Annual Reports

  • 10-K (Mar 11, 2014)
  • 10-K (Mar 7, 2013)
  • 10-K (Mar 24, 2011)
  • 10-K (Mar 24, 2010)
  • 10-K (Sep 15, 2009)
  • 10-K (Mar 31, 2009)

 
Quarterly Reports

 
8-K

 
Other

TOR MINERALS INTERNATIONAL 10-K 2009

Documents found in this filing:

  1. 10-K/A
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
  6. Ex-32
FORM 10-K, Year End December 31, 2008

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 FORM 10-K/A
(Amendment No. 1)

(Mark One)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2008
 

[_]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 Commission File Number 0-17321

 

 

 

TOR Minerals International, Inc.
(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of incorporation or organization)
 


 

74-2081929
(I.R.S. Employer Identification No.)


722 Burleson Street


Corpus Christi, Texas


78402

(Address, including zip code, of principal executive offices)
(361) 883-5591
(Registrant's telephone number, including area code)

 

 

 

Securities registered under section 12(b) of the Act:

Title of each class
Common Stock, $0.25 par value

Name of exchange on which registered
NASDAQ Capital Market

Securities registered pursuant to section 12(g) of the Act:  None.

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.   Yes [_]   No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act of 1934.   Yes [_]   No [X]

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_]

Accelerated filer [_]

Non-accelerated filer [_]

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_]   No [X]

The aggregate market value of the common stock, the Registrant's only common equity, held by non-affiliates of the registrant (based upon the closing sale price of the registrant's Common Stock on the NASDAQ Capital Market tier of the NASDAQ Stock Market on June 30, 2008) was approximately $9,639,789.  Shares of common stock held by each executive officer and director and by each entity that owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 31, 2009, there were 9,453,492 shares of the registrant's common stock outstanding.



EXPLANATORY NOTE

TOR Minerals International, Inc. (the "Registrant") is filing this amendment to its Annual Report on Form 10-K for the year ended December 31, 2008 (the "Form 10-K"), solely to reflect the conformed signature in the Report of Independent Registered Public Accounting Firm.  This amendment should be read in conjunction with the original Form 10-K, which continues to speak as of the date that the original Form 10-K was filed.  Except as specifically noted above, this amendment does not modify or update any disclosures in the original Form 10-K.  Accordingly, this amendment does not reflect events occurring after the filing of the original Form 10-K or modify or update any disclosures that may have been affected by subsequent events.



PART IV

Item 15.

Exhibits

(a)

The following documents are being filed as part of this annual report on Form 10-K:

 

1.

The Financial Statements are set out in this annual report on Form 10-K commencing on page F-1.

Exhibit No.

Description

2.1(2)

Purchase and Sale agreement effective March 1, 2000 between TOR Minerals International, Inc. and Megamin Ventures Sdn. Bhd.

2.2(5)

Asset purchase agreement effective May 16, 2001 between TOR Minerals International, Inc. and the Royal Begemann Group

2.3(5)

Closing agreement effective May 16, 2001 between TOR Minerals International, Inc. and the Royal Begemann Group

2.4(5)

Non-Compete agreement effective May 16, 2001 between TOR Minerals International, Inc. and the Royal Begemann Group

3.1(14)

Certificate of Incorporation of the Company as amended through December 31, 2004

3.2(14)

By-laws of the Company, as amended through December 31, 2004

4.1(1)

Form of Common Stock Certificate

4.2(5)

Form of Convertible Subordinated Debenture of the Company and Renaissance US Growth and Income Trust, PLC, dated April 5, 2001, in the amount of $360,000

10.1(1)

Lease from Port of Corpus Christi Authority, dated April 14, 1987

10.2(1)

Lease from Port of Corpus Christi Authority, dated January 12, 1988, as
amended on December 24, 1992

10.3(1) **

Summary Plan Description for the 1990 HITOX Profit Sharing Plan & Trust

10.4(3) **

Summary Plan Description for the 2000 Incentive Plan for TOR Minerals International, Inc.

10.5(4)

Amendment of Leases from Port of Corpus Christi Authority, dated July 11, 2000

10.6(6)

Security and Loan Agreement with Paulson Ranch, dated April 5, 2001

10.7(7)

Subordination Agreement between the Company, Paulson Ranch, Ltd.,
and Bank of America, dated May 1, 2002

10.8(8)

Security and Loan Agreement with Paulson Ranch dated December 12, 2003

10.9(8)

Security and Loan Agreement with D & C H Trust dated December 12, 2003

10.10(8)

Security and Loan Agreement with Douglas MacDonald Hartman Family
Irrevocable Family Trust dated December 12, 2003

10.11(9)

Form of Common Stock Purchase Agreement, dated January 16, 2004

10.12(9)

Form of Series A Convertible Preferred Stock Purchase Agreement,
dated January 15, 2004

10.13(11)

Master Lease Agreement with Bank of America Leasing & Capital, LLC ("BALC"),
dated August 9, 2004

10.14(11) *

Schedule No. 1 to Master Lease Agreement with BALC, dated September 27, 2004

10.15(12)

Schedule No. 2 to Master Lease Agreement with BALC, dated December 21, 2004

10.16(14)

Loan Agreement with Bank of America, N.A., dated December 21, 2004

10.17(14)

Loan Agreement with HSBC Bank, dated November 23, 2004

10.18(14)

Loan Agreement with RHB Bank, dated November 23, 2004

- 58 -



10.19(14) *

2004 Sale and Purchase Agreement with Engelhard Corporation, dated February 2, 2004

10.20(14) *

2005 Sale and Purchase Agreement with Engelhard Corporation, dated December 20, 2004

10.21 (13)

Sales Agreement with Tronox Incorporated (formerly a division of the Kerr-McGee Chemical, LLC), dated March 28, 2003, and effective April 1, 2003

10.22(14) **

Form of Incentive Stock Option Agreement for Officers A

10.23(14) **

Form of Incentive Stock Option Agreement for Officers B

10.24(14) **

Form of Nonqualified Option Agreement for Directors

10.25(14)

Allonge and Amendment to Promissory Note with Paulson Ranch, Ltd.,
dated February 1, 2005

10.26(14)

First Amendment to Security Agreement with Paulson Ranch, Ltd.,
dated February 1, 2005

10.27

Loan Agreement with Rabobank, dated March 1, 2004

10.28(15)

Loan Agreement with Rabobank, dated July 6, 2004

10.29(16)

Capital Lease Agreement with De Lage Landen Financial Services, B.V.,
dated June 27, 2005

10.30(17)

Schedule No. 3 to Master Lease Agreement with BALC, dated July 8, 2005

10.31(18)

Loan Agreement with Rabobank, dated July 19, 2005

10.32(19)

Amendment to Loan Agreement with HSBC Bank, dated September 14, 2005

10.33(20)

First Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated December 13, 2005

10.34(20)

Real Estate Term Loan with Bank of America, N.A., dated December 13, 2005

10.35(20)

Assignment of Leases and Rents (Deed of Trust) with Bank of America, N.A.,
dated December 13, 2005

10.36(20)

Assignment of Leases and Rents (Leasehold Deed of Trust) with Bank of America, N.A.,
dated December 13, 2005

10.37(20)

Deed of Trust with Bank of America, N.A., dated December 13, 2005

10.38(20)

Leasehold Deed of Trust with Bank of America, N.A., dated December 13, 2005

10.39(21)

Amendment to Loan Agreement with HSBC Bank, dated December 22, 2005

10.40(21)

Amendment to Loan Agreement with RHB Bank, dated December 22, 2005

10.41

Allonge and Second Amendment to Promissory Note with Paulson Ranch, Ltd.,
dated February 1, 2006

10.42(23)

Schedule No. 4 to Master Lease Agreement with BALC, dated July 17, 2006

10.43(24)

Second Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated November 29, 2006

10.44(25)

Schedule No. 5 to Master Lease Agreement with BALC, dated December 29, 2006

10.45(26)

Third Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated February 28, 2007

10.46(27)

Loan Agreement with Rabobank, dated March 20, 2007

10.47

Service Agreement between Dr. Olaf Karasch and TOR Process and Trade, BV, (TPT)
dated May 11, 2001

10.48(28)

Fourth Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated May 7, 2007

10.49(29)

Fifth Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated March 19, 2008 

10.50(30)

Waiver and Sixth Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated August 14, 2008

10.51(31)

Form of Subscription Agreement with respect to the Company's September - October 2008 Private Placement

10.52(31)

Form of Warrant with respect to the Company's September - October 2008 Private Placement

10.53(32)

Waiver and Seventh Amendment to Second Amended and Restated Loan Agreement with Bank of America, N.A., dated November 13, 2008

- 59 -



14.1

Code of Ethics

16.1(10)

Letter dated July 15, 2004 from Ernst & Young LLP
to the Securities and Exchange Commission

16.2(22)

Letter dated July 14, 2006 from UHY Mann Frankfort Stein & Lipp CPAs, LLP
to the Securities and Exchange Commission

21****

Subsidiaries of Registrant:  TOR Minerals Malaysia Sdn Bhd and

TOR Processing & Trade BV

23.1****

Consent of UHY LLP

 

31.1***

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2***

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1***

Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2***

Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- 60 -



(1)

Incorporated by reference to the exhibit filed with the Registrant's Registration Statement
on Form S-1 (No. 33-25354) filed November 3, 1988, which registration statement became
effective December 14, 1988.

