PART
I
General
TOR
Minerals International, Inc. (“TOR”, “we”, “us”, “our” or the “Company”) is a
global producer of high performance, specialty mineral products focused on
product innovation and technical support. Our specialty mineral products,
which include flame retardant and smoke suppressant fillers, engineered
fillers, and titanium dioxide (“TiO
2
”) color hybrid pigments, are
designed for use in plastics, coatings, paints and catalysts applications, as
well as a wide range of other industrial applications.
We
were organized as a subsidiary of the Benilite Corporation of America
(“Benilite”) in 1973. In 1980, the subsidiary was spun off to its
shareholders. In December 1988, the Company became a publicly owned company
after completing a public offering of 1.38 million shares of its common stock.
Effective
February 23, 2018, our shares will be traded on the Pink Market, operated by
OTC Markets Group (www.otcmarkets.com) under the ticker symbol TORM.
As
noted in the Company’s filing of Form 8-K with the Securities and Exchange
Commission (the “SEC”) on February 2, 2018, the Company’s Board of Directors
approved the voluntary suspension of its duty to file reports with the SEC and
the voluntary deregistration of its common stock. These actions resulted in
the Company’s common shares no longer being listed on the NASDAQ and the
Company no longer being a reporting issuer to the SEC. The Company was eligible
to suspend its reporting obligations and deregister its common stock because
there are fewer than 300 holders of record of the Company’s common stock.
After
careful consideration, the Board of Directors concluded that the costs
associated with operating as a reporting company, and the attendant demands on
management, were not justified by the limited benefits. In that regard, in the
last several years, the volume of trading in the Company’s common stock has
declined significantly, the public market has not offered liquidity for
significant amounts of stock, and the stock often has not traded at all.
The
Company is unable to predict the precise cost savings that are expected to
result from the decision to suspend its reporting obligations, but it believes
such costs will be substantial. These include, but are not limited to, reduced
costs arising from audits of financial statements; elimination of quarterly
reviews by auditors of interim financial statements; elimination of costs
associated with preparation and filing of Forms 10-K, 10-Q, 8-K and other
reports, and of proxy statements; and elimination of stock exchange listing
fees. In addition, the Company expects that some legal and accounting fees and
corporate insurance costs should be reduced over time because of the
elimination of required SEC reporting.
Although
the Company will no longer file reports with the SEC or be subject to rules of
the NASDAQ Capital Market, for the foreseeable future it intends to continue
making information available to shareholders and to observe corporate
governance practices comparable to those which have existed in recent years.
Specifically:
-
The Company intends to obtain and
make available to shareholders annual audited financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America, beginning with the statements for the year ending December 31,
2018.
-
The Company expects to make
available quarterly and annual financial statements of TOR Minerals
International, Inc. via the Company’s website at www.torminerals.com and via the OTC Markets’ website at www.otcmarkets.com under the trading symbol TORM.
-
The Company expects to continue to
hold an annual meeting of shareholders each year, but it anticipates not
distributing a proxy statement or soliciting proxies from shareholders. Notice
of the meeting would be given to shareholders.
-
The Board of Directors of the
Company currently consists of six independent directors and one management
director. Although it will not be under a legal requirement to do so, the
Company plans, for the foreseeable future, to maintain a majority of
independent directors on the Board and its Audit, Corporate Governance and
Compensation Committees.
Global Headquarters
We
are headquartered in Corpus Christi, Texas, United States. This location
houses senior management, customer service, logistics, and corporate research
and development/technical service laboratories. Our financial and accounting
functions also operate from this location. Our principal offices in Corpus
Christi are located at 722 Burleson Street, Corpus Christi, Texas 78402, and
our telephone number is (361) 883-5591. Our website is located at
www.torminerals.com
.
Information contained in our website and links contained on our website are not
part of this Annual Report on Form 10-K.
United States (“U.S.”) Operations
Our
U.S. manufacturing plant, located in Corpus Christi, Texas, is situated on the
north side of the Corpus Christi Ship Channel and has its own dock frontage at
the plant. We also utilize the Bulk Terminal, operated by the Port of Corpus
Christi Authority (the “Port”), to discharge bulk shipments of barite from
cargo vessels directly into trucks for delivery to our plant. The site has its
own railhead and easy access to major highways linking it to the rest of the United
States and to Mexico. Our products, HITOX
®
, BARTEX
®
,
HALTEX
®
, OPTILOAD
®
and TIOPREM
®
, are all produced at this
location.
Asian Operations
We
acquired our Asian operation, TOR Minerals Malaysia, Sdn. Bhd. (“TMM”), in
2000. Located in Ipoh, Perak, Malaysia, close to the port of Lumut, TMM produces
HITOX and TIOPREM which are sold primarily in Asia and Europe. The sales team
and the quality assurance laboratory for Asia are located at the offices in
Ipoh.
In
2015, we made a strategic decision to take our Synthetic Rutile (“SR”)
production capacity out of service. SR is a precursor material used in the
production of HITOX and TIOPREM. We are currently supplementing our existing
SR inventory with product produced by alternate sources. By making this
strategic move, we have reduced the cost of our SR and reduced our inventory
levels during both 2017 and 2016.
European Operations
In
2001, we acquired our European operation, TOR Processing and Trade, B.V. (“TPT”),
situated within reach of the major shipping port of Rotterdam. TPT, located in
Hattem, The Netherlands, specializes in the manufacturing of premium alumina
products ALUPREM
®
and
BAYRPREM
®
for use worldwide.
Customer applications, quality assurance laboratory and support facilities for
Europe are located in Hattem. Our global headquarters in Texas provide
customer service and shipping logistics for TPT’s North American customers.
Our Products
TOR
and its subsidiaries operate in the business of mineral product manufacturing
in three geographic segments. All U.S. manufacturing is done at the
facility located in Corpus Christi, Texas. Foreign manufacturing is done
by the Company’s wholly-owned subsidiaries, TMM and TPT. Our products are
currently marketed in the United States and in more than 60 other
countries. We sell our products through a network of direct sales
representatives employed by the Company and independent stocking distributors
in the United States, as well as distributors and agents overseas. Our
sales representatives sell directly to end-users and provide technical support
and market guidance for our independent distribution network.
Below is a list of our
current specialty mineral products and a brief description of the unique
characteristics which lend to the high performance of these specialty products.
ALUPREM
Premium
Alumina Trihydrate (“ATH”) and Boehmite (“AMH”) products are produced at our
European operation and are designed for the most demanding worldwide applications.
In-house engineered surface treatment is available for enhanced performance
benefits.
ALUPREM
TB and SR Boehmite alumina products are suitable for a broad range of
applications including wire and cable, catalysts, high-tech polishing, coatings
and pigments. Performance benefits include high temperature flame retardant,
improved mechanical properties and scratch resistance, good resin compatibility
and high brightness.
ALUPREM
XHL is specially designed ATH for “Extra High Loading” to meet more stringent
flame retardant and smoke suppressant requirements for sheet molding compound
(“SMC”), bulk molding compound (“BMC”), pultrusion and other thermoset
composite applications.
ALUPREM
TA Bayer and TG ultra-white / translucent grade ATH products are designed for
color critical applications like solid surface and performance driven uses such
as wire and cable.
HITOX
HITOX
(high grade TiO
2
) is a high quality, cost-effective, beige colored
titanium dioxide pigment produced at both our U.S. and Asian operations. In
products which require opacity and color, HITOX can reduce the amount of
expensive organic and inorganic pigments as well as white TiO
2
.
HITOX is used in a broad range of paint and coatings and plastics applications
including architectural, coil backers, powder, container, wood, traffic, paper,
primers, adhesive and sealants, roof coatings and PVC.
BARTEX and BARYPREM
High
whiteness and brightness, chemical inertness and controlled particle sizing are
features of BARTEX. Barium Sulfate’s high density is one of the primary reasons
it is used as a pigment. Suitable for use in both acid and basic conditions,
BARTEX gives weight and body to products ranging from powder coatings to rubber
products and plastics. BARTEX is also used as an extender pigment in top coats
and primers.
OPTILOAD
OPTILOAD
ATH, specially developed for “Optimum Loading”, offers a halogen-free solution
for passing the most stringent flame retardant and smoke suppressant
requirements. With increasing legislative concerns over smoke and toxicity
associated with older halogenated systems, interest in re-formulation with
OPTILOAD is growing. Produced at our U.S. operation, the low viscosity
OPTILOAD series offers high performance in a wide range of thermoset composite
applications including SMC, BMC, pultrusion, resin infusion and spray-up / hand
lay-up.
HALTEX
HALTEX
ATH is an economical, non-toxic, flame retardant and smoke suppressant filler
produced at our U.S. operation for supply to the North American market. HALTEX
features tightly controlled particle sizing to meet specific application
performance requirements. Quality is suitable for a broad range of uses
including electrical components, SMC, BMC, adhesives and sealants, roof
coatings, foam insulation and rubber mining belts.
TIOPREM
TIOPREM
is a high performance TiO
2
colored hybrid pigment
produced at both the U.S. and Asian operations. TIOPREM offers excellent heat
stability making it suitable for use in high temperature resins and coatings.
Typical applications are plastic master batch, color concentrates and liquid
color. TIOPREM exhibits good opacity and is cost-effective in formulation,
partially replacing more expensive heat stable pigments as well as white TiO
2
.
Raw
Materials and Energy
We
utilize a variety of raw materials in the manufacturing of our products.
Outlined below are the principal raw materials for TOR’s products.
ALUPREM:
Alumina trihydrate, the chief raw material for
ALUPREM, is manufactured throughout the world including Europe and North
America. The ATH material used for chemicals, fillers and flame-retardants is
produced by the Bayer alumina process. This grade of ATH accounts for
approximately 95% of the total ATH produced worldwide. The Company purchases
ATH from various suppliers in Europe. The average prices for ATH remained
stable in 2017.
BARTEX
/ BARYPREM:
High grade barites
(barium sulfate) are mined in China, India, Turkey and Mexico and are the raw
materials used to produce our BARTEX and BARYPREM product lines. The average
price for this grade of barites remained stable in 2017. The availability of
finer grade barites in China are declining, which could lead to higher prices
in the future.
HALTEX
/ OPTILOAD:
Bayer grade aluminum
hydroxide, used to produce HALTEX, is purchased from a supplier located overseas.
The average price for the Bayer grade aluminum hydroxide increased in 2017 as
the majority of U.S. suppliers located near the Gulf of Mexico stopped
production in 2016 which decreased U.S. supply and had a negative impact on
our pricing structure.
HITOX
/ TIOPREM:
Historically, SR, the
primary raw material used in the production of our HITOX and TIOPREM, was
manufactured at TMM. However, during the later part of 2014 and 2015, we
secured two alternate sources of SR and discontinued manufacturing our own SR.
As a result of this strategic move, the average price of SR was reduced in 2016
and remained stable in 2017. We anticipate the cost to remain stable
throughout the next year.
ENERGY:
We are highly dependent on energy in our
manufacturing processes. Electricity is the predominant source of energy at
each of our three operations and we also utilize natural gas as a source of
energy at our U.S. and European operations. At our plant in Corpus Christi,
the average price of electricity was flat in 2017 and the average price of natural
gas increased 6% in 2017. At our plant in The Netherlands, the average price for
electricity decreased 22% and the average price of natural gas decreased 9%;
and, at TMM, the average price for electricity remained flat in 2017.
Research
and Development / Technical Services
Our
expenditures for research and development and technical services were
approximately $200,000 in 2017. We conduct our research and technical service
primarily at our facilities in Corpus Christi and The Netherlands, and our
efforts are principally focused on process technology, product development and
technical service to our customers. There are no research and development
costs borne directly by our customers.
Marketing and Customers
Sales and Marketing Department Organization
TOR’s
sales efforts are managed out of Corpus Christi, Texas, by our Executive Vice
President. We have sales offices at our U.S., Asian and European operations.
Area and product managers report to the Executive Vice President and assist with
customer, agent and distributor relations.
Independent Distributors and Agents
We
utilize a network of both domestic and foreign independent distributors and
agents. Within North America there are multiple agents serving us on either a
regional or a product basis. In most other countries there is one stocking
distributor who purchases directly from TOR and resells in their territory. In
certain large countries there may be multiple distributors. Our use of
domestic and foreign distributors and agents allows us to have the benefit of
sales specialists with specific trade knowledge in each country.
Customers
Our
end-use customers include companies in the paints, coatings and plastics, as
well as other industries. For the year ended December 31, 2017 and 2016, one
of our customers, BASF, represented 14% and 24%, respectively, of our total
consolidated sales.
Geographic Distribution
We
sell our products globally and market them in North, Central and South America,
Asia and Europe to customers located in more than 60 countries. For the years
ended December 31, 2017 and 2016, our foreign sales in Germany represented 19%
and 22%, respectively, and Italy represented 7% and 10%, respectively. Sales
to external customers are attributed to geographic area based on the country of
distribution.
A
summary of the Company’s sales by geographic area is presented below:
|
(In thousands)
|
|
2017
|
|
2016
|
|
Summary by Geographic
Area
|
|
Sales
Revenue
|
|
% of
Total Sales
|
|
Sales
Revenue
|
|
% of
Total Sales
|
|
United States
|
$
|
20,630
|
|
53%
|
$
|
23,836
|
|
62%
|
|
Canada, Mexico &
South/Central America
|
|
3,067
|
|
8%
|
|
2,608
|
|
7%
|
|
Pacific Rim
|
|
3,678
|
|
9%
|
|
2,418
|
|
6%
|
|
Europe, Africa & Middle
East
|
|
11,591
|
|
30%
|
|
9,594
|
|
25%
|
|
Total
Sales
|
$
|
38,966
|
|
100%
|
$
|
38,456
|
|
100%
|
Competition
We
experience competition with respect to each of our products. In order to
maintain and grow sales volumes, we must rely on our ability to innovate, to
add value, as well as to manufacture and distribute products at competitive
prices. We believe that quality, delivery on schedule and price are the
principal competitive factors. Due to the nature and the size of our company
as compared to others in the industry, we are not price leaders, but are price
followers. While we generally attempt to increase prices to offset cost
increases, these actions tend to lag the cost increases.
Our
competitors range from large corporations with a full line of production
capabilities and products to small local firms specializing in one or two
products. More recently we have faced competition from a large number of
Chinese suppliers. A number of these competitors are owned and operated by
large diversified corporations, such as Kronos, Inc., the Chemours Company and
J.M. Huber. They have substantially greater financial and other resources, and
their share of industry sales is substantially larger than ours.
Environmental
Regulations and Product Safety
Our
plant in Corpus Christi is subject to regulations promulgated by the Federal
Environmental Protection Agency ("EPA") and state and local
authorities with respect to the discharge of substances into the environment.
We believe that the Corpus Christi plant is in compliance with all applicable
federal, state and local laws and regulations relating to the discharge of
substances into the environment, and we do not expect that any material capital
expenditures for environmental control facilities will be necessary in order to
continue such compliance.
TMM's SR plant is required to be licensed by the
Malaysian Atomic Energy Licensing Board ("AELB") as the ilmenite previously
used by the plant’s SR production is derived from tin tailings and may contain
small amounts of monazite and hafnium, which are radioactive rare earth
compounds. The monitoring is done in-house by TMM personnel and results are
reported to the AELB as required. TMM is also currently in compliance with various
other licensing and permitting requirements.
TPT
operates an alumina processing plant in Hattem, The Netherlands, and is
governed by rules promulgated by both The Netherlands and the European
Community. We believe that the Hattem plant is in compliance with all
applicable environmental and safety regulations.
Backlog
We
normally manufacture our products in anticipation of, and not in response to,
customer orders and generally fill orders within a short time after receipt.
Consequently, we seek to maintain adequate inventories of our products in order
to permit us to fill orders promptly after receipt. As of March 13, 2018, we
did not have a significant backlog of customer orders.
Seasonality
Our
business is closely correlated with the construction industry and its demand
for materials that use pigments, such as paints and plastics. This has
generally led to higher sales in our second and third quarters due to increases
in construction and maintenance during warmer weather. Also, pigment
consumption is closely correlated with general economic conditions. When the
economy is in an expansionary state, there is typically an increase in pigment
consumption, while a slowdown in the economy typically results in decreased
pigment consumption. When the construction industry or the economy is in a
period of decline, TOR's sales and profits are likely to be adversely affected.
Patents
and Trademarks
We
currently hold no patents on the processes for manufacturing any of our
products. Seven of TOR’s products, HITOX (4/30/2025), ALUPREM (7/29/2023),
HALTEX (7/28/2019), BARTEX (2/24/2027), TIOPREM (8/5/2018), OPTILOAD
(10/27/2019), and BARYPREM (8/31/2026), are marketed under names which have
been registered with the United States Patent and Trademark Office. Expiration
dates are shown in parenthetical phrases following each product in the preceding
sentence. Trademarks are also registered in certain foreign countries.
Employees
As
of December 31, 2017, our U.S. operations had 45 full-time employees, our
European operation had 45 employees, and our Asian operation had 35 employees, of
which 9 are covered by a collective bargaining agreement with an in-house
union. We have not experienced any work stoppages and believe that our
relations with all of our employees are good.
Available
Information
TOR’s
internet website address is
www.torminerals.com
. Our Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are
available through our internet website as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and
Exchange Commission. Our internet website and the information contained
therein or connected thereto are not intended to be incorporated into this
Annual Report on Form 10-K.
In
addition to the factors discussed in the “Forward-Looking Statement” at the
beginning of this Annual Report on Form 10-K, the following are important
factors that could cause actual results or events to differ materially from
those contained in any forward-looking statements made by or on behalf of the
Company. In addition, you should know that the risks and uncertainties
described below are not the only risks and uncertainties that we face.
Unforeseen risks could arise and problems or issues that we now view as minor
could become more significant. If we were unable to adequately respond to any
risks, our business, financial condition and results of operations could be
materially adversely affected. Additionally, we cannot be certain or give any
assurances that any actions taken to reduce known risks or uncertainties will be
successful.
Risks Related to Our
Business
We are a company with
operations around the world and are exposed to general
economic,
political and regulatory conditions and risks in the countries in which we
have
operations and customers.
We operate
globally and have customers in many countries. Our production facilities are
located in North America, Europe and Asia. Our principal customers are
similarly global in scope and the prices of our most significant products are
typically regional or world market prices. Consequently, our business and
financial results are affected, directly and indirectly, by world economic
conditions, including instability in credit markets, declining consumer and
business confidence, fluctuating commodity prices and interest rates, volatile
exchange rates and other challenges such as the changing regulatory
environment.
