TOR MINERALS INTERNATIONAL INC (Form: 10-Q, Received: 10/29/2015 12:09:29)

United States Securities and Exchange Commission Washington, D. C. 20549 ____________________________ FORM 10-Q ____________________________
(Mark One) ☒
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015 OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________
Commission file number 0-17321 TOR MINERALS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)					74-2081929 (I.R.S. Employer Identification No.)
722 Burleson Street, Corpus Christi, Texas 78402 (Address of principal executive offices)
(361) 883-5591 (Registrant’s telephone number, including area code) ____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒				No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒				No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐		Accelerated filer ☐	Non-accelerated filer ☐			Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐				No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Common Stock, $1.25 par value				Shares Outstanding as of October 27, 2015 3,014,022

Table of Contents

Part I - Financial Information
			Page No.
Item 1.	Condensed Consolidated Financial Statements
		Consolidated Statements of Operations -- Three and nine month periods ended September 30, 2015 and 2014	3
		Consolidated Statements of Comprehensive Income (Loss) -- Three and nine month periods ended September 30, 2015 and 2014	4
		Consolidated Balance Sheets -- September 30, 2015 and December 31, 2014	5
		Consolidated Statements of Cash Flows -- Nine months ended September 30, 2015 and 2014	6

	Notes to the Consolidated Financial Statements		7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16

Item 4.	Controls and Procedures		28

Part II - Other Information

Item 6.	Exhibits		29

Signatures			29

Forward Looking Information

Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of TOR Minerals International, Inc. and its Subsidiaries (the “Company”). The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in market price for titanium dioxide pigments, changes in foreign currency exchange rates, increases in the price of energy and raw materials, such as ilmenite, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “intends,” “should,” “may,” “likely” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

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


		Three Months Ended September 30,				Nine Months Ended September 30,
		2015		2014		2015		2014
NET SALES	$	8,988	$	11,317	$	29,066	$	36,841
Cost of sales		7,877		9,809		26,108		31,674
GROSS MARGIN		1,111		1,508		2,958		5,167
Technical services, research and development		44		50		143		150
Selling, general and administrative expenses		943		1,092		3,034		3,319
Loss on disposal of assets		38		-		38		-
OPERATING INCOME (LOSS)		86		366		(257)		1,698
OTHER EXPENSE:
Interest expense, net		(37)		(85)		(177)		(275)
Gain (Loss) on foreign currency exchange rate		(157)		71		(134)		10
Other, net		9		5		18		10
Total Other Expense		(185)		(9)		(293)		(255)
INCOME (LOSS) BEFORE INCOME TAX		(99)		357		(550)		1,443
Income tax (benefit) expense		22		61		(132)		287
NET INCOME (LOSS)	$	(121)	$	296	$	(418)	$	1,156

Earnings (loss) per common share:
Basic	$	(0.04)	$	0.10	$	(0.14)	$	0.38
Diluted	$	(0.04)	$	0.09	$	(0.14)	$	0.34
Weighted average common shares outstanding:
Basic		3,014		3,014		3,014		3,014
Diluted		3,014		3,394		3,014		3,403

See accompanying notes.

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


		Three Months Ended June 30,				Nine Months Ended September 30,
		2015		2014		2015		2014
NET INCOME (LOSS)	$	(121)	$	296	$	(418)	$	1,156
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Currency translation adjustment, net of tax:
Net foreign currency translation adjustment loss		(1,662)		(1,021)		(3,161)		(729)
Other comprehensive loss, net of tax		(1,662)		(1,021)		(3,161)		(729)
COMPREHENSIVE INCOME (LOSS)	$	(1,783)	$	(725)	$	(3,579)	$	427

See accompanying notes.

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


		September 30, 2015		December 31, 2014
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,088	$	2,657
Trade accounts receivable, net		4,380		4,915
Inventories, net		14,256		20,175
Other current assets		1,128		752
Current deferred tax asset, domestic		30		37
Current deferred tax asset, foreign		44		54
Total current assets		21,926		28,590
RESTRICTED CASH, foreign		1,561		-
PROPERTY, PLANT AND EQUIPMENT, net		19,278		18,889
DEFERRED TAX ASSET, foreign		689		662
OTHER ASSETS		17		22
Total Assets	$	43,471	$	48,163

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,080	$	3,318
Accrued expenses		1,034		1,832
Notes payable under lines of credit		876		886
Export credit refinancing facility		1,014		2,777
Current maturities of long-term debt – financial institutions		5,347		2,720
Total current liabilities		10,351		11,533
DEFERRED TAX LIABILITY, domestic		584		618
Total liabilities		10,935		12,151
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.25 par value: authorized, 6,000 shares; 3,014 shares issued and outstanding at September 30, 2015 and December 31, 2014		3,767		3,767
Additional paid-in capital		29,606		29,503
Retained earnings		681		1,099
Accumulated other comprehensive income (loss):		(1,518)		1,643
Total shareholders' equity		32,536		36,012
Total Liabilities and Shareholders' Equity	$	43,471	$	48,163

See accompanying notes.

TOR Minerals International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
		Nine Months Ended September 30,
		2015		2014
*CASH FLOWS FROM OPERATING ACTIVITIES:*
Net Income (Loss)	$	(418)	$	1,156
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		2,123		2,570
Loss on disposal of assets		38		-
Stock-based compensation		104		100
Deferred income tax (benefit) expense		(178)		189
Change in inventory reserve		-		(174)
Provision for bad debts		23		(7)
Changes in working capital:
Trade accounts receivables		302		(1,411)
Inventories		3,568		343
Other current assets		(414)		(381)
Accounts payable and accrued expenses		(1,431)		2,223
Net cash provided by operating activities		3,717		4,608

*CASH FLOWS FROM INVESTING ACTIVITIES:*
Additions to property, plant and equipment		(4,174)		(1,386)
Restricted Cash		(1,561)		-
Net cash used in investing activities		(5,735)		(1,386)

*CASH FLOWS FROM FINANCING ACTIVITIES:*
Proceeds from lines of credit		2,663		2,260
Payments on lines of credit		(2,567)		(3,225)
Proceeds from export credit refinancing facility		3,420		5,666
Payments on export credit refinancing facility		(4,619)		(7,198)
Payments on capital leases		-		(11)
Proceeds from long-term bank debt		3,740		236
Payments on long-term bank debt		(735)		(947)
Proceeds from the issuance of common stock and exercise of common stock options		-		11
Net cash provided by (used in) financing activities		1,902		(3,208)
Effect of foreign currency exchange rate fluctuations on cash and cash equivalents		(453)		(198)
Net decrease in cash and cash equivalents		(569)		(184)
Cash and cash equivalents at beginning of period		2,657		2,920
Cash and cash equivalents at end of period	$	2,088	$	2,736

Supplemental cash flow disclosures:
Interest paid	$	112	$	275
Income taxes paid	$	349	$	78
See accompanying notes.

Note 1. Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim consolidated financial statements (the “financial statements”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial statements include the consolidated accounts of TOR Minerals International, Inc. (“TOR”, “we”, “us”, “our” or the “Company”) and its wholly-owned subsidiaries, TOR Processing and Trade, BV (“TPT”) and TOR Minerals Malaysia, Sdn. Bhd. (“TMM”). All significant intercompany transactions have been eliminated. All adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the consolidated financial position, results of operations and cash flows for the interim periods presented have been made. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014, in our Annual Report on Form 10-K filed with the SEC on March 17, 2015. Operating results for the three and nine month periods ended September 30, 2015, are not necessarily indicative of the results for the year ending December 31, 2015.

Restricted Cash

As noted in the Company’s filings on Form 8-K, filed with the Securities and Exchange Commission on July 17, 2015, TPT entered into a facilities agreement (the “TPT Agreement”) with Rabobank on July 13, 2015, at which time Rabobank funded both the mortgage loan and the term loan (See Note 2). Under the terms of the TPT Agreement, the cash is restricted to payment of invoices related to TPT’s building expansion and equipment purchases. At September 30, 2015, TPT had €1,398,000 ($1,561,000) in restricted cash related to the TPT Agreement which is included as a non-current asset on the Company’s consolidated balance sheet.

Income Taxes

The Company records income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income taxes consisted of federal income tax expense of approximately $237,000, state income tax expense of approximately $5,000 and foreign tax benefit of approximately $220,000 for the three month period ended September 30, 2015, as compared to a federal and state tax expense of approximately $163,000 and $2,000, respectively, and foreign tax benefit of approximately $104,000 for the same three month period in 2014.

For the nine month period ended September 30, 2015, income taxes consisted of federal income tax benefit of approximately $31,000, state income tax expense of approximately $5,000 and foreign tax benefit of approximately $106,000, as compared to a federal and state tax expense of approximately $220,000 and $7,000, respectively, and foreign tax expense of approximately $60,000 for the same nine month period in 2014.