(2)

Incorporated by reference to the exhibit filed with the Company's March 1, 2000 Form 8-K

(3)

Incorporated by reference to the exhibit filed with the Company's May 25, 2000 Form S-8

(4)

Incorporated by reference to the exhibit filed with the Company's December 31, 2000
Form 10-K

(5)

Incorporated by reference to the exhibit filed with the Company's May 16, 2001 Form 8-K

(6)

Incorporated by reference to the exhibit filed with the Company's June 30, 2001 Form 10-QSB

(7)

Incorporated by reference to the exhibit filed with the Company's March 31, 2002 Form 10-QSB

(8)

Incorporated by reference to the exhibit filed with the Company's December 12, 2003 Form 8-K

(9)

Incorporated by reference to the January 19, 2004 Form 8-K filed with the Commission
on January 21, 2004

(10)

Incorporated by reference to the exhibit filed with the Company's July 14, 2004 Form 8-K

(11)

Incorporated by reference to the exhibit filed with the Company's October 5, 2004 Form 8-K

(12)

Incorporated by reference to the exhibit filed with the Company's December 22, 2004 Form 8-K

(13)

Incorporated by reference to exhibit 10.2 filed with the Company's Registration
Statement on Form S-3/A (No. 333-114483) filed August 16, 2004

(14)

Incorporated by reference to the exhibit filed with the Company's December 31, 2004
Form 10-K

(15)

Incorporated by reference to the exhibit filed with the Company's January 3, 2005 Form 8-K

(16)

Incorporated by reference to the exhibit filed with the Company's June 27, 2005 Form 8-K

(17)

Incorporated by reference to the exhibit filed with the Company's July 8, 2005 Form 8-K

(18)

Incorporated by reference to the exhibit filed with the Company's July 19, 2005 Form 8-K

(19)

Incorporated by reference to the exhibit filed with the Company's September 14, 2005 Form 8-K

(20)

Incorporated by reference to the exhibit filed with the Company's December 13, 2005 Form 8-K

(21)

Incorporated by reference to the exhibit filed with the Company's December 22, 2005 Form 8-K

(22)

Incorporated by reference to the exhibit filed with the Company's June 14, 2006 Form 8-K

(23)

Incorporated by reference to the exhibit filed with the Company's July 17, 2006 Form 8-K

(24)

Incorporated by reference to the exhibit filed with the Company's November 29, 2006 Form 8-K

(25)

Incorporated by reference to the exhibit filed with the Company's December 29, 2006 Form 8-K

(26)

Incorporated by reference to the exhibit filed with the Company's February 28, 2007 Form 8-K

(27)

Incorporated by reference to the exhibit filed with the Company's March 20, 2007 Form 8-K

(28)

Incorporated by reference to the exhibit filed with the Company's May 7, 2007 Form 8-K

(29)

Incorporated by reference to the exhibit filed with the Company's March 19, 2008 Form 8-K

(30)

Incorporated by reference to the exhibit filed with the Company's June 30, 2008 Form 10-Q

(31)

Incorporated by reference to the exhibit filed with the Company's September 15, 2008 Form 8-K

(32)

Incorporated by reference to the exhibit filed with the Company's September 30, 2008 Form 10-Q

*

Confidential treatment has been granted for certain portions of the exhibit

**

Constitutes a compensation plan or agreement under which executive officers may participate

***

Filed herewith

****

Previously Filed

- 61 -



SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TOR MINERALS INTERNATIONAL, INC.
(Registrant)

Date:  September 15, 2009

By:

OLAF KARASCH
Olaf Karasch, President and CEO

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signatures

Capacity with the Company

Date

OLAF KARASCH
(Olaf Karasch)

President and Chief Executive Officer

September 15, 2009

BERNARD A. PAULSON
(Bernard A. Paulson)

Chairman of the Board

September 15, 2009

BARBARA RUSSELL
(Barbara Russell)

Acting Chief Financial Officer
(Principal Accounting Officer)

September 15, 2009

DAVID HARTMAN
(David Hartman)

Director

September 15, 2009

DOUG HARTMAN
(Doug Hartman)

Director

September 15, 2009

THOMAS W. PAUKEN
(Thomas W. Pauken)

Director

September 15, 2009

STEVEN PAULSON
(Steven Paulson)

Director

September 15, 2009

CHIN YONG TAN
(Chin Yong Tan)

Director

September 15, 2009

- 62 -



TOR MINERALS INTERNATIONAL, INC. AND SUBSIDIARIES
Annual Report on Form 10-K

Item 8.             Index to Financial Statements

TOR Minerals International, Inc.

Page

Report of Independent Registered Public Accounting Firm

F - 2

Consolidated Statements of Operations -
Years ended December 31, 2008, 2007 and 2006


F - 3

Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2008, 2007 and 2006


F - 4

Consolidated Balance Sheets -
December 31, 2008 and 2007


F - 5

Consolidated Statements of Shareholders' Equity -
Years ended December 31, 2008, 2007 and 2006


F - 6

Consolidated Statements of Cash Flows -
Years ended December 31, 2008, 2007 and 2006


F - 7

Notes to the Consolidated Financial Statements

F - 8

F - 1



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

TOR Minerals International, Inc.

We have audited the accompanying consolidated balance sheets of TOR Minerals International, Inc. and Subsidiaries ("the Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2008.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management's assertion about the effectiveness of the Company's internal control over financial reporting as of December 31, 2008 included in the accompanying Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TOR Minerals International, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company's credit facility with a U.S. Financial Institution matures on April 1, 2009, at which time the credit facility will be terminated as indicated by the financial institution.  As a result, the Company will be required to raise additional capital, find alternative means of financial support, or both.  The Company may have difficulty in obtaining the necessary financing to repay this credit facility. These conditions raise substantial doubt about its ability to continue as a going concern.  Management's plans regarding these matters are also described in Note 1.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Houston, Texas

/s/ UHY LLP

March 31, 2009

F - 2



TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)

 

Year Ended December 31,

 

 

2008

 

2007

 

2006

NET SALES

 $

25,304 

 $

27,961 

 $

26,079 

Cost of sales

22,032 

22,768 

20,939 

GROSS MARGIN

 

3,272 

 

5,193 

 

5,140 

Technical services and research and development

244 

245 

239 

Selling, general and administrative expenses

4,673 

4,290 

4,160 

Goodwill impairment

1,976 

Loss on assets held for sale

679 

(Gain) loss on disposal of assets

98 

(12)

OPERATING INCOME (LOSS)

 

(4,398)

 

670 

 

740 

OTHER INCOME (EXPENSES):

Interest income

18 

17 

Interest expense

(524)

(684)

(547)

Gain (loss) on foreign currency exchange rate

(38)

25 

(135)

Other, net

15 

20 

INCOME (LOSS) BEFORE INCOME TAX

 

(4,943)

 

29 

 

95 

Income tax expense (benefit)

19 

(42)

NET INCOME (LOSS)

 $

(4,962)

 $

71 

 $

93 

Less:  Preferred Stock Dividends

60 

60 

60 

Income (Loss) Available to Common Shareholders

 $

(5,022)

 $

11 

 $

33 

 

 

 

 

 

 

 

Income (loss) per common share:

Basic

 $

(0.64)

 $

0.00 

 $

0.00 

Diluted

 $

(0.64)

 $

0.00 

 $

0.00 

Weighted average common shares outstanding:

Basic

7,881 

7,849 

7,836 

Diluted

7,881 

7,885 

7,873 


See accompanying notes.

F - 3



TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)

 

Year Ended December 31,

 

 

2008

 

2007

 

2006

NET INCOME (LOSS)

$

(4,962)

$

71 

$

93 

OTHER COMPREHENSIVE INCOME (LOSS) , net of tax

Net gain (loss) on derivative instruments designated and
qualifying as cash flow hedges, net of tax:

Net gain (loss) arising during the period

(567)

695 

Net gain (loss) reclassified to income

485 

(507)

Currency translation adjustment, net of tax:

Net foreign currency translation adjustment gains (losses)

(916)

1,418 

1,468 

Other comprehensive income (loss), net of tax

(915)

1,336 

1,656 

COMPREHENSIVE INCOME (LOSS)

$

(5,877)

$

1,407 

$

1,749 



See accompanying notes.

F - 4



TOR Minerals International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)

 

December 31,

 

 

2008

 

2007

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

 $

191 

 $

376 

Trade accounts receivable, net

2,310 

3,791 

Inventories

11,839 

11,392 

Other current assets

444 

578 

Total current assets

14,784 

16,137 

PROPERTY, PLANT AND EQUIPMENT, net

19,515 

20,421 

GOODWILL

2,131 

OTHER ASSETS

38 

47 

Total Assets

 $

34,337 

 $

38,736 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

 $

2,268 

 $

1,992 

Accrued expenses

1,611 

1,266 

Notes payable under lines of credit

2,156 

4,576 

Export credit refinancing facility

1,458 

Current deferred tax liability

56 

16 

Current maturities - capital leases

86 

80 

Current maturities of long-term debt - financial institutions

1,590 

907 

Total current liabilities

9,225 

8,837 

LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES

Capital leases

141 

213 

Long-term debt - financial institutions

1,876 

2,678 

DEFERRED TAX LIABILITY

580 

603 

Total liabilities

11,822 

12,331 

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

Series A 6% convertible preferred stock $.01 par value:  authorized, 5,000 shares; 200 shares issued and   outstanding at 12/31/08 and 12/31/07

Common stock $.25 par value:  authorized, 20,000 shares; 9,453 and 7,869 shares issued and outstanding at 12/31/08 and at 12/31/07, respectively

2,363 

1,967 

Additional paid-in capital

24,525 

22,874 

Accumulated deficit

(7,611)

(2,589)

Accumulated other comprehensive loss:

Unrealized loss on derivatives

(1)

Cumulative translation adjustment

3,236 

4,152 

Total shareholders' equity

22,515 

26,405 

Total Liabilities and Shareholders' Equity

 $

34,337 

 $

38,736 


See accompanying notes.

F - 5



TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2008, 2007 and 2006
(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income (Loss)

 

Total

Balance at
December 31, 2005

200 

$

 

7,827 

$

1,957 

$

22,467 

$

(2,633)

$

1,159 

$

22,952 

Exercise of stock options

12 

22 

25 

Share based compensation
expense

163 

163 

Dividends declared
 - Preferred

(60)

(60)

Net income

93 

93 

Cumulative translation
adjustment

1,468 

1,468 

Net unrealized loss on
foreign currency hedge

188 

188 

Balance at
December 31, 2006

200 

$

 

7,839 

$

1,960 

$

22,652 

$

(2,600)

$

2,815 

$

24,829 

Exercise of stock options

30 

50 

58 

Share based compensation
expense

172 

172 

Dividends declared
 - Preferred

(60)

(60)

Net income

71 

71 

Cumulative translation
adjustment

1,418 

1,418 

Net unrealized loss on
foreign currency hedge

(82)

(82)

Balance at
December 31, 2007

200 

$

 

7,869 

$

1,967 

$

22,874 

$

(2,589)

$

4,151 

$

26,405 

Issuance of Common Stock

1,575 

394 

1,496 

1,890 

Exercise of stock options

10 

12 

Share based compensation
expense

145 

145 

Dividends declared
 - Preferred

(60)

(60)

Net loss

(4,962)

(4,962)

Cumulative translation
adjustment

(916)

(916)

Net unrealized loss on
foreign currency hedge

Balance at
December 31, 2008

200 

$

 

9,453 

$

2,363 

$

24,525 

$

(7,611)

$

3,236 

$

22,515 


See accompanying notes.