Failure to comply
with applicable laws, rules, regulations or court decisions could expose us to
fines, penalties and other costs. Moreover, changes in laws or regulations,
such as unexpected changes in regulatory requirements (including import or
export licensing requirements), or changes in reporting requirements of the U.S.,
European Union ("EU") or Asian governmental agencies, could increase
the cost of doing business in these regions. Any of these conditions may have
an effect on our business and financial results as a whole and may result in
volatile current and future prices for our securities, including our stock.
In addition,
we have significant operations and financial relationships based in Europe. Sales
originating in Europe accounted for approximately 29% of our consolidated sales
revenue in 2017. Adverse conditions in the European economy may negatively
impact our overall financial results due to reduced economic growth and
resulting decreased end-use customer demand.
Finally,
conditions such as the uncertainties associated with war, terrorist activities,
civil unrest, epidemics, pandemics, weather, natural disasters, the effects of
climate change or political instability in any of the countries in which we
operate or have significant customers or suppliers could affect us by causing
delays or losses in the supply or delivery of raw materials and products, as
well as increasing security costs, insurance premiums and other expenses. These
conditions could also result in or lengthen economic recession in the U.S.,
Europe, Asia or elsewhere.
Our Malaysian debt is subject to subjective
acceleration provisions and demand provisions that allow our lending
institutions to accelerate payment at any time. If TMM’s debt was accelerated
under the demand provisions, our working capital and financial condition would
be severely impacted.
TMM has loan agreements with banks in Malaysia that
provide short-term credit facilities and term loans. These borrowings are
subject to certain subjective acceleration provisions based on the judgment of
the banks and demand provisions that provide that the banks may demand
repayment at any time. We believe such a demand provision is customary in
Malaysia for such facilities. At December 31, 2017, our Malaysian debt consisted
of long-term debt of $309,000.
If demand is made by the banks, we may require
additional debt or equity financing to meet our working capital and operational
requirements and to refinance our maturing or demanded indebtedness. Should we
find it necessary to raise additional funds, we may find that such funds are
either not available or are available only on terms that are unattractive in
terms of shareholders’ interest. If this debt could not be repaid or
refinanced, the banks could foreclose and sell our foreign operations, which
would adversely affect our financial condition and liquidity.
Our business is
affected by global economic factors including risks associated with declining
economic conditions.
Our financial results are substantially dependent upon
overall economic conditions in the United States, the EU and Asia. Declining
economic conditions or negative perceptions about economic conditions in any or
all of these locations could result in a substantial decrease in demand for our
products and could adversely affect our business.
Uncertain economic conditions and market instability
make it difficult for us, our customers and our suppliers to forecast demand
trends. Declines in demand would place additional pressure on our results of
operations. The timing and extent of any changes to currently prevailing
market conditions is uncertain and supply and demand may be unbalanced at any
time. Consequently, at present, we are unable to accurately predict future
economic conditions or the effect of such conditions on our financial
conditions or results of operations, and we can give no assurances as to the
timing, extent or duration of the current or future economic cycles impacting
our industry.
We have undertaken cost-savings initiatives to improve
our operating performance, but we may not be able to implement and/or
administer these initiatives in the manner contemplated and these initiatives
may not produce the desired results.
We
have undertaken cost-savings initiatives and may undertake additional
cost-savings initiatives in the future. These initiatives involve, among other
things, staff reductions. Although we expect these initiatives to help us
achieve incremental cost savings and operational efficiencies, we may not be
able to implement and/or administer these initiatives, including staff
reductions, in the manner contemplated, which could cause the initiatives to
fail to achieve the desired results. Additionally, the implementation of these
initiatives may result in impairment charges, some of which could be material.
Even if we do implement and administer these initiatives in the manner
contemplated, they may not produce the desired results. Accordingly, the
initiatives that we have implemented and those that we may implement in the
future may not improve our operating performance and may not help us achieve
cost savings. Failure to successfully implement and/or administer these
initiatives could have an adverse effect on our financial performance.
We strive to improve operating margins through sales
growth, price increases, productivity gains, and improved purchasing
techniques, but we may not achieve the desired improvements.
We
work to improve operating profit margins through activities such as growing
sales to achieve increased economies of scale, increasing prices, improving
manufacturing processes, and adopting purchasing techniques that lower costs or
provide increased cost predictability to realize cost savings. However, these
activities depend on a combination of improved product design and engineering,
effective manufacturing process control initiatives, cost-effective
redistribution of production, and other efforts that may not be as successful
as anticipated. The success of sales growth and price increases depends not
only on our actions but also on the strength of customer demand and
competitors' pricing responses, which are not fully predictable. Failure to
successfully implement actions to improve operating margins could adversely
affect our financial performance.
Our businesses depend on a continuous
stream of new products, and failure to introduce new products could affect our
sales, profitability and liquidity.
One way that we remain competitive is by developing and
introducing new and improved products on an ongoing basis. Customers
continually evaluate our products in comparison to those offered by our
competitors. A failure to introduce new products at the right time that are
price competitive and that provide the features and performance required by
customers could adversely affect our sales, or could require us to compensate
by lowering prices. In addition, when we invest in new product development, we
face risks related to production delays, cost over-runs and unanticipated
technical difficulties, which could impact sales, profitability and/or
liquidity.
Our strategy includes seeking opportunities in new
growth markets, and failure to identify or successfully enter such markets
could affect our ability to grow our revenues and earnings.
Certain
of our products are sold into mature markets and part of our strategy is to
identify and enter into markets growing more rapidly. These growth
opportunities may involve new geographies, new product lines, new technologies
or new customers. We may not be successful capitalizing on such opportunities
and our ability to increase our revenue and earnings could be impacted.
The markets for our
products are highly competitive and subject to intense price competition, which
could adversely affect our sales and earnings performance.
Our
customers typically have multiple suppliers from which to choose. If we are
unwilling or unable to provide products at competitive prices, and if other
factors, such as product performance and value-added services, do not provide
an offsetting competitive advantage, customers may reduce, discontinue, or
decide not to purchase our products. If we could not secure alternate customers
for lost business, our sales and earnings performance could be adversely
affected.
Our multi-jurisdictional tax structure may not provide
favorable tax efficiencies.
We
conduct our business operations in the United States, Malaysia and The
Netherlands and are subject to taxation in those jurisdictions. While we seek
to minimize our worldwide effective tax rate, our corporate structure may not
optimize tax efficiency opportunities. We develop our tax position based upon the
anticipated nature and structure of our business and the tax laws,
administrative practices and judicial decisions now in effect in the countries
in which we have operations, which are subject to change or differing
interpretations. In addition, our effective tax rate could be adversely
affected by several other factors, including: increases in expenses that are
not deductible for tax purposes, the tax effects of restructuring charges or
purchase accounting for acquisitions, changes related to our ability to
ultimately realize future benefits attributed to our deferred tax assets,
including those related to other-than-temporary impairment, as well as the Tax
Cuts and Jobs Act of 2017 regarding the taxation of foreign earnings, which
impacted our decision to indefinitely reinvest foreign earnings. Further, we
are subject to review and audit by both domestic and foreign tax authorities,
which may result in adverse decisions. Increased tax expense could have a
negative effect on our operating results and financial condition.
We are exposed to risks associated with acts of God,
terrorists and others, as well as fires, explosions, wars, riots, accidents,
embargoes, natural disasters, strikes and other work stoppages, quarantines and
other governmental actions, and other events or circumstances that are beyond
our control.
We are
exposed to risks from various events that are beyond our control, which may
have significant effects on our results of operations. While we attempt to
mitigate these risks through appropriate loss prevention measures, insurance,
contingency planning and other means, we may not be able to anticipate all
risks or to reasonably or cost-effectively manage those risks that we do
anticipate. As a result, our operations could be adversely affected by
circumstances or events in ways that are significant and/or long lasting.
The
risks and uncertainties identified above are not the only risks that we face.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial also may adversely affect us. If any known
or unknown risks and uncertainties develop into actual events, these
developments could have material adverse effects on our financial position,
results of operations, and cash flows.
Costs of raw materials and energy have resulted, and
may continue to result, in increased operating expenses and reduced results of
operations.
We purchase large amounts of raw materials and energy
for our manufacturing operations. The cost of these raw materials and energy,
in the aggregate, represent a substantial portion of our operating expenses.
The costs of raw materials and energy generally follow price trends of, and
vary with the market conditions, for crude oil and natural gas, which may be
highly volatile and cyclical. Moreover, the fluctuation of the U.S. Dollar to
other currencies adds to the volatility in raw material costs. There have
been, and will likely continue to be, periods of time when we are unable to
pass raw material and energy cost increases on to our customers quickly enough
to avoid adverse impacts on our results of operations. Our results of
operations have been in the past, and could be in the future, significantly
affected by increases and volatility in these costs. Cost increases also may
increase working capital needs, which could reduce our liquidity and cash
flow. In addition, when raw material and energy costs increase rapidly and are
passed along to customers as product price increases, the credit risks
associated with certain customers can be compounded. To the extent we increase
our product sales prices to reflect rising raw material and energy costs,
demand for products may decrease as customers reduce their consumption and use
substitute products, which may have an adverse impact on our results of
operations.
Climate change poses
both regulatory and physical risks that could adversely impact our results of
operations.
In addition to the possible direct economic impact
that climate change could have on us, climate change regulation could
significantly increase our costs. Energy costs are a significant component of
our overall costs, and climate change regulation may result in significant
increases in the cost of energy.
We are dependent on a limited number of customers and
could experience significant revenue reductions if they use alternative
sources.
We derive a significant portion of our revenue each
quarter from a limited number of customers. Our top 10 customers accounted for
approximately 37% of our consolidated sales revenues in 2017. As a result, a
decrease in sales volume of any one of our top 10 customers could have a
material impact on our business, operating results, and financial condition.
For the years ended December 31, 2017 and 2016, one customer, BASF, represented
approximately 14% and 24%, respectively, of our total consolidated sales and
the loss of this customer could have a material impact on our business,
operating results and financial condition.
Foreign currency fluctuations could adversely impact
our financial condition.
We conduct a
significant portion of our operations outside the United States. Consequently,
fluctuations in currencies of other countries, especially the Euro, may
materially affect our operating results. Because our consolidated financial
statements are presented in U.S. Dollars, we must translate revenues, income
and expenses, as well as assets and liabilities, into U.S. Dollars based on
average exchange rates prevailing during the reporting period or the exchange
rate at the end of that period. Therefore, increases or decreases in value of
the U.S. Dollar against other major currencies will affect our net operating
revenues, operating income and the cost of balance sheet items denominated in
foreign currencies. Foreign exchange rates can also impact the competitiveness
of products produced in certain jurisdictions and exported for sale into other
jurisdictions. These changes may impact the value received for the sale of our
goods versus those of our competitors.
In addition to
currency translation risks, we incur a currency transaction risk whenever one
of our operating subsidiaries enters into a purchase or sales transaction using
a currency different from the operating subsidiary's functional currency. Given
the volatility of exchange rates, particularly the strengthening of the U.S. Dollar
against major currencies or the currencies of large developing countries, we
may not be able to manage our currency transaction and translation risks
effectively. Failure to effectively manage these risks could have an adverse
impact on our financial position, results of operations and cash flows.
(See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Other Matters – Foreign
Operations – Impact of Exchange Rate”).
We are required to make estimates and assumptions that
may differ from actual results.
In preparing our consolidated financial statements in
conformity with generally accepted accounting principles in the United States
of America (“GAAP”), we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from previously estimated amounts
under different conditions and assumptions.
Our competitors are established companies that have
greater experience than us in a number of crucial areas, including
manufacturing and distribution.
There is intense competition with respect to each of
our products. In order to maintain sales volume, we must consistently deliver
high quality products on schedule at competitive prices. Our competitors range
from large corporations with full lines of production capabilities and products,
such as Kronos, Inc., the Chemours Company and J. M. Huber, to small local
firms specializing in one or two products and, more recently, we have faced
competition from a large number of Chinese suppliers. The established
companies have significantly greater experience than us in manufacturing and
distributing products and have considerably more resources and market share
than we do. We may have difficulty competing with these companies.
Production at
our manufacturing facilities could be disrupted for a variety of
reasons,
which could prevent us from producing enough of our products to maintain our
sales
and satisfy our customers' demands.
A disruption
in production at one or more of our manufacturing facilities could have a
material adverse effect on our business. Disruptions could occur for many
reasons, including fire, natural disasters, weather, unplanned maintenance or
other manufacturing problems, disease, strikes or other labor unrest,
transportation interruption, government regulation, political unrest or
terrorism. Alternative facilities with sufficient capacity or capabilities may
not be available, may cost substantially more or may take a significant time to
start production, each of which could negatively affect our business and
financial performance. If one of our key manufacturing facilities is unable to produce
our products for an extended period of time, our sales may be reduced by the
shortfall caused by the disruption and we may not be able to meet our
customers' needs, which could cause them to seek other suppliers.
Our U.S. operation is located on the Gulf of Mexico
coastline and could be adversely affected by hurricanes.
We may be subject to work stoppages for hurricanes,
particularly during the period ranging from June to November. If a hurricane
is severe and our Corpus Christi plant incurs heavy damage and prolonged
downtime, which may not be fully covered by insurance, our financial results
would be adversely affected.
The insurance coverage that we
maintain may not fully cover all operational risks.
We maintain
property, business interruption and casualty insurance but such insurance may
not cover all of the risks associated with the hazards of our business and is
subject to limitations, including deductibles and maximum liabilities covered.
We may incur losses beyond the limits, or outside the coverage, of our
insurance policies, including liabilities for environmental remediation. In the
future, the types of insurance we obtain and the level of coverage we maintain
may be inadequate or we may be unable to continue to maintain our existing insurance
coverage or obtain comparable insurance coverage at a reasonable cost.
Our business is exposed to
risks associated with the creditworthiness of our
suppliers,
customers and business partners and the industries in which our suppliers,
customers and business partners
participate are cyclical in
nature, both of which may adversely affect
our business and
results of operations.
Some of the
industries in which our end-use customers participate, such as the automotive,
electrical, construction and textile industries, are highly competitive, to a
large extent driven by end-use applications, and may experience overcapacity,
all of which may affect demand for and pricing of our products. Our business is
exposed to risks associated with the creditworthiness of our key suppliers,
customers and business partners and reductions in demand for our customers'
products. These risks include the interruption of production at the facilities
of our customers, the reduction, delay or cancellation of customer orders,
delays in or the inability of customers to obtain financing to purchase our
products, delays in or interruptions of the supply of raw materials we purchase
and bankruptcy of customers, suppliers or other creditors. In addition, many of
these industries are cyclical in nature, thus posing risks to us that vary
throughout the year. The occurrence of any of these events may adversely affect
our cash flow, profitability and financial condition.
Our business and financial
results may be adversely affected by various legal and
regulatory
proceedings.
We are subject
to legal and regulatory proceedings, lawsuits and claims in the normal course
of business and could become subject to additional claims in the future, some
of which could be material. The outcome of existing proceedings, lawsuits and
claims may differ from our expectations because the outcomes of litigation are
often difficult to reliably predict. As a result, future adverse rulings,
settlements, or unfavorable developments could result in charges that could
have a material adverse effect on our business, results of operations or
financial condition in any particular period.
The Company is
subject to cyber security risks and may incur increasing costs in an effort to
minimize those risks and to respond to cyber incidents.
The
Company’s business involves the storage and transmission of the Company’s and
its customers’ and suppliers’ proprietary information, and security breaches
could expose it to a risk of loss or misuse of this information, litigation and
potential liability. A number of companies have disclosed security breaches,
some of which have involved intentional attacks. The Company may not have the
resources or technical sophistication to anticipate or prevent rapidly evolving
types of cyber attacks. Attacks may be targeted at the Company, its customers,
or both. If an actual or perceived breach of security occurs, customer and/or
supplier perception of the effectiveness of the Company’s security measures
could be harmed and could result in the loss of customers, suppliers or both.
Actual or anticipated attacks and risks may cause the Company to incur
increasing costs, including costs to deploy additional personnel and protection
technologies, train employees, and engage third party experts and consultants.
A
person who is able to circumvent the Company’s security measures could
misappropriate the Company’s or its customers’ and suppliers’ proprietary
information, cause interruption in its operations, damage its computers or
those of its users, or otherwise damage its reputation and business. Any
compromise of security could result in a violation of applicable privacy and
other laws, significant legal and financial exposure, damage to the Company’s
reputation, and/or a loss of confidence in its security measures, which could
harm its business.
The
Company’s servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, including “denial-of-service”
type attacks. The Company may need to expend significant resources to protect
against security breaches or to address problems caused by breaches. Security
breaches, including any breach by the Company or by persons with whom it has
commercial relationships that result in the unauthorized release of its users’
personal information, could damage its reputation and expose it to a risk of
loss or litigation and possible liability.
As
of the date of this Report, we do not have any unresolved staff comments.
We
believe that all of the facilities and equipment of the Company are adequately
insured, in generally good condition, well maintained, and generally suitable
and adequate to carry on our business.
United States Operations
We
operate a plant in Corpus Christi, Texas, that manufactures HITOX, BARTEX,
HALTEX, OPTILOAD and TIOPREM. During 2017, the Corpus Christi plant operated at
approximately 58% of capacity. The facility is located in the Rincon
Industrial Park on approximately 15 acres of land, 14 acres leased from the
Port and approximately one acre of which we own. The lease payment is subject
to "equalization valuation" every five years. The equalization
valuation is used as a means of equalizing rentals on various Port lands and is
determined solely at the discretion of the Port. The last equalization
valuation was July 2017 at which time the annual lease increased from
approximately $95,000 to $178,000. We executed an amended lease agreement with
the Port on July 11, 2000, which extended the expiration date of the lease to
June 30, 2027.
We
own the improvements on the plant site, including a 3,400 square-foot office, a
5,000 square-foot laboratory building, a maintenance shop and several
manufacturing and warehousing buildings containing a total of approximately
90,000 square feet of space. The leased premises includes approximately 350
lineal feet of bulk-headed industrial canal frontage, which provides access to
the Gulf of Mexico inter-coastal waterway system through the Corpus Christi
ship channel. This property is also serviced by a Company owned railroad spur
that runs through our property to the canal.
European Operations
Our
European Operation, TPT, is located in Hattem, The Netherlands, near the major
shipping port of Rotterdam. TPT operated at approximately 75% of capacity in 2017.
