9,444,000, an increase of $2,387,000 or 34% over the third quarter period 2003. Net sales at the Corpus Christi location increased approximately $1,441,000 or 36% primarily due to increased sales of its Aluprem products of approximately $784,000 (approximately $659,000 in volume, $18,000 due to price and $107,000 of increase due to the Euro strengthening as compared to the US dollar). The volume increase in Aluprem is primarily due to increased demand from one customer of approximately $759,000. Sales of the Corpus Christi operation's other products (Hitox, Synflux, Bartex and Haltex) increased $657,000 (approximately $515,000 due to volume increases and $142,000 due to price) related primarily to the strengthening of the US economy. TMM's net sales to third parties increased approximately $770,000 or 28% primarily related to an increase in sales volume of Synthetic Rutile ("SR") to one customer of
16
approximately $1,045,000 offset by a decrease in price of approximately $88,000. Sales volume of Hitox and other products at TMM decreased approximately $207,000 offset by price increases in Hitox of approximately $20,000. The volume decrease is primarily due to a reduction in TMM's third party sales of Hitox to one customer. TP&T's sales to third parties of Aluprem increased approximately $176,000 (volume increased approximately $135,000 and increases due to the Euro strengthening as compared to the US dollar of approximately $41,000). Third party volume increases are due primarily to European demand for Aluprem products.
Sales by product for the third quarter 2004 as compared to the same period 2003 are presented below (in thousands).
Product |
3rd Qtr 2004 Sales |
3rd Qtr 2003 Sales |
$ Increase |
% Increase |
||
Hitox |
$ 3,133 |
33.2% |
$ 2,979 |
42.2% |
$ 154 |
5.2% |
Aluprem |
2,192 |
23.2% |
1,233 |
17.5% |
959 |
77.8% |
Synthetic Rutile |
2,722 |
28.8% |
1,765 |
25.0% |
957 |
54.2% |
Bartex |
711 |
7.5% |
646 |
9.2% |
65 |
10.1% |
Haltex |
243 |
2.6% |
207 |
2.9% |
36 |
17.4% |
Other |
443 |
4.7% |
227 |
3.2% |
216 |
95.2% |
|
_______ |
______ |
_______ |
______ |
_______ |
______ |
Year to date 2004 consolidated net sales were $21,834,000, an increase of $4,875,000 or 29% over the same nine-month period 2003. Net sales at the Corpus Christi location increased approximately $3,706,000 or 33% primarily due to increased sales of its Aluprem products of approximately $2,475,000 (approximately $2,172,000 in volume, $57,000 due to price and $246,000 of increase due to the Euro strengthening as compared to the US dollar). The volume increase in Aluprem is primarily due to increased demand from one customer of approximately $2,175,000. Sales of the Corpus Christi operation's other products (Hitox, Synflux, Bartex and Haltex) increased $1,231,000 (approximately $472,000 due to price and $759,000 due to volume increases). Price and volume increases are primarily due to continued strengthening of the US economy. TMM's net sales to third parties increased approximately $859,000 or 19%. The increase is primarily volume related due to sales of Synthetic Rutile to one custome r of approximately $1,403,000 offset by price decreases of approximately $86,000 and Hitox price increases of approximately $102,000 offset by a decrease in sales volume of Hitox of $405,000 and other products of $155,000. The volume decrease in Hitox is primarily due to a reduction in third party sales to one customer and the decrease in other products is primarily due to a one time sale of specialty product in 2003. TP&T's Aluprem sales to third parties increased approximately $310,000 primarily due to the effects of the Euro strengthening against the US dollar of $133,000, volume increases of approximately $141,000 and prices increases of approximately $36,000.
Year to date sales by product for the first nine-months 2004 as compared to the same period 2003 are presented below (in thousands).