F - 6



TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

Year Ended December 31,

2008

2007

2006

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

Net Income (loss)

$

(4,962)

$

71 

$

93 

Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:

Depreciation

1,954 

1,785 

1,496 

Goodwill impairment

1,976 

Loss on assets held for sale

679 

(Gain) loss on disposal of assets

98 

(12)

Share-based compensation

145 

172 

163 

Deferred income taxes

19 

(42)

Provision for bad debts

381 

11 

Changes in working capital:

Trade accounts receivables

1,049 

(49)

441 

Inventories

(685)

61 

(3,396)

Other current assets

134 

(79)

(163)

Accounts payable and accrued expenses

709 

(1,056)

382 

Net cash provided by (used in) operating activities

1,497 

851 

(971)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

Additions to property, plant and equipment

(2,396)

(1,037)

(759)

Proceeds from sales of property, plant and equipment

4

16

3

Net cash used in investing activities

(2,392)

(1,021)

(756)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

Net proceeds from (payments on) lines of credit

(2,365)

154 

1,819 

Net proceeds from export credit refinancing facility

1,458 

Proceeds from capital lease

26 

12 

Payments on capital lease

(80)

(72)

(61)

Proceeds from long-term bank debt

914 

1,057 

241 

Payments on long-term bank debt

(931)

(1,134)

(683)

Payments on related party long-term debt

(400)

(100)

Loan origination costs

11 

(10)

Proceeds from the issuance of common stock,
and exercise of common stock options

1,902 

57 

25 

Preferred stock dividends paid

(60)

(60)

(60)

Net cash provided by (used in) financing activities

873 

(375)

1,171 

Effect of exchange rate fluctuations on cash and cash equivalents

(163)

25 

172 

Net decrease in cash and cash equivalents

(185)

(520)

(384)

Cash and cash equivalents at beginning of year

376 

896 

1,280 

Cash and cash equivalents at end of year

$

191 

$

376 

$

896 

Supplemental cash flow disclosures:

 

 

 

Interest paid

$

524 

$

684 

$

543 

Income taxes paid

$

10 

$

10 

$

15 

See accompanying notes.

F - 7



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

1.

Going Concern

The consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As discussed in Note 4, the Company has significant borrowings which require, among other things, compliance with certain financial covenants, specifically a Consolidated Fixed Charge Ratio and a Consolidated Funded Debt to EBITDA Ratio, on a quarterly basis.  As a result of the operating losses incurred throughout 2008, the Company was not in compliance with these ratio covenants under our US Credit Agreement (the "Credit Agreement") with Bank of America, N.A. (the "Bank") as of December 31, 2008.

As reported in the Company's Form 8-K filed with the Securities and Exchange Commission on March 11, 2009, the Company received notification from the Bank on March 5, 2009 of the Bank's decision to terminate the existing Credit Agreement with the Company's US operation and require the Company to pay off all outstanding indebtedness with the Bank by April 1, 2009, in an amount of approximately $2,456,000.  At March 5, 2009, the Credit Agreement with the Bank consisted of the following:

  • Line of Credit, secured by the accounts receivable and inventory of the Company's US operation, in the amount of $1,600,000
  • Real Estate Term Loan, secured by the real estate of the Company's US operation, in the amount of $539,000; and
  • Term Loan, secured by the property, plant, equipment, accounts receivable and inventory of the Company's US operation, in the amount of $317,000

We have pledged all of the Company's assets in the US to the Bank to secure repayment of this indebtedness.  On March 9, 2009, the Bank notified the Company that it now believes that pay off by April 1, 2009 is not commercially reasonable for the Company given the current credit market conditions and the amount of time necessary for the Company to establish a corporate lending relationship with a new financial institution.  Therefore, the Bank notified the Company that it is considering an extension to the Credit Agreement on the condition, among other things, that the Company raise additional equity capital and that one or more members of the Company's Board of Directors execute personal guaranties of the Credit Agreement in favor of the Bank.  The actual terms and conditions upon which the Bank may grant an extension is subject to satisfactory due diligence, necessary credit approval and such other terms and conditions as may be required by the Bank.

There can be no assurance that the Bank will extend the Credit Agreement on terms favorable to the Company or at all or that the Company will be able to meet any of the conditions required by the Bank in order for the Company's US operation to obtain an extension or that we will be able to successfully refinance the debt.  If the Company is unable to obtain an extension or refinance the debt, the Company does not have sufficient liquidity to pay off the indebtedness owed to the Bank, and the Bank would be entitled to exercise all of its rights and remedies as a secured lender under the Credit Agreement which could force us into bankruptcy or liquidation.

In addition, the Company's two subsidiaries, TOR Minerals Malaysia, Sdn. Bhd. ("TMM") and TOR Processing and Trade, BV ("TPT") have short-term credit facilities and term loans at banks in Malaysia and the Netherlands, respectively.  At December 31, 2008, TMM's utilization under the credit facilities and term loans with HSBC Bank Malaysia, Bhd. ("HSBC") and RHB Bank, Bhd. ("RHB") totaled $2,205,000 and TPT's utilization under the credit facility and term loans with Rabobank totaled $3,082,000.  The credit facilities with HSBC, RHB and Rabobank are subject to demand provisions and are subject to certain subjective acceleration covenants based on the judgment of the banks.  While the banks have made no indication that they will demand payment of the debt in Malaysia or in the Netherlands, in light of the Company's liquidity difficulties, there can be no assurances that this debt will not be called for payment.

F - 8



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Over the last year, the Company has actively pursued new production methods and new product development.  As a result, the Company introduced new products to the market in 2008 and completed a new powder treatment facility in Malaysia in May 2008.  In addition, the Company has invested in a new powder treatment facility at the US operation which will be commissioned in April 2009.  With the new process equipment, the Company will be able to replace natural gas with electricity as the primary energy source at the US operation.  The Company believes that the changes in the manufacturing process in the US and Malaysia, as well as the acceptance of its new products in the market, will improve cash flows.  However, the introduction of new products and the sales volume of existing product lines may be negatively impacted by the decline in the global economy.  To offset the possible decline in sales revenue associated with the economy, the Company has initiated numerous cost cutting measures at each of the three operations, including, but not limited to, reductions in staff, salaries, travel and other discretionary expenses.

The events described above raise substantial doubt about the Company's ability to continue as a going concern.  Our ability to continue to operate as a going concern is dependent on our ability to successfully negotiate with our US lending institution or establish a corporate lending relationship with a new financial institution, and/or raise sufficient new capital and improve our operating cash flows to a sufficient level.  There can be no assurance we will be able to successfully negotiate with our US lending institution or establish a corporate lending relationship with a new financial institution, and/or raise sufficient new capital and improve our operating cash flows to a sufficient level or that these changes in our operations will be successful.

2.

Summary of Significant Accounting Policies

Business Description

TOR Minerals International, Inc. and Subsidiaries (the "Company"), a Delaware Corporation, is engaged in a single industry, the manufacture and sale of mineral products for use as pigments and extenders, primarily in the manufacture of paints, industrial coatings plastics, catalysts and solid surface applications.  The Company's global headquarters and US manufacturing plant are located in Corpus Christi, Texas ("TOR US" or "US Operation").  The Asian Operation, TMM, is located in Ipoh, Malaysia, and the European Operation, TPT, is located in Hattem, Netherlands.

Basis of Presentation and Use of Estimates

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 and Trade, BV ("TPT").  All significant intercompany 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.  As a result, gains and losses resulting from translating the Balance Sheet from Ringgits to US Dollars are recorded as cumulative translation adjustments (which are included in accumulated other comprehensive income, a separate component of shareholders' equity) on the Consolidated Balance Sheets.  As of December 31, 2008 and 2007, the cumulative translation adjustment related to the change in functional currency to the US Dollar totaled $1,206,000 and $1,680,000, respectively.

TPT's functional currency is the Euro.  As a result, gains and losses resulting from translating the Balance Sheet from Euros to US Dollars are recorded as cumulative translation adjustments on the Consolidated Balance Sheet.  As of December 31, 2008 and 2007, the cumulative translation adjustment related to the change in functional currency to the US Dollar totaled $2,015,000 and $2,472,000, respectively.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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.

F - 9



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Cash and Cash Equivalents

The Company considers all highly liquid investments readily convertible to known cash amounts and with a maturity of three months or less at the date of purchase to be cash equivalents.

Accounts Receivable

The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers.  The allowance for non-collection of accounts receivable is based upon the expected collectability of all accounts receivable including review of agings and current economic conditions.  Accounts are written off when all reasonable internal and external collection efforts have been performed.  At December 31, 2008 and 2007, the Company maintained a reserve for doubtful accounts of approximately $357,000 and $28,000, respectively.  The Company's decision to increase the allowance for doubtful accounts was primarily related to the current global economic conditions and its effects on the collectability of customer balances.

Foreign Currency

Results of operations for the Company's foreign operations, TMM and TPT, are translated from the designated functional currency to the US dollar using average exchange rates during the period, while assets and liabilities are translated at the exchange rate in effect at the reporting date.  Resulting gains or losses from translating foreign currency financial statements are reported as other comprehensive (loss) income.  The effect of changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated are recorded as foreign currency transaction gains (losses) in earnings.

Inventories

Inventories are stated at the lower of cost or market with cost being determined principally by use of the average-cost method.  The Company writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  At December 31, 2008 and 2007, we maintained a reserve for obsolescence and unmarketable inventory of approximately $224,000 and $3,000, respectively.

Overhead is charged to inventory based on normal capacity and the Company expenses abnormal amounts of idle facility expense, freight and handling costs in the period incurred.  For the year ended December 31, 2008, the Company recorded approximately $2,020,000 related to idle facility expense primarily at the US and Malaysian operations.