In 2017, TPT completed the second phase of an expansion project to increase
capacity and diversify its production capabilities. The factory site, which
the Company owns, consists of a 20,000 square foot steel frame metal building,
a 2,000 square foot office building, and a 10,000 square foot warehouse with a
loading dock.
The
Netherlands plant and improvements are encumbered by a mortgage held by
Rabobank. (See “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity – European Operations”).
Asian Operations
Our
Asian Operation, TMM, manufactures HITOX and TIOPREM in our plant in Ipoh,
Malaysia, and is close in proximity to the Port of Lumut. The plant site has
38 acres of land that TMM has a right to use through 2074. The TMM plant
operated at approximately 63% of capacity in 2017.
TMM
owns the improvements on the plant site, including a 3,960 square-foot office,
a 1,980 square-foot laboratory, a spare parts storage warehouse, an employee
cafeteria, and several manufacturing and warehousing buildings containing a
total of approximately 106,500 square feet of space.
The
Malaysian plant and improvements are encumbered by liens held by HSBC Bank
Malaysia Berhad (“HSBC”) and RHB Bank Berhad (“RHB”). (See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
– Asian Operations”).
As
of the date of this Report, we are involved in a legal proceeding which is ordinary
and routine litigation to our business. We do not expect this matter to have a
material impact on our business, results of operations, cash flows or financial
condition.
Not
applicable.
PART III
The
following table sets forth the name, age and position of each of our directors
and executive officers at March 27, 2018.
|
Director Nominee
|
Age
|
Present Office(s) Held In Our Company
|
Since
|
|
Olaf Karasch
|
60
|
President, Chief Executive Officer
|
2006
|
|
Douglas M. Hartman
|
50
|
Chairman of the Board
|
2001
|
|
Julie Ann Ehmann
|
58
|
None
|
2009
|
|
Thomas W. Pauken Esq.
|
74
|
None
|
1999
|
|
Bernard A. Paulson
|
89
|
None
|
1992
|
|
Steven E. Paulson
|
54
|
None
|
2008
|
|
Tan Chin Yong, PhD.
|
53
|
None
|
2001
|
|
|
|
|
|
|
|
|
|
|
Dr.
Olaf Karasch,
age 60, was appointed
as our Executive Vice President, Operations, on September 4, 2002. He was
appointed President and Chief Executive Officer and elected as a director on
July 1, 2006. Dr. Karasch served as Managing Director of our Company’s wholly
owned Netherlands subsidiary, TOR Processing and Trade, B.V. (“TP&T”),
since joining our Company on May 16, 2001. In January 1996, Dr. Karasch was
managing director for Flohme Chrome Plating and Plasma Coating. In 1997, he
joined the Royal Begemann Group in The Netherlands, TP&T’s predecessor,
until we purchased it in 2001. Dr. Karasch received his Ph.D. in Mineralogy at
Reinisch-Westfalische University in Aachen, Germany, where he specialized in
submicronization (particle size reduction below one micron). We believe Dr.
Karasch’s qualifications to sit on the Board of Directors include his extensive
business experience in leading and managing businesses that have domestic and
foreign operations, his entrepreneurial experience, as well as his direct
knowledge of the mineral industry.
Douglas
M. Hartman, MBA,
age 50, has served
as a director of our Company since 2001. Mr. Hartman has served as our
Chairman of the Board since May 2014. Mr. Hartman currently serves as Chairman
and President of Hartman & Associates, Inc., a venture capital firm in
Austin, Texas, and has served as its President since 1999. He also serves as a
director of The Software Revolution, Inc., a provider of automated legacy
computer system modernization services, since 2001. He served as a
Commissioner on The Texas Facilities Commission from 2009 – 2014. Mr. Hartman
is the sole Trustee for The Douglas MacDonald Hartman Family Irrevocable
Trust. We believe Mr. Hartman’s qualifications to sit on the Board of
Directors include his leadership and management experience in several
industries, in particular his role as President and Chief Operating Officer of
Hartland Bank N.A., his 10 years of direct experience as a corporate banker,
and his varied experiences as an investor and director in several private and
publicly held companies. He also served as the Company’s Chairman of the Audit
Committee.
Julie Ann Ehmann, CPA,
age 58, has served as a director of our Company since
2009. Ms. Ehmann has been an accountant with Buckley and Associates since 1991
and was elected President of Buckley and Associates, PC in 2008. Ms. Ehmann
has served as a director of Driscoll Children’s Hospital Development Foundation
and the Texas A&M University Corpus Christi Foundation since 2008, where
she also served as president, vice president and treasurer. In addition, she
has served in the following roles as: (1) director of the Art Museum of South
Texas since 2007, where she also served as chairman, past chairman and
treasurer; (2) treasurer of the Texas State Aquarium since 2011; (3) treasurer
and secretary of the Corpus Christi Yacht Club; and (4) as a member of the
Business Advisory Board of American Bank since 2009. We believe Ms. Ehmann’s
qualifications to sit on the Board of Directors include her leadership
experience, specifically her experience as a Certified Public Accountant, her
experience in finance and her experience as a director of private
organizations.
Thomas
W. Pauken, Esq.,
age 74, has served
as a director of our Company since 1999. Mr. Pauken has been President of TWP,
Inc., an investment company in Dallas, Texas, since 1991, and as Commissioner
of the Texas Workforce Commission from 2008 to 2013. Mr. Pauken is also a
director of Future Matrix, a privately held company. We believe Mr. Pauken’s
qualifications to sit on the Board of Directors include his leadership
experience, specifically his experience as an attorney, and his experience as a
director of both private and publicly traded companies.
Bernard
A. Paulson,
age 89, has served as a
director of our Company since 1992 and served as Chairman from 2000 to 2014.
Mr. Paulson has served as chairman of Contech Control Services since 2014. Mr.
Paulson has served as a director of the Del Mar College Foundation since 1992,
Driscoll Children’s Hospital Development Foundation and the Art Museum of South
Texas since 1994. Mr. Paulson is the father of Steven E. Paulson. We believe
Mr. Paulson’s qualifications to sit on the Board of Directors include his
executive leadership and management experience in several businesses, his over
50 years of experience as an engineer, and his experience as a director of both
private and publicly traded companies.
Steven
E. Paulson,
age 54, has served as a
director of our Company since 2008. Mr. Paulson has severed as the president
and Chief Executive Officer of Contech Control Services since 2014. Mr.
Paulson served as President and a director of TAG from 1996 until its sale to
Emerson Electric in December 2007; following the sale, he continued to serve as
a consultant there through 2012. Mr. Paulson is the son of Bernard A.
Paulson. We believe Mr. Paulson’s qualifications to sit on the Board of
Directors include his extensive business experience in leading and managing
businesses, his experience as an engineer, his knowledge of the manufacturing
industry, as well as his experience analyzing financial statements.
Tan
Chin Yong, Ph.D.,
age 53, has served
as a director of our Company, as well as our subsidiary company in Malaysia,
TOR Minerals Malaysia Sdn. Bhd., since 2001. Dr. Tan has also served as Chief
Executive Officer of Kaizen Holdings Sdn. Bhd. in Malaysia since 2008. We
believe Dr. Tan’s qualifications to sit on the Board of Directors include his
extensive business experience in leading and managing businesses that have
foreign operations as well as his entrepreneurial experience.
Board
Leadership Structure
The
roles of Chairman and Chief Executive Officer are separate positions within our
Company. Mr. Hartman serves as our Chairman and Dr. Karasch serves as our
Chief Executive Officer. We separate the roles of Chairman and Chief Executive
Officer in recognition of the differences between the two roles. The Chief
Executive Officer is responsible for setting the strategic direction for the
Company and the day to day leadership and performance of the Company, while the
Chairman of the Board provides guidance to the Chief Executive Officer and
presides over meetings of the Board of Directors.
Risk Oversight
The
Board of Directors has an active role, as a whole and also at the committee
level, in overseeing management of our risks. The Board of Directors regularly
receives reports from senior management on areas of material risk to our
Company, including our credit, liquidity, operational and legal and regulatory
risks. Pursuant to its charter, the Audit Committee reviews our major
financial risk exposures and the steps management has taken to monitor and
control such exposures. The Audit Committee also meets periodically with
management to discuss policies with respect to risk assessment and risk
management. In addition, the Compensation and Incentive Plan Committee oversees
the management of risks relating to our executive and non-executive
compensation plans and arrangements, and the Executive Committee manages risks
associated with the independence of the Board of Directors and potential
conflicts of interest. While each committee oversees certain risks and the
management of such risks, the entire Board of Directors is regularly informed
through committee reports about such risks.
Section
16(a) Beneficial Ownership Reporting Compliance
Officers,
directors and greater than ten-percent (10%) stockholders are required by
Securities and Exchange Commission (the “SEC”) regulations to furnish us with
copies of all Section 16(a) forms they file. Based on our review of documents
provided, all such reports required to be filed pursuant to Section 16(a)
during the fiscal year ended December 31, 2017, were timely filed.
Committees
of Our Board
Our
Board of Directors has the following three standing committees: (1) Audit
Committee; (2) Compensation and Incentive Plan Committee; and (3) Executive
Committee.
Audit
Committee
The
Audit Committee is composed of three outside directors and operates under a
written charter adopted by our Board of Directors according to the rules and
regulations of the SEC and the Nasdaq Stock Market Marketplace Rules. A copy
of the charter may be found on our website,
www.torminerals.com
. The
Audit Committee met four times in 2017. The Audit Committee members are Ms.
Ehmann, Chairman, Mr. Pauken and Dr. Tan. Each member of our Audit Committee,
as determined by the Board of Directors, qualifies as independent as such term
is defined under the applicable rules of the Nasdaq Stock Market and the SEC.
Our Board of Directors has reviewed the education, experience and other
qualifications of each of the members of its Audit Committee. After review,
our Board of Directors has determined that Julie A. Ehmann, CPA, meets the
SEC’s definition of an “audit committee financial expert.”
The
Audit Committee is the communication link between our Board of Directors and
our independent auditors. In addition to recommending the appointment of the
independent auditors to our Board of Directors, the Audit Committee reviews the
scope of the audit, the accounting policies and reporting practices, internal
control, compliance with our policies regarding business conduct and other
matters as deemed appropriate.
Independent
Auditors
For the years ended December 31, 2017 and 2016, the Company
retained BDO USA, LLP (“BDO”), an independent registered public
accounting firm, to provide audit
services to the Company and, in consideration of such services, paid to BDO the
amounts specified under the heading “Independent Public Accountants” (see Item
14).
The audit reports of BDO on the Company's consolidated financial
statements for the years ended December 31, 2017 and 2016 did not contain an
adverse opinion or disclaimer of opinion, and these statements were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2017
and 2016, there were no disagreements with BDO on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreement, had it not been resolved to the satisfaction of
BDO, would have caused BDO to make reference thereto in its reports on the
financial statements for such periods. During this time, there have been no
"reportable events," as that term is described in Item 304(a)(1)(v)
of Regulation S-K.
|
|
REPORT OF THE AUDIT COMMITTEE
|
|
The
following is the report of the Audit Committee with respect to our audited
consolidated financial statements for the fiscal year ended December 31, 2017.
The information contained in this report shall not be deemed to be “soliciting
material” or to be filed with the SEC, nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent that we specifically incorporate it by reference in such filing.
Review
with Management
The
Audit Committee has reviewed and discussed with management and our independent
auditors the audited consolidated financial statements of TOR Minerals
International, Inc. The committee reviewed with our independent auditors the
matters required to be discussed by Auditing Standards No. 1301, Communications
with Audit Committee regarding their judgments as to the quality, not just the
acceptability, of the accounting principles of TOR Minerals International, Inc.
and such other matters as the committee and the auditors are required to
discuss under auditing standards generally accepted in the United States.
Additionally, the committee discussed with the auditors their independence from
the Company, and our management, including the matters in the written
disclosures and the letter provided by the independent auditors to the Audit
Committee as required by the Public Company Accounting Oversight Board
(“PCAOB”) Rule 3526, and considered the compatibility of non-audit services
with the auditors’ independence.
Review
and Discussions with Independent Accountants
The
Audit Committee held three regularly scheduled meetings with the independent
auditors prior to the inclusion of the consolidated financial statements into
the periodic filings and one special meeting during our Company’s fiscal year
ended December 31, 2017.
The
Audit Committee has received the written disclosures and letter from BDO as
required by the PCAOB,
confirming their independence from us and our
related entities within the meaning of the rules and regulations of the PCAOB,
and the Audit Committee has discussed with BDO their independence from us.
Based
on the foregoing reviews and discussions, the committee recommended to our
Board of Directors that the audited consolidated financial statements of TOR
Minerals International, Inc. be included in our Form 10-K for the year ended
December 31, 2017 for filing with the SEC.
Based
on the review and discussions referred to above, the Audit Committee
recommended to our Board of Directors that BDO be appointed as the independent
auditors for the fiscal year ending December 31, 2018. In the event the
appointment of BDO is not ratified by our stockholders, the Audit Committee
will consider the appointment of other independent auditors.
Executive Committee
We
established an Executive Committee in September 2002 to advise the President
and Chief Executive Officer in matters of debt financing, contract negotiations
and other situations that may arise. The Executive Committee met four times in
the fiscal year ended December 31, 2017. Members of the Executive Committee
include Ms. Julie Ehmann and Messrs. Douglas Hartman (chairman), Olaf Karasch,
Bernard Paulson and Steven Paulson.
Nomination
of Directors
We
do not have a standing nominating committee or a committee performing similar
functions. Our Board of Directors believes that it is appropriate for us not
to have such a committee because director nominees have historically been
selected by our Board of Directors, six members of which are considered
independent. The independent directors are Ms. Julie Ehmann, Messrs. Bernard
Paulson, Douglas Hartman, Thomas Pauken, Steven Paulson and Dr. Tan Chin Yong.
In accordance with the Nasdaq Stock Market Marketplace Rules, a majority of our
independent directors recommend director nominees for the Board of Director’s
selection. Because we do not maintain a standing nominating committee, there
is no written nominating committee charter; however, we have adopted the
nomination policy described in this section by board resolution. All of this
year’s nominees for director are current directors standing for re-election.
We did not pay any fee to any third party to identify or evaluate potential
nominees.
Our
Board of Directors has no minimum qualifications that nominees must meet in
order to be considered. In the fulfillment of their responsibilities to
identify and recommend to our Board of Directors individuals qualified to
become board members, the independent directors will take into account all
factors they consider appropriate, which may include experience,
accomplishments, education, understanding of the business and the industry in
which it operates, specific skills, general business acumen and the highest
personal and professional integrity. Generally, the independent directors will
first consider current board members because they meet the criteria listed
above and possess an in-depth knowledge of our Company, its history, strengths,
weaknesses, goals and objectives. This level of knowledge has proven very
valuable to our Company. All current nominees to our Board of Directors were
approved by a majority or all of our independent directors. Our Board of
Directors has no formal policy with regard to the consideration of diversity in
identifying director nominees, but the Board of Directors believes that the
backgrounds and qualifications of the directors, considered as a group, should
provide a significant composite mix of experience, knowledge and abilities that
will allow the Board of Directors to fulfill its responsibilities. Nominees
are not discriminated against on the basis of race, religion, nation origin,
sexual orientation, disability or any other basis proscribed by law.
The
independent directors will consider stockholder recommendations for candidates
to serve on our Board of Directors, and will evaluate such candidates in the
same manner they evaluate nominees recommended by the independent directors.
In order to provide the independent directors time to evaluate candidates prior
to submission to our stockholders for vote at the 2019 Annual Meeting,
stockholders desiring to recommend a candidate must submit a recommendation to
the Secretary of the Company at our corporate office by February 1, 2019. The
recommendation must contain the following: (i) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the stockholder is a holder of record
of stock of our Company entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (iv) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the SEC, had
the nominee been nominated, or intended to be nominated, by a majority of
independent directors; and (v) the consent of each nominee to serve as a
director of our Company, if so elected.
Stockholder Communication with Our Board of Directors
Our
Board of Directors has adopted a formal policy by which our stockholders may
communicate with members of our Board of Directors by mail addressed to an
individual member of the Board of Directors, to the full Board of Directors, or
to a particular committee of the Board of Directors, at the following address:
c/o Corporate Secretary, TOR Minerals, Inc. 722 Burleson Street, Corpus
Christi, Texas 78402. Any such communication must contain:
-
a representation that the
stockholder is a holder of record of our capital stock;
-
the name and address, as they
appear on our books, of the stockholder sending such communication; and
-
the class and number of shares of
our capital stock that are beneficially owned by such stockholder.
The
Corporate Secretary will forward such communications to our Board of Directors
or the specified individual director to whom the communication is directed
unless such communication is unduly hostile, threatening, illegal or similarly
inappropriate, in which case the Corporate Secretary has the authority to
discard the communication or to take the appropriate legal action regarding
such communication. The foregoing information is also available on our website
at
www.torminerals.com
.
Code
of Ethics
We
have adopted a Code of Ethics and Business Conduct that applies to all of our
directors and employees, including our principal executive officer, principal
financial officer, principal accounting officer or controller and persons
performing similar functions. The Code of Ethics and Business Conduct may be
found on our website at
www.torminerals.com
.
Compensation and Incentive
Plan Committee
The
Compensation and Incentive Plan Committee (the “Comp Committee”) currently
consists of Messrs. Steven E. Paulson (Chairman), Thomas Pauken and Bernard
Paulson, each of which our Board of Directors has determined qualify as
independent, as that term is defined under the applicable rules of the Nasdaq
Stock Market, and operates under a written charter adopted by our Board of
Directors. A copy of the charter may be found on our website at
www.torminerals.com
.
The Comp Committee met three times in 2017.
The
Comp Committee formulates and presents to our Board of Directors
recommendations as to the base salaries for all officers of our Company. The
Comp Committee specifically reviews, approves and establishes the compensation
for our executive officers. This committee is authorized to (1) select persons
to receive awards under the Plan; (2) determine the terms, provisions and
amount of the awards, if any; (3) to review performance of persons selected for
bonuses; and (4) otherwise administer the Plan to the full extent provided in
such Plan. The Comp Committee is not authorized to delegate its authority to
other persons.
Overview
The
Comp Committee is responsible for administering the executive compensation
program for our Company. The Comp Committee is responsible for establishing
appropriate compensation goals for the executive officers of our Company,
evaluating the performance of such executive officers in meeting such goals and
making recommendations to our Board of Directors with regard to executive
compensation. Our Company’s compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, and achievement of specific operation, financial and
strategic objectives. None of the current members of our Comp Committee has
ever been an employee of ours or any of our subsidiaries. Except for Olaf
Karasch, our Chief Executive Officer and President, who is also a member of our
Board of Directors, none of our executive officers serve as a member of our
Board of Directors or Comp Committee. Dr. Karasch participates in compensation
discussions concerning our executive officers except when such discussion
pertains to his compensation.