When accounting for uncertainties in income taxes, we evaluate all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws. We are subject to taxation in the United States, Malaysia and The Netherlands. Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2012 through December 31, 2014. Our state tax return, which is filed in Texas, is subject to examination for the tax years ended December 31, 2010 through December 31, 2014. Our tax returns in various non-U.S. jurisdictions are subject to examination for various tax years dating back to December 31, 2010.

As of January 1, 2015, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2015. In addition, we did not recognize any interest and penalties in our financial statements during the three and nine month periods ended September 30, 2015. If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 2. Debt and Notes Payable

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions as of September 30, 2015 and December 31, 2014, in thousands:

		September 30, 2015		December 31,
		(Unaudited)		2014
Fixed rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2015, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of the Company's U.S. Operation.	$	153	$	486
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2015, due July 1, 2029, secured by TPT's land and office building. (Balance in Euro at September 30, 2015, €221)		247		286
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2015, due January 31, 2030, secured by TPT's land and building. (Balance in Euro at September 30, 2015, €247)		276		316
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. (Balance in Euro at September 30, 2015, €1,000)		1,117		-
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 TPT's assets. (Balance in Euro at September 30, 2015, €2,350)		2,624		-
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, 5.2% at September 30, 2015, due March 1, 2016, secured by TMM's property, plant and equipment. (Balance in Ringgit ("RM") at September 30, 2015, RM 584)		133		417
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, 5.2% at September 30, 2015, due October 25, 2018, secured by TMM's property, plant and equipment. (Balance in Ringgit at September 30, 2015, RM 3,500)		797		1,215
Total current maturities		5,347		2,720

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

As noted above, TPT entered into the TPT Agreement with Rabobank on July 13, 2015, which provides the following:

Mortgage loan, in the amount of €1,000,000 ($1,117,000);
Term loan, in the amount of €2,350,000 ($2,624,000); and
Line of credit reduced from €1,100,000 to €500,000 ($558,000).

The mortgage loan, which relates to a plant expansion at TPT, is amortized over a period of 10 years at an interest rate of 3% per annum and is fixed for a period of 5 years. The monthly principal payment of €8,333 ($9,304) is scheduled to begin January 31, 2016. The mortgage is secured by TPT’s real estate.

The term loan, which relates to equipment purchases designed to improve production efficiencies and increase capacity at TPT, also reduced TPT’s existing line of credit (the “TPT Line”) from €1,100,000 to €500,000 ($1,228,000 to $558,000). The term loan, amortized over a period of 5 years, 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% per annum was 2.203% at September 30, 2015. The monthly principal payment of €39,167 ($43,730) is schedule to begin January 31, 2016.

Short-term Debt

U.S. Operations

On December 31, 2010, the Company’s U.S. Operation, located in Corpus Christi, Texas entered into a credit agreement, (the “Agreement”) with American Bank, N.A. (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 which reduced the minimum interest rate floor on the Line from 5.5% to 4.5%.

On January 17, 2014, the Company entered into the third amendment (the “Third Amendment”) to the Agreement with the Lender. Under the terms of the Third Amendment, the Company is required to maintain a ratio of cash flow to debt service of 1.0 to 1.0 for the four month period ended April 30, 2014, six month period ended June 30, 2014, nine month period ended September 30, 2014, and twelve month period ended December 31, 2014. Thereafter, the required ratio of cash flow to debt service shall be 1.25 to 1.0 measured on a rolling four quarter basis as originally detailed in the Agreement. The Company was in compliance with all financial and non-financial covenants for the rolling four quarter period ended September 30, 2015.

On May 26, 2015, the Company entered into the fifth amendment (the “Fifth Amendment”) to the Agreement, with the Lender. Under the terms of the Fifth Amendment, the maturity date on the Line was extended from October 15, 2015 to October 15, 2016.

Under the terms of the Agreement, as amended, 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 point 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 September 30, 2015, no funds were outstanding on the Line.

European Operations

On July 13, 2015, the TPT Agreement reduced the TPT line from €1,100,000 to €500,000 ($1,228,000 to $558,000) and interest was changed from a variable interest rate of bank prime plus 2.8% to the average 1-month EURIBOR plus the bank margin of 3.3%, which was 3.194% at September 30, 2015. No funds were outstanding on the TPT line at September 30, 2015.

TPT’s loan agreements covering the TPT line and term loans, included in “Long-term Debt – Financial Institutions” above, include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. Subjective acceleration clauses are customary in The Netherlands for such borrowings. However, if demand is made by Rabobank, we may be unable to refinance the demanded indebtedness, in which case the bank could foreclose on the assets of TPT.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Asian Operations

On August 24, 2015, TMM amended its short-term banking facility with HSBC to extend the maturity date from June 30, 2015 to June 30, 2016. The HSBC facility includes the following in RM: (1) overdraft of RM 500,000 ($114,000); (2) an import/export line (“ECR”) of RM 10,460,000 ($2,382,000); and (3) a foreign exchange contract limit of RM 5,000,000 ($1,139,000). At September 30, 2015, the outstanding balances on the ECR and the foreign exchange contract were RM 4,453,000 ($1,014,000) and RM 3,848,000 ($876,000), respectively, and at the current interest rates of 4.96% and 2.506%, respectively.

On August 15, 2014, TMM amended its short term banking facility with RHB Bank Berhad (“RHB”) to extend the maturity date from March 24, 2014 to April 1, 2015. TMM is currently negotiating with RHB to extend the maturity date to April 21, 2016. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000 ($228,000); (2) an ECR of RM 7,300,000 ($1,662,000); (3) a bank guarantee of RM 1,200,000 ($273,000); and (4) a foreign exchange contract limit of RM 25,000,000 ($5,693,000). At September 30, 2015, no funds were outstanding on the RHB facility.

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 facilities 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.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 3. Fair Value Measurements

The following table summarizes the valuation of our financial instruments recorded on a fair value basis as of September 30, 2015 and December 31, 2014. The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at September 30, 2015 or at December 31, 2014.

		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 Liability
December 31, 2014
Currency forward contracts	$	26	$	-	$	26	$	-
September 30, 2015
Currency forward contracts	$	72	$	-	$	72	$	-

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 rates 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:

		September 30, 2015				December 31, 2014
(In Thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion	$	5,347	$	4,800	$	2,720	$	2,558

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 Condensed Consolidated Financial Statements

(Unaudited)

Note 4. Inventories

Following is a summary of inventory at September 30, 2015 and December 31, 2014, in thousands:

		September 30,		December 31,
		2015		2014
Raw materials	$	5,393	$	8,465
Work in progress		3,844		6,126
Finished goods		4,296		4,800
Supplies		810		915
Total Inventories		14,343		20,306
Inventory reserve		(87)		(131)
Net Inventories	$	14,256	$	20,175

Note 5. Calculation of Basic and Diluted Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

(in thousands, except per share amounts)		Three Months Ended September 30,				Nine Months Ended September 30,
		2015		2014		2015		2014
Numerator:
Net Income (Loss)	$	(121)	$	296	$	(418)	$	1,156
Numerator for basic earnings (loss) per share - income available to common shareholders		(121)		296		(418)		1,156
Effect of dilutive securities:
Numerator for diluted earnings (loss) per share - income available to common shareholders after assumed conversions	$	(121)	$	296	$	(418)	$	1,156

Denominator:
Denominator for basic earnings (loss) per share - weighted-average shares		3,014		3,014		3,014		3,014
Effect of dilutive securities:
Employee stock options		-		4		-		1
Warrants		-		376		-		388
Dilutive potential common shares		-		380		-		389
Denominator for diluted earnings (loss) per share - weighted-average shares and assumed conversions		3,014		3,394		3,014		3,403
*Basic earnings (loss) per common share*	$	(0.04)	$	0.10	$	(0.14)	$	0.38
*Diluted earnings (loss) per common share*	$	(0.04)	$	0.09	$	(0.14)	$	0.34

For the three and nine month periods ended September 30, 2015, approximately 528,000 detachable warrants were excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive. The warrants, issued in May 2009 with our six percent (6%) convertible subordinated debentures, have an exercise price of $2.65 and a maturity date of May 4, 2016.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

For the three and nine month periods ended September 30, 2015, approximately 146,000 employee stock options were excluded from the calculation of diluted earnings per share as the effect would be anti-dilutive.

For the three and nine month periods ended September 30, 2014, approximately 134,000 employee stock options were excluded from the calculation of diluted earnings per share as the exercise price was greater than the market price of the common shares and, therefore, the effect would be anti-dilutive.

Note 6. Segment Information

The Company operates in the business of pigment manufacturing and related products in three geographic segments. All United States (“U.S.”) manufacturing is done at the facility located in Corpus Christi, Texas. Foreign manufacturing is done by the Company’s wholly-owned foreign operations, TMM, located in Malaysia, and TPT, located in The Netherlands.

Product sales of inventory between the U.S., Asian and European operations are based on inter-company pricing, which includes an inter-company profit margin. In the geographic information, the location profit (loss) from all locations is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments. Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker. The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period. To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.

Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consist primarily of ALUPREM®, Synthetic Rutile, HITOX® and TIOPREM®.