TMM is our primary source for SR.  There is only one other available source for the quality of SR required for the production of HITOX.  If supplies of SR from TMM are interrupted and we are unable to arrange for an alternative source, this could result in our inability to produce HITOX, which accounted for approximately 52%, 53% and 58% of our sales for the years ended December 31, 2008, 2007 and 2006, respectively.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets which range from 3 to 39 years.  Maintenance and repair costs are charged to operations as incurred and major improvements extending asset lives are capitalized.

On July 1, 2006, the Company's Asian Operation, TMM, changed its depreciation method on $6,359,000 of plant assets from the "Units of Production" to the "Straight Line" method with a remaining depreciable life of 15 years.  The reason for the change is that the Company believes the units of production method no longer accurately reflects the useful or economic life of the plant assets based on the current units of production; and due to the variability of amounts produced annually, management cannot accurately estimate the remaining units of production.  The straight line method of depreciation over 15 years more accurately reflects the utilization of the assets and reflects the useful and economic life of the assets.

F - 10



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

During the fourth quarter 2008, the Company's Board of Directors and the Bank approved the classification of certain assets of the US operation as "held for sale".  As a result, the Company reduced the book value of the assets to fair market value, less costs to sell, and recorded an expense of approximately $679,000.  In addition, the US operation recorded an expense in 2008 of approximately $98,000 related to the sale/disposal of assets.

Long-Lived Assets

The impairment of long-lived assets is assessed when changes in circumstances indicate that their current carrying value may not be recoverable.  Under Statements of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", assets held for use are tested for impairment if events or circumstances indicate potential impairment.  Determination of impairment, if any, is made based on comparison of the undiscounted value of estimated future cash flows to carrying value.  Asset impairment losses are then measured as the excess of the carrying value over the estimated fair value of such assets.  Based upon the most recent analysis, no impairment exists at December 31, 2008.  There can be no assurance that future impairment tests will not result in a charge to net earnings (loss).

Intangible Assets

In June 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets".  SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.  SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001.  Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

Indefinite-lived Intangibles:

The Company adopted the provisions of SFAS 141 and SFAS 142 effective January 1, 2002.  Under the provisions of Statement No. 142, the Company concluded, after the annual review, that impairments have occurred to the carrying value of the Company's goodwill.  As a result, the fourth quarter and full year 2008 financial results of the Company include an aggregate non-cash pretax impairment charge of approximately $1,976,000.  The impairment charge is the result of the annual assessment for impairment required by Statement No. 142 and reflects factors impacted by current market conditions and the completion of our annual budget and forecasting process.  This non-cash charge will have no effect on our cash balances or cash flows from operating activities, nor will ongoing operations be affected.

Revenue Recognition

The Company recognizes revenue when each of the following four criteria are met:  1) a contract or sales arrangement exists; 2) title and risk of loss transfers to the customer upon shipment for FOB shipping point sales and when the Company receives confirmation of receipt and acceptance by the customer for FOB destination sales; 3) the price of the products is fixed or determinable; 4) collectability is reasonably assured.

Shipping and Handling

The Company records shipping and handling costs, associated with the outbound freight on products shipped to customers, as a component of cost of goods sold.

Earnings Per Share

Basic earnings per share are based on the weighted average number of shares outstanding and exclude any dilutive effects of options, warrants and/or convertible preferred stock.  Diluted earnings per share reflect the effect of all dilutive items.

F - 11



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Income Taxes

The Company records income taxes under SFAS No. 109, "Accounting for Income Taxes", using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

In May 2006, the State of Texas enacted a new business tax that is imposed on gross revenues to replace the State's franchise tax regime effective January 1, 2007.  The Company's first Texas margins tax ("TMT") return, which was due May 15, 2008, was based on the Company's 2007 operations.  Although the TMT is imposed on an entity's gross revenues rather than on its net income, certain aspects of the tax make it similar to an income tax.  In accordance with the guidance provided in SFAS No. 109, the Company has determined the impact of the newly-enacted legislation in the determination of the reported state current and deferred income tax liability.

Derivatives and Hedging Activities

Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  The fair value of all outstanding derivative instruments are recorded on the Consolidated Balance Sheets in other current assets and current liabilities.  Derivatives are held as part of a formally documented risk management (hedging) program.  All derivatives are straightforward and are held for purposes other than trading.  The Company measures hedge effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item.  The ineffective portions, if any, are recorded in current earnings in the current period.  If the hedging relationship ceases to be highly effective or if it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are recorded in current earnings.  Changes in the fair value of derivatives are recorded in current earnings along with the change in fair value of the underlying hedged item if the derivative is designated as a fair value hedge or in other comprehensive income if the derivative is designated as a cash flow hedge.  If no hedging relationship is designated, the derivative is marked to market through current earnings.  The Company has utilized natural gas forward contracts to hedge a portion of its US Operation's natural gas needs and has utilized foreign currency forward contracts at both the US and Asian Operations to hedge a portion of its foreign currency risk.  (See Note 15 to the "Notes to the Consolidated Financial Statements" on page F-32).

Share-Based Payment

On January 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payment, utilizing the modified prospective transition method.  Prior to the adoption of SFAS No. 123, the Company had accounted for stock options using the fair value method under FASB Statement No. 148, Accounting for Stock Based Compensation - Transition and Disclosure.  Under SFAS No. 148, the Company recorded the effect of actual forfeitures on a go forward basis.  With the adoption of SFAS 123(R), the Company began recognizing the effect of forfeitures by estimating the number of outstanding instruments for which the requisite service is not expected to be rendered.  The adoption of SFAS 123(R) did not materially impact the Company's consolidated financial position or results of operations and, therefore, no cumulative effect adjustment was needed.

Inventory Costs

On January 1, 2006, the Company adopted SFAS 151, Inventory Costs - An amendment to ARB No. 43, Chapter 4.  SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead.  Further, SFAS 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities.  Because the Company has historically expensed the abnormal amounts of idle facility expense, freight, handling costs and spoilage, adoption of SFAS 151 did not materially impact the Company's consolidated financial position or results of operations.

F - 12



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Accounting Changes and Error Corrections

On January 1, 2006, the Company adopted SFAS 154, Accounting Changes and Error Corrections.  SFAS 154 replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements, and changes the requirement for the accounting for and reporting of a change in accounting principle.  This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued.  The adoption of SFAS 154 did not materially impact the Company's consolidated financial position and results of operations.

On July 1, 2006, the Company's Asian Operation, TMM, changed its depreciation method on $6,359,000 of plant assets from the "Units of Production" to the "Straight Line" method with a remaining depreciable life of 15 years.  The reason for the change is that the Company believes the units of production method no longer accurately reflects the useful or economic life of the plant assets based on the current units of production; and due to the variability of amounts produced annually, management cannot accurately estimate the remaining units of production.  The straight line method of depreciation over 15 years more accurately reflects the utilization of the assets and reflects the useful and economic life of the assets.

In accordance with SFAS No. 154, Accounting Changes and Error Corrections, this change in depreciation method is accounted for prospectively.  The effect on income from continuing operations will be a reduction of approximately $175,000 (642,000RM) annually.  The effect on net income will be a reduction of approximately $125,000 (443,000RM) annually.  For the twelve-month period ended December 31, 2006, the effect on net income was a reduction of approximately $62,000 (220,000RM).

Uncertainty in Income Taxes

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48"), effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity's consolidated financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for consolidated financial statement disclosure of tax positions taken or expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

In accordance with the requirements of FIN 48, we evaluated all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws. As of January 1, 2008, the Company did not have any unrecognized tax benefits and there was no change during the twelve-month period ended December 31, 2008.

We did not recognize any interest or penalties in our consolidated financial statements as a result of the adoption of FIN 48. If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.

We are subject to taxation in the United States, Malaysia and The Netherlands. Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2005 through December 31, 2008.  Our state returns, which are filed in Texas, Ohio and Michigan, are subject to examination for the tax years ended December 31, 2005 through December 31, 2008.  Our tax returns in various non-US jurisdictions are subject to examination for various tax years ended December 31, 2003 through December 31, 2008.

F - 13



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Fair Value Option for Financial Assets and Financial Liabilities

On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value.  The Company elected not to fair value any additional financial instruments and thus the adoption of SFAS 159 did not materially impact our consolidated financial position or results of operations.

Fair Value Measurements

On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurement ("SFAS 157"), for our financial assets and financial liabilities.  As permitted by FASB Staff Position No. 157-2 ("FSP 157-2"), we will adopt SFAS 157 for our non-financial assets and non-financial liabilities on January 1, 2009.  SFAS 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures.  FSP 157-2 amends SFAS 157 to delay the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities.  Non-financial assets and non-financial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing and those initially measured at fair value in business combinations.  The adoption of SFAS 157, as amended by FSP 157-2, did not materially impact our consolidated financial position or results of operations.

SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).  The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The following is a brief description of those three levels:

  • Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
  • Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
  • Level 3 - Unobservable inputs that reflect the reporting entity's own assumptions.

The following table presents the Company's financial assets and financial liabilities that are measured and recognized at fair value on a recurring basis, classified under the appropriate level of fair value hierarchy, as of December 31, 2008:

(In thousands)

Balance at
December 31,
2008

Quoted Prices
in Active
Markets for
Identical Items
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Asset for foreign currency
derivative financial instruments
(including forward contracts)

$

$

-   

$

$

-   

Liability for natural gas
derivative financial instruments
(including forward contracts)

$

(26)

$

-   

$

(26)

$

-   

Our foreign currency derivative financial instruments mitigate foreign exchange risks, while our natural gas derivative financial instruments mitigate the fluctuation in the price of natural gas; both include forward contracts.

F - 14



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Recent Accounting and Regulatory Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007) Business Combinations and SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements, which are effective for fiscal years beginning after December 15, 2008.  These new standards represent the completion of the FASB's first major joint project with the International Accounting Standards Board (IASB) and are intended to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests (formerly minority interests) in consolidated financial statements.  We will adopt these standards at the beginning of our 2009 fiscal year.  The effect of adoption will generally be prospectively applied to transactions completed after the end of our 2008 fiscal year, although the new presentation and disclosure requirements for pre-existing noncontrolling interests will be retrospectively applied to all prior-period financial information presented.  The impact of SFAS No. 141(R) and SFAS 160 on our consolidated financial statements depends on acquisitions entered into by the Company after January 1, 2009.

The FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities", an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".  SFAS No. 161 requires entities to provide greater transparency in derivative disclosures by requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of gains and losses on derivative instruments.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will be required to comply with the disclosure requirements of SFAS No. 161 in our 2009 first quarter financial statements and believes the adoption will not have a significant impact on our Disclosures.

The FASB has issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities.  SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

3.

Related Party Transactions

The Company entered into a loan and security agreement on December 12, 2003, with the Company's Chairman of the Board, Bernard Paulson, a 21.4%  shareholder, through Paulson Ranch, Ltd.  Under the agreement, Paulson Ranch made a loan to the Company in the amount $500,000.  The loan proceeds were used for working capital.  The principal balance outstanding at December 31, 2006 was $400,000.  The Company paid the outstanding principal balance of $400,000 and accrued interest to Paulson Ranch, Ltd., on March 15, 2007.

4.

Series A 6% Convertible Preferred Stock Dividend

On December 6, 2008, the Company declared a dividend, in the amount of $15,000, for the quarterly period ended December 31, 2008, payable on January 1, 2009, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on December 6, 2008.  The Company declared total dividends of $60,000 in both 2008 and 2007 on the Series A Convertible Preferred Stock.

F - 15



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

5.

Long-Term Debt and Notes Payable

(In thousands)

December 31,

2008

2007

Term note payable to a US bank, with an interest rate of 6.0% at December 31, 2008, due November 30, 2010.

$

576 

$

723 

Term note payable to a US bank, with an interest rate of 5.25% at December 31, 2008, due May 1, 2012

342 

441 

Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at December 31, 2008, due June 1, 2009.  (68 Euro)

94 

296 

Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 7.8% at December 31, 2008, due July 1, 2029.  (401 Euro)

560 

614 

Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 4.7% at December 31, 2008, due January 31, 2030.  (398 Euro)

556 

608 

Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 6.1% at December 31, 2008, due July 31, 2015.  (333 Euro)

465 

560 

US Dollar term note payable to a Malaysian bank, with an interest rate of 3.18% at December 31, 2008, due June 30, 2010

525 

343 

U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 3.3% at December 31, 2008, due April 1, 2010.

242 

Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at September 30, 2008, due April 13, 2013

106 

Total

3,466 

3,585 

Less current maturities

1,590 

907 

Total long-term debt and notes payable

$

1,876 

$

2,678 

The majority of the Company's debt is either floating rate or has been recently negotiated and the carrying values approximate fair value.

US Bank Credit Facility and Term Loans

Bank of America Credit Facility and Term Loans

We amended and restated our US Credit Agreement (the "Credit Agreement") with Bank of America, N.A. (the "Bank") on March 19, 2008.  Under the amendment, the Bank extended the maturity date on our Line of Credit (the "Line") from October 1, 2008 to April 1, 2009.  As a condition of the waiver granted by the Bank on November 13, 2008, the Line, which provides us with a revolving line of credit subject to a defined borrowing base, was reduced from $5,000,000 to $2,500,000.  At December 31, 2008 and 2007, the outstanding balance on the Line was $750,000 and $3,300,000, respectively, and we had $1,035,000 and $305,000, respectively, available on that date based on eligible accounts receivable and inventory borrowing limitations.

On December 13, 2005 we entered into a real estate term loan (the "Loan") with the Bank, in the amount of $1,029,000.  The Loan is secured by our US real estate and leasehold improvements.  Interest, which is a rate equal to the Bank's Prime Rate plus two percent (currently 6.0%), is due and payable monthly.  The monthly principal and interest payments commenced on December 30, 2005, and will continue through November 30, 2010 at which time the "final payment" of $294,000 is due.  The monthly principal payment is $12,250.  The Term Loan balance at December 31, 2008 and 2007, was $576,000 and $723,000, respectively.

F - 16



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

On May 7, 2007, we entered into a term loan (the "Term Loan") with the Bank in the amount of $500,000 which is secured by our US property, plant and equipment, as well as inventory and accounts receivable.  Interest, which is due and payable monthly, is equal to the Bank's Prime Rate plus two percent (currently 5.25%).  The monthly principal and interest payments commenced on June 1, 2007, and will continue through May 1, 2012.  The monthly principal payment is $8,333.33.  The Term Loan balance at December 31, 2008 and 2007, was $342,000 and $441,000, respectively.

The Credit Agreement, which includes the Line, the Loan and the Term Loan identified above, contains covenants that, among other things, require the maintenance of financial ratios based on our consolidated results of operations.  The Credit Agreement also requires us to notify the Bank upon the occurrence of a "material adverse event", which among other items, is considered to be an event that may adversely affect our consolidated financial condition, business, properties, operations, the Bank's collateral or the Bank's ability to enforce its rights under the Agreement.

As a result of the operating losses incurred throughout 2008, we were not in compliance with these ratio covenants under our Credit Agreement with the Bank as of December 31, 2008.  As a result, the Bank notified us on March 5, 2009 of the Bank's decision to terminate the existing Credit Agreement and require us to pay off all outstanding indebtedness within the Bank by April 1, 2009.  On March 9, 2009, the Bank notified us that it now believes that pay off by April 1, 2009 is not commercially reasonable for the Company given the current credit market conditions and the amount of time necessary for us to establish a corporate lending relationship with a new financial institution.  Therefore, the Bank notified the Company that it is considering an extension to the Credit Agreement on the condition, among other things, that we raise additional equity capital and that one or more members of our Board of Directors execute personal guaranties of the Credit Agreement in favor of the Bank.  The actual terms and conditions upon which the Bank may grant an extension is subject to satisfactory due diligence, necessary credit approval and such other terms and conditions as may be required by the Bank.  There can be no assurance that the Bank will extend the Credit Agreement on terms favorable to the Company or at all or that we will be able to meet any of the conditions required by the Bank in order for the Company's US operation to obtain an extension.  If we are unable to an extension, the Company does not have sufficient liquidity to pay off the indebtedness owed to the Bank, and the Bank would be entitled to exercise all of its rights and remedies as a secured lender under the Credit Agreement, which could force the Company into bankruptcy or liquidation.

Other Term Loans

On March 31, 2008, we entered into a term loan with Holt Financing in the amount of $120,000.  The proceeds of the loan were used to purchase a new Caterpillar front-end loader.  The loan provides for amortization over five years with interest fixed at a rate of 5.24%.  Monthly principal and interest payments commenced on May 1, 2008, and will continue through April 1, 2013.  The monthly principal and interest payment is $2,275.  The loan balance at December 31, 2008 was $106,000.

F - 17



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Netherlands Bank Credit Facility, Mortgage and Term Loan

On March 20, 2007, our subsidiary, TPT, entered into a new short-term credit facility (the "Credit Facility") with Rabobank which replaced the existing Euro 650,000 short-term credit facility (dated April 2, 2004).  Under the terms of the Credit Facility, TPT's line of credit increased from Euro 650,000 to Euro 1,100,000.  The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (currently at 8.45%), will mature on December 31, 2009 and is secured by TPT's accounts receivable and inventory.  At December 31, 2008 and 2007, TPT had utilized Euro 1,007,000 and Euro 874,000, respectively ($1,406,000 and $1,276,000, respectively) of its short-term credit facility.

On April 2, 2004, TPT entered into a term loan with Rabobank in the amount of Euro 676,000.  The proceeds of the term loan were used to reduce TPT's credit facility and reduce inter-company payables to the US Operation.  The term loan, which is secured by TPT's assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%.  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 ($15,734).  The loan balance at December 31, 2008 and 2007 was Euro 68,000 and Euro 203,000, respectively ($94,000 and $296,000, respectively).  Under the terms of the Loan Agreement, the Company has guaranteed the term loan.

On July 7, 2004, TPT entered into a mortgage loan (the "First Mortgage") with Rabobank.  The First Mortgage, in the amount of Euro 485,000, will be repaid over 25 years with interest fixed at 5.2% per year for the first four years.  Under the terms of the agreement, the interest was adjusted to a fixed rate of 7.8%, effective August 1, 2008, for a period of five years.  Thereafter, the rate will change to Rabobank prime plus 1.75%.  TPT utilized Euro 325,000 of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the office building.  The balance of the loan proceeds, Euro 160,000, was used for the expansion of TPT's existing building.  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 ($2,257).  The loan balance at December 31, 2008 and 2007 was Euro 401,000 and Euro 420,000, respectively ($560,000 and $614,000, respectively).  The mortgage loan is secured by the land and office building purchased on July 7, 2004.

On January 3, 2005, TPT entered into a second mortgage loan (the "Second Mortgage") with Rabobank to fund the acquisition of a 10,000 square foot warehouse with a loading dock that is located adjacent to TPT's existing production facility.  The Second Mortgage, in the amount of Euro 470,000, will be repaid over 25 years with interest fixed at 4.672% per year for the first five years.  Thereafter, the rate will change to Rabobank prime plus 1.75%.  Monthly principal and interest payments commenced on February 28, 2005 and will continue through January 31, 2030.  The monthly principal payment is Euro 1,566 ($2,187).  The mortgage is secured by the land and building purchased by TPT on January 3, 2005.  The loan balance at December 31, 2008 and 2007 was Euro 398,000 and Euro 417,000, respectively ($556,000 and $608,000, respectively).

On July 19, 2005, TPT entered into a new term loan with Rabobank to fund the completion of its building expansion.  The loan, in the amount of Euro 500,000, will be repaid over 10 years with interest fixed at 6.1% per year for the first five years.  Thereafter, the rate will change to Rabobank prime plus 1.75%.  Monthly principal and interest payments commenced on August 31, 2005 and will continue through July 31, 2015.  The monthly principal payment is Euro 4,167 ($5,820).  The loan is secured by TPT's assets.  The loan balance at December 31, 2008 and 2007 was Euro 333,000 and Euro 383,000, respectively ($465,000 and $560,000, respectively).

TPT's loan agreements covering both the credit facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business.  We believe that such subjective acceleration clauses are customary in the Netherlands for such borrowings.  However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case the lenders could foreclose on the assets of TPT.