The
Comp Committee conducts a bi-annual review of the compensation packages of our
executive officers, which accounts for factors which it considers relevant,
such as the Company’s financial performance and the performance of the
executive officer under consideration. The Comp Committee does not engage in any
benchmarking of total compensation or any material element of compensation
against any specific companies or groups of companies. The particular elements
of our compensation programs for our executive officers are described below.
In
carrying out its duties to establish the executive compensation program, the
Comp Committee is guided by the Company’s desire to achieve the following
objectives:
-
attract and retain high-quality
leadership;
-
provide competitive compensation
opportunities that support our overall business strategy and objectives; and
-
effectively serve the interests of
our stockholders.
These
objectives are implemented by the Comp Committee through its executive
compensation program. In 2017, the compensation program established by the Comp
Committee was comprised of the following three primary components:
The
Comp Committee has the flexibility to use these primary components, along with
certain other benefits, in a manner that attempts to effectively implement its
stated objectives with respect to the compensation arrangements for each of our
executive officers. Each of the primary components, and the certain other
benefits, are discussed in more detail below.
Base
Salary
Our
executive officers’ salaries are determined by evaluating their relative roles
and responsibilities. Individual salaries are reviewed annually and salary
increases are based on the Company’s overall performance and the executive’s
individual performance during the preceding year. The Comp Committee does not
assign relative weights or importance to any specific measure of our financial
performance.
In
determining the base salary for 2017 for Dr. Olaf Karasch, our President and
Chief Executive Officer, the Comp Committee considered the Company’s financial
performance and his performance. Based on these factors, the Committee
established Dr. Karasch’s salary under his employment agreement as $355,198 in
2017 and $343,250 in 2016. Mr. Schomp, our Executive Vice President, received
a base salary of $208,993 in 2017 and $208,993 in 2016. Ms. Russell, our
Secretary, Treasurer and Chief Financial Officer, received a base salary of $122,740
in 2017 and $120,334 in 2016.
Annual
Bonuses
The
annual compensation of our executive officers consists of a base salary and
discretionary bonus payments. Our Board of Directors may issue bonuses to our
executive officers based on the financial performance of the Company and the
individual performance of the officer. The Comp Committee reviewed the 2017
and 2016 fiscal year performance of the Company and determined that Dr. Karasch
would receive a bonus, in the amount of approximately $39,000, for 2017. The
Comp Committee determined that there would not be any bonuses approved for our
executive officers in 2016.
Stock
Option Grants
The
Plan, intended to advance the interests of our Company by encouraging stock
ownership on the part of key employees, was approved by the stockholders on May
5, 2000 and amended by stockholder approval on May 11, 2012. This amendment
increased the number of shares subject to the Plan to 500,000 shares. The Plan
is intended to provide our directors, executive officers and employees the
opportunity to acquire a proprietary interest in the success of our Company by
granting stock options to such directors, executive officers and employees.
Specifically, the plan is intended to advance the interests of our Company by:
-
enabling us to attract and retain
the best available individuals for positions of substantial responsibility;
-
providing additional incentive to
such persons by affording them an opportunity for equity participation in our
business; and
-
rewarding our directors, executive
officers and employees for their contributions to our business.
The
Plan is administered by our Comp Committee. Both “Incentive Stock Options” and
“Non-statutory Options” may be granted under the Plan from time to time.
Incentive Stock Options are stock options intended to satisfy the requirements
of Section 422 of the Internal Revenue Code. Non-statutory Options are stock
options that do not satisfy the requirements of Section 422 of the Internal
Revenue Code.
All
options under the Plan are required to be at an exercise price of not less than
100% of the fair market value of the stock on the date of grant. Each option
expires not later than ten years from the date the option was granted. Options
are exercisable in installments as provided in individual stock option agreements.
Stock
options are the primary source of long-term incentive compensation for our
executive officers and directors. Each of our executive officers and directors
are eligible to participate in the Plan.
Stock
option grants are made at the discretion of the Comp Committee. Each grant is
designed to align the interests of the executive officer with those of our
stockholders and provide each individual with a significant incentive to manage
our Company from the perspective of an owner with an equity stake in the
business. Each grant allows the officer to acquire shares of Common Stock at a
fixed price per share (which is required to be the market price on the grant
date) over a specified period of time (up to ten years). Shares underlying each
option become exercisable in a series of installments over a vesting period and
are contingent upon the officer’s continued employment with our Company.
Accordingly, the option will provide a return to the executive officer only if
he or she remains employed by our Company during the vesting period so long as
the market price of the shares appreciates over the option term.
The size of the option grant to each executive officer
is set by the Comp Committee at a level that is intended to create a meaningful
opportunity for stock ownership based upon the individual’s current position
with our Company, the individual’s personal performance in recent periods and
his or her potential for future responsibility and promotion over the option
term. The Comp Committee also takes into account the number of unvested
options held by the executive officer in order to maintain an appropriate level
of equity incentive for that individual. The relevant weight given to each of
these factors varies from individual to individual. Our Company does not have
security ownership requirements or guidelines for its executive officers.
The
Comp Committee reviewed the 2017 fiscal year performance of the Company and
determined that there would not be any option grants approved for our executive
officers in 2016.
On April 21, 2016, the Board of Directors of TOR
Minerals International, Inc. (the “Company”) granted the officers of the
Company non-statutory stock options (the “Performance Awards”). The
Performance Awards, which are subject to the terms, definitions and provisions
of the 2000 Incentive Plan as amended, consist of the following grants:
|
Officer's Name
|
|
Position
|
|
Five Year Performance
Grant Award
|
|
Olaf Karasch
|
|
President & Chief
Executive Officer
|
|
150,000
|
|
Mark Schomp
|
|
Executive Vice President,
Sales & Marketing
|
|
50,000
|
|
Barbara Russell
|
|
Treasurer & Chief
Financial Officer
|
|
15,000
|
The Performance Awards will vest over a five year
period based solely on the basis of satisfaction of the performance criteria
established annually by the Company’s Board of Directors. The Performance
Periods begin on January 1 of each calendar year and ending on December 31 of
such year. The first Performance Period shall begin on January 1, 2016 and end
on December 31, 2016. The final Performance Period shall begin on January 1,
2020 and shall end on December 31, 2020. The exercise price for the
Performance Awards was set at the closing price of the Company’s stock on
January 4, 2016, as established by NASDAQ, at $4.51 per share.
Agreements
with Employees
On
June 3, 2016, the Board of Directors of the Company entered into a Service
Agreement with the Company’s President and Chief Executive Officer, Dr. Olaf
Karasch. Under the terms of the Service Agreement, Dr. Karasch’s annual
salary, on the date of the agreement, will be €311,016 (Euro). The
Service Agreement contains a “Change in Control” provision whereby Dr. Karasch
will be assured a minimum of two (2) years of compensation following any Change
in Control (as defined in the agreement), whether as an active employee of the
Company or through the severance payment provided in the Service Agreement,
unless Dr. Karasch is terminated by the Company for “Cause” (as defined
in the Service Agreement) or his employment is terminated by him other than for
“Good Reason” (as defined in the Service Agreement).
In
addition, the Board of Directors updated the Severance Agreement with the
Company’s Treasurer and Chief Financial Officer, Barbara Russell, on June 3,
2016. Under the terms of the Severance Agreement, Ms. Russell will be
assured a minimum of one year of compensation following any Change in Control
(as defined in the applicable Severance Agreement), whether as an active
employee of the Company or through the severance payment provided in the
Severance Agreement, unless Ms. Russell is terminated by the Company
for “Cause” (as defined in the applicable Severance Agreement) or her employment
is terminated by the Company for other than for “Good Reason” (as defined in the
applicable Severance Agreement).
Section 162(m) of the Internal Revenue Code
Section
162(m) of the Internal Revenue Code (“Section 162(m)”) generally disallows a
tax deduction to publicly held companies for compensation paid to certain of
their executive officers, to the extent that compensation exceeds $1 million
per covered officer in any fiscal year. The limitation applies only to
compensation that is not considered to be performance-based. We generally
intend to limit non-performance based compensation to our executive officers
consistent with the terms of Section 162(m) so that compensation will not be
subject to the $1 million deductibility limit. Cash and other
non-performance-based compensation paid to our executive officers for fiscal
year 2017 did not exceed the $1 million limit per officer.
Review
of All Components of Executive Compensation
The
Comp Committee has reviewed all components of compensation for our named
executive officers (our “NEOs”), including salary, bonus, accumulated realized
and unrealized stock option gains, the dollar value to the NEO and cost to us
of all perquisites and other personal benefits. Based on this review, the Comp
Committee finds the total compensation for our NEOs in the aggregate to be
reasonable and not excessive. The Comp Committee specifically considered that
our Company does not maintain any employment contracts, with the exception of
its employment agreement with Dr. Karasch, as described above under the section
entitled “Agreements with Employees.” It should be noted that when the Comp
Committee considers any component of total compensation of our NEOs, the
aggregate amounts and mix of all the components, including accumulated
(realized and unrealized) option gains, are taken into consideration in the
Comp Committee’s decisions.
Our
Chief Executive Officer assists the Comp Committee in assessing and designing
our Company’s compensation program, and he attended all of the Comp Committee’s
meetings held in 2017 but was not present during voting or deliberations of his
compensation. Except as described herein, the Comp Committee did not adopt any
new compensation programs or amend any existing compensation policies in 2017.
Internal Pay Equity
The
Comp Committee believes that the relative difference between the Chief
Executive Officer’s compensation and the compensation of our Company’s other
executives is consistent with similar compensation differences found in our
reference labor market.
Management
– Executive Officers
Our
Comp Committee discusses the total compensation of our NEOs, a group that
includes our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”),
and our other most highly compensated executive officers whose total
compensation for our fiscal year ended December 31, 2017 exceeded $100,000,
which included one other person. Each of our NEOs is elected annually, and as
of December 31, 2017, our NEOs were as follows:
|
Name
|
Age
|
Position
|
Since
|
|
Olaf Karasch
|
60
|
President and Chief Executive Officer
|
2006
|
|
Mark Schomp
|
57
|
Executive Vice President
|
2006
|
|
Barbara Russell
|
65
|
Chief Financial Officer, Treasurer and Secretary
|
2010
|
Dr.
Olaf Karasch, President and Chief Executive Officer —
Dr. Olaf Karasch was appointed President and Chief
Executive Officer by the Board on July 1, 2006. Dr. Karasch resides in Germany
and holds his office at our European operation, TP&T, located in Hattem,
Netherlands. Dr. Karasch had served as Executive Vice President, Operations,
since September 4, 2002. Dr. Karasch had served as Managing Director of
TP&T since joining the Company on May 16, 2001. In January 1996, Dr.
Karasch was managing director for Flohme Chrome Plating and Plasma Coating. In
1997, he joined the Royal Begemann Group in The Netherlands until its purchase
by TOR in 2001. Dr. Karasch received his Ph.D. in Mineralogy at
Reinisch-Westfalische University in Aachen, Germany, where he specialized in
submicronization (particle size reduction below one micron).
Mark Schomp, Executive Vice President —
Mark
Schomp was appointed Executive Vice President by the Board on July 1, 2006.
Mr. Schomp had served as Vice President, Sales and Marketing since September 4,
2002. Mr. Schomp is a Chemical Engineer who spent 15 years in sales and sales
management with Alusuisse-Lonza, a large European manufacturer of aluminum,
specialty aluminas, and other products. He has wide experience in selling
pigments and fillers for plastics and coatings applications. Mr. Schomp joined
the Company’s sales department in 2001.
Barbara
Russell, Secretary, Treasurer and Chief Financial
Officer
– Barbara Russell was appointed Chief
Financial Officer on February 12, 2010 and Secretary and Treasurer on May 23,
2008. Ms. Russell had served as the Company’s Controller since 1999 and as the
Acting Chief Financial Officer since May of 2008. Prior to joining the Company
in 1997, she was Chief Executive Officer of the South Texas Lighthouse for the
Blind.
No
executive officer of the Company has any family relationship with any other director
or executive officer of the Company.
Summary Compensation Table
for 2017 and 2016
The
following table sets forth information concerning the compensation of our NEOs
for the fiscal years ended December 31, 2017 and 2016.
|
Name and Principal
Position
|
Year
|
Salary
|
Bonus
|
Option
Awards
(1)
|
All Other
Compensation
|
Total
|
|
Olaf Karasch
President and
|
2017
|
$
|
355,198
|
|
$
|
39,258
|
|
$
|
18,765
|
|
$
|
20,502
|
(2)
|
$
|
433,723
|
|
Chief Executive Officer
|
2016
|
$
|
343,250
|
|
$
|
-
|
|
$
|
27,105
|
|
$
|
17,122
|
(2)
|
$
|
387,477
|
|
Barbara Russell
Chief Financial Officer
|
2017
|
$
|
122,740
|
|
$
|
-
|
|
$
|
1,774
|
|
$
|
-
|
|
$
|
124,514
|
|
Treasurer and Secretary
|
2016
|
$
|
120,334
|
|
$
|
-
|
|
$
|
2,710
|
|
$
|
-
|
|
$
|
123,044
|
|
Mark J. Schomp
Executive Vice President,
|
2017
|
$
|
208,993
|
|
$
|
-
|
|
$
|
3,128
|
|
$
|
6,000
|
(3)
|
$
|
218,121
|
|
Marketing and Sales
|
2016
|
$
|
208,993
|
|
$
|
-
|
|
$
|
9,035
|
|
$
|
6,000
|
(3)
|
$
|
224,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
fair value per option at the date of grant, computed in accordance with FASB
ASC Topic 718, was valued using the Black-Scholes option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
|
2.10%
|
|
1.90%
|
|
Expected dividend yield
|
|
|
|
0.00%
|
|
0.00%
|
|
Expected volatility
|
|
|
|
0.48
|
|
0.59
|
|
Expected term (in years)
|
|
|
|
7.00
|
|
7.00
|
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 the grant date.
(2)
Consists of Dr. Karasch’s Netherlands insurance policy
and taxes.
(3)
Consists of car allowance.
Outstanding
Equity Awards at Fiscal Year-End for 2017
The following table sets forth
information concerning unexercised options and stock that has not vested for
each of our executive officers named in the Summary Compensation Table
outstanding as of December 31, 2017:
|
|
|
Option Awards
|
|
|
|
|
|
|
|
|
Number of Securities Underlying
Unexercised Options
|
|
Option
|
|
Name
|
|
(#) Exercisable
|
|
(#) Unexercisable
|
|
Exercise
Price
|
|
Expiration
Date
|
|
Olaf Karasch
|
|
10,000
|
(2)
|
|
|
|
|
$
|
12.96
|
|
2/25/2021
|
|
|
|
10,000
|
(3)
|
|
|
|
|
$
|
16.77
|
|
5/18/2022
|
|
|
|
8,000
|
(4)
|
|
2,000
|
(4)
|
|
$
|
11.39
|
|
5/10/2023
|
|
|
|
6,000
|
(5)
|
|
4,000
|
(5)
|
|
$
|
10.31
|
|
5/8/2024
|
|
|
|
10,125
|
(6)
|
|
90,000
|
(6)
|
|
$
|
4.51
|
|
1/1/2026
|
|
Barbara
Russell
|
|
1,019
|
(1)
|
|
|
|
|
$
|
7.50
|
|
6/18/2020
|
|
|
|
2,500
|
(2)
|
|
|
|
|
$
|
12.96
|
|
2/25/2021
|
|
|
|
2,500
|
(3)
|
|
|
|
|
$
|
16.77
|
|
5/18/2022
|
|
|
|
2,000
|
(4)
|
|
500
|
(4)
|
|
$
|
11.39
|
|
5/10/2023
|
|
|
|
1,500
|
(5)
|
|
1,000
|
(5)
|
|
$
|
10.31
|
|
5/8/2024
|
|
|
|
1,313
|
(6)
|
|
9,000
|
(6)
|
|
$
|
4.51
|
|
1/1/2026
|
|
Mark J.
Schomp
|
|
2,031
|
(1)
|
|
|
|
|
$
|
7.50
|
|
6/18/2020
|
|
|
|
5,000
|
(2)
|
|
|
|
|
$
|
12.96
|
|
2/25/2021
|
|
|
|
5,000
|
(3)
|
|
|
|
|
$
|
16.97
|
|
5/18/2022
|
|
|
|
4,000
|
(4)
|
|
1,000
|
(4)
|
|
$
|
11.39
|
|
5/10/2023
|
|
|
|
3,000
|
(5)
|
|
2,000
|
(5)
|
|
$
|
10.31
|
|
5/8/2024
|
|
|
|
3,375
|
(6)
|
|
30,000
|
(6)
|
|
$
|
4.51
|
|
1/1/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The options were immediately vested at date of grant.
(2)
The options vest in five annual equal increments on
each February 25, 2012, 2013, 2014, 2015 and 2016.
(3)
The options vest in five annual equal increments on
each May 17, 2013, 2014, 2015, 2016 and 2017.
(4)
The options vest in five annual equal increments on
each May 10, 2014, 2015, 2016, 2017 and 2018.
(5)
The options vest in five annual equal increments on
each May 10, 2015, 2016, 2017, 2018 and 2019.
(6)
The performance option awards vest in five annual
equal increments on each January 1, 2017, 2018, 2019, 2020 and 2021.
Directors’ Compensation
The
table below sets forth the amounts paid to our outside directors for their
service as directors of our Company for the fiscal year ended December 31, 2017.
Employee directors receive no additional compensation for service on our Board
of Directors or on committees of our Board of Directors.
|
Name
|
Fees Earned or Paid in Cash
(1)
|
Option Awards
(2)
|
Total
|
|
Julie A. Ehmann
|
|
$
|
20,000
|
|
$
|
3,790
|
|
$
|
23,790
|
|
Douglas M. Hartman
|
|
$
|
18,000
|
|
$
|
3,790
|
|
$
|
21,790
|
|
Thomas W. Pauken Esq.
|
|
$
|
16,500
|
|
$
|
3,790
|
|
$
|
20,290
|
|
Bernard A. Paulson
|
|
$
|
16,500
|
|
$
|
3,790
|
|
$
|
20,290
|
|
Steven E. Paulson
|
|
$
|
16,500
|
|
$
|
3,790
|
|
$
|
20,290
|
|
Tan Chin Yong, PhD.
|
|
$
|
16,000
|
|
$
|
3,790
|
|
$
|
19,790
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Non-employee members of our
Board of Directors are compensated by our Company for board meetings attended
in the amount of $1,000 per meeting and a quarterly retainer of $2,500, with
the Chairman receiving an additional $500 per quarter. All directors are
reimbursed for their reasonable travel expenses incurred in attending meetings
of our Board of Directors or any committee of our Board of Directors or
otherwise in connection with their service as a director. Additionally, compensation
of $500 is paid to the non-employee directors for each committee meeting
attended, and the audit committee chairman receives $1,000 for each quarterly
committee meeting.