A summary of the Company’s manufacturing operations by geographic segment is presented below:

(In Thousands)		United States (Corpus Christi)		Europe (TPT)		Asia (TMM)		Inter-Company Eliminations		Consolidated

As of and for the three months ended:
*September 30, 2015*
Net Sales:
Customer sales	$	6,308	$	2,059	$	621	$	-	$	8,988
Intercompany sales		33		1,418		789		(2,240)		-
Total Net Sales	$	6,341	$	3,477	$	1,410	$	(2,240)	$	8,988

Location income (loss)	$	(229)	$	138	$	(210)	$	180	$	(121)

*September 30, 2014*
Net Sales:
Customer sales	$	8,137	$	2,341	$	839	$	-	$	11,317
Intercompany sales		-		1,936		2,430		(4,366)		-
Total Net Sales	$	8,137	$	4,277	$	3,269	$	(4,366)	$	11,317

Location income (loss)	$	135	$	215	$	(201)	$	147	$	296

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 6. Segment Information (continued)

(In Thousands)		United States (Corpus Christi)		Europe (TPT)		Asia (TMM)		Inter-Company Eliminations		Consolidated

As of and for the nine months ended:
*September 30, 2015*
Net Sales:
Customer sales	$	20,485	$	6,418	$	2,163	$	-	$	29,066
Intercompany sales		37		3,456		4,343		(7,836)		-
Total Net Sales	$	20,522	$	9,874	$	6,506	$	(7,836)	$	29,066

Location income (loss)	$	(327)	$	152	$	(356)	$	113	$	(418)

Location assets	$	17,026	$	13,769	$	12,676	$	-	$	43,471

*September 30, 2014*
Net Sales:
Customer sales	$	24,534	$	8,148	$	4,159	$	-	$	36,841
Intercompany sales		58		5,903		6,315		(12,276)		-
Total Net Sales	$	24,592	$	14,051	$	10,474	$	(12,276)	$	36,841

Location income (loss)	$	181	$	1,362	$	(630)	$	243	$	1,156

Location assets	$	21,574	$	10,577	$	19,888	$	-	$	52,039

Note 7. Stock Options and Equity Compensation Plan

For the three and nine month periods ended September 30, 2015, the Company recorded stock-based employee compensation expense of $29,000 and $104,000, respectively, as compared to $30,000 and $100,000 for the same three and nine month periods of 2014, respectively. This compensation expense is included in “selling, general and administrative expenses” in the accompanying consolidated statements of operations.

The Company granted 6,000 and 20,500 stock options during the nine month periods ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, there was approximately $286,000 of compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 1.93 years.

As most options issued under the Company’s 2000 Incentive Stock Option Plan are incentive stock options, the Company does not receive any excess tax benefits relating to the compensation expense recognized on vested options.

TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 8. 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 currency 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 September 30, 2015, we marked these contracts to market, recording $72,000 as a current liability on the consolidated balance sheets.

The following table summarizes the gross fair market value of all derivative instruments, which are not designated as hedging instruments and their location in our consolidated balance sheets at September 30, 2015 and December 31, 2014, in thousands:

Liability Derivatives
Derivative Instrument	Location		September 30, 2015		December 31, 2014
Foreign Currency Exchange Contracts	Other Current Liabilities	$	72	$	26

For the three and nine month periods ended September 30, 2015, we recorded a net loss on these contracts of $51,000 and $72,000, respectively, as a component of our net loss. For the three and nine month periods ended September 30, 2014, we recorded a net loss of $35,000 and $21,000, respectively, as a component of our operations income (loss).

The following table summarizes, in thousands, the impact of the Company’s derivatives on the consolidated financial statements of operations for the three and nine month periods ended September 30, 2015 and 2014:

			Amount of Gain (Loss) Recognized in Operations
Derivative Instrument	Location of Gain (loss) on Derivative Instrument		Three Months Ended September 30,				Nine Month Ended September 30,
Derivative Instrument	Location of Gain (loss) on Derivative Instrument		2015		2014		2015		2014
Foreign Currency Exchange Contracts	Gain (loss) on foreign currency exchange rate	$	(51)	$	(35)	$	(72)	$	(21)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

We are 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 TiO2-color hybrid pigments, are designed for use in plastics, coatings, paints and catalysts applications, as well as a wide range of other industrial applications. With operating segments in the United States, Europe and Asia, our mission is to bring high value products and superior levels of service to our customers to help ensure their success.

Our U.S. operation, located in Corpus Christi, Texas, is also the global headquarters for the Company. TPT, our European operation, is located in Hattem, Netherlands, and TMM, our Asian operation, is located in Ipoh, Malaysia.

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 slow down typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.

Operating expenses in the foreign locations are primarily in local currencies. Accordingly, we have exposure to fluctuation in foreign currency exchange rates. These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the U.S. Dollar.

Following are our results for the three and nine month periods ended September 30, 2015 and 2014.

		(Unaudited)
(In thousands, except per share amounts)		Three Months Ended September 30,				Nine Months Ended September 30,
		2015		2014		2015		2014
NET SALES	$	8,988	$	11,317	$	29,066	$	36,841
Cost of sales		7,877		9,809		26,108		31,674
GROSS MARGIN		1,111		1,508		2,958		5,167
Technical services, research and development		44		50		143		150
Selling, general and administrative expenses		943		1,092		3,034		3,319
Loss on disposal of assets		38		-		38		-
OPERATING INCOME (LOSS)		86		366		(257)		1,698
OTHER EXPENSE:
Interest expense, net		(37)		(85)		(177)		(275)
Gain (Loss) on foreign currency exchange rate		(157)		71		(134)		10
Other, net		9		5		18		10
INCOME (LOSS) BEFORE INCOME TAX		(99)		357		(550)		1,443
Income tax (benefit) expense		22		61		(132)		287
NET INCOME (LOSS)	$	(121)	$	296	$	(418)	$	1,156

Earnings (loss) per common share:
Basic	$	(0.04)	$	0.10	$	(0.14)	$	0.38
Diluted	$	(0.04)	$	0.09	$	(0.14)	$	0.34

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The Company operates in three geographic segments. Product sales between the U.S., European and Asian operations are based on inter-company pricing which includes an inter-company profit margin. The inter-company sales are excluded from our consolidated sales and from the sales of each of our three geographic segments.

Net Sales : Consolidated net sales decreased approximately 21% for the three and nine month periods ended September 30, 2015, as compared to the same three and nine month periods of 2014. The decrease was primarily due to a decrease in volume, selling price and the impact of the change in foreign currency exchange rates as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2015 and 2014 (in thousands). All inter-company sales have been eliminated.

		(Unaudited)
		Three Months Ended September 30,									Nine Months Ended September 30,
Product		2015			2014			Variance			2015			2014			Variance
ALUPREM	$	3,457	39%	$	4,450	39%	$	(993)	-22%	$	10,237	35%	$	14,195	38%	$	(3,958)	-28%
HITOX		2,357	26%		3,425	30%		(1,068)	-31%		8,475	29%		10,569	29%		(2,094)	-20%
BARTEX/ BARYPREM		2,018	23%		2,280	20%		(262)	-11%		6,557	23%		6,926	19%		(369)	-5%
HALTEX/ OPTILOAD		848	9%		750	7%		98	13%		2,714	9%		2,491	7%		223	9%
TIOPREM		116	1%		215	2%		(99)	-46%		553	2%		716	2%		(163)	-23%
SYNTHETIC RUTILE		-	0%		-	0%		-	0%		14	<1%		1,365	4%		(1,351)	-99%
OTHER		192	2%		197	2%		(5)	-3%		516	2%		579	1%		(63)	-11%
Total	$	8,988	100%	$	11,317	100%	$	(2,329)	-21%	$	29,066	100%	$	36,841	100%	$	(7,775)	-21%

ALUPREM sales decreased 22% for the three month period ended September 30, 2015, primarily related to a decrease in volume of 11%, selling price of 6% and the impact of the change in the foreign currency exchange rates of 6% as the Euro weakened against the U.S. Dollar, which was partially offset by a shift in product mix of 1%.

For the nine month period ended September 30, 2015, ALUPREM sales decreased 28%, primarily related to a decrease in volume of 16%, selling price of 4% and the impact of the change in the foreign currency exchange rates of 8% as the Euro weakened against the U.S. Dollar.

The decrease in volume and selling price was primarily related to a decrease in orders from a large U.S. customer, while the change in product mix and the change in the foreign currency exchange rates impacted European sales. The order pattern of our largest ALUPREM customers can vary significantly from quarter to quarter and does not necessarily follow a normal seasonal pattern. However, we do anticipate that volume and pricing from a large U.S. customer will continue to be below last year’s levels.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

HITOX sales decreased 31% for the three month period ended September 30, 2015, primarily due to a reduction in volume of 25% and the impact of the change in the foreign currency exchange rates of 6% as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

For the nine month period ended September 30, 2015, HITOX sales decreased 20%, primarily due to a decrease in volume of 15%, and the impact of the change in the foreign currency exchange rates of 5% as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

The decrease in sales volume of HITOX was primarily due to the continued weakness in the global TiO2 market, as well as aggressive pricing pressure from producers of white TiO2 in China. We expect this pressure to continue to affect both volume and pricing in our TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.