F - 18



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Malaysian Bank Credit Facility and Term Loan

On November 3, 2008, the Company's subsidiary, TMM, amended its banking facility with HSBC Bank Malaysia Berhad ("HSBC").  The amendment decreased the Bankers Acceptance from Malaysian Ringgits ("RM") 3,780,000 ($1,093,000) to RM 500,000 ($145,000); the Export Line ("ECR") from RM 8,000,000 ($2,324,000) to RM 5,000,000 ($1,447,000); and the Foreign Exchange Contract Limit from RM 22,000,000 ($6,365,000) to RM 5,000,000 ($1,447,000).  In addition, the amendment extended the maturity date of the HSBC facility from October 1, 2008 to October 31, 2009.

The HSBC facility provides for an overdraft line of credit up to RM 500,000 ($145,000), a bank guarantee of RM 300,000 ($87,000) and an ECR up to RM 5,000,000 ($1,447,000).  The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 120 to 180 days against customers' and inter-company shipments.

On September 14, 2005, TMM amended the banking facility with HSBC to include a US Dollar loan (the "HSBC Loan") in the amount of $1,000,000 for the purpose of upgrading TMM's plant and machinery.  Monthly interest payments began in December 2005.  Monthly principal payments of $27,778 began on August 26, 2007 and will continue through June 30, 2010.  The interest rate at December 31, 2008 was 3.18%.  The loan balance at December 31, 2008 and 2007 was $525,000 and $343,000, respectively.

On October 30, 2007, TMM renewed its banking facility with RHB Bank Berhad ("RHB") for the purpose of extending the maturity date of the current facilities from October 31, 2007, to October 31, 2008.  The RHB facility, which TMM is currently renegotiating, provides for an overdraft line of credit up to RM 1,000,000 ($289,000) and an ECR up to RM 9,300,000 ($2,690,000).  The RHB facility was also amended to include the following:

  • Incorporate a Revolving Credit facility as part of the existing Overdraft facility of RM 1,000,000 ($289,000) (i.e. an interchangeable Overdraft/Revolving Credit facility) with a combined limit of RM 1.0 million to be used for working capital purposes.
  • Increase the Foreign Exchange Contract Line facility by an additional RM 10 million from RM 15 million to RM 25 million ($4,339,000 to $7,232,000) to be used for hedging purposes against TMM's sales based in currencies other than the RM.
  • Increase the maximum length of financing for the Multi-Trade Line facility (ECR), which is used by TMM for short-term financing against customers' and inter-company shipments, from the existing 150 days up to 180 days.

On May 30, 2008, TMM entered into a US Dollar term loan with RHB to fund the completion of its new powder processing facility.  The loan, in the amount of $292,000, will be repaid over a period of 22 months with an interest rate of 0.75% above the RHB prime.  Monthly principal payments ($8,350 per month) and interest payments commenced on July 1, 2008, and will continue through April 1, 2010.  The interest rate at December 31, 2008 was 3.3% and the loan balance was $242,000.

The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad.  At December 31, 2008, the interest rate was 4.5% and the outstanding balance on their ECR facilities was RM 5,039,000 ($1,458,000).  At December 31, 2007, TMM was not utilizing their overdraft or their ECR facilities.

The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time.  We believe such a demand provision is customary in Malaysia for such facilities.  The loan agreements are secured by TMM's property, plant and equipment.  However, if demand is made by HSBC or RHB, we may be unable to refinance the demanded indebtedness, in which case, the lenders could foreclose on the assets of TMM.  The credit facilities prohibit TMM from paying dividends and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.

F - 19



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

6.

Capital Lease

On June 27, 2005, TPT entered into a financial lease agreement with De Lage Landen Financial Services, BV for equipment related to the production of ALUPREM.  The cost of the equipment under the capital lease is included in the balance sheets as property, plant and equipment and was $381,181.  Accumulated amortization of the leased equipment at December 31, 2008 was approximately Euro 102,000 ($142,000).  Amortization of assets under capital leases is included in depreciation expense.  The capital lease is in the amount of Euro 377,351 including interest of Euro 62,113 (implicit interest rate 6.3%) and Euro 238 in executory costs.  The lease term is 72 months with equal monthly installments of Euro 5,241 ($7,651).  The net present value of the lease at December 31, 2008 was Euro 140,000 ($197,000).

On October 30, 2007, the Company entered into a financial lease agreement with Dell Financial Services for two computer servers.  The cost of the equipment under the capital lease, in the amount of $12,420, is included in the balance sheets as property, plant and equipment.  Accumulated amortization of the leased equipment at December 31, 2008 was approximately $5,000.  The capital lease is in the amount of $13,217 including interest of $800 (implicit interest rate 4.1%).  The lease term is 36 months with equal monthly installments of $367.  The net present value of the lease at December 31, 2008 was $8,000.

On March 13, 2008, the Company entered into a financial lease agreement with Toyota Financial Services for a forklift.  The cost of the equipment under the capital lease, in the amount of $26,527, is included in the balance sheets as property, plant and equipment.  Accumulated amortization of the leased equipment at December 31, 2008 was approximately $3,000.  The capital lease is in the amount of $31,164 including interest of $4,637 (implicit interest rate 6.53%).  The lease term is 60 months with equal monthly installments of $519.  The net present value of the lease at December 31, 2008 was $22,000.

The following table sets forth the minimum future lease payments (in thousands) under these leases as of December 31, 2008:

Year Ending December 31,

 

Amount

2009

$

98 

2010

98 

2011

44 

2012

2013

Total minimum lease payments

247 

Less:  Amount representing executory costs

Net minimum lease payments

247 

Less:  Amount representing interest

(20)

Present value of net minimum lease payments

227 

Less:  Current maturities of capital lease obligations

(86)

Long-term capital lease obligations

$

141 

F - 20



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

7.

Inventories

A summary of inventories follows:

(In thousands)

December 31,

2008

2007

Raw materials

$

5,208 

$

6,552 

Work in progress

 

1,327 

 

751 

Finished goods

4,828 

3,540 

Supplies

700 

573 

Total Inventories

12,063 

11,416 

Inventory reserve

(224)

(24)

Net Inventories

$

11,839 

$

11,392 

Inventory is stated at the lower of cost or market, including adjustments for inventory expected to be sold below cost as a result of damage, deterioration, obsolescence or pricing factors.  At December 31, 2008 and 2007, the Company maintained a reserve for inventory obsolescence of $224,000 and $24,000, respectively.

Overhead is charged to inventory based on normal capacity and the Company expenses abnormal amounts of idle facility expense, freight and handling costs in the period incurred.  For the year ended December 31, 2008, the Company recorded approximately $2,020,000 related to idle facility expense primarily at the US and Malaysian operations.

8.

Property, Plant and Equipment

Major classifications and expected lives of property, plant and equipment are summarized below:

(In thousands)

December 31,

Expected Life

2008

2007

Land and office buildings

39 years

$

3,411 

$

3,562 

Production facilities

10 - 20 years

6,294 

6,603 

Machinery and equipment

3 - 15 years

25,499 

27,195 

Furniture and fixtures

3 - 20 years

1,002 

1,226 

Total

36,206 

38,586 

Less accumulated depreciation

(17,605)

(18,536)

Property, plant and equipment, net

18,601 

20,050 

Construction in progress

914 

371 

$

19,515 

$

20,421 

The amounts of depreciation expense calculated on the Company's property, plant and equipment for the years ended December 31, 2008, 2007 and 2006 were $1,954,000, $1,785,000 and $1,496,000, respectively.

During the fourth quarter 2008, the Company's Board of Directors and the Bank approved the classification of certain assets of the US operation as "held for sale".  As a result, the Company reduced the book value of the assets to fair market value, less costs to sell, and recorded an expense of approximately $679,000.  In addition, the US operation recorded an expense in 2008 of approximately $98,000 related to the sale/disposal of assets.

F - 21



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

On July 1, 2006, the Company's Asian Operation, TMM, changed its depreciation method on $6,359,000 of plant assets from the "Units of Production" to the "Straight Line" method with a remaining depreciable life of 15 years.  The reason for the change is that the Company believes the units of production method no longer accurately reflects the useful or economic life of the plant assets based on the current units of production; and due to the variability of amounts produced annually, management cannot accurately estimate the remaining units of production.  The straight line method of depreciation over 15 years more accurately reflects the utilization of the assets and reflects the useful and economic life of the assets.

In accordance with SFAS No. 154, Accounting Changes and Error Corrections, this change in depreciation method is accounted for prospectively.  The effect on income from continuing operations will be a reduction of approximately $175,000 (642,000RM) annually.  The effect on net income will be a reduction of approximately $125,000 (443,000RM) annually.  For the twelve-month period ended December 31, 2006, the effect on net income was a reduction of approximately $62,000 (220,000RM).

9.

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 foreign operations, TMM, located in Malaysia and TPT, located in the Netherlands.

Product sales of inventory between the US, Asian and European operations are based on inter-company pricing, which includes an inter-company profit margin.  In the geographic 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 the Company'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.

For the twelve-month period ended December 31, 2008, no single customer represented 10% or more of the US operation's total third party sales revenue.  The European operation received approximately 23% and 10% of its total third party sales revenue from two customers, respectively; and the Asian operation received approximately 22% and 12% of its total third party sales revenue from two customers, respectively.  No single customer represented 10% or more of the 2008 total consolidated sales.

For the twelve-month period ended December 31, 2007, the US operation received approximately 15% of its total third party sales revenue from a single customer.  The European operation received approximately 20% of its total third party sales revenue from a single customer and the Asian operation received approximately 28% and 13% of its total third party sales revenue from two customers, respectively.  No single customer represented 10% or more of the 2007 total consolidated sales.

Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products.  Intercompany sales consisted of SR, HITOX and ALUPREM.

The Company's principal product, HITOX, accounted for approximately 52%, 53% and 58% of net consolidated sales in 2008 , 2007 and 2006, respectively.

The Company sells its products to customers located in more than 60 countries.  Sales to external customers are attributed to geographic area based on country of distribution.  Sales to customers located in the US represented 51%, 58% and 60% for the years ended December 31, 2008, 2007 and 2006, respectively.

F - 22



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

No individual foreign country accounted for 10% or more of foreign sales in either 2008, 2007 or 2006.