(2)
Our 2000 Incentive Plan, as
amended on April 27, 2017, (the “Plan”) provides that each non-employee
director of our Company will automatically be granted a non-qualified option
for 1,000 shares of Common Stock under the Plan on the first business date
after each annual meeting of stockholders of our Company. In accordance with
the Financial Accounting Standards Board,
Accounting Standards Codification
718, Compensation – Stock Compensation
(“FASB ASC Topic 718”), each option
so granted to a non-employee director has an exercise price per share equal to
the fair market value of the Common Stock on the date of grant of such option.
Each such option will be fully exercisable at the date of grant and will expire
upon the tenth anniversary.
On April 28, 2017, Ms. Ehmann, Messrs. Hartman,
Pauken, Bernard Paulson, Steven Paulson and Dr. Tan were each granted options
to purchase 1,000 shares of Common Stock at the per share exercise price of $7.35,
with the grant date fair value of $3,790, none of which were exercised during
fiscal 2017.
On April 27, 2017, the stockholders
approved an amendment to the Plan, which increases the number of non-qualified
options automatically granted to non-employee directors, on the first business
date after each annual meeting of stockholders of our Company, from 500 shares
to 1,000 shares of Common Stock under the Plan.
Security Ownership of Management
The following table sets forth the
number of shares of Common Stock beneficially owned by each director and
nominee for director and each named executive officers, and all directors and
the named executive officer as a group, as of March 27, 2018:
|
|
Amount of Common Stock
Beneficially Owned
(2)
|
Percent of
Class *
(1)
|
|
Julie Ehmann
|
7,540
|
(3)
|
*
|
|
Douglas M. Hartman
|
409,080
|
(4)
|
11.4%
|
|
Olaf Karasch
|
78,333
|
(5)
|
2.2%
|
|
Thomas W. Pauken
|
83,036
|
(6)
|
2.3%
|
|
Bernard A. Paulson
|
808,141
|
(7)
|
22.8%
|
|
Steven E. Paulson
|
7,267
|
(8)
|
*
|
|
Barbara Russell
|
12,392
|
(9)
|
*
|
|
Mark J. Schomp
|
42,826
|
(10)
|
1.2%
|
|
Tan Chin Yong
|
92,146
|
(11)
|
2.6%
|
|
All directors and three
executive
officers as a group (9) persons
|
1,540,761
|
(12)
|
42.0%
|
|
|
|
|
|
* Indicates ownership of less than 1% of our
Common Stock
(1)
Beneficial ownership as
reported in the above table has been determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended.
(2)
Unless otherwise indicated,
each person has sole voting and investment power over the shares indicated and
their address is 722 Burleson Street, Corpus Christi, Texas 78402.
(3)
Consists of (A) 2,540 shares
held directly by Ms. Ehmann and (B) 5,000 shares issuable upon exercise of
options that are exercisable at or within sixty days of March 13, 2018.
(4)
Consists of (A) 304,340
shares held for The Douglas MacDonald Hartman Family Irrevocable Trust account;
(B) 94,340 shares issuable upon exercise of warrants held for the account of
The Douglas MacDonald Hartman Family Irrevocable Trust account which are
exercisable at or within sixty days of March 13, 2018; (C) 3,000 shares held by
Mr. Douglas Hartman; and (D) 7,400 shares issuable upon exercise of options
that are subject to stock options exercisable at or within sixty days of March
13, 2018, held for Douglas MacDonald Hartman’s account. Douglas MacDonald
Hartman has sole voting power over the shares held by The Douglas MacDonald
Hartman Family Irrevocable Trust.
(5)
Consists of (A) 28,208
shares held by Dr. Karasch and (B) 50,125 shares issuable upon exercise of
options that are exercisable at or within sixty days of March 13, 2018.
(6)
Consists of (A) 7,267 shares issuable upon exercise of
options that are exercisable at or within sixty days of March 13, 2018; (B)
45,077 shares held by Mr. Pauken; (C) 21,454 shares held by Mr. Pauken’s
spouse, of which Mr. Pauken disclaims beneficial ownership; and (D) 9,238
shares held by TWP Inc., of which Mr. Pauken is president and has sole voting
power.
(7)
Consists of (A) 592,001
shares held for the account of Paulson Ranch, Ltd.; (B) 188,680 shares issuable
upon exercise of warrants that are exercisable at or within sixty days of March
13, 2018; (C) 17,160 shares held by the Joan Lee Paulson Family Trust; (D)
3,000 shares held by Mr. Paulson; and (E) 7,300 shares issuable upon exercise
of options that are exercisable at or within sixty days of March 13, 2018, held
for Mr. Paulson’s account. Mr. Paulson is Trustee and has sole voting power
over the shares held by the Joan Lee Paulson Family Trust.
(8)
Consists of 7,267 shares
issuable upon exercise of options that are exercisable at or within sixty days
of March 13, 2018, held for Mr. Steven Paulson’s account. Mr. Steven Paulson
has a 19.6% ownership interest in Paulson Ranch, Ltd.; however, he disclaims
all beneficial ownership of the shares held by Paulson Ranch, Ltd. Paulson
Ranch, L.L.C., the general partner of Paulson Ranch, Ltd. possesses sole voting
and dispositive power with respect to these shares.
(9)
Consists of (A) 12,332
shares issuable upon exercise of options that are exercisable at or within
sixty days of March 13, 2018 and (B) 60 shares held by Ms. Russell.
(10)
Includes (A) 800 shares held
by Mr. Schomp’s associates, of which Mr. Schomp disclaims beneficial ownership;
(B) 16,620 shares owned by Mr. Schomp; and (C) 25,406 shares issuable upon
exercise of options that are exercisable at or within sixty days of March 13,
2018.
(11)
Consists of (A) 84,946
shares held directly by Dr. Tan and (B) 7,200 shares issuable upon exercise of
options that are subject to stock options exercisable at or within sixty days
of March 13, 2018.
(12)
Includes 129,297 shares
which the directors and named executive officers as a group have the right to
acquire pursuant to stock options within sixty days of March 13, 2018.
Equity Compensation Plan
The
following table provides information as of December 31, 2017, about our Common
Stock that may be issued upon the exercise of options, warrants and rights
under all of our existing equity compensation plans (including individual
arrangements).
|
Plan Category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
|
|
Weighted-average exercise
price of outstanding
options,
warrants and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
Equity compensation
plans approved
by security holders
|
|
133,002
|
|
$5.33
|
|
252,367
|
|
Equity compensation
plans not approved
by security holders
|
|
--
|
|
|
|
--
|
|
Total
|
|
133,002
|
|
$5.33
|
|
252,367
|
On
February 21, 2000, the Company's Board of Directors approved the adoption of
the 2000 Incentive Stock Option Plan (the “Plan”) for TOR Minerals
International, Inc. The Plan provides for the award of a variety of incentive
compensation arrangements, including restricted stock awards, performance units
or other non-option awards, to such employees and directors as may be
determined by a Committee of the Board. At the Annual Shareholders’ meeting on
May 11, 2012, the maximum number of shares of the Company’s common stock that
may be sold or issued under the Plan was increased to 500,000 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, 2022. At December 31, 2017, there were 133,002 options outstanding, 114,631
exercised and 252,367 available for future issuance under the Plan.
For the years ended December 31, 2017 and 2016, the
Company recorded $131,000 and $170,000, respectively, in stock-based
compensation. This compensation cost is included in general and administrative
expense in the Company’s consolidated financial statements of operations.
On April 21, 2016, the Board of Directors
granted the officers of the Company non-qualifying stock options (the
“Performance Awards”). The Performance Awards, which are subject to the
terms, definitions and provisions of the 2000 Incentive Plan as amended,
consist of the following grants:
|
Officer's Name
|
|
Position
|
|
Five Year Performance
Grant Award
|
|
Olaf Karasch
|
|
President & Chief
Executive Officer
|
|
150,000
|
|
Mark Schomp
|
|
Executive Vice President,
Sales & Marketing
|
|
50,000
|
|
Barbara Russell
|
|
Treasurer & Chief
Financial Officer
|
|
15,000
|
The Performance Awards, which vest over a
five year period, are based solely on the basis of satisfaction of the
performance criteria established annually by the Company’s Board of
Directors. The Performance Periods begin on January 1 of each calendar
year and ending on December 31 of such year. The first Performance Period
began on January 1, 2016 and ended on December 31, 2016. The final
Performance Period shall begin on January 1, 2020 and shall end on December 31,
2020. The exercise price for the Performance Awards was set at the
closing price of the Company’s stock on January 4, 2016, as established by
NASDAQ, at $4.51 per share.
The 2017 Performance Awards consisted of
43,000 or one fifth of the five year total. Based on the satisfaction of the
performance criteria established by the Company’s Board of Directors for the
year ended December 31, 2017, the actual number of Performance Awards vested
was 5,138 or approximately 12% of the annual grant.
The 2016 Performance Awards consisted of
43,000 or one fifth of the five year total. Based on the satisfaction of the
performance criteria established by the Company’s Board of Directors for the
year ended December 31, 2016, the actual number of Performance Awards vested
was 9,675 or approximately 22% of the annual grant.
The Company granted options to purchase 6,000 shares of
common stock during the year ended December 31, 2017. The weighted average
fair value per option at the date of grant for options granted in the year
ended December 31, 2017 was $3.79 as valued using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
2.10%
|
|
1.90%
|
|
Expected dividend yield
|
|
|
0.00%
|
|
0.00%
|
|
Expected volatility
|
|
|
0.48
|
|
0.59
|
|
Expected term (in years)
|
|
|
7.00
|
|
7.00
|
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.
The number of shares of common stock underlying options
exercisable at December 31, 2017 was 115,502 and the weighted-average remaining
contractual life of those options is 5.32 years. Exercise prices on options
outstanding at December 31, 2017, ranged from $2.70 to $18.22 per share as
noted in the following table.
|
Options Outstanding at December 31,
|
|
|
|
2017
|
|
2016
|
|
Range of
Exercise Prices
|
|
23,563
|
|
22,725
|
|
$ 2.70 - $ 4.99
|
|
22,439
|
|
16,439
|
|
$ 5.00 - $ 9.99
|
|
23,000
|
|
38,000
|
|
$ 10.00 - $ 10.99
|
|
40,500
|
|
40,500
|
|
$ 11.00 - $ 12.99
|
|
23,500
|
|
35,500
|
|
$ 13.00 - $ 18.22
|
|
133,002
|
|
153,164
|
|
|
|
|
|
|
|
|
As of December 31, 2017, there was approximately $46,000
of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 0.61 years.
As most 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.
Directors’
Attendance and Independence
During
the year ended December 31, 2017, there were four regularly scheduled meetings
of our Board of Directors. No incumbent director attended less than 75% of
such meetings and no incumbent director attended less than 75% of the director
committee meetings on which such director served. While the Company does not
have a formal policy requiring the Board of Directors to attend the Annual
Meeting of stockholders, the Company encourages its directors to attend the
Annual Meeting of stockholders.
Our
Board of Directors consists of a majority of independent directors as such term
is defined in the Nasdaq Stock Market Marketplace Rules and has determined
that, of our current directors, Ms. Ehmann, Messrs. Hartman, Pauken, Bernard
Paulson, Steven Paulson, and Dr. Tan are independent.
Independent Public Accountants
BDO
served as the Company’s principal independent public accountants for fiscal
year ended December 31, 2017 and 2016.
Audit
Fees and Audit-Related Fees
Fees
incurred by us for audit services provided by BDO for the years ended December
31, 2017 and 2016 were approximately $231,000 and $200,000, respectively. The
audit fees consist primarily of fees for professional services rendered for the
audit of our annual consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports. No fees were
incurred in either year for audit-related fees.
Tax
Fees
Fees
incurred by us for tax related services provided by BDO for the year ended
December 31, 2017 and 2016 were approximately $34,000 and $25,000,
respectively.
All
Other Fees
During the year ended
December 31, 2017 and 2016, BDO did not perform any other services for the
Company.
Pre-Approval Policy
On
March 5, 2005, the Audit Committee pre-approved the rendering of audit related
and non-audit services not prohibited by law to be performed by our independent
auditors with fees for such services approved up to aggregate maximum of
$25,000. The term of the pre-approval is 12 months. The Audit Committee
updated and approved the current pre-approval policy on February 24, 2018. The
Audit Committee has delegated to the Chairman of the Audit Committee the
authority to pre-approve a service not included in the general pre-approval and
any proposed services exceeding pre-approved cost levels or budgeted amounts,
provided that the Chairman shall report any decisions to pre-approve such audit
related or non-audit services and fees to the full Audit Committee at its next
regular meeting.
|
Item
8.
|
Financial Statements and Supplementary Data
|
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Consolidated Statements of Operations
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
NET SALES
|
$
|
38,966
|
$
|
38,456
|
|
Cost of sales
|
|
35,412
|
|
33,361
|
|
GROSS MARGIN
|
|
3,554
|
|
5,095
|
|
Technical services and research and development
|
|
199
|
|
199
|
|
Selling, general and administrative expenses
|
|
4,682
|
|
4,154
|
|
Loss on disposal of assets
|
|
15
|
|
2
|
|
OPERATING
(LOSS) INCOME
|
|
(1,342)
|
|
740
|
|
OTHER INCOME
(EXPENSE):
|
|
|
|
|
|
Interest expense, net
|
|
(112)
|
|
(177)
|
|
Loss on foreign currency exchange rate
|
|
(26)
|
|
(50)
|
|
Other income, net
|
|
30
|
|
38
|
|
Total Other
Expense
|
|
(108)
|
|
(189)
|
|
(LOSS)
INCOME BEFORE INCOME TAX
|
|
(1,450)
|
|
551
|
|
Income tax (benefit) expense
|
|
(314)
|
|
107
|
|
NET (LOSS)
INCOME
|
$
|
(1,136)
|
$
|
444
|
|
|
|
|
|
|
|
(Loss) Income per common share:
|
|
|
|
|
|
Basic
|
$
|
(0.32)
|
$
|
0.13
|
|
Diluted
|
$
|
(0.32)
|
$
|
0.13
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
|
3,542
|
|
3,376
|
|
Diluted
|
|
3,542
|
|
3,454
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
|
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Consolidated Statements of Comprehensive Income
(Loss)
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
NET (LOSS)
INCOME
|
$
|
(1,136)
|
$
|
444
|
|
OTHER
COMPREHENSIVE INCOME (LOSS), net of tax
|
|
|
|
|
|
Currency translation adjustment, net of tax:
|
|
|
|
|
|
Net foreign currency translation adjustment income (loss)
|
|
1,586
|
|
(496)
|
|
Other comprehensive income (loss), net of tax
|
|
1,586
|
|
(496)
|
|
COMPREHENSIVE
INCOME (LOSS)
|
$
|
450
|
$
|
(52)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
|
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Consolidated Balance Sheets
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
3,609
|
$
|
3,716
|
|
Trade
accounts receivable, net
|
|
4,323
|
|
3,557
|
|
Inventories,
net
|
|
9,136
|
|
11,776
|
|
Other
current assets
|
|
848
|
|
742
|
|
Total
current assets
|
|
17,916
|
|
19,791
|
|
PROPERTY, PLANT AND
EQUIPMENT, net
|
|
18,389
|
|
15,907
|
|
DEFERRED TAX ASSET, foreign
|
|
20
|
|
27
|
|
OTHER ASSETS
|
|
4
|
|
4
|
|
Total Assets
|
$
|
36,329
|
$
|
35,729
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts
payable
|
$
|
2,672
|
$
|
2,122
|
|
Accrued
expenses
|
|
1,232
|
|
1,136
|
|
Notes
payable under lines of credit
|
|
36
|
|
-
|
|
Export
credit refinancing facility
|
|
-
|
|
206
|
|
Current
maturities - capital leases
|
|
34
|
|
-
|
|
Current
maturities of long-term debt – financial institutions
|
|
1,039
|
|
1,142
|
|
Total
current liabilities
|
|
5,013
|
|
4,606
|
|
LONG-TERM DEBT - FINANCIAL
INSTITUTIONS
|
|
2,378
|
|
2,725
|
|
LONG-TERM DEBT - CAPITAL
LEASES
|
|
65
|
|
-
|
|
DEFERRED TAX LIABILITY,
domestic
|
|
21
|
|
127
|
|
Total
liabilities
|
|
7,477
|
|
7,458
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
Common
stock $1.25 par value: authorized, 6,000 shares; 3,542
shares issued and outstanding at December 31, 2017 and 2016
|
|
4,426
|
|
4,426
|
|
Additional
paid-in capital
|
|
30,675
|
|
30,544
|
|
Accumulated
deficit
|
|
(5,957)
|
|
(4,821)
|
|
Accumulated
other comprehensive loss
|
|
(292)
|
|
(1,878)
|
|
Total
shareholders' equity
|
|
28,852
|
|
28,271
|
|
Total Liabilities and Shareholders'
Equity
|
$
|
36,329
|
$
|
35,729
|
|
|
|
|
|
|
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Consolidated Statements of Shareholders' Equity
|
|
Years ended December 31, 2017 and 2016
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
Earnings
|
|
Other
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
(Accumulated
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit)
|
|
Income (Loss)
|
|
Total
|
|
Balance at
December 31, 2015
|
3,014
|
$
|
3,767
|
$
|
29,636
|
$
|
(5,265)
|
$
|
(1,382)
|
$
|
26,756
|
|
Exercise
of
warrants
|
528
|
|
659
|
|
738
|
|
|
|
|
|
1,397
|
|
Share
based
compensation
|
|
|
|
|
170
|
|
|
|
|
|
170
|
|
Net
income
|
|
|
|
|
|
|
444
|
|
|
|
444
|
|
Cumulative
Translation
Adjustment
|
|
|
|
|
|
|
|
|
(496)
|
|
(496)
|
|
Balance at
December 31, 2016
|
3,542
|
$
|
4,426
|
$
|
30,544
|
$
|
(4,821)
|
$
|
(1,878)
|
$
|
28,271
|
|
Share
based
compensation
|
|
|
|
|
131
|
|
|
|
|
|
131
|
|
Net
loss
|
|
|
|
|
|
|
(1,136)
|
|
|
|
(1,136)
|
|
Cumulative
Translation
Adjustment
|
|
|
|
|
|
|
|
|
1,586
|
|
1,586
|
|
Balance at
December 31, 2017
|
3,542
|
$
|
4,426
|
$
|
30,675
|
$
|
(5,957)
|
$
|
(292)
|
$
|
28,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
|
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Consolidated Statements of Cash Flows
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
(Loss)
Income
|
$
|
(1,136)
|
$
|
444
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
Depreciation
|
|
2,774
|
|
2,561
|
|
(Gain) Loss on disposal of assets
|
|
(3)
|
|
2
|
|
Share-based compensation
|
|
131
|
|
170
|
|
Deferred income tax benefit
|
|
(98)
|
|
(144)
|
|
(Recovery of) provision for bad debts
|
|
58
|
|
(237)
|
|
Changes in working capital:
|
|
|
|
|
|
Trade accounts receivables
|
|
(601)
|
|
182
|
|
Inventories
|
|
3,235
|
|
1,937
|
|
Other current assets
|
|
(39)
|
|
114
|
|
Accounts payable and accrued expenses
|
|
(442)
|
|
(197)
|
|
Net
cash provided by operating activities
|
|
3,879
|
|
4,832
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(3,099)
|
|
(1,203)
|
|
Proceeds from sales of property, plant and equipment
|
|
2
|
|
2
|
|
Net cash used in investing activities
|
|
(3,097)
|
|
(1,201)
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from lines of credit
|
|
118
|
|
82
|
|
Payments on lines of credit
|
|
(82)
|
|
(254)
|
|
Proceeds from export credit refinancing facility
|
|
-
|
|
1,705
|
|
Payments on export credit refinancing facility
|
|
(228)
|
|
(2,560)
|
|
Proceeds from capital lease
|
|
107
|
|
-
|
|
Payments on capital lease
|
|
(8)
|
|
-
|
|
Payments on long-term bank debt
|
|
(977)
|
|
(931)
|
|
Proceeds from the issuance of common stock through exercise of
warrants
|
|
-
|
|
1,397
|
|
Net
cash used in financing activities
|
|
(1,070)
|
|
(561)
|
|
Effect of
foreign currency exchange rate fluctuations on cash and cash equivalents
|
|
181
|
|
(167)
|
|
Net (decrease)
increase in cash and cash equivalents
|
|
(107)
|
|
2,903
|
|
Cash and cash
equivalents at beginning of year
|
|
3,716
|
|
813
|
|
Cash and cash
equivalents at end of year
|
$
|
3,609
|
$
|
3,716
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
Interest paid
|
$
|
117
|
$
|
147
|
|
Income taxes paid
|
$
|
76
|
$
|
95
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
Capital expenditures financed through accounts payable and
accrued expenses
|
$
|
879
|
$
|
96
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
1.