Product |
YTD 2004 Sales |
YTD 2003 Sales |
$ Increase |
% Increase |
||
Hitox |
$ 9,174 |
42.0% |
$ 8,983 |
53.0% |
$ 191 |
2.1% |
Aluprem |
5,733 |
26.3% |
2,948 |
17.4% |
2,785 |
94.5% |
Synthetic Rutile |
3,082 |
14.1% |
1,765 |
10.4% |
1,317 |
74.6% |
Bartex |
2,233 |
10.2% |
1,884 |
11.1% |
349 |
18.5% |
Haltex |
891 |
4.1% |
673 |
4.0% |
218 |
32.4% |
Other |
721 |
3.3% |
706 |
4.1% |
15 |
2.1% |
|
_______ |
______ |
_______ |
______ |
______ |
______ |
17
Gross Margin:
Gross margin increased $22,000 (1%) for the three-month period ending September 30, 2004, compared to the same period 2003. Factors contributing to the increase in gross margin are primarily related to:
Offsetting the margin improvement are increased costs of production of approximately $850,000. The increase in production costs are primarily due to:
Year to date gross margin increased $566,000 (13%). Factors contributing to the increase in gross margin are primarily related to:
Offsetting the margin improvement are increased costs of production of approximately $1,825,000. The increase in production costs are primarily due to:
The Company is continuing to experience increases in freight, fuel and production costs. To offset the increase in costs, the Company is continuing to increase the price of its products. However, due to the lag time between price increases to the Company's customers and increased costs, the Company anticipates that the margins will continue to be negatively impacted.
General, Administrative and Selling Expenses:
Total general, administrative and selling expenses ("SG&A") increased from $1,063,000 during the third quarter of 2003 to $1,151,000 for the same period 2004, an increase of $88,000 or 8%. Primary factors contributing to the increase in SG&A include: (1) audit and legal fees of approximately $22,000; (2) trade shows and travel expense of approximately $26,000; (3) and various other SG&A expenses of approximately $40,000.
18
Year to date, total SG&A expenses increased from $3,099,000 for the nine-month period ending September 30, 2003 to $3,681,000 for the same period 2004, an increase of $582,000 or 19%. Primary factors contributing to the increase in SG&A include: (1) salaries and benefits related to an increase in staff and annual increases of approximately $185,000; (2) option compensation expense of approximately $107,000; (3) audit and legal fees of approximately $149,000; (4) investor relations of approximately $51,000; (5) trade shows and travel expense of approximately $50,000; and (6) various other SG&A expenses of approximately $40,000.
Interest Expense:
Year to date 2004 Interest expense includes a correction of a bank over-charge of interest and principal totaling approximately $33,000 relating to fiscal year 2003. While the correction is not expected to materially affect fiscal year 2004 earnings, the correction increased net income by approximately $33,000 or 3.7% for the nine-month period ended September 30, 2004 which did not have a significant impact on basic or diluted earnings per share for this nine-month period.
Provision for Income Tax:
Due to the utilization of operating loss carry-forwards, the Company recorded only state income tax expense during the first nine-months of 2003 totaling $27,000. During the first nine-months of 2004, the Company recorded state income tax expense of $24,000 and Malaysian income tax expense of $123,000 as TMM's deferred tax assets do not fully offset TMM's deferred tax liability. Taxes are applied based on an estimated annualized effective rate, which assumes continued ability to offset US federal income taxes through the utilization of net operating loss carry-forwards.
Liquidity, Capital Resources and Other Financial Information
Cash and Cash Equivalents:
Cash and cash equivalents increased approximately $378,000 from December 31, 2003 to September 30, 2004. Cash used in operating activities totaled $824,000 and $2,787,000 was used in investing activities. Financing activities provided $3,971,000. The effect of exchange rate fluctuations increased cash $18,000.