BARTEX®/BARYPREM® sales decreased 11% during the three month period ended September 30, 2015, primarily due to a decrease in volume and selling price of 5% and 3%, respectively, and the impact of the change in the foreign currency exchange rates of 3% as the Euro weakened against the U.S. Dollar.

For the nine month period ended September 30, 2015, sales decreased 5%, primarily due to a decrease in selling price of 2% and the impact of the change in the foreign currency exchange rates of 3% as the Euro weakened against the U.S. Dollar.

HALTEX®/OPTILOAD® sales increased 13% for the three month period ended September 30, 2015, primarily due to an increase in volume of 14%, which was partially offset by a change in product mix of 1%.

For the nine month period ended September 30, 2015, sales increased 9%, primarily due to an increase in volume of 10% which was partially offset by a change in product mix of 1%. The increase in sales volume primarily relates to an increase in the customer base, as well as an increase in requirements for existing customers.

TIOPREM sales decreased 46% for the three month period ended September 30, 2015, primarily due to a decrease in volume of 39%, a change in product mix of 3% and the impact of the change in the foreign currency exchange rates of 4% as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

For the nine month period ended September 30, 2015, TIOPREM sales decreased 23%, primarily due to a decrease in volume of 10%, a change in product mix of 11% and the impact of the change in the foreign currency exchange rates of 2% as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

Synthetic Rutile (“SR”) – For the three month periods ended September 30, 2015 and 2014, there were no sales of SR to third parties. For the nine month period ended September 30, 2015, our SR sales revenue from third party customers was approximately $14,000 as compared to $1,365,000 during the first nine months of 2014. While producers of white TiO2 in China have contributed to the overall weakness in the global TiO2 market, we typically only produce SR for our own internal consumption. Separately, we have made a strategic decision to take a portion of our SR production capacity out of service. We are currently supplementing our existing SR inventory with product produced by alternate sources. By making this strategic move, we expect cost savings as well as a reduction in our SR inventory levels over the next 12 months.

Other Product sales decreased 3% and 11% for the three and nine month periods ended September 30, 2015, respectively, primarily due to a decrease in volume and selling price in the U.S. and at TMM.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

U.S. Operations

Our U.S. operation manufactures and sells HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM to third-party customers. In addition, we purchase ALUPREM and HITOX from our subsidiaries, TPT and TMM, for distribution in the Americas. Following is a summary of net sales for our U.S. operation for the three and nine month periods ended September 30, 2015 and 2014 (in thousands), as well as a summary of the material changes. All inter-company sales have been eliminated.

		(Unaudited)
		Three Months Ended September 30,									Nine Months Ended September 30,
Product		2015			2014			Variance			2015			2014			Variance
ALUPREM	$	1,827	29%	$	2,760	34%	$	(933)	-34%	$	5,202	26%	$	8,239	34%	$	(3,037)	-37%
HITOX		1,563	25%		2,361	29%		(798)	-34%		5,883	29%		7,017	29%		(1,134)	-16%
BARTEX		1,778	28%		1,908	24%		(130)	-7%		5,736	28%		5,615	23%		121	2%
HALTEX/ OPTILOAD		848	13%		750	9%		98	13%		2,714	13%		2,491	10%		223	9%
TIOPREM		100	2%		168	2%		(68)	-40%		467	2%		614	2%		(147)	-24%
OTHER		192	3%		190	2%		2	1%		483	2%		558	2%		(75)	-13%
Total	$	6,308	100%	$	8,137	100%	$	(1,829)	-22%	$	20,485	100%	$	24,534	100%	$	(4,049)	-17%

ALUPREM sales decreased 34% for the three month period ended September 30, 2015, primarily related to a decrease in volume of 25% and selling price of 9%.

For the nine month period ended September 30, 2015, ALUPREM sales decreased 37%, primarily related to a decrease in volume of 30% and selling price of 7%. The decrease in volume and selling price was primarily related to a significant U.S. customer’s product demand, and we anticipate that that volume and pricing from this customer will continue to be below last year’s levels.

HITOX sales decreased 34% for the three month period ended September 30, 2015, primarily due to a reduction in volume of 31% and product mix of 3%.

For the nine month period ended September 30, 2015, HITOX sales decreased 16%, primarily due to a decrease in volume of 14% and product mix of 2%. The decrease in sales volume was primarily due to the continued weakness in the global TiO2 market, as well as the entry into the TiO2 market by producers of white TiO2 in China. We expect this pressure to continue to affect both volume and pricing in our TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.

BARTEX sales decreased 7% for the three month period ended September 30, 2015, primarily due to a decrease in volume and selling price of 3% and 4%, respectively.

For the nine month period ended September 30, 2015, BARTEX sales increased 2%, primarily due to an increase in volume of 4% which was partially offset by a reduction in selling price of 2%.

HALTEX/OPTILOAD sales increased 13% for the three month period ended September 30, 2015, due to an increase in volume resulting from an increase in our customer base, as well as an increase in requirements for existing customers.

For the nine month period ended September 30, 2015, sales increased 9%, primarily due to an increase in volume of 10%, which was partially offset by a change in product mix of 1%.

TIOPREM sales decreased 40% for the three month period ended September 30, 2015, primarily due to a decrease in volume and change in product mix of 34% and 6%, respectively.

For the nine month period ended September 30, 2015, TIOPREM sales decreased 24%, primarily due to a decrease in volume and change in product mix of 10% and 14%, respectively.

Other Product sales increased 1% for the three month period ended September 30, 2015, due to an increase in volume of 20%, which was partially offset by a decrease in selling price of 19%.

For the nine month period ended September 30, 2015, sales decreased 13% due to a decrease in selling price of 15%, which was partially offset by an increase in volume of 2%.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

European Operations

TPT manufactures and sells ALUPREM to third-party customers, as well as to our U.S. operation for distribution to U.S. customers. In addition, TPT purchases HITOX from TMM for distribution in Europe. The following table represents TPT’s sales (in thousands) for the three and nine month periods ended September 30, 2015 and 2014 to third-party customers. All inter-company sales have been eliminated.

		(Unaudited)
		Three Months Ended September 30,									Nine Months Ended September 30,
Product		2015			2014			Variance			2015			2014			Variance
ALUPREM	$	1,630	79%	$	1,690	72%	$	(60)	-4%	$	5,035	78%	$	5,956	73%	$	(921)	-15%
BARYPREM		240	12%		372	16%		(132)	-35%		821	13%		1,311	16%		(490)	-37%
HITOX		173	8%		253	11%		(80)	-32%		533	8%		805	10%		(272)	-34%
TIOPREM		16	1%		26	1%		(10)	-38%		29	1%		76	1%		(47)	-62%
Total	$	2,059	100%	$	2,341	100%	$	(282)	-12%	$	6,418	100%	$	8,148	100%	$	(1,730)	-21%

ALUPREM sales in Europe decreased 4% for the three month period ended September 30, 2015, primarily due to the impact of the change in foreign currency which reduced sales 16%. Partially offsetting the fluctuation in currency was an increase in sales related to volume and the change in product mix of 10% and 2%, respectively.

For the nine month period ended September 30, 2015, sales decreased 15%, primarily due to the impact of the change in the foreign currency exchange rates as the Euro weakened against the U.S. Dollar resulting in a reduction in sales of 18%. Partially offsetting the negative impact of the fluctuation in foreign currency was an increase in sales related to volume and the change in product mix of 2% and 1%, respectively.

BARYPREM sales in Europe decreased 35% for the three month period ended September 30, 2015, primarily due to a decrease in volume and the impact of the change in foreign currency of 19% and 16%, respectively.

For the nine month period ended September 30, 2015, sales decreased 37%, primarily due to a decrease in volume of 20% and the impact of the change in the foreign currency exchange rates of 17% as the Euro weakened against the U.S. Dollar. The decrease in volume primarily relates to lower demand by a customer in Europe.

HITOX sales in Europe decreased 32% during the three month period ended September 30, 2015, primarily due to a decrease in volume and the impact of the change in foreign currency of 15% and 17%, respectively.

For the nine month period ended September 30, 2015, sales decreased 34%, primarily due to a decrease in volume of 16% and the impact of the change in the foreign currency exchange rates of 18% as the Euro weakened against the U.S. Dollar. The European HITOX sales continue to be impacted by the overall weakness in the global TiO2 market.

TIOPREM sales in Europe decreased 38% during the three month period ended September 30, 2015, primarily due to a decrease in volume and the impact of the change in foreign currency of 23% and 15%, respectively.

For the nine month period ended September 30, 2015, sales decreased 62%, primarily due to a decrease in volume of 45% and the impact of the change in the foreign currency exchange rates of 17% as the Euro weakened against the U.S. Dollar.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Asian Operations

Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third-party customers, as well as to our U.S. operation and TPT. The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2015 and 2014 to third-party customers. All inter-company sales have been eliminated.