|
Description of Business
|
TOR Minerals International, Inc. and Subsidiaries (“TOR”,
“we”, “us”, “our”, or the "Company"), a Delaware Corporation, is
engaged in a single industry, the manufacture and sale of mineral products for
use as pigments and extenders, primarily in the manufacture of paints,
industrial coatings plastics, and solid surface applications. The Company's
global headquarters and U.S. manufacturing plant are located in Corpus Christi,
Texas (“TOR U.S.” or “U.S. Operation”). The Asian Operation, TOR Minerals
Malaysia, Sdn. Bhd. (“TMM”), is located in Ipoh, Malaysia, and the European Operation,
TOR Processing and Trade, BV (“TPT”), is located in Hattem, The Netherlands.
Basis of Presentation and Use of Estimates:
The consolidated financial statements include accounts
of TOR Minerals International, Inc. and its wholly-owned subsidiaries, TMM and TPT.
All significant intercompany transactions and balances are eliminated in the
consolidation process.
In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, we evaluate our
estimates, including those related to bad debt, inventories, income taxes,
financing operations, contingencies and litigation. TOR bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Cash and Cash Equivalents:
The
Company considers all highly liquid investments readily convertible to known
cash amounts and with a maturity of twelve months or less at the date of purchase
to be cash equivalents.
Allowance for Doubtful Accounts:
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
current aging schedules and current economic conditions and customer history.
Accounts are written off when all reasonable internal and external collection
efforts have been performed. At December 31, 2017 and 2016, we maintained a
reserve for doubtful accounts of approximately $170,000 and 102,000,
respectively.
Foreign Currency:
Results
of operations for the Company’s foreign operations, TMM and TPT, are translated
from the designated functional currency to the U.S. 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 income (loss), net of income tax. 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.
TMM
measures and records its transactions in terms of the local Malaysian currency,
the Ringgit (“RM”), which is also the functional currency. As a result, gains
and losses resulting from translating the balance sheet from RM to U.S. 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, 2017, the
cumulative translation adjustment included on the consolidated balance sheets was
a loss of approximately $1,140,000.
TPT’s
functional currency is the Euro. As a result, gains and losses resulting from
translating the balance sheet from Euros to U.S. Dollars are recorded as
cumulative translation adjustments on the consolidated balance sheets. As of December
31, 2017, the cumulative translation adjustment included on the consolidated
balance sheets was income of approximately $848,000.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
Inventory:
We write down
our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the net realizable value based
upon assumptions about future demand and market conditions. Based on our 2017
and 2016 inventory analysis, no such write down was required.
Overhead
is charged to inventory based on normal capacity and we expense abnormal
amounts of idle facility expense, freight and handling costs in the period
incurred. For the year ended December 31, 2017, the Company recorded
approximately $2,150,000 related to idle facility expense primarily at the European
operations which is included in the 2017 Consolidated Statement of Operations
as a component of “Cost of sales”. During 2016, we incurred approximately $475,000
related to idle facility expense.
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.
Impairment of Long-Lived Assets:
The impairment of long-lived assets is assessed when changes in
circumstances (such as, but not limited to, a decrease in market value of an
asset, current and historical operating losses or a change in business
strategy) indicate that their carrying value may not be recoverable. This
assessment is based on management’s estimates of future undiscounted cash
flows, salvage values or net sales proceeds. These estimates take into account
management’s expectations and judgments regarding future business and economic
conditions, future market values and disposal costs. Actual results and events
could differ significantly from management’s estimates. Based upon our most
recent analysis, management determined no assets were impaired. There can be
no assurance that future impairment tests will not result in a charge to net
earnings (loss).
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 or 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; and
4) collectability is reasonably assured. The Company does not offer any type
of discount or allowance to our customers.
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 (Loss) Per Share:
Basic
earnings (loss) per share are based on the weighted average number of shares
outstanding and exclude any dilutive effects of options, warrants, debentures
and/or convertible preferred stock. Diluted earnings per share reflect the
effect of all dilutive items.
Income Taxes:
The Company records a provision for income taxes
for the anticipated tax consequences of the reported results of operations
using the asset and liability method. Deferred income taxes are recognized by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases as well as net operating loss and
tax credit carry-forwards. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits for which future
realization is uncertain.
When
accounting for uncertainties in income taxes, the Company evaluates all tax
years still subject to potential audit under the applicable state, federal and
foreign income tax laws. The Company is subject to taxation in the United
States, Malaysia and The Netherlands. Federal income tax returns in the United
States are subject to examination for the tax years ended December 31, 2014
through December 31, 2017. State tax returns, which are filed in Texas, are
subject to examination for the tax years ended December 31, 2013 through
December 31, 2017. The Company’s tax returns in various non-U.S. jurisdictions
are subject to examination for various tax years dating back to December 31,
2012.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
The Company
did not recognize certain tax benefits from uncertain tax positions within the
provision for income taxes. The Company may recognize a tax benefit only if it
is more likely than not the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such positions are then
measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon settlement.
In addition, the Company did not recognize any
interest and penalties in our consolidated financial statements during the years
ended December 31, 2017 and 2016. If any interest or penalties related to any
income tax liabilities are imposed in future reporting periods, the Company
expects to record both of these items as components of income tax expense.
Share Based Compensation:
The
Company calculates share based compensation using the Black-Scholes-Merton
(“Black-Scholes”) option-pricing model, which requires the input of subjective
assumptions including the expected stock price volatility. For the years ended
December 31, 2017 and 2016, we recorded $131,000 and $170,000, respectively, in
share-based employee compensation. This compensation cost is included in the
general and administrative expenses in the accompanying consolidated statements
of operations.
Derivatives:
We manage the risk of changes in
foreign currency exchange rates, primarily at our Malaysian operation, through
the use of foreign currency contracts. Foreign exchange contracts are used to
protect the Company from the risk that the eventual cash flows resulting from
transactions in foreign currencies, including sales and purchases transacted in
a currency other than the functional currency, will be adversely affected by
changes in exchange rates. We report the fair value of the derivatives on our
consolidated balance sheets and changes in the fair value are recognized in
earnings in the period of the change.
(See Note 12, Derivatives and Other
Financial Instruments).
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. ASU 2016-09 changes how companies account for
certain aspects of share based payment awards to employees, including the
accounting for income taxes, forfeitures and statutory tax withholding
requirements, as well as classification in the statement of cash flows. ASU
2016-09 is effective for annual periods beginning after December 15, 2016,
including interim periods within those annual periods. The adoption of this
standard, which we adopted on January 1, 2017, did not have a material impact
on the Company’s financial condition, results of operations or cash flows.
New Accounting
Standards
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with
Customers (Topic 606),” as amended by multiple standards updates. The
pronouncement was issued to clarify the principles for recognizing revenue and
to develop a common revenue standard and disclosure requirements for U.S. GAAP
and IFRS. The pronouncement is effective for reporting periods beginning
after December 15, 2017.
The Company has
completed its analysis of the impact, and adopted the standard on January 1,
2018, using the modified retrospective method. The adoption did not have a
material impact on the timing or pattern of revenue recognition
.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), which supersedes all existing guidance on
accounting for leases in ASC Topic 840. ASU 2016-02 is intended to
provide enhanced transparency and comparability by requiring lessees to record
right-of-use assets and corresponding lease liabilities on the balance
sheet. ASU 2016-02 will continue to classify leases as either finance or
operating, with classification affecting the pattern of expense recognition in
the statement of income. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption is permitted. ASU 2016-02 is required
to be applied with a modified retrospective approach to each prior reporting
period presented with various optional practical expedients. We are
currently in the initial stages of evaluating the potential impact of adopting
ASU 2016-02 on our financial statements and related disclosures.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
In June 2016, the FASB issued ASU No.
2016-13,
Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments
, which requires that entities use a new forward
looking “expected loss” model that generally will result in the earlier
recognition of allowance for credit losses. The measurement of expected credit
losses is based upon historical experience, current conditions, and reasonable
and supportable forecasts that affect the collectability of the reported
amount. ASU No. 2016-13 is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. We are currently
assessing the potential impact that adoption of ASU No. 2016-13 will have in
our consolidated financial statements.
In the second half of 2016, the FASB
issued ASU Nos. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, and 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash. The objective of these
updates is to reduce the diversity in practice in the classification of certain
cash receipts and cash payments, and the presentation of restricted cash within
an entity's statement of cash flows, respectively. These ASUs are
effective for interim and annual fiscal periods beginning after December 15,
2017. Early adoption is permitted. The adoption of this guidance is
not expected to have a material impact on the Company's consolidated financial
statements.
|
2.
|
Debt and Notes Payable
|
Long-term Debt – Financial Institutions
Below is a summary of our long-term debt to
financial institutions as of December 31, 2017 and 2016:
|
(In thousands)
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Fixed
rate Euro term note payable to a Netherlands bank, with an interest rate of
3.85% at December 31, 2017, due July 1, 2029, secured by TPT's land and
buildings. (Euro balance at December 31, 2017, €176)
|
$
|
211
|
$
|
206
|
|
Fixed
rate Euro term note payable to a Netherlands bank, with an interest rate of
3.3% at December 31, 2017, due January 31, 2030, secured by TPT's land and
buildings. (Euro balance at December 31, 2017, €204)
|
|
245
|
|
234
|
|
Fixed
rate Euro term note payable to a Netherlands bank, with an interest rate of
3.0% per annum, due December 31, 2025, is secured by TPT's land and
buildings. (Euro balance at December 31, 2017, €800)
|
|
960
|
|
947
|
|
Variable
rate Euro term note payable to a Netherlands bank, with a EURIBOR interest
rate plus bank margin of 2.3% per annum, due December 31, 2020, is secured by
substantially all of TPT's assets. The interest rate at December 31, 2017
was 2.3%. (Euro balance at December 31, 2017, €1,410)
|
|
1,692
|
|
1,978
|
|
Malaysian
Ringgit term note payable to a Malaysian bank, with an interest rate of 2%
above the bank base lending rate, due October 25, 2018, secured by TMM's
property, plant and equipment. The interest rate at December 31, 2017 was
5.2%. (Ringgit balance at December 31, 2017, RM 1,250)
|
|
309
|
|
502
|
|
|
|
|
|
|
|
Total
|
$
|
3,417
|
$
|
3,867
|
|
Less
current maturities
|
|
1,039
|
|
1,142
|
|
Total
long-term debt - financial institutions
|
$
|
2,378
|
$
|
2,725
|
|
|
|
|
|
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
European Operations
On
July 7, 2004, TPT entered into a mortgage loan (the “First Mortgage”) with
Rabobank. The First Mortgage, in the amount of €485,000 ($582,000 at
12/31/2017), is to be repaid over 25 years and the interest rate is to be
adjusted every five years. Under the terms of the First Mortgage, the interest
was adjusted to a fixed rate of 3.85%, effective August 1, 2013, for a period
of five years. Thereafter, the rate will change to Rabobank prime plus 1.75%.
TPT utilized €325,000 ($390,000 at 12/31/2017) 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, €160,000 ($192,000 at
12/31/2017), 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 €1,616 ($1,939
at 12/31/2017). The loan balance at December 31, 2017 was €176,000 ($211,000 at
12/31/2017). The First Mortgage 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 €470,000 ($564,000 at
12/31/2017), is to be repaid over 25 years and the interest rate is to be
adjusted every five years. Under the terms of the Second Mortgage, the
interest was adjusted to a fixed rate of 3.3%, effective January 3, 2013, for a
period of five years. On January 3, 2018, interest rate was adjusted to a fix
rate of 2.1% for a period of 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 €1,566 ($1,879 at 12/31/2017). The Second Mortgage is
secured by the land and building purchased by TPT on January 3, 2005. The loan
balance at December 31, 2017 was €204,000 ($245,000 at 12/31/2017).
On
July 13, 2015, TPT entered into a third mortgage loan (the “Third Mortgage”)
with Rabobank to fund the completion of its plant expansion. The Third
Mortgage, in the amount of €1,000,000 ($1,200,000 at 12/31/2017), will be
repaid over 10 years and the interest rate, currently fixed at 3%, is to be
adjusted every five years. Thereafter, the rate will change to Rabobank prime
plus 1.75%. Monthly principal payments of €8,333 ($10,000 at 12/31/2017)
commenced on January 31, 2016 and will continue through December 31, 2025. The
Third Mortgage is secured by TPT’s real estate. The loan balance at December
31, 2017 was €800,000 ($960,000 at 12/31/2017).
On
July 13, 2015, TPT entered into a term loan (the “Term Loan”) with Rabobank to
fund equipment purchases designed to improve production efficiencies and
increase capacity at TPT. The Term Loan, in the amount of €2,350,000
($2,820,000 at 12/31/2017), will be repaid over a period of 5 years and is
secured by TPT’s assets. The interest rate, set for a period of three months,
is based on the relevant EURIBOR rate plus the bank margin of 2.3 percentage
points per annum, which was 2.3% (bank margin which is floor) at December 31,
2017. The monthly principal payment of €39,167 ($47,000 at 12/31/2017) commenced
on January 31, 2016 and continues through December 31, 2020. The loan balance
at December 31, 2017 was €1,410,000 ($1,692,000 at 12/31/2017).
At December 31, 2017, TPT was in compliance with all
covenants.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
Asian Operations
On
July 19, 2017, TMM amended its banking facility (the “HSBC Facility”) with HSBC
Bank Malaysia Berhad (“HSBC”), a Malaysian Bank, extend the maturity date from
June 30, 2017 to June 30, 2018. Under the terms of the HSBC Facility, HSBC
granted a new term loan to TMM in the amount of RM 5,000,000 ($1,236,000 at
12/31/2017) which was used to finance a portion of the cost of plant
improvements to increase efficiency and production capacity. Under the terms
of the HSBC Facility, the term loan, which will be repaid over a period of five
(5) years at an interest rate of 2.0% per annum above the HSBC’s base lending
rate, matures June 30, 2018. The interest rate at December 31, 2017 was 5.2%
per annum. Monthly principal payments, in the amount of RM 83,333 ($20,591 at
12/31/2017), commenced October 25, 2013 and will continue through October 25,
2018. The loan balance at December 31, 2017 was RM 1,250,000 ($309,000 at
12/31/2017). Under the terms of the HSBC Facility, TMM’s debt is due on
demand, therefore, the loan balance at December 31, 2017, was classified as
current.
At
December 31, 2017, TMM was not in compliance with the utilization ratio
required under their agreement with HSBC. The HSBC Facility requires TMM to
maintain a 70% utilization of the HSBC Facility. Due to TMM’s positive cash
flow throughout 2017, it did not meet the 70% utilization. As a result, TMM is
working with HSBC to revise this specific covenant of the HSBC Facility.
Short term Debt
U.S. Operations
On December 31, 2010, the Company entered into the
Agreement with the Lender which established a $1,000,000 line of credit (the
“Line”), and on March 1, 2012, the Line was increased from $1,000,000 to
$2,000,000. On May 15, 2013, the Company and the Lender entered into the
Second Amendment to the Agreement which reduced the minimum interest rate floor
from 5.5% to 4.5%. On May 15, 2015, the Company and the Lender entered into
the Fifth Amendment to the Agreement which extended the Line from October 15,
2015 to October 15, 2016.
On June 23, 2016, the Company and the Lender amended
and restated the credit agreement (the “Amended Agreement”). Under the terms of
the Amended Agreement, the Lender extended the maturity date on the Line from
October 15, 2016 to October 15, 2017. In addition, the Company requested that
the Lender reduce the Line from $2,000,000 to $1,000,000.