Approximately 36% of the Company's employees are represented by an in-house collective bargaining agreement.

A summary of the Company's manufacturing operations by geographic area is presented below:

(In thousands)

United States
(Corpus Christi)

Netherlands
(TP&T)

Malaysia
(TMM)

Inter-Company
Eliminations

Consolidated

As of and for the years ended:

December 31, 2008

Net Sales:

Customer sales

$

15,332 

$

6,879 

$

3,093 

$

$

25,304 

Intercompany sales

69 

1,106 

5,947 

(7,122)

Total Net Sales

$

15,401 

$

7,985 

$

9,040 

$

(7,122)

$

25,304 

Share based compensation expense

$

145 

$

$

$

$

145 

Depreciation

$

665 

$

558 

$

731 

$

$

1,954 

Goodwill impairment

$

$

1,976 

$

$

$

1,976 

Loss on assets held for sale

$

679 

$

$

$

$

679 

Interest income

$

$

$

$

$

Interest expense

$

212 

$

256 

$

56 

$

$

524 

Income tax expense (benefit)

$

199 

$

(89)

$

(91)

$

$

19 

Location profit (loss)

$

(2,681)

$

(2,150)

$

12 

$

(143)

$

(4,962)

Capital expenditures

$

1,116 

$

60 

$

1,220 

$

$

2,396 

Location long-lived assets

$

4,698 

$

6,534 

$

8,283 

$

$

19,515 

Location assets

$

12,156 

$

8,238 

$

13,943 

$

$

34,337 

December 31, 2007

Net Sales:

Customer sales

$

18,290 

$

6,274 

$

3,397 

$

$

27,961 

Intercompany sales

53 

2,037 

4,594 

(6,684)

Total Net Sales

$

18,343 

$

8,311 

$

7,991 

$

(6,684)

$

27,961 

Share based compensation expense

$

172 

$

$

$

$

172 

Depreciation

$

641 

$

513 

$

631 

$

$

1,785 

Interest income

$

$

$

18 

$

$

18 

Interest expense

$

441 

$

239 

$

$

$

684 

Income tax expense (benefit)

$

10 

$

105 

$

(157)

$

$

(42)

Location profit (loss)

$

111 

$

285 

$

(374)

$

49 

$

71 

Goodwill

$

$

2,131 

$

$

$

2,131 

Capital expenditures

$

442 

$

354 

$

241 

$

$

1,037 

Location long-lived assets

$

5,045 

$

7,320 

$

8,056 

$

$

20,421 

Location assets

$

12,158 

$

11,718 

$

14,860 

$

$

38,736 

F - 23



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

9.

Segment Information - Continued

 

(In thousands)

United States
(Corpus Christi)

Netherlands
(TP&T)

Malaysia
(TMM)

Inter-Company
Eliminations

Consolidated

As of and for the years ended:

December 31, 2006

Net Sales:

Customer sales

$

17,868 

$

4,757 

$

3,454 

$

$

26,079 

Intercompany sales

1,276 

6,821 

(8,097)

Total Net Sales

$

17,868 

$

6,033 

$

10,275 

$

(8,097)

$

26,079 

Share based compensation expense

$

163 

$

$

$

$

163 

Depreciation

$

577 

$

437 

$

482 

$

$

1,496 

Interest income

$

$

$

17 

$

$

17 

Interest expense

$

364 

$

182 

$

$

$

547 

Income tax expense (benefit)

$

10 

$

(106)

$

98 

$

$

Location profit (loss)

$

(42)

$

(295)

$

307 

$

123 

$

93 

Goodwill

$

$

1,927 

$

$

$

1,927 

Capital expenditures

$

316 

$

42 

$

401 

$

$

759 

Location long-lived assets

$

5,249 

$

6,791 

$

7,994 

$

$

20,034 

Location assets

$

12,897 

$

10,416 

$

14,698 

$

$

38,011 

F - 24



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

10.
 

Quarterly Data (Unaudited)
 

TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)

 

 

2008

(In thousands, except per share amounts)

 

1st Qtr

 

2nd Qtr

 

3rd Qtr

 

4th Qtr

 

Total

NET SALES

$

6,746 

$

6,916 

$

7,503 

$

4,139 

$

25,304 

Cost of sales

6,086 

5,912 

6,527 

3,507 

22,032 

GROSS MARGIN

 

660 

 

1,004 

 

976 

 

632 

 

3,272 

Technical services and research and development

66 

61 

62 

55 

244 

Selling, general and administrative expenses

1,075 

1,154 

1,058 

1,386 

4,673 

Goodwill impairment

1,976 

1,976 

Loss on assets held for sale

679 

679 

(Gain) Loss on disposal of assets

(2)

100 

98 

OPERATING LOSS

 

(479)

 

(211)

 

(144)

 

(3,564)

 

(4,398)

OTHER INCOME (EXPENSES):

Interest income

Interest expense

(144)

(131)

(134)

(115)

(524)

Gain (loss) on foreign currency exchange rate

(2)

(4)

(33)

(38)

Other, net

15 

LOSS BEFORE INCOME TAX

 

(620)

 

(335)

 

(281)

 

(3,707)

 

(4,943)

Income tax expense (benefit)

(31)

89 

(42)

19 

NET LOSS

$

(589)

 $

(338)

$

(370)

$

(3,665)

$

(4,962)

Less:  Preferred Stock Dividends

15 

15 

15 

15 

60 

Loss Available to Common Shareholders

$

(604)

$

(353)

$

(385)

$

(3,680)

$

(5,022)

Loss per common share:

Basic

$

(0.08)

$

(0.04)

$

(0.05)

$

(0.47)

$

(0.64)

Diluted

$

(0.08)

$

(0.04)

$

(0.05)

$

(0.47)

$

(0.64)

Weighted average common shares outstanding:

Basic

7,871 

7,878 

7,878 

7,896 

7,881 

Diluted

7,871 

7,878 

7,878 

7,896 

7,881 

F - 25



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

10.
 

Quarterly Data (Unaudited) - Continued
 

TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)

 

 

2007

(In thousands, except per share amounts)

 

1st Qtr

 

2nd Qtr

 

3rd Qtr

 

4th Qtr

 

Total

NET SALES

$

7,153 

$

7,281 

$

7,558 

$

5,969 

$

27,961 

Cost of sales

5,751 

5,906 

6,082 

5,029 

22,768 

GROSS MARGIN

 

1,402 

 

1,375 

 

1,476 

 

940 

 

5,193 

Technical services and research and development

62 

56 

65 

62 

245 

Selling, general and administrative expenses

1,143 

1,078 

1,055 

1,014 

4,290 

Loss on disposal of assets

(12)

(12)

OPERATING INCOME (LOSS)

 

197 

 

241 

 

356 

 

(124)

 

670 

OTHER INCOME (EXPENSES):

Interest income

18 

Interest expense

(159)

(180)

(179)

(166)

(684)

Gain (loss) on foreign currency exchange rate

46 

(35)

25 

INCOME (LOSS) BEFORE INCOME TAX

 

44 

 

109 

 

150 

 

(274)

 

29 

Income tax expense (benefit)

27 

(15)

(59)

(42)

NET INCOME (LOSS)

$

39 

$

82 

$

165 

$

(215)

$

71 

Less:  Preferred Stock Dividends

15 

15 

15 

15 

60 

Income (Loss) Available to
Common Shareholders

$

24 

$

67 

$

150 

$

(230)

$

11 

Income (loss) per common share:

Basic

$

0.00 

$

0.01 

$

0.02 

$

(0.03)

$

0.00 

Diluted

$

0.00 

$

0.01 

$

0.02 

$

(0.03)

$

0.00 

Weighted average common shares outstanding:

Basic

7,839 

7,839 

7,844 

7,849 

7,849 

Diluted

7,915 

7,937 

7,844 

7,849 

7,885 

F - 26



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

11.
 

Calculation of Basic and Diluted Earnings per Share
 

(in thousands, except per share amounts)

Year Ended December 31,

2008

2007

 

2006

Numerator:

Net Income (Loss)

$

(4,962)

$

71 

$

93 

Preferred Stock Dividends

(60)

(60)

(60)

Numerator for basic earnings per share
- income (loss) available to common shareholders

(5,022)

11 

33 

Effect of dilutive securities:

Numerator for diluted earnings per share - income (loss)
available to common shareholders after assumed conversions

$

(5,022)

$

11 

$

33 

Denominator:

Denominator for basic earnings per share
- weighted-average shares

7,881 

7,849 

7,836 

Effect of dilutive securities:

Employee stock options

36 

37 

Dilutive potential common shares

36 

37 

Denominator for diluted earnings per share -
weighted-average shares and assumed conversions

7,881 

7,885 

7,873 

 

Basic earnings per common share:

Net Income (Loss)

$

(0.64)

$

0.00 

$

0.00 

 

Diluted earnings per common share:

Net Income (Loss)

$

(0.64)

$

0.00 

$

0.00 

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 years ended December 31, 2008, 2007 and 2006.  The convertible preferred shares were not included in the computation of diluted earnings per share as the effect would be antidilutive.

A total of 1,575,000 warrants excluded from the calculation 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.

For the twelve-month periods ended December 31, 2008, 2007 and 2006, stock options excluded from diluted earnings per share were 743,600, 295,700 and 614,000, 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.

F - 27



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

12.

Income Taxes

The Company provides for deferred taxes on temporary differences between the financial statements and tax bases of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse.

Our US and European operations had net deferred tax assets of $4,757,000 and $486,000 that were fully reserved by the valuation allowance due to uncertainties as to the Company's ability to utilize the net deferred tax asset.

At December 31, 2008, 2007 and 2006, we had federal net operating loss ("NOL") carryforwards of approximately $13,990,000, $12,256,000 and $13,283,000, respectively.  Approximately $9,800,000 of the US NOL carryforward will expire in 2009 and the balance will expire from 2018 to 2028.

TPT, our European operation, had NOL carryforwards at December 31, 2008, 2007 and 2006 of approximately $1,907,000, $1,827,000, $3,379,000, respectively.  The European NOL carryforward will expire from 2011 to 2017.