		(Unaudited)
		Three Months Ended September 30,									Nine Months Ended September 30,
Product		2015			2014			Variance			2015			2014			Variance
HITOX	$	621	100%	$	811	97%	$	(190)	-23%	$	2,059	95%	$	2,747	66%	$	(688)	-25%
TIOPREM		-	0%		21	2%		(21)	100%		57	3%		26	1%		31	119%
SYNTHETIC RUTILE		-	0%		-	0%		-	0%		14	<1%		1,365	33%		(1,351)	99%
OTHER		-	0%		7	1%		(7)	-100%		33	2%		21	<1%		12	57%
Total	$	621	100%	$	839	100%	$	(218)	-26%	$	2,163	100%	$	4,159	100%	$	(1,996)	-48%

HITOX sales in Asia decreased 23% for the three month period ended September 30, 2015, primarily due to the impact of the change in foreign currency and a decrease in volume of 21% and 12%, respectively, which was partially offset by a change in product mix of 10%.

For the nine month period ended September 30, 2015, sales decreased 25%, primarily due to a decrease in volume and the impact of the change in foreign currency of 15% and 14%, respectively, which was partially offset by a change in product mix of 4%. The HITOX market in Asia continues to decline due to the weakness in the TiO2 market, as well as the entry into the TiO2 market by producers of white TiO2 in China. We expect this pressure to continue to affect both volume and pricing in our TiO2 product sales for the balance of the year, and we expect conditions in the TiO2 market to remain difficult for the next several years.

TIOPREM sales in Asia decreased in volume 100% for the three month period ended September 30, 2015. For the nine month period ended September 30, 2015, sales increased 119% primarily due to an increase in volume of 127%, which was partially offset by the impact of the change in foreign currency of 8%. The year to date increase in sales volume primarily relates the first and second quarter sales as we added new TIOPREM customers in Asia.

Other Product sales volume decreased 100% for the three month period ended September 30, 2015, and increased 57% for the nine month period. The increase in volume was primarily due to new customer.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Other Consolidated Results

Gross Margin : The following table represents our net sales, cost of sales and gross margin for the three and nine month periods ended September 30, 2015 and 2014, in thousands.

		(Unaudited)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2015		2014		2015		2014
NET SALES	$	8,988	$	11,317	$	29,066	$	36,841
Cost of sales		7,877		9,809		26,108		31,674
GROSS MARGIN	$	1,111	$	1,508	$	2,958	$	5,167
GROSS MARGIN %		12.4 %		13.3 %		10.2 %		14.0 %

For the three month period ended September 30, 2015, gross margin decreased approximately 0.9%, primary due to the negative impact fluctuation in foreign currency exchange rates as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar.

For the nine month period ended September 30, 2015, gross margin decreased approximately 3.8%, primary due to a reduction in selling price of 1.8%, change in product mix of 0.7%, and the negative impact of the fluctuation in foreign currency exchange rates as both the Euro and the Malaysian Ringgit weakened against the U.S. Dollar of 1.3%.

Selling, General, Administrative and Expenses (“SG&A”) : SG&A expense decreased approximately 13.6% and 8.6% during the three and nine month periods ended September 30, 2015, respectively, primarily due to a decrease in salaries and sales expense, as well as the impact of the change in foreign currency exchange rates.

Interest Expense : Net interest expense decreased approximately $48,000 and $98,000 for the three and nine month periods ended September 30 2015, respectively, due to a decrease in our average long-term and short-term financing at each of our three operations.

Income Taxes : Income taxes consisted of federal income tax expense of approximately $237,000, state income tax expense of approximately $5,000 and foreign tax benefit of approximately $220,000 for the three month period ended September 30, 2015, as compared to a federal and state tax expense of approximately $163,000 and $2,000, respectively, and foreign tax benefit of approximately $104,000 for the same three month period in 2014.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity, Capital Resources and Other Financial Information

Long-term Debt – Financial Institutions

Following is a summary of our long-term debt to financial institutions as of September 30, 2015 and December 31, 2014, in thousands:

		September 30, 2015		December 31,
		(Unaudited)		2014
Fixed rate term note payable to a U.S. bank, with an interest rate of 5.5% at September 30, 2015, due January 1, 2016, secured by real estate, leasehold improvements, property, plant and equipment, inventory and accounts receivable of the Company's U.S. Operation.	$	153	$	486
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.85% at September 30, 2015, due July 1, 2029, secured by TPT's land and office building. (Balance in Euro at September 30, 2015, €221)		247		286
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 3.3% at September 30, 2015, due January 31, 2030, secured by TPT's land and building. (Balance in Euro at September 30, 2015, €247)		276		316
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. (Balance in Euro at September 30, 2015, €1,000)		1,117		-
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 TPT's assets. (Balance in Euro at September 30, 2015, €2,350)		2,624		-
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, 5.2% at September 30, 2015, due March 1, 2016, secured by TMM's property, plant and equipment. (Balance in Ringgit ("RM") at September 30, 2015, RM 584)		133		417
Malaysian Ringgit term note payable to a Malaysian bank, with an interest rate 2% above the bank base lending rate, 5.2% at September 30, 2015, due October 25, 2018, secured by TMM's property, plant and equipment. (Balance in Ringgit at September 30, 2015, RM 3,500)		797		1,215
Total current maturities		5,347		2,720

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Mortgage loan, in the amount of €1,000,000 ($1,117,000);
Term loan, in the amount of €2,350,000 ($2,624,000); and
Line of credit reduced from €1,100,000 to €500,000 ($558,000).

The term loan, which relates to equipment purchases designed to improve production efficiencies and increase capacity at TPT, also reduced TPT’s existing line of credit (the “TPT Line”) from €1,100,000 to €500,000 ($1,228,000 to $558,000). The term loan, amortized over a period of 5 years, 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 point per annum was 2.203% at September 30, 2015. The monthly principal payment of €39,167 ($43,730) is schedule to begin January 31, 2016.

Short-term Debt

U.S. Operations

European Operations

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Asian Operations

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Cash and Cash Equivalents

Cash and cash equivalents decreased $569,000 from December 31, 2014 to September 30, 2015. Operating activities provided $3,717,000 and financing activities provided $1,902,000. We used $5,735,000 in investing activities and the effect of the exchange rates fluctuations decreased cash of $453,000.

		(Unaudited)
		Nine Months Ended September 30,
		2015		2014
Net cash provided by (used in)
Operating activities	$	3,717	$	4,608
Investing activities		(5,735)		(1,386)
Financing activities		1,902		(3,208)
Effect of exchange rate fluctuations		(453)		(198)
Net decrease in cash and cash equivalents	$	(569)	$	(184)

Operating Activities

Major changes in working capital affecting cash provided by operating activities during the nine month period ended September 30, 2015, include the following:

Trade Accounts Receivable : Accounts receivable provided cash of $302,000 during the first nine months of 2015. The decrease in accounts receivable is primarily due to the timing of sales between the fourth quarter of 2014 and the third quarter of 2015, primarily at the U.S. operation. Accounts receivable decreased $551,000 at the U.S. operation and $91,000 at TMM and increased $340,000 at TPT.
Inventories : Inventories provided cash of $3,568,000 during the first nine months of 2015 due to a reduction in inventory at each of the Company’s three operating segments. Inventories at the U.S. operation decreased $2,002,000, primarily related to a decrease in raw materials and work in progress. TPT’s inventory decreased approximately $99,000, primarily related to a decrease in raw materials and finished goods. TMM’s inventory decreased approximately $1,467,000, primarily related to a decrease in raw materials and work in progress.
Other Current Assets : Other current assets used cash of $414,000 during the first nine months of 2015. Current assets at the U.S. operation increased $116,000, primarily related to the timing of insurance premiums. TPT’s current assets increased $215,000, primarily due to the prepayment of payroll taxes, deposits on equipment parts and timing of insurance premiums. TMM’s current assets increased $83,000, primarily due to the timing of insurance.
Accounts Payable and Accrued Expenses : Trade accounts payable and accrued expenses used cash of $1,431,000 during the first nine months of 2015. Accounts payable and accrued expenses at TMM decreased $1,253,000, primarily related to the payments associated with the fourth quarter 2014 SR production. At the U.S. operation, accounts payable and accrued expenses decreased $82,000, and TPT’s decreased $96,000, primarily related to the timing of purchases.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Investing Activities

We used cash of $5,735,000 in investing activities during the first nine months of 2015, of which approximately $4,174,000 related to equipment purchases and plant expansion at our U.S. and European locations. The remaining $1,561,000 is restricted cash at the European Operation. Net investments for each operation are as follows:

Property, Plant and Equipment
- U.S. Operation : We invested approximately $1,200,000 during the first nine months of 2015 for new production equipment designed to improve production yield and efficiency.
- European Operation : We invested approximately $2,970,000 during the first nine months of 2015 for new equipment and plant expansion to increase the production capacity of ALUPREM.
- Asian Operation : We invested approximately $4,000 during the first nine months of 2015 for new computer equipment.
Restricted Cash
- European Operation : We have $1,561,000 in restricted cash at TPT related to the July 13, 2015 funding of the TPT Agreement with Rabobank for the plant expansion and equipment purchases related to the increase in ALUPREM production capacity. (See Note 1, Accounting Policies, Restricted Cash, page 7)

Financing Activities

Financing activities provided cash of $1,902,000 during the nine month period ended September 30, 2015. Significant factors relating to financing activities include the following:

Lines of Credit
- U.S. Operation: Borrowings on our U.S. line of credit were not utilized by the Company during the nine month period ended September 30, 2015.
- European Operation: Borrowings on TPT’s line of credit decreased $544,000 during the nine month period ended September 30, 2015.
- Asian Operation: Borrowings on TMM’s line of credit increased $640,000 during the nine month period ended September 30, 2015.
Export Credit Refinancing Facility (ECR): TMM’s borrowing on the ECR decreased $1,199,000 during the nine month period ended September 30, 2015.
Long-term Debt:
- U.S. Operation: Our U.S. long-term debt decreased $333,000 for the nine month period ended September 30, 2015.
- European Operation: TPT’s long-term debt increased $3,708,000 for the nine month period ended September 30, 2015.
- Asian Operation: TMM’s long-term debt decreased $370,000 for the nine month period ended September 30, 2015.

TOR Minerals International, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations

Off-Balance Sheet Arrangements and Contractual Obligations

No material changes have been made to the “ Off-Balance Sheet Arrangements and Contractual Obligations” noted in the Company’s 2014 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms; and (ii) to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During the last fiscal quarter, there were no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 6. Exhibits

(a)	Exhibits

	Exhibit 10.1	Amendment to Loan Agreement with HSBC Bank, dated August 24, 2015
	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TOR Minerals International, Inc.
	____________
	(Registrant)

Date:	October 29, 2015	OLAF KARASCH Olaf Karasch President and Chief Executive Officer

Date:	October 29, 2015	BARBARA RUSSELL Barbara Russell Chief Financial Officer

EXHIBIT 10.1

PRIVATE AND CONFIDENTIAL

Our Ref : CS/MME/IPH/GWISCOP15175-145326028C/rk/cl
CARM : 150519

29 June 2015

TOR MINERALS (M) SDN BHD
4 1/2 Miles, Lahat Road,
30200 Ipoh,
Perak.

Dear Sirs,

Banking Facility(ies) (“Facilities”)
Customer No. 383-136280

We have reviewed your Facilities and agree to continue providing you the Facilities as revised below for a further period subject to the terms and conditions herein, in the Schedule and the Annexures (collectively, “the Facilities Offer Letter”)..

The Facilities are subject to review at any time, in any event by June 2016.

The Facilities are subject always to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand. Other terms herein also apply which may allow the Bank to cease providing the Facilities to you.

Facilities		Limit (RM)

Overdraft		500,000.00
Term Loan 1		*874,999.79
Term Loan 2		*3,749,769.60
Bank Guarantees		500,000.00
Import/Export Line ^# consisting of:- • Documentary credits • Bankers Acceptance Import • Bankers Acceptance Export • Export Credit Refinancing Scheme (Pre Shipment) • Export Credit Refinancing Scheme (Post Shipment) • Loans Against Imports • Foreign Currency Loans against Imports	[Tenor : 120 days] [Tenor : 120 days] [Tenor : 120 days] [Tenor : 120 days] [Tenor : 120 days] [Tenor : 120 days]	10,460,000.00 (10,460,000.00) (10,460,000.00) (5,000,000.00) (10,460,000.00) (5,000,000.00) (10,460,000.00) (5,000,000.00)
Total Gross Foreign Exchange Contract Limit (inclusive of marked-to-market losses incurred from time to time)		5,000,000.00

# This Combined Limit applies to each facility within this Line subject to total utilisation of this Line not exceeding the Combined Limit at any one time.

* Outstanding principal sum as at date hereof .

The Facilities are also granted subject to satisfactory conduct of your current accounts in accordance with guidelines issued by Bank Negara Malaysia and/or policies of the Bank or other financial institutions you have current accounts with from time to time.

If there is any breach which may subject any of your current accounts (be it with the Bank or other financial institution) to closure, the Bank shall have the right to recall the Facilities. This is notwithstanding that your current account(s) with the Bank whether held solely or jointly with others are conducted satisfactorily.

The Bank may rely on information furnished by the Credit Bureau established by Bank Negara Malaysia for information whether any or you current accounts have become liable to closure.

Reliance by the Bank on such information shall not subject it to any liability to you or other parties should there be inaccuracy in such formation unknown to the Bank.

To signify understanding and acceptance of the Facilities and its terms and conditions, please arrange for your authorized signatories to sign this Facilities Offer Letter in accordance your company’s board resolution or your partnership resolution (or other similar authorization) (where and whichever is applicable), a certified true copy of which is to be given to the Bank together with the required documents (please refer to First Schedule Part C ) and payment of the Facilities Arrangement Fee of RM530.00 (inclusive of Goods and Services Tax) when returning the duly accepted Facilities Offer Letter to the Bank on or before 29 July 2015 , otherwise this offer will lapse unless the Bank in its discretion agrees to extend the offer period. Please note that we reserve the right to withdraw the offer at any time prior to receipt of the acceptance .

We are pleased to be of assistance to you and look forward to the development of the mutually beneficial and lasting banking relationship including your open and/or maintaining your main working capital / operating account with us. Should you have any query, please do not hesitate to contact our Lim Jit Foo at telephone no. 05-208 3846 .

Yours Faithfully,

For and on behalf of

HSBC Bank Malaysia Berhad

Relationship Manager

FIRST SCHEDULE

PART A

(an integral part of this Facilities Offer Letter)

Purpose of the Facilities :

Overdraft

Working capital requirements.

Term Loan 1

To finance upgrading of existing production line and capex.

Term Loan 2

To support the Group capex of approx RM 9,045,000.00 to increase efficiency and production capacity which will invariably increase import/export bills business.

Bank Guarantees

For issuance of security deposit-/tender-/performance- bonds and other guarantee requirements related to your business.

Import Line

To finance your imports and domestic purchases.

Export Line

To finance your exports and domestic sales.

Export Credit Refinancing Scheme (Pre/Post Shipment)

Pre-shipment ECR – as working capital for production of eligible goods for export.

Post-shipment ECR – to finance export sales of eligible goods on credit terms upon shipment.

Total Gross Foreign Exchange Contract Limit

( inclusive of marked-to-market losses incurred from time to time )

Spot and forward foreign exchange contracts to hedge against fluctuations in foreign exchange rates for the Customer’s trade-related and other permitted transactions as the Bank may agree to, subject to any restrictions under prevailing Foreign Exchange Administration Rules. The Bank reserves the right to require Customer to provide satisfactory documentary evidence of the underlying financing arrangement including any variation or termination of the same.

The Bank shall have no obligation to monitor or ensure the usage of the Facilities for their stated purpose(s). It shall have the right to recall the Facilities if not used for the purpose(s) stated.

[end of Part A]

FIRST SCHEDULE

PART B

(an integral part of this Facilities Offer Letter)

Existing Security :

a) First Party Charge

(all monies first legal charge)

Title particulars : HS (D) KA 1376/75, Lot No. 70808 and HSD (D) KA 1377/75, Lot 70809, Mukim Ulu Kinta,

District of Kinta, Perak

Description of property : Factory cum Office

b) Debenture (all monies):

Fixed and floating charge over all assets of the Customer. It is presently stamped for RM22,500,000.00.

c) Letter of Awareness:

From Tor Minerals International

d) Letter of Awareness:

From Tor Minerals International. Letter of Awareness of total increase facilities granted to TOR Minerals (M) Sdn Bhd from TOR Minerals International.

e) General Security Agreement:

From Tor Minerals (M) Sdn Bhd

f) Blanket Counter Indemnity:

From : TOR Minerals (M) Sdn Bhd

g) Letter of Undertaking

From Tor Minerals (M) Sdn Bhd undertakes not to
declare or pay any dividend without the prior
consent of the bank.

h) Letter of Undertaking

From Tor Minerals (M) Sdn Bhd undertakes to upstamp the debenture whenever required by the Bank.

i) Letter of Undertaking

From Tor Minerals (M) Sdn Bhd undertakes not to lend to related companies.

j) Co-Lenders’ Agreement

Between RHB Bank Bhd and HSBC Bank Malaysia Bhd to rank pari passu.

k) Letter of Confirmation

To RHB Bank Bhd for its additional
stamping to rank subsequent to the
original stamping.

l) Letter of Consent From RHB Bank Bhd allowing the Bank to rank Pari Passu for additional facilities.

m) Security Sharing Agreement:

Security Sharing Agreement between RHB Bank Bhd, HSBC Bank (M) Bhd, RHB Bank Bhd
Labuan & HSBC Bank (M) Bhd Labuan.