On August 15, 2017, the Company entered into a new
loan agreement (“Loan Agreement”) with the Lender which replaced the Agreement
with the Lender dated December 31, 2010 and the Amended Agreement dated June
23, 2016. Under the terms of the Loan Agreement, our Line was reestablished at
$1,000,000 and the maturity date is extended from October 15, 2017 to October 15,
2018. Under the terms of the Loan Agreement, the Company is required to
maintain positive net earnings before taxes, interest, depreciation,
amortization and all other non-cash charges on a rolling four-quarter basis.
Under the terms of the Loan Agreement, the amount the
Company is entitled to borrow under the Line is subject to a borrowing base,
which is based on the loan value of the collateral pledged to the Lender to
secure the indebtedness owing to the Lender by the Company. Amounts advanced
under the Line bear interest at a variable rate equal to one percent per annum
above the Wall Street Journal Prime Rate as such prime rate changes from time
to time, with a minimum floor rate of 4.5%. At December 31, 2017, no funds
were outstanding on the Line.
The U.S.
Operation was in compliance with all covenants at December
31, 2017.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
European Operations
O
n
J
u
l
y
1
3,
2
0
1
5,
TP
T
a
m
e
nd
e
d
t
he
sh
or
t
ter
m
b
a
nk
i
ng
facilit
y
(t
he
“TPT A
m
e
nd
e
d
Agre
e
m
e
n
t”
)
wit
h
Ra
b
o
b
a
n
k
.
U
nd
e
r
t
he
ter
m
s of
t
he
TPT
Ame
nd
e
d
A
g
reeme
n
t
,
t
he
TP
T
li
ne of
cre
d
i
t
wa
s
r
ed
u
ce
d
f
ro
m
€1
,1
0
0,00
0
t
o
€5
0
0,00
0
($1,320,00
0
t
o
$600,000
at
December 31, 2017)
a
n
d
i
n
te
rest
was
c
h
ang
e
d
fr
om
a
var
i
a
b
l
e
i
n
te
r
e
st
ra
t
e
of
b
a
n
k
pr
i
m
e
p
l
us
2
.
8%
t
o
t
he
a
ve
r
age
1-
m
on
t
h
EU
R
I
B
OR
p
l
us
t
he
b
a
nk
m
a
rg
i
n
o
f
3
.3
%. The interest rate
w
a
s
2
.
9%
at
December 31, 2017.
At December 31, 2017, TPT had €30,000 ($36,000 at 12/31/2017)
o
u
t
s
tan
d
in
g
o
n
the
li
ne.
TPT
was in compliance with all covenants at December 31, 2017.
Asian Operations
On
July 19, 2017, TMM amended its short-term banking facility with HSBC to extend
the maturity date from June 30, 2017 to June 30, 2018. The HSBC facility
includes the following in RM: (1) overdraft of RM 500,000 ($124,000 at 12/31/2017);
(2) an import/export line (“ECR”) of RM 10,460,000 ($2,585,000 at 12/31/2017);
and (3) a foreign exchange contract limit of RM 5,000,000 ($1,236,000 at 12/31/2017).
At December 31, 2017, no funds were outstanding on the HSBC short-term banking
facility.
On
October 12, 2017, TMM amended its short-term banking facility with RHB Bank
Berhad (“RHB”) to extend the maturity date from August 11, 2017 to February 11,
2018. TMM is currently negotiating with RHB to extend the maturity date to August
11, 2018. The RHB facility includes the following: (1) a multi-trade line of
RM 3,500,000 ($865,000 at 12/31/2017); (2) a bank guarantee of RM 1,200,000 ($297,000
at 12/31/2017); and (3) a foreign exchange contract line of RM 2,500,000 ($618,000
at 12/31/2017). At December 31, 2017, no funds were outstanding on the RHB
short-term banking facility.
TMM
was not in compliance with the utilization ratio required under their agreement
with HSBC at December 31, 2017. The HSBC Facility requires TMM to maintain a
70% utilization of the HSBC Facility. Due to TMM’s positive cash flow
throughout 2017, it did not meet the 70% utilization.
The
banking facilities with both HSBC and RHB bear an interest rate on the
respective overdraft facilities at 1.25% over bank prime, and the respective
ECR facilities bear interest at 1.0% above the funding rate stipulated by the
Export-Import Bank of Malaysia Berhad. The ECR facilities, which are a
government supported financing arrangement specifically for exporters, are used
by TMM for short-term financing of up to 180 days against customers’ and
inter-company shipments.
The
borrowings under both the HSBC and the RHB short term credit facility are
subject to certain subjective acceleration covenants based on the judgment of
the banks and a demand provision that provides that the banks may demand
repayment at any time. 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. While repatriation is allowed in the form of dividends,
the credit facilities prohibit TMM from paying dividends, and the HSBC facility
further prohibits loans to related parties without the prior consent of HSBC.
The
following is a summary of the future maturities of long-term debt to financial
institutions as of December 31, 2017:
|
Years Ending December
31,
|
|
|
|
(In
thousands)
|
|
|
|
2018
|
|
$
|
1,039
|
|
2019
|
|
730
|
|
2020
|
|
730
|
|
2021
|
|
166
|
|
2022
|
|
166
|
|
Thereafter
|
|
586
|
|
Total
|
|
$
|
3,417
|
|
|
|
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
3.
|
Fair Value
Measurements
|
The
following table summarizes the valuation of our financial instruments recorded
on a fair value basis as of December 31, 2017 and 2016. The Company did not
hold any non-financial assets and/or non-financial liabilities subject to fair
value measurements on a non-recurring basis at December 31, 2017 or 2016.
The
fair value measurements consist of the following three levels:
Level 1 inputs:
Level 1
inputs
are quoted prices
(unadjusted) in active markets for identical assets or liabilities that are
accessible at the measurement date (e
.
g
.,
equity securities
traded on the New York Stock Exchange).
Level 2 inputs:
Level 2 inputs are other than quoted
prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly (e. g., quoted prices of similar assets or
liabilities in active markets, or quoted prices for identical or similar assets
or liabilities in markets that are not active).
Level 3 inputs:
Level 3 inputs are unobservable inputs (e.
g., a company’s own data) for the asset or liability and should be used to
measure fair value to the extent that relevant observable inputs are not
available.
|
|
|
Fair Value Measurements
|
|
(In Thousands)
|
|
Total
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Current Asset
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Currency
forward contracts
|
$
|
3
|
$
|
-
|
$
|
3
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Current Liability
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Currency
forward contracts
|
$
|
2
|
$
|
-
|
$
|
2
|
$
|
-
|
Our
foreign currency derivative financial instruments mitigate foreign currency exchange
risks and include forward contracts. The forward contracts are
marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income as part of the gain or loss on foreign currency exchange
rate included under “Other Expense” on the Company’s consolidated statement of
operations. The fair value of the currency forward contracts is determined
using Level 2 inputs based on the currency rate in effect at the end of the
reporting period.
The
fair value of the Company’s debt is based on estimates using standard pricing
models and Level 2 inputs, including the Company’s estimated borrowing rate, that
take into account the present value of future cash flows as of the consolidated
balance sheet date. The computation of the fair value of these instruments is
performed by the Company. The carrying amounts and estimated fair values of
the Company’s long-term debt, including current maturities, are summarized
below:
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(In Thousands)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Long-term
debt, including
current portion
|
$
|
3,417
|
$
|
3,348
|
$
|
3,867
|
$
|
3,785
|
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, trade receivables, payables and accrued liabilities, accrued
income taxes and short-term borrowings approximate fair values due to the short
term nature of these instruments, accordingly, these items have been excluded
from the above table.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
A
summary of inventories follows:
|
(In thousands)
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Raw materials
|
$
|
3,205
|
$
|
5,235
|
|
Work in
progress
|
|
1,446
|
|
1,636
|
|
Finished goods
|
|
4,087
|
|
4,587
|
|
Supplies
|
|
844
|
|
717
|
|
Total Inventories
|
|
9,582
|
|
12,175
|
|
Inventory reserve
|
|
(446)
|
|
(399)
|
|
Net Inventories
|
$
|
9,136
|
$
|
11,776
|
|
5.
|
Property, Plant
and Equipment
|
Major
classifications and expected lives of property, plant and equipment are
summarized below:
|
(In thousands)
|
|
|
December 31,
|
|
|
Expected Life
|
|
2017
|
|
2016
|
|
Land
|
--
|
$
|
324
|
$
|
292
|
|
Office buildings
|
39 years
|
|
4,785
|
|
4,280
|
|
Production facilities
|
10 - 20 years
|
|
11,509
|
|
10,734
|
|
Machinery and equipment
|
3 - 15 years
|
|
27,492
|
|
24,492
|
|
Furniture and fixtures
|
3 - 20 years
|
|
1,892
|
|
1,706
|
|
Total
|
|
|
46,002
|
|
41,504
|
|
Less accumulated
depreciation
|
|
|
(29,503)
|
|
(25,968)
|
|
Property,
plant and equipment, net
|
|
|
16,499
|
|
15,536
|
|
Construction in progress
|
|
|
1,890
|
|
371
|
|
|
|
$
|
18,389
|
$
|
15,907
|
All
property, plant and equipment is depreciated 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.
The
amounts of depreciation expense recorded on the Company’s property, plant and
equipment for the year ended December 31, 2017 and 2016 was $2,774,000 and $2,561,000,
respectively.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
The
Company and its subsidiaries operate in the business of pigment manufacturing
and related products in three geographic segments – United States, European and
Asian.
United States
– This
segment represents products manufactured at our facility located in Corpus
Christi, Texas. The segment manufactures HITOX, BARTEX, HALTEX, OPTILOAD and TIOPREM
which is sold primarily in North, Central and South America. Sales of this
segment, which includes intercompany purchases of ALUPREM from our European operation,
represented approximately 62% and 69% of our consolidated sales for the years
ended December 31, 2017 and 2016, respectively.
European
– This segment
represents products manufactured at the Company’s wholly-owned operation, TPT,
located in the Netherlands. TPT manufactures ALUPREM and BARYPREM which is
sold primarily in Europe. Sales of this segment, which include intercompany
purchases HITOX and TIOPREM from our Asian operation, represented approximately
29% and 24% of our consolidated sales for the years ended December 31, 2017 and
2016, respectively. Intercompany sales of ALUPREM between the TPT and the U.S.
operation, which are eliminated in consolidation, represented 25% and 44% of
this segments total sales for the years ended December 31, 2017 and 2016,
respectively.
Asian
– This segment
represents products manufactured at the Company’s wholly-owned operation, TMM,
located in Malaysia. TMM manufactures HITOX and TIOPREM which is sold
primarily in Asia. Sales of this segment represented approximately 10% and 6%
of our consolidated sales for the years ended December 31, 2017 and 2016,
respectively. Intercompany sales of HITOX, TIOPREM and SR between the TMM and
the U.S. and European operations are eliminated in consolidation represented 46%
and 65% of this segments total sales for the years ended December 31, 2017 and
2016, respectively .
The
accounting policies of the segments are the same as those described in the
Summary of Significant Policies (See Note 1). Product sales of inventory
between the U.S., European and Asian operations are based on inter-company
pricing, which includes an inter-company profit margin. The segment profit
(loss), included in the table below, from each location is reflective of these
inter-company prices, as is inventory at the Corpus Christi location prior to
elimination adjustments. 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 segment
inventories that include an inter-company component, the net effect of these
adjustments can decrease/increase location profit.
Such presentation is consistent with the internal
reporting reviewed by the Company’s chief operating decision maker (“CODM”).
Our CODM regularly reviews financial information about our segments in order to
allocate resources and evaluate performance. Our CODM assesses segment performance
based on segment sales and segment net income (loss) before depreciation and
amortization, interest expense, income taxes, and other items which management
does not believe reflect the underlying performance of the segment.
For the year ended December 31, 2017 and 2016, the U.S.
operations received approximately 23% and 35%, respectively, of its total third
party sales revenue from BASF; the European operations received approximately 16%
and 17%, respectively, from Hemmelrath; and, the Asian operations received
approximately 25% and 22%, respectively, of its total third party sales revenue
from Connell Brothers.
Sales from the subsidiary to the parent company are
based upon profit margins which represent competitive pricing of similar
products. Intercompany sales consist of ALUPREM, SR, HITOX and TIOPREM.
The Company's principal products, ALUPREM and HITOX,
accounted for approximately 38% and 24%, respectively, of net consolidated
sales in 2017 and approximately 44% and 21%, respectively in 2016.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
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 U.S. represented approximately
53% and 62% for the years ended December 31, 2017 and 2016, respectively.
For
the year ended December 31, 2017 and 2016, sales to customers in Germany
represented approximately 19% and 22%, respectively, of our total foreign sales
and sales to customers in Italy represented 10% of our 2016 total foreign sales.
Approximately 7% of the Company's employees are
represented by an in-house collective bargaining agreement during 2017 and 2016.
A
summary of the Company’s manufacturing operations by geographic segment is
presented below:
|
(In thousands)
|
|
United States
(Corpus Christi)
|
|
European
(TPT)
|
|
Asian
(TMM)
|
|
Inter-
Company
Eliminations
|
|
Consolidated
|
|
As of and for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
Customer
sales
|
$
|
23,998
|
$
|
11,125
|
$
|
3,843
|
$
|
-
|
$
|
38,966
|
|
Intercompany
sales
|
|
38
|
|
3,817
|
|
3,233
|
|
(7,088)
|
|
-
|
|
Total Net Sales
|
$
|
24,036
|
$
|
14,942
|
$
|
7,076
|
$
|
(7,088)
|
$
|
38,966
|
|
Share based compensation
|
$
|
131
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
131
|
|
Depreciation
|
$
|
1,119
|
$
|
1,521
|
$
|
134
|
$
|
|
$
|
2,774
|
|
Interest (income) expense
|
$
|
(2)
|
$
|
96
|
$
|
18
|
$
|
|
$
|
112
|
|
Income tax (benefit) expense
|
$
|
(104)
|
$
|
(218)
|
$
|
(2)
|
$
|
10
|
$
|
(314)
|
|
Location profit (loss)
|
$
|
(604)
|
$
|
(882)
|
$
|
331
|
$
|
19
|
$
|
(1,136)
|
|
Capital expenditures
|
$
|
1,062
|
$
|
1,975
|
$
|
62
|
$
|
|
$
|
3,099
|
|
Location long-lived assets
|
$
|
5,437
|
$
|
12,181
|
$
|
771
|
$
|
-
|
$
|
18,389
|
|
Location assets
|
$
|
16,822
|
$
|
15,608
|
$
|
6,407
|
$
|
(2,508)
|
$
|
36,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
Customer
sales
|
$
|
26,678
|
$
|
9,313
|
$
|
2,465
|
$
|
-
|
$
|
38,456
|
|
Intercompany
sales
|
|
98
|
|
7,357
|
|
4,535
|
|
(11,990)
|
|
-
|
|
Total Net Sales
|
$
|
26,776
|
$
|
16,670
|
$
|
7,000
|
$
|
(11,990)
|
$
|
38,456
|
|
Share based compensation
|
$
|
170
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
170
|
|
Depreciation
|
$
|
1,076
|
$
|
1,343
|
$
|
142
|
$
|
-
|
$
|
2,561
|
|
Interest (income) expense
|
$
|
(2)
|
$
|
107
|
$
|
72
|
$
|
-
|
$
|
177
|
|
Income tax (benefit) expense
|
$
|
(131)
|
$
|
247
|
$
|
-
|
$
|
(9)
|
$
|
107
|
|
Location profit (loss)
|
$
|
(406)
|
$
|
826
|
$
|
34
|
$
|
(10)
|
$
|
444
|
|
Capital expenditures
|
$
|
463
|
$
|
735
|
$
|
5
|
$
|
-
|
$
|
1,203
|
|
Location long-lived assets
|
$
|
5,291
|
$
|
9,832
|
$
|
784
|
$
|
-
|
$
|
15,907
|
|
Location assets
|
$
|
17,013
|
$
|
13,417
|
$
|
6,013
|
$
|
(714)
|
$
|
35,729
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
7.
|
Calculation of Basic
and Diluted Earnings per Share
|
|
(in thousands,
except per share amounts)
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
Net (Loss) Income
|
$
|
(1,136)
|
$
|
444
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic (loss) earnings per share
- weighted-average shares
|
|
3,542
|
|
3,376
|
|
Dilutive
potential common shares
|
|
-
|
|
78
|
|
Denominator for
diluted (loss) earnings per share -
weighted-average shares and assumed conversions
|
|
3,542
|
|
3,454
|
|
|
|
|
|
|
|
Basic and
diluted (loss) earnings per common share
|
$
|
(0.32)
|
$
|
0.13
|
Approximately
133,000 and 130,000 employee stock options were excluded from calculation of
diluted earnings per share for the years ended December 31, 2017 and 2016,
respectively, as the effect would be anti-dilutive.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
Loss
(income) before provision for income taxes was as follows:
|
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2017
|
|
2016
|
|
Domestic
|
$
|
(708)
|
$
|
(537)
|
|
Foreign
|
|
(742)
|
|
1,088
|
|
(Loss) income before income taxes
|
$
|
(1,450)
|
$
|
551
|
The components of provision
for income taxes for periods presented are as follows:
|
|
|
Components of Provision for Income Tax
(Benefit) Expense
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
Current
|
|
Deferred
|
|
Total
|
|
Current
|
|
Deferred
|
|
Total
|
|
Federal
|
$
|
-
|
$
|
(102)
|
$
|
(102)
|
$
|
-
|
$
|
(140)
|
$
|
(140)
|
|
State
|
|
2
|
|
-
|
|
2
|
|
4
|
|
-
|
|
4
|
|
Foreign
|
|
(218)
|
|
4
|
|
(214)
|
|
247
|
|
(4)
|
|
243
|
|
Total Income
Tax
(Benefit) Expense
|
$
|
(216)
|
$
|
(98)
|
$
|
(314)
|
$
|
251
|
$
|
(144)
|
$
|
107
|
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 (the “Act”) was signed into law making significant changes to
the Internal Revenue Code. Changes include, but are not limited to, a corporate
tax rate decrease from 35% to 21% effective for tax years
beginning after December 31, 2017, the transition of U.S
international taxation from a worldwide tax system to a territorial system, and
a one-time transition tax on the mandatory deemed repatriation of cumulative
foreign earnings as of December 31, 2017. We have calculated our best estimate
of the impact of the Act in our year end income tax provision in accordance
with our understanding of the Act and guidance available as of the date of this
filing and as a result have recorded $103,000 as additional income
tax expense in the fourth quarter of 2017, the period in which the
legislation was enacted. The provisional amount related to the remeasurement of
certain deferred tax assets and liabilities, based on the rates at which they
are expected to reverse in the future, was a benefit of $13,000. The
provisional amount related to the one-time transition tax on the mandatory
deemed repatriation of foreign earnings resulted in an increase in our tax
expense of $116,000.