Operating Activities
Cash used by operating activities totaled $824,000 from December 31, 2003 to September 30, 2004. Major changes in operating activities include the following:
19
Investing Activities
Cash used in investing activities increased $2,787,000 from December 31, 2003 to September 30, 2004. Net investments for each of the Company's three locations are as follows:
Financing Activities
Cash provided by financing activities totaled $3,971,000 for the nine-month period ending September 30, 2004. Factors relating to financing activities include the following:
US Bank Credit Facility
The Company entered into a loan agreement (the "Agreement") with Bank of America, N.A. (the "Bank") on August 23, 2002, which amended and restated the loan agreement between the Bank and the Company dated May 1, 2002, as amended. The Agreement provides the Company with a revolving line of credit (the "Line") and a term loan. On May 13, 2003, the Company and the Bank entered into the Second Amendment to the Agreement which increased the Company's Line from $3,000,000 to $3,500,000 and extended the Line from August 31, 2003 to August 31, 2004. On December 13, 2003, the Company and the Bank entered into the Third Amendment to the Agreement which extended the Line from August 31, 2004 to August 31, 2005. The amendment also authorized the Company to borrow up to $1,000,000 from its Directors. The Company entered into the Fourth Amendment to the Agreement with the Bank on January 13, 2004, which increased the Line to $5,000,000, subject to a defined borrowing base limited to the lesser of $5,000,000 or 80% of eligible accounts receivable and 50% of eligible inventory up to a maximum of $2,850,000. The interest rate on the Line is the Bank's prime, 4.75% at September 30, 2004. The Company did not have any outstanding borrowings on the Line and $3,682,316 was available to the Company on September 30, 2004, based on eligible accounts receivable and inventory borrowing limitations.
The Company entered into the Fifth Amendment to the Agreement on February 2, 2004, which increased the term loan to $782,500. The loan proceeds were used to refinance the Company's term loan, with a balance of $580,833, that was due to mature on May 1, 2007, and pay the balance outstanding on the Company's loan with the Company's Chairman of the Board, Bernard Paulson, a 15.5% shareholder, through Paulson Ranch Ltd., a related party, that was due to mature on April 5, 2005. The interest rate for the loan is fixed until maturity at 5.2%. Monthly principal and interest payments commenced on March 1, 2004 and will continue through May 1, 2007. The monthly principal payment is $20,064. At September 30, 2004 the loan balance was $642,000.
20
The Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants, which are calculated at the end of each quarter, are as follows:
As noted above, as of and for the four quarters ended September 30, 2004, the Company was in compliance with all financial ratios contained in the amended Agreement and expects to be in compliance for a period of twelve-months beyond September 30, 2004. In addition to the covenants described above, the loan agreements covering both the revolving line of credit and the term loan include subjective acceleration clauses that allow the Bank to accelerate payment if, in the judgment of the Bank, there are adverse changes in the Company's business. 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.
Related Party Debt
The Company entered into a loan and security agreement on April 5, 2001 with the Company's Chairman of the Board, Bernard Paulson, a 15.5% shareholder, through Paulson Ranch, Ltd. Paulson Ranch made a loan to the Company in the amount of $600,000 with an interest rate of 10.0%. On February 6, 2004, the Company paid the outstanding principal balance of $230,735 to Paulson Ranch.
On December 12, 2003, the Company entered into a loan and security agreement with the Company's Chairman of the Board, Bernard Paulson through the Paulson Ranch, Ltd., under which Paulson Ranch made a loan to the Company in the amount $500,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". Principal is due and payable on or before February 15, 2005. Accrued interest is paid monthly. The principal balance outstanding on September 30, 2004 was $500,000. The loan proceeds were used for working capital.
On December 12, 2003, the Company entered into a loan and security agreement David Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the D & C H Trust, under which the D &C H Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $250,000 and accrued interest to the D & C H Trust on February 6, 2004.
On December 12, 2003, the Company entered into a loan and security agreement with Douglas Hartman, a member of the Company's Board of Directors and a 7.9% shareholder, through the Douglas MacDonald Hartman Family Irrevocable Trust (the "Trust"), under which the Trust made a loan to the Company in the amount $250,000 with a variable interest rate of 4% per annum above the "Wall Street Journal Prime Rate". The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $250,000 and accrued interest to the Trust on February 6, 2004.
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 $5,394,737. At September 30, 2004, TMM had utilized $3,923,029 of that facility under the ECR, with a weighted average interest rate of 3.5%. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of 150 days or less against customers' and inter-company purchase orders. The borrowings under the short-term credit facility are subject to a demand provision and include subjective acceleration clauses that allow the Bank to accelerate payment if in the judgment of the Bank, there are adverse changes in the Company's business, which the Company believes is customary for Malaysian short-term banking facilities. The credit facility with HSBC Bank also prohibits loans to related parties and prohibits TMM from paying dividends without prior c onsent of the bank. In the event dividends are declared, the payment would be subject to a 28% Malaysian income tax. The facility is subject to annual review and renewal.