Further Security

If at any time the Bank shall consider that the securities for the Facilities as described in First Schedule (Part B) are insufficient or further securities are required, the Customer shall within 14 days from the date of the Bank’s notice requiring the Customer to do so, provide such security or further security as the Bank shall require, whether in cash or otherwise, of such value and for such tenure as the Bank shall specify. In the event the Customer fails to provide such security within the time stipulated, the Bank shall have the right to require repayment on demand or to decline to continue to make available or to withdraw the Facilities or any part thereof.

Pari Passu Ranking of Security (where applicable)

If more than one charge over property or debenture are created over the same asset(s) n favour of the Bank and HSBC Amanah Malaysia Berhad respectively, such charges or debentures shall rank pari passu and rateably in all respects with each other, without preference or priority. A certificate signed by an officer of the Bank enforcing the security as to the amount and distribution of the realized proceeds between the two banks shall be conclusive and binding the Customer and the security provider (if applicable) save for manifest error.

Security Sharing (where applicable)

In the event that the security(ies) listed under Security above is utilized by the Customer and/or the security provider towards securing any facilities which now vest with HSBC Amanah Malaysia Berhad thereby creating a shared security, the Customer and/or the security provider hereby acknowledge that the Bank and HSBC Amanah Malaysia Berhad will both have the right to recourse to the shared security in the manner prescribed in the Security Sharing Agreement to be executed between the Bank and HSBC Amanah Malaysia Berhad. The Customer and/or the security provider further agree to the appointment of HSBC Bank Malaysia Berhad as the Security Agent for the purpose of carrying out its functions as prescribed in the said agreement.

Standby Letters of Credit / Bank Guarantees / Counter-Guarantees / Indemnities / Counter-Indemnities and other forms of Payment Undertaking issued by banks in the People Republic of China is/are taken as security for the Facilities (where applicable)

The Customer acknowledges and understands that the laws, regulations and guidelines of the People’s Republic of China (“PRC”) are applicable in the relation to standby letters of credit, bank guarantees, counter-guarantees, indemnities, counter-indemnities and any other forms of payment undertakings issued by banks and financial institutions in PRC as security for the Facilities.

The Customer represents, declares and undertakes that the entry into and performance by the Customer of, and the utilization of any of the Facilities or use of proceeds drawn under, this Facilities Offer Letter do not and will not conflict with any laws, regulations or guidelines applicable to the Customer (including without limitation (i) those in force in the PRC and Malaysia and (ii) those relating to economic sanctions, anti-bribery/corruption, anti-money laundering and anti-terrorist financing). The above representation and declaration is deemed to be made by the Customer by reference to the facts then existing on each day during the subsistence of this Facilities Offer Letter.

The Customer further agrees that nothing herein shall prejudice or affect the Bank’s right to suspend, withdraw or make demand in respect of the whole or any part of the Facilities at any time. By accepting this Facilities Offer Letter, the Customer expressly acknowledges that the Bank may suspend, withdraw or make demand for repayment of the whole or any part of the Facilities at any time whether or not the above representation / declaration is true and whether or not the Customer is in compliance with the above undertaking

[end of Part B]

FIRST SCHEDULE

PART C

(An integral part of this Facilities Offer Letter)

Representations and warranties:

The Customer and where applicable, any companies within the Customer’s group are in compliance with all applicable environmental laws, regulations and guidelines (‘environmental laws’) in force from time to time in the place(s) where the Customer’s business and where applicable, companies within your Customers group is/are conducted.
Where the Facilities include an Import/Export Line, you are in compliance with the Strategic Trade Act 2010 and undertake to obtain and/or ensure the continuing validity of the relevant permit(s) and/or broker registration certificate where required under the said Act prior to each utilization of the Import/Export Line.

Positive Covenants :

The Customer herby covenants and agrees that it shall:

Inform the Bank regarding any management structure change/change in the composition of the Board/major shareholders in the Customer’s business.
submit two (2) signed/certified copies of the Customer’s next set of audited accounts, and if the Bank’s review date is more than six (6) months from the end of the Customer’s last financial period, the Customer is also required to submit two (2) copies of its latest updated management accounts before the review date mentioned above or whenever so requested by the bank.
Inform the Bank of any significant internal or external business developments which may affect the financial position of your business.
Ensure that audited financial statements submitted to the Bank shall be by external audit firms/partners acceptable to the Bank. The Bank shall have the right to require engagement of alternative external audit firms/partners if otherwise not acceptable, without assigning reason therefore.
Ensure that the trade debts due from the holding company/any related company must not exceed 25% of the total annual turnover OR RM10,000,000.00 whichever is lower at the close of every financial year.
Ensure not to lend to related companies, (CA Chemical is currently a dormant company).
Maintain Facility Utilization Ratio at 70%.
Inform the Bank if there any adverse findings/comments by the Department of Environmental/Atomic Energy License Board/relevant approval authorities relating to the company operation.
Ensure that utilization of all trade-related facilities are restricted to the preapproved buyers / suppliers counterparties (subject to any subsequent review by the Bank at its sole discretion). We may, at our sole and absolute discretion, refuse to allow drawings under the facilities if the drawee is considered by us to be unacceptable and/or if the transaction in question does not meet our operational requirements in respect of these facilities):-

Financial Covenants :

The Customer covenants that, so long as part of its indebtedness or facilities remains unpaid, it shall not without the prior written consent of the Bank:

1. Permit the ratio of total external borrowings to tangible net worth (hereinafter known as “ Gearing Ratio ”) calculated annually in accordance with the formula below, to exceed 1.5 times.

Formula:

External Gearing = Total External Borrowings*

Tangible Net Worth**+ Minority Interest

* Total External Borrowings = Overdraft + Trade Finance + Bank Borrowings + Other Borrowings + HP or Leasing + Convertible Bonds (Notes) + Redeemable Preference Shares

**Tangible Net Worth = Ordinary Shares + Non-redeemable Preference Shares + Share Premium + Retained Earnings + Reserves + Proprietary or Partners Funds – Treasury Stock – Intangibles.

2. Declare or pay any dividends (including stock dividends) or carry out other forms of distribution of profits.

Documents Required:

1. Board or Partnership Resolution (whichever is applicable)

A suitable board or partnership resolution (or similar corporate authorization) from the Customer authorizing:-

(i) The negotiation and acceptance of the Facilities;

(ii) The creation of the security(ies) listed in First Schedule (Part B) in favour of the Bank;

(iii) The provision of cash cover/margin on demand by the Bank to cover documentary credits, bank guarantees, performance bonds issued by the Bank;

(iv) Person(s) authorized to sign and accept on behalf of the Customer, this Facilities Offer Letter, the security documents and all other documents as may be required by the Bank;

Conditions precedent

The Facilities shall only be available for drawing or utilisation if:

no misrepresentation or breach of warranty made to the Bank express or implied has occurred;
all fees, costs and expenses due and payable under the Facilities or under any of the Security Documents shall have been fully paid and settled;
no Event of Default and no event which with the giving of notice or lapse of time would constitute an Event of Default shall have occurred or is continuing;
the Bank shall have received all documents, opinions, certificates, or evidence of authorisations as it shall require;

The conditions precedent are for the sole benefit of the Bank, who may waive their compliance without prejudice to its rights herein or in any Security Document.

Waiver shall not preclude us from demanding that any waived provision be complied with or remedied subsequently. Waiver of a condition precedent shall not mean waiver of any other condition precedent or term.

Revision/Cancellation of Facilities:

Please not that the Facilities may be revised and/or cancelled by the Bank in its absolute discretion through cancellation of unutilized limits and/or early settlement requested by the Bank, without discharging any of the Customer’s liabilities in respect of the same, and the revision/cancellation shall take effect upon notice to the Customer or upon the effective date stated in the notice to the Customer.

[end of Part C]

Customer’s Acknowledgments/acceptance

To: HSBC BANK MALAYSIA BERHAD (Company No. 127776-V) (“the Bank”)

We have viewed the terms of this Facilities Offer Letter (including the Schedule and Annexures) and agree to the terms thereto.

We acknowledge that notwithstanding anything to the contrary herein contained and whether it is prior to the time for annual review, the Facilities may be reviewed at any time and are subject to the Bank’s overriding right of suspension, withdrawal and repayment on demand, as well as the right to call for cash cover or other acceptable security on demand (which shall be in addition, and not subject o, any similar right stipulated for any of the Facilities). Nothing contained in this Facilities Offer Letter shall be deemed to impose on the Bank any obligation to make or to continue to make available the Facilities or any advances thereunder to us. We also acknowledge that in the event of a recall of an overdraft facility, we shall be obliged to immediately fund our overdraft account with sufficient funds to meet any un-presented cheques still in circulation and that the Bank is under no obligation whatsoever to issue any notices or requests to us to do so. Any failure on our part to do so will entitle the Bank to reuse payment on such cheques, for which the Bank shall not be liable to us in any way whatsoever.