On December 22, 2017, Staff Accounting
Bulletin No. 118 ("SAB 118") was issued to address the application of
US GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail
to complete the accounting for certain income tax effects of the Act. In
accordance with SAB 118, the Company has determined that the $13,000 of the
deferred tax benefit recorded in connection with the remeasurement of certain
deferred tax assets and liabilities and the $116,000 of current tax
expense recorded in connection with the transition tax on the mandatory deemed
repatriation of foreign earnings was a provisional amount and a reasonable
estimate at December 31, 2017. Additional work is necessary to do a more
detailed analysis of historical foreign earnings as well as potential
correlative adjustments. Any subsequent adjustment to these amounts will be
recorded to current tax expense in the quarter of 2018 when the analysis is
complete.
Due to the adoption of ASU 2016-09 in
2017, all excess tax benefits and deficiencies are recognized as income tax
expense in the Company’s Consolidated Statement of Operations. This will result
in increased volatility in the Company’s effective tax rate.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
A
reconciliation of the provision for income taxes, with the amount computed by
applying the statutory Federal income tax rate to income before income taxes is
as follows:
|
Effective
Tax Rate Reconciliation
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2017
|
|
2016
|
|
Expense (benefit) computed at statutory rate
|
$
|
(493)
|
$
|
187
|
|
Change in valuation allowance - Foreign
|
|
(114)
|
|
(30)
|
|
Effect of items deductible for book not tax, net
|
|
|
|
|
|
Share based compensation
|
|
32
|
|
40
|
|
Other - Domestic
|
|
5
|
|
5
|
|
Effect of foreign tax credit
|
|
33
|
|
11
|
|
Effect of foreign tax rate differential
|
|
118
|
|
(109)
|
|
State
income taxes, net of Federal benefit
|
|
2
|
|
3
|
|
Impact
of Tax Cuts and Jobs Act of 2017
|
|
|
|
|
|
Change
in tax rate
|
|
(13)
|
|
-
|
|
Transition
Tax
|
|
116
|
|
-
|
|
|
$
|
(314)
|
$
|
107
|
|
|
|
|
|
|
|
Significant
Components of Deferred Taxes
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2017
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
Net operating loss carry-forwards - Domestic
|
$
|
214
|
$
|
316
|
|
Net operating loss carry-forwards - Foreign
|
|
840
|
|
758
|
|
Intercompany profit
|
|
43
|
|
50
|
|
Alternative minimum tax credit carryforwards
|
|
20
|
|
65
|
|
Domestic reserves
|
|
20
|
|
33
|
|
Foreign tax credits
|
|
515
|
|
642
|
|
Other deferred assets - Domestic
|
|
25
|
|
57
|
|
Other deferred assets - Foreign
|
|
-
|
|
107
|
|
|
$
|
1,677
|
$
|
2,028
|
|
Valuation Allowance - Foreign
|
|
(1,364)
|
|
(1,478)
|
|
Total deferred tax assets
|
|
313
|
|
550
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
PP&E - Domestic
|
$
|
287
|
$
|
590
|
|
PP&E - Foreign
|
|
14
|
|
52
|
|
Unrealized foreign currency gains - Domestic
|
|
11
|
|
-
|
|
Unrealized foreign currency gains - Foreign
|
|
-
|
|
5
|
|
Other
|
|
2
|
|
3
|
|
Total deferred tax liabilities
|
|
314
|
|
650
|
|
Net deferred tax asset (liability)
|
$
|
(1)
|
$
|
(100)
|
Our effective tax rate is based on our level of pre-tax
income, statutory rates and tax planning strategies.
Significant management judgment is required in
determining the effective rate and in evaluating our tax position. At December
31, 2017, our U.S. operation had federal NOL carry-forwards of approximately $1,018,000
which resulted in a deferred tax asset (“DTA”) of approximately $214,000 which
will begin to expire in 2033. At December 31, 2017, the U.S. operation had
deferred tax liabilities (“DTL”) of $287,000, primarily related to book vs. tax
depreciation. These temporary differences are expected to fully reverse prior
to the expiration of the existing DTA; therefore, we determined that it is not
necessary to provide a valuation allowance for our U.S. NOL as we believe the
DTA is fully recoverable.
The Company remeasured these non-current assets
and liabilities at the applicable tax rate of 21% in accordance with
the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total
decrease in the U.S. deferred taxes of $13,000.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
At December 31, 2017, our Asian operation, TMM, had NOL
carry-forwards of approximately $3,502,000 and certain other deferred tax
assets of approximately $2,183,000 which resulted in a DTA of approximately
$1,356,000. Due to the uncertainties regarding TMM’s ability to utilize these
DTAs, the Company established a valuation allowance to fully reserve against
these DTAs.
On
February 21, 2000, the Company's Board of Directors approved the adoption of
the 2000 Incentive Stock Option Plan (the “Plan”) for TOR Minerals
International, Inc. The Plan provides for the award of a variety of incentive
compensation arrangements, including restricted stock awards, performance units
or other non-option awards, to such employees and directors as may be
determined by a Committee of the Board. At the Annual Shareholders’ meeting on
May 11, 2012, the maximum number of shares of the Company’s common stock that
may be sold or issued under the Plan was increased to 500,000 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, 2022.
For the years ended December 31, 2017 and 2016, the
Company recorded $131,000 and $170,000, respectively, in stock-based employee
compensation. This compensation cost is included in the general and
administrative expenses and cost of sales in the accompanying consolidated
statements of operations.
On April 21, 2016, the Board of Directors
granted the officers of the Company non-qualifying stock options (the
“Performance Awards”). The Performance Awards, which are subject to the
terms, definitions and provisions of the 2000 Incentive Plan as amended,
consist of the following grants:
|
Officer's Name
|
|
Position
|
|
Five Year Performance Grant Award
|
|
Olaf Karasch
|
|
President & Chief
Executive Officer
|
|
150,000
|
|
Mark Schomp
|
|
Executive Vice President,
Sales & Marketing
|
|
50,000
|
|
Barbara Russell
|
|
Treasurer & Chief
Financial Officer
|
|
15,000
|
The Performance Awards, which vest over a
five year period, are based solely on the basis of satisfaction of the
performance criteria established annually by the Company’s Board of
Directors. The Performance Periods begin on January 1 of each calendar
year and ending on December 31 of such year. The first Performance Period
began on January 1, 2016 and ended on December 31, 2017. The final
Performance Period shall begin on January 1, 2020 and shall end on December 31,
2020. The exercise price for the Performance Awards was set at the
closing price of the Company’s stock on January 4, 2016, as established by
NASDAQ, at $4.51 per share.
The 2017 Performance Awards consisted of
43,000 or one fifth of the five year total. Based on the satisfaction of the
performance criteria established by the Company’s Board of Directors for the
year ended December 31, 2017, the actual number of Performance Awards vested consisted
of 5,138 or approximately 12% of the annual grant.
The Company granted options to purchase 6,000 shares of
common stock in each of the years ended December 31, 2017 and 2016. The
weighted average fair value per option at the date of grant for options granted
in the years ended December 31, 2017 and 2016 was $3.79 and $2.73, respectively,
as valued using the Black-Scholes option-pricing model with the following
weighted average assumptions:
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
|
2.10%
|
|
1.90%
|
|
Expected dividend yield
|
|
|
|
0.00%
|
|
0.00%
|
|
Expected volatility
|
|
|
|
0.48
|
|
0.59
|
|
Expected term (in years)
|
|
|
|
7.00
|
|
7.00
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
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.
The following table summarizes certain information
regarding stock option activity:
|
|
|
|
|
Options
|
|
|
|
Total
Reserved
|
|
Outstanding
|
|
Weighted Avg
Exercise Price
|
|
Range of
Exercise Prices
|
|
Balances at
December 31, 2015
|
|
385,369
|
|
146,305
|
|
$13.24
|
|
$2.70 - $30.55
|
|
Granted
|
|
|
|
19,975
|
|
$4.51
|
|
$4.51 - $4.50
|
|
Forfeited
or expired
|
|
|
|
(13,116)
|
|
$10.38
|
|
$29.50 - $30.55
|
|
Balances at
December 31, 2016
|
|
385,369
|
|
153,164
|
|
$10.84
|
|
$2.70 - $18.22
|
|
Granted
|
|
|
|
11,138
|
|
$6.04
|
|
$7.35 - $7.35
|
|
Forfeited
or expired
|
|
|
|
(31,300)
|
|
$10.79
|
|
$4.51 - $13.45
|
|
Balances at
December 31, 2017
|
|
385,369
|
|
133,002
|
|
$5.33
|
|
$2.70 - $18.22
|
Of
the 500,000 shares included in the Plan, there have been 114,631 options
exercised. At December 31, 2017, there were 133,002 options outstanding and 252,367
were available for future issuance.
The number of shares of common stock underlying options
exercisable at December 31, 2017 was 122,502 and the weighted-average remaining
contractual life of those options is 5.32 years. Exercise prices on options
outstanding at December 31, 2017, ranged from $2.70 to $18.22 per share as
noted in the following table.
|
Options Outstanding at December 31,
|
|
|
|
2017
|
|
2016
|
|
Range of
Exercise Prices
|
|
23,563
|
|
22,725
|
|
$ 2.70 - $ 4.99
|
|
22,439
|
|
16,439
|
|
$ 5.00 - $ 9.99
|
|
23,000
|
|
38,000
|
|
$ 10.00 - $ 10.99
|
|
40,500
|
|
40,500
|
|
$ 11.00 - $ 12.99
|
|
23,500
|
|
35,500
|
|
$ 13.00 - $ 18.22
|
|
133,002
|
|
153,164
|
|
|
As of December 31, 2017, there was approximately $46,000
of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 0.85years.
The
Company has a profit sharing plan that covers the U.S. 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, 2017 and 2016,
there were no contributions to the plan.
The
Company also offers U.S. employees a 401(k) 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, 2017 and 2016
was approximately $68,000 and $66,000, respectively.
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
11.
|
Derivatives and Other
Financial Instruments
|
The Company has
exposure to certain risks relating to its ongoing business operations,
including financial, market, political and economic risks. The following
discussion provides information regarding our exposure to the risks of changing
foreign currency exchange rates. The Company has not entered into these contracts
for trading or speculative purposes in the past, nor do we currently anticipate
entering into such contracts for trading or speculative purposes in the
future. The foreign exchange contracts are used to mitigate uncertainty and
volatility, and to cover underlying exposures.
Foreign Currency Forward Contracts
We manage the risk
of changes in foreign currency exchange rates, primarily at our Malaysian
operation, through the use of foreign currency contracts. Foreign exchange
contracts are used to protect the Company from the risk that the eventual cash
flows resulting from transactions in foreign currencies, including sales and
purchases transacted in a currency other than the functional currency, will be
adversely affected by changes in exchange rates. We report the fair value of
the derivatives on our consolidated balance sheets and changes in the fair
value are recognized in earnings in the period of the change.
At December 31, 2017, we had foreign currency contracts not
designated as hedges. We marked these contracts to market, recording income of
approximately $3,000 as a component of our 2017 net loss and $3,000 as a
current asset on the consolidated balance sheet
at December 31, 2017.
The following table
summarizes the gross fair market value of all derivative instruments, in
thousands, which are not designated as hedging instruments and their location
in our consolidated balance sheets:
|
Asset Derivatives
|
|
Derivative Instrument
|
|
Location
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Foreign Currency
Exchange Contracts
|
|
Other
Current Assets
|
$
|
3
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Derivative Instrument
|
|
Location
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Foreign Currency
Exchange Contracts
|
|
Accrued Expenses
|
$
|
-
|
$
|
2
|
The following table
summarizes the impact of the Company’s derivatives, in thousands, on the
consolidated financial statements of operations for the years ended December
31, 2017 and 2016:
|
Derivative
|
|
Location of (Gain) Loss on Derivative
|
|
Amount of Loss Recognized in Operations
Year Ended December 31,
|
|
Instrument
|
|
Instrument
|
|
2017
|
|
2016
|
|
Foreign Currency
Exchange Contracts
|
|
(Gain) Loss on foreign
currency exchange rate
|
$
|
(3)
|
$
|
3
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
12.
|
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 approximately
14 acres leased from the Port of Corpus Christi Authority (the
"Port") and approximately one acre 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 last equalization valuation was July 2017 at which time the annual
lease increased from approximately $95,000 to $178,000. 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.
Minimum future rental payments for non-cancelable leases
as of December 31, 2017 for the next five years ending December 31 and in total
thereafter are as follows:
|
Years Ending December
31,
|
|
|
|
(In
thousands)
|
|
|
|
2018
|
|
$
|
178
|
|
2019
|
|
178
|
|
2020
|
|
178
|
|
2021
|
|
178
|
|
2022
|
|
178
|
|
Thereafter
|
|
800
|
|
Total
minimum lease payments
|
|
$
|
1,690
|
Rent expense under these leases was approximately $160,000
and $114,000 for the years ended December 31, 2017 and 2016, respectively.
Capital Leases
The Company’s operation in The Netherlands entered into a
capital lease, in the amount of €89,550 ($107,460) for a compressed air system
from Diependael. The lease, which has an interest rate of 5.75%, includes
executory costs of €270 ($324) and a purchase option of €9,950 ($11,940) at the
end of the 36 month lease term.
|
Year Ending December 31,
2017
|
|
|
|
(In
thousands)
|
|
|
|
2018
|
|
$
|
39
|
|
2019
|
|
39
|
|
2020
|
|
29
|
|
Total
minimum lease payments
|
|
107
|
|
Less:
Amount representing executory costs
|
|
-
|
|
Net
minimum lease payments
|
|
107
|
|
Less:
Amount representing interest
|
|
(8)
|
|
Present
value of net minimum lease payments
|
|
99
|
|
Less:
Current maturities of capital lease obligations
|
|
(34)
|
|
Long-term
capital lease obligations, net of current maturities
|
|
$
|
65
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
Contingencies
There
are claims arising in the normal course of business that are pending against
the Company. While it is not feasible to predict or determine the outcome of
any case, it is the opinion of management that the ultimate dispositions will
have no material effect on the consolidated financial statements of the
Company.
The
Company believes that it is in compliance with all applicable federal, state
and local laws and regulations relating to the discharge of substances into the
environment, and it does not expect that any material expenditure for
environmental control facilities will be necessary in order to continue such
compliance.
|
13.
|
Significant
Customers
|
For the years ended December
31, 2017 and 2016, one customer accounted for approximately 14% and 24%,
respectively, of our total consolidated sales revenue. At December 31, 2017,
this customer did not have an open balance included in Accounts Receivable. Amounts
included in Accounts Receivable for this customer as of December 31, 2016 was
approximately $290,000.
|
14.
|
Foreign Customer
Sales
|
Revenues
from sales to customers located outside the U.S. for the years ended December
31, 2017 and 2016 are as follows:
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2017
|
|
2016
|
|
Canada, Mexico & South/Central
America
|
$
|
3,067
|
$
|
2,608
|
|
Pacific Rim
|
|
3,678
|
|
2,418
|
|
Europe, Africa & Middle
East
|
|
11,591
|
|
9,594
|
|
Total
Foreign Sales
|
$
|
18,336
|
$
|
14,620
|
For the years ended December
31, 2017 and 2016, Germany represented 17% and 22%, respectively, of our
foreign sales and Italy represented 10% of our 2016 foreign sales.
Revenues
from sales by product for the years ended December 31, 2017 and 2016 are as
follows (in thousands):
|
Product
|
|
2017
|
|
2016
|
|
Variance
|
|
ALUPREM
|
$
|
14,958
|
38%
|
$
|
16,802
|
44%
|
$
|
(1,844)
|
-11%
|
|
HITOX
|
|
9,349
|
24%
|
|
8,006
|
21%
|
|
1,343
|
17%
|
|
BARTEX / BARYPREM
|
|
8,383
|
22%
|
|
8,217
|
21%
|
|
166
|
2%
|
|
HALTEX / OPTILOAD
|
|
5,383
|
14%
|
|
4,364
|
11%
|
|
1,019
|
23%
|
|
TIOPREM
|
|
585
|
1%
|
|
742
|
2%
|
|
(157)
|
-21%
|
|
OTHER
|
|
308
|
1%
|
|
325
|
1%
|
|
(17)
|
-5%
|
|
Total
|
$
|
38,966
|
100%
|
$
|
38,456
|
100%
|
$
|
510
|
1%
|
TOR Minerals
International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2017 and 2016
|
TOR Minerals International, Inc. and Subsidiaries
|
|
Schedule II - Valuation and Qualifying Accounts
|
|
Years Ended December 31, 2017 and 2016
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Deductions
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Charged to
Operations
|
|
Credited to
Operations
|
|
Written
Off
|
|
Effect of
Exchange
Rate Changes
|
|
Balance at
End of year
|
|
Allowance for Doubtful
Accounts Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
102
|
$
|
68
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
366
|
$
|
42
|
$
|
(295)
|
$
|
-
|
$
|
(11)
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Deductions
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Charged to
Operations
|
|
Credited to
Operations
|
|
Written
Off
|
|
Effect of
Exchange
Rate Changes
|
|
Balance at
End of year
|
|
Inventory Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
399
|
$
|
40
|
$
|
-
|
$
|
-
|
$
|
7
|
$
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
826
|
$
|
60
|
$
|
(458)
|
$
|
-
|
$
|
(29)
|
$
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Deductions
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Charged to
Operations
|
|
Charged to
Additional Paid-in
Capital and Other
Comprehensive
Income
|
|
Credited to
Operations
|
|
Credited to
Additional Paid-in
Capital and Other
Comprehensive
Income
|
|
Other
Adjustments
|
|
Balance at
End of year
|
|
Deferred Tax Valuation Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
1,478
|
$
|
-
|
$
|
-
|
$
|
(114)
|
$
|
-
|
$
|
-
|
$
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
$
|
1,703
|
$
|
-
|
$
|
-
|
$
|
(225)
|
$
|
-
|
$
|
-
|
$
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOR Minerals (PK) (USOTC:TORM)
Historical Stock Chart
From Nov 2024 to Dec 2024
TOR Minerals (PK) (USOTC:TORM)
Historical Stock Chart
From Dec 2023 to Dec 2024