Our Asian operation, TMM, had NOL carryforwards of approximately $3,807,000, $4,288,000 and $3,732,000, at December 31, 2008, 2007 and 2006, respectively.  Because these foreign NOL carryforwards have an indefinite carry forward period, we have elected not to reserve with a valuation allowance.

The undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested.  Accordingly, no provision for US federal and state income taxes or foreign withholding taxes has been provided on approximately $6,000,000 of such cumulative undistributed earnings.  Determination of the potential amount of unrecognized deferred US income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.

Components of Pretax Income (Loss)

Year Ended December 31,

(In thousands)

2008

2007

2006

Domestic

$

(2,482)

$

121 

$

(31)

Foreign

(2,461)

(92)

126 

Pretax income (loss)

$

(4,943)

$

29 

$

95 

 

 Components of Income Tax Expense (Benefit)

 

Year Ended December 31,

2008

 

2007

 

2006

(In thousands)

Current

Deferred

Total

Current

Deferred

Total

Current

Deferred

Total

Federal

$

$

199 

$

199 

$

$

$

$

$

$

State

10 

10 

10 

10 

Foreign

(182)

(182)

(57)

(52)

(8)

(8)

Total Income
Tax Expense
(Benefit)

$

$

17 

$

19 

$

15 

$

(57)

$

(42)

$

10 

$

(8)

$

 

 

F - 28



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory US federal income tax rate of 34% to income before taxes.

Effective Tax Rate Reconciliation

 Year Ended December 31,

(In thousands)

 2008

 2007

 2006

Expense (benefit) computed at statutory rate

$

(1,679)

$

10 

$

32 

Change in valuation allowance - Domestic

986 

(102)

(77)

Change in valuation allowance - Foreign

486 

Effect of items deductible for book not tax, net

Option compensation

49 

54 

55 

Other

11 

(1)

Effect of foreign tax rate differential

175 

(26)

(17)

State income taxes, net of Federal benefit

Other, net

 

$

19 

$

(42)

$



 
   

Significant Components of Deferred Taxes

 Year Ended December 31,

(In thousands)

 2008

 2007

Deferred Tax Assets:

 

 

Net operating loss carryforwards - Domestic

$

4,757 

$

4,162 

Net operating loss carryforwards - Foreign

1,438 

1,607 

PP&E - Foreign

10 

11 

Intercompany profit

65 

15 

Alternative minimum tax credit carryforwards

65 

65 

Domestic reserves

44 

Unrealized foreign currency losses - Foreign

13 

Other deferred assets

29 

25 

6,421 

5,887 

Valuation allowance

(5,243)

(3,670)

Total deferred tax assets

$

1,178 

$

2,217 

Deferred Tax Liabilities:

 

 

PP&E - Domestic

313 

568 

PP&E - Foreign

1,459 

1,688 

Goodwill - Foreign

17 

543 

Unrealized gain on derivatives

21 

23 

Unrealized foreign currency gains - Foreign

Other

Total deferred tax liabilities

1,814 

2,836 

Net deferred tax liability

$

(636)

$

(619)

F - 29



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

13.

Stock Options

The Company's 1990 Incentive Stock Option Plan ("ISO") for TOR Minerals International, Inc. (the "1990 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 1990 Plan expired in February of 2000, with options to acquire 372,200 shares of common stock still outstanding.  At December 31, 2008, the 1990 Plan had outstanding options to purchase 13,000 share of common stock.

On February 21, 2000, the Company's Board of Directors approved the adoption of the 2000 Incentive Stock Option Plan for TOR Minerals International, Inc. (the "Plan").  The Plan provides for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board.  At the Annual Shareholders' meeting on May 23, 2008, the maximum number of shares of the Company's common stock that may be sold or issued under the Plan was increased from 1,050,000 shares to 1,250,000 shares subject to certain adjustments upon recapitalization, stock splits and combinations, merger, stock dividend and similar events; in addition the plan was extended to May 23, 2018.  At December 31, 2008, the Plan had 730,600 options outstanding, 134,089 exercised and 385,311 available for future issuance.

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.

For the twelve-month periods ended December 31, 2008, 2007 and 2006, the Company recorded $145,000, $172,000 and $163,000, respectively, in stock-based employee compensation.  This compensation cost is included in the general and administrative expenses and inventory/cost of sales in the accompanying consolidated income statements.

The Company granted options to purchase 15,000, 242,500 and 96,200 shares of common stock during the twelve-month periods ended December 31, 2008, 2007 and 2006, respectively.  The weighted average fair value per option at the date of grant for options granted in the twelve-month periods ended December 31, 2008, 2007 and 2006 was $1.44, $1.81 and $1.52, respectively, as valued using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

Twelve Months Ended December 31,

 

 

2008

 

2007

 

2006

Risk-free interest rate

3.52%

4.37%

5.03%

Expected dividend yield

0.00%

0.00%

0.00%

Expected volatility

0.70

0.73

0.83

Expected term (in years)

7.00

7.00

6.71

The risk free interest rate is based on the Treasury Constant Maturity Rate as quoted by the Federal Reserve at the time of the grant for a term equivalent to the expected term of the grant.  The estimated volatility is based on the historical volatility of our stock and other factors.  The expected term of options represents the period of time the options are expected to be outstanding from grant date.

F - 30



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

The following table summarizes certain information regarding stock option activity:

Options

Total
Reserved

Outstanding

Weighted Avg
Exercise Price

Range of
Exercise Prices

Balances at 12/31/2005

1,074,950 

907,650 

$3.16

$0.92

-

$6.11

Granted

96,200 

$2.10

$1.86

-

$2.76

Exercised

(11,750)

(11,750)

$2.01

$1.19

-

$2.13

Forfeited or expired

(42,500)

(206,900)

$4.84

$1.19

-

$6.11

Balances at 12/31/2006

1,020,700 

785,200 

$3.16

$0.92

-

$6.11

Granted

242,500 

$2.52

$2.10

-

$2.84

Exercised

(30,389)

(30,389)

$1.87

$1.53

-

$2.21

Forfeited or expired

(47,200)

(118,011)

$3.76

$1.25

-

$5.02

Balances at 12/31/2007

943,111 

879,300 

$2.60

$0.92

-

$6.11

Additional options authorized

200,000 

Granted

15,000 

$2.09

$2.09

-

$2.09

Exercised

(9,200)

(9,200)

$1.35

$1.15

-

$1.53

Forfeited or expired

(5,000)

(141,500)

$2.94

$2.06

-

$5.90

Balances at 12/31/2008

1,128,911 

743,600 

$2.54

$0.92

-

$6.11

The number of shares of common stock underlying options exercisable at December 31, 2008, 2007 and 2006 was 589,500, 565,980 and 597,160, respectively.  The weighted-average remaining contractual life of those options is 5.6 years.  Exercise prices on options outstanding at December 31, 2008, ranged from $0.92 to $6.11 per share as noted in the following table.

Options Outstanding

2008

2007

2006

 

Range of Exercise Prices

64,900

74,100

92,900

$ 0.92 - $ 1.99

573,400

686,900

548,400

$ 2.00 - $ 2.99

600

600

600

$ 3.00 - $ 3.99

64,000

70,500

95,500

$ 4.00 - $ 4.99

13,700

20,200

20,800

$ 5.00 - $ 5.99

27,000

27,000

27,000

$ 6.00 - $ 6.11

743,600

879,300

785,200

As of December 31, 2008, there was $180,000 of option compensation expense related to non-vested awards.  This expense is expected to be recognized over a weighted average period of 2.1 years.

As all options issued under the Plan are Incentive Stock Options, the Company does not receive any excess tax benefits relating to the compensation expense recognized on vested options.

F - 31



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

14.

Profit Sharing Plan

The Company has a profit sharing plan that covers the US employees.  Contributions to the plan are at the option of and determined by the Board of Directors and are limited to the maximum amount deductible by the Company for Federal income tax purposes.  For the years ended December 31, 2008, 2007 and 2006, there were no contributions to the plan.

The Company also offers a 401(k) on US employees savings plan administered by an investment services company.  Employees are eligible to participate in the plan after completing six months of service with the Company.  The Company matches contributions up to 4% of the employee's eligible earnings.  Total Company contributions to the 401(k) plan for the years ended December 31, 2008, 2007 and 2006 were approximately $59,000, $63,000 and $67,000, respectively.

15.

Derivatives and Hedging Activities

Natural Gas Contracts

On November 18, 2008, the Company entered into a natural gas contract with Bank of America, N.A. for 40,000 MM/Btu's of natural gas.  The contract, which was not designated as a hedge, was marked to market at December 31, 2008 and recorded a net loss of approximately $26,000 as a component of our net loss and as a current liability on the balance sheet at December 31, 2008.

At December 31, 2007 there were no natural gas contracts outstanding.

Foreign Currency Forward Contracts

At December 31, 2008, none of our foreign currency contracts were designated as hedges.  As a result, we marked these contracts to market, recording a net gain of approximately $3,000 as a component of net income and as a current asset on the balance sheet at December 31, 2008.

For the contracts designated as hedges at December 31, 2007, we recorded a net loss of approximately $1,000 as a component of "Other Comprehensive Income" and as a current liability on the balance sheet at December 31, 2007.  The recognition of this net loss had no effect on our cash flow.  In addition, we had foreign currency contracts not designated as hedges.  At December 31, 2007, we marked these contracts to market, recording a net gain of approximately $23,000 as a component of net income and as a current asset on the balance sheet at December 31, 2007.

 

16.

Commitments and Contingencies

Land Lease

The Company operates a plant in Corpus Christi, Texas.  The facility is located in the Rincon Industrial Park on approximately 15 acres of land, with 13 acres leased from the Port of Corpus Christi Authority (the "Port") and approximately two acres owned by the Company.  The lease payment is subject to an adjustment every 5 years for what the Port calls the "equalization valuation".  This is used as a means of equalizing rentals on various Port lands and is determined solely at the discretion of the Port.  The Company and the Port executed an amended lease agreement on July 11, 2000, which extended the expiration date of the lease to June 30, 2027.

F - 32



TOR Minerals International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2008, 2007 and 2006

Equipment Lease

The Company entered into a master lease agreement (the "Master Lease") with Bank of America Leasing & Capital, LLC ("BALC") dated August 9, 2004, effective August 13, 2004, for e