21
At December 31, 2003, TMM had two term loans with HSBC Bank Labuan and RHB Bank Labuan with an outstanding principal balance on each of the two term loans of $34,998 for total outstanding borrowings of $69,996. The loans were secured by TMM's inventory, accounts receivable, and property, plant and equipment. These loans were fully paid on February 26, 2004.
Netherlands Bank Credit Facility
On July 7, 2004, the Company's subsidiary, TP&T, entered into a new loan agreement with Rabobank in the Netherlands. The agreement increased TP&T's line of credit from Euro 650,000 to Euro 760,000 ($945,136 at September 30, 2004) for the purpose of funding the refundable portion of VAT tax on the operation's building expansion. The increase in TP&T's line of credit will be in effect until March 31, 2005. The credit facility is secured by TP&T's inventory and accounts receivable. The Company has guaranteed this credit facility. At September 30, 2004, TP&T had utilized Euro 65,114 ($80,976) of their short-term credit facility with an interest rate of Bank prime plus 2% (6.75% at September 30, 2004).
On July 7, 2004, TP&T entered into a mortgage loan with Rabobank. The mortgage, in the amount of Euro 485,000 ($603,146 at September 30, 2004), will be repaid over 25 years with interest fixed at 5.2% per year for the first four years. TP&T utilized Euro 325,000 ($404,170 at September 30, 2004) of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the building. The balance of the loan proceeds, Euro 160,000 ($199,507 at September 30, 2004), will be used for expansion of TP&T's existing building. These funds have been placed in a restricted account for the building expansion and will remain in the restricted account until the Company has invested Euro 470,000 ($584,492 at September 30, 2004) in the expansion of TP&T's current plant facility. Monthly principal and interest payments commenced on September 1, 2004, and will continue through July 1, 2029. The monthly principal payment is Euro 1,616 ($2,010 at September 30, 2004). The loan balance at September 30, 2004 was Euro 483,384 ($601,136).
On April 2, 2004, TP&T, entered into a new loan agreement with Rabobank. The new loan agreement with Rabobank funded a term loan in the amount of Euro 676,000 ($840,374 at September 30, 2004). The proceeds of the term loan were used to reduce the credit facility and reduce inter-company payables to Corpus Christi. The term loan, which is secured by TP&T's assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%. The Company has guaranteed this term loan. Monthly principal and interest payments commenced on July 1, 2004, and will continue through June 1, 2009. The monthly principal payment is Euro 11,266 ($14,010 at September 30, 2004). The loan balance at September 30, 2004 was Euro 642,202 ($798,642).
Rabobank has also made a commitment to loan TP&T an additional Euro 470,000 for the purchase of the 10,000 square foot warehouse with loading dock which is scheduled to close in January 2005. The loan will be repaid over 25 years and the interest rate will be based on Rabobank's prime rate plus 1.75% at the time of funding.
TP&T's loan agreement covering both the credit facility the term loan include subjective acceleration clauses that allow the Rabobank to accelerate payment if in the judgment of the bank, there are adverse changes in the Company's business.
Interest Expense
Year to date 2004, interest expense includes a correction of a bank over-charge of interest and principal totaling approximately $33,000 relating to fiscal year 2003. While the correction is not expected to materially affect fiscal year 2004 earnings, the correction increased net income by approximately $33,000 or 3.8% for the nine-month period ended September 30, 2004 which did not have a significant impact on basic or diluted earnings per share for this nine-month period.
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Liquidity
Management believes that it has adequate liquidity for fiscal year 2004 and expects to maintain compliance with all financial covenants for a period of twelve-months beyond September 30, 2004.
TOR's financial position may be "adversely affected" if TOR fails to comply with the restrictions and covenants in the terms of TOR's loan agreements. The terms of the various loan documents include subjective acceleration provisions available to the lending institution as a remedy, if based on the judgment of the bank, TOR fails to comply with covenants or if there are adverse changes in TOR's business. If demand is made by the lending institutions, TOR may require additional debt or equity financing to meet its working capital and operational requirements or, if required, to refinance maturing or demanded indebtedness. If additional funds are raised through the issuance of equity securities or through alternative debt financing that provides for the issuance of equity securities, TOR's stockholders may experience significant dilution. Furthermore, there can be no assurance that any additional funds will be available when needed, or that if available, such financing will inc lude favorable terms.
Off-Balance Sheet Arrangements
The Company entered into a lease agreement schedule (the "Schedule") dated September 27, 2004, effective September 29, 2004, with Banc of America Leasing & Capital, LLC ("BALC") for equipment related to the Hitox plant expansion. The amount of the lease, $694,205, has a term of 84 months with equal installments of $8,792. At the end of the least term, we can either: 1) return the equipment; 2) extend the lease for a period to be agreed upon by the Company and BALC for an amount equal to the equipment's fair market rental value as determined by BALC, or 3) purchase the equipment at the then fair market value of the equipment. The schedule contains an early buyout provision that grants the Company the option of purchasing the equipment after payment of the 72nd installment for $172,302. The schedule is part of a master lease agreement entered into with BALC dated August 9, 2004, effective August 13, 2004, for an amount not to exceed $1,200,0 00. The latest date for any funding shall be December 31, 2004.
During the quarter ended September 30, 2004, there were no other material changes outside the normal course of business to the quantitative and qualitative disclosures about off-balance sheet arrangements previously reported in the Annual Report on Form 10-KSB for the year ended December 31, 2003. See Item 6. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements" in the Form 10-KSB for a detailed discussion.
Other Financial Information:
Private Placement of Common Stock and Series A Convertible Preferred Stock
In January 2004, the Company raised approximately $2,500,000 through the placement of 526,316 shares of common stock at a price of $4.75 per share to existing shareholders and new institutional holders. The Company also raised $1,000,000 through the placement of 200,000 shares of convertible preferred stock at $5.00 per share. The convertible preferred stock has a 6.0% coupon rate, and each preferred share is convertible into 0.84 shares of common stock and is redeemable at the option of the Company after two years. The securities were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933. The transactions were privately negotiated without any general solicitation or advertising. The purchasers are "sophisticated investors" within the meaning of the Securities Act of 1933 and have access to all information concerning the Company needed to make an informed decision regarding the transaction. At the date of issue, the common and p referred shares were not registered under the Securities Act of 1933 and, therefore, could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company filed a registration statement with the Securities and Exchange Commission covering the resale of the common shares, which was declared effective on October 12, 2004 The Company used $3,200,000 of the proceeds to pay amounts owed under the Company's domestic line of credit and related party loans from David Hartman and Douglas Hartman. The balance of the proceeds was used for working capital purposes.
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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, an increase in the price of natural gas and other raw materials, 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 forward-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
Item 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-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by 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 over financial reporting that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting.
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Part II - Other Information
Item 6. |
Exhibits |
(a) |
Exhibits |
|
Exhibit 31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Exhibit 31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
Exhibit 32.1 |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Exhibit 32.2 |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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. |
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____________ |
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(Registrant) |
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Date: |
November 12, 2004 |
RICHARD L. BOWERS President and CEO |
|
Date: |
November 12, 2004 |
LAWRENCE W. HAAS Treasurer and CFO |
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Exhibit 31.1
CERTIFICATION
I, Richard L. Bowers, President and Chief Executive Officer of TOR Minerals International, Inc. (the "Registrant"), certify that:
/s/ Richard L. Bowers |
Richard L. Bowers
President and Chief Executive Officer
(Principal Executive Officer)
November 12, 2004
Exhibit 31.2
CERTIFICATION
I, Lawrence W. Haas, Treasurer and Chief Financial Officer of TOR Minerals International, Inc. (the "Registrant"), certify that:
/s/ Lawrence W. Haas |
Lawrence W. Haas
Treasurer and Chief Financial Officer
(Principal Financial Officer)
November 12, 2004
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
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 September 30, 2004 (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
(Principal Executive Officer)
November 12, 2004
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
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 September 30, 2004 (the "Report") as filed with the Securities and Exchange Commission, the undersigned Chief Financial Officer of the Registrant hereby certifies, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
LAWRENCE W. HAAS
Lawrence W. Haas
Treasurer and CFO
(Principal Financial Officer)
November 12, 2004