We confirm our acceptance of the Facilities and that the Bank’s agreement to provide us with the Facilities will not contravene the provisions of (a) Section 47 of the Financial Services Act 2013 read with BNM’s Guidelines on Credit Transactions and Exposures with Connected Parties, and (b) Section 83 of the Banking Ordinance of the Hong Kong Special Administrative Region (collectively the “Prohibitions” ).

We acknowledge the Bank’s right to recall the Facilities in the event of any contravention of the Prohibitions.

We further agree that the Facilities Offer Letter embodies in writing all the terms for the Facilities to be granted to us and hereby confirm that ay warranties, promised, representations or collateral agreements that may have been made to us, orally or otherwise by the Bank in the course of the pre-contractual negotiations which have not now been included in this Facilities Offer Letter shall hereafter be deemed to have lapsed and not legally binding upon the Bank nor shall it be raised as defence or to support any claim by us in any legal proceedings.

We are responsible for assessing the terms in this Facilities Offer Letter and Facilities and shall seek our own independent legal advice on them.

We acknowledge that we will be opening and/or maintaining our main working capital / operating account with the Bank.

If we decide to hedge any exposure related to the Facilities herein, we will first discuss with the Bank and give the Bank the opportunity to match any other offers.

We undertake that all our FEX transactions shall be to hedge underlying trade transactions and other permitted purposes, and not for speculative purposes.

Our FEX transactions shall be in compliance with Malaysian Foreign Exchange Administration Rules and supported by appropriate documentation which may be required by the Bank.

We acknowledge that where we enter into any FEX transaction, we shall do so in reliance only upon our own judgment and assessment and obtain our own independent advice and not in reliance on any advice of the Bank or its personnel in accordance with Section 7 of IFEMA terms.

To: HSBC AMANAH MALAYSIA BERHAD (Company No. 807705-X)

Debiting of Accounts with HSBC Amanah Malaysia Berhad

If we have current or deposit account(s) with HSBC Amanah Malaysia Berhad (“HSBC Amanah”), we irrevocably authorise HSBC Amanah to debit our HSBC Amanah account(s) and pay such proceeds to the Bank for any amount due from us the Bank hereunder even if such debiting causes an overdrawn position, or any existing Cash Line-i or other relevant facility limit to be exceeded, due to insufficient funds in our HSBC Amanah account(s), and we agree to bear the financial consequences of such overdrawing or excess according to the terms and conditions imposed by HSBC Amanah. We acknowledge that the manner of debiting shall be in accordance with HSBC Amanah’s Generic Terms & Conditions applicable to the relevant account.

Agreed and accepted by:-

..............................................................................

Authorised signatory (ies)

Date.....................................................

ANNEXURE I

SPECIFIC TERMS APPLICABLE TO A FACILITY

(an integral part of the Facilities Offer Letter)

Overdraft

Interest

Interest is charged at 1.25% per annum at daily rests above the Bank’s Base Lending Rate (presently at 6.85% per annum). The effective rate is therefore presently 8.10% per annum subject to fluctuations at our absolute discretion.
Interest will be payable monthly, to the debit of the Customer’s current account on every 26th day of the month, or as otherwise stipulated by the Bank.
In the event the approved limit is exceeded, or if the Bank has demanded repayment of the overdraft, additional interest will be charged at one per centum (1%) per annum, or such other higher rate determined by the Bank from time to time, above the applicable rate of interest of the overdraft on the excess amount, or the amount outstanding and unpaid after demand for repayment, as the case may be.
The additional interest shall accrue from day to day and may be debited to your current account but this shall not oblige the Bank to allow or continue to allow any excesses on your overdraft or shall be without prejudice to any right or remedy of the Bank arising upon demand for repayment, as the case may be.
Interest due shall be capitalised and added for all purposes to the principal sum, and bear interest at the relevant applicable rate, notwithstanding any demand by the Bank and/or cessation of the banker and customer relationship.

Commitment Fee

A commitment fee of 1.00% per annum will be charged on the unutilised portion of the overdraft facility.

Repayment

The overdraft, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand. This shall be notwithstanding anything to the contrary herein contained and whether it is prior to the time for annual review.

Where the overdraft is recalled, it shall be the Customer’s sole responsibility to immediately fund the Customer’s account without any further notice to the Customer from the Bank to meet any un-presented cheques in circulation to avoid such cheques being returned for lack or insufficiency of funds. In the event the Customer fails to do so, the Bank shall be entitled to refuse to honour any such cheques still in circulation and shall not incur any liability to the Customer whatsoever.

Term Loan

Term Loan remains subject to all terms and conditions contained in the prior documentation.

Documentary Credit

DC Opening Charges

At the Bank’s prevailing rates, currently at 0.10% for each month or part thereof (minimum RM200-00).

Where a bill under a Documentary Credit is drawn at usance, in addition to the above, an opening charge on usance period of 0.10% is levied on the amount of the Documentary Credit for each month or part thereof.

The facility is subject to our right to call for cash cover/cash margin on demand for prospective and contingent liabilities under the documentary credits issued/to be issued by us.

The facility, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand. This shall be notwithstanding anything to the contrary herein contained in the Facilities Offer Letter and whether it is prior to the time for annual review.

Bankers Acceptance

Availability

The Bank may, at our sole and absolute discretion, refuse to allow drawings under this Bankers Acceptance facility if the drawee is considered by us to be unacceptable and/or if the transaction in question does not meet the Bank’s operational requirements in respect of this Bankers Acceptance facility.

Commission

Bankers Acceptance ( BA ) commission is charged at 1.25% per annum subject to fluctuations at the Bank’s discretion.

Interest

Interest will be charged at a rate quoted by the Bank for the respective tenor at the time of discounting. Quotations are obtainable on request.

Sales proceeds of all BAs financed must be credited to your current account to meet payments on maturing BAs. Notwithstanding this , all BAs drawn must be paid on their respective maturity dates and if there is default in such payment, the matured BAs will be charged at:-

i) the maximum interest margin plus penalty (if any) prescribed by Bank Negara Malaysia from time to time; or

ii) the original discount rate plus a late payment fee of 1.00%; or

iii) the prevailing BA discounting rate plus a late payment fee of 1.00% effective on the day the BA goes into past due; or

iv) 1.00% per annum over the Bank’s then prevailing Base Lending Rate, plus a late payment fee of RM150.00;

whichever is the highest, for the period overdue.

Procedures for accepting or discounting BAs will be subject to the conditions and guidelines laid down from time to time by Bank Negara Malaysia or other statutory bodies.

This facility, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment of demand. This shall be notwithstanding anything to the contrary herein contained in this Facilities Offer Letter and whether it is prior to the time for annual review.

Loans Against Imports

Availability

The Bank may, at our sole and absolute discretion, refuse to allow drawings under this Loans Against Imports facility if the drawee is considered by us to be unacceptable and/or if the transaction in question does not meet our operational requirements in respect of this Loans Against Imports facility.

Interest

Interest is charged at 1.25% per annum at daily rests above our Base Lending Rate (presently at 6.85 % per annum). The effective rate is therefore presently at 8.10 % per annum subject to fluctuations at the Bank’s absolute discretion and payable upon maturity of any bills drawn by us and accepted by the Customer on all goods covered by the Loan Against Imports by debiting the Customer’s account with all sums due to the Bank.

Additional Interest on Overdue Bills

In the event of late payment of bills, additional interest on the amount overdue will be charged at an additional 1.00% per annum over the prescribed interest rate, levied from due date until the date of payment.
All interest due shall be capitalised and added for all purposes to the principal sum and bear interest at the relevant applicable rate notwithstanding any demand by the Bank and/or cessation of the banker and customer relationship for whatever reason.

The facility, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand. This shall be notwithstanding anything to the contrary herein contained in these Facilities Offer Letter and whether it is prior to the time for annual review.

Foreign Currency Loans Against Imports (FCY LAI)

Availability

The Bank may, at its sole and absolute discretion, refuse to allow drawings under this Foreign Currency Loans Against Imports facility if the drawee is considered by the Bank to be unacceptable and/or if the transaction in question does not meet the Bank’s operational requirements in respect of this Foreign Currency Loans Against Imports facility.

Interest and repayment

Interest on FCY LAI will be charged at 1.75 % per annum above the Bank’s funding cost of the relevant currency, and payable upon maturity of all bills drawn by us and accepted by the Customer on all goods covered under a Trust Receipt by debiting the Customer’s foreign currency account or the Customer’s Ringgit current account (at the prevailing foreign exchange rates) with all sums due to the Bank. Interest is calculated on a 360 or 365 day year as per the norm for the relevant particular currency.

In the event of late payment, additional interest on the amount overdue will be charged at an additional [1.00%] per annum over the applicable interest rate, levied from due date until the date of payment.

Commission in lieu of Exchange

Commission in lieu of Exchange of 0.10% (maximum of MYR500) will be levied for same currency settlement at the point of financing under a FCY LAI and/or at the point of payment of a FCY LAI using the Customer’s FCY deposits.
The FCY LAI financing is made available to the Customer at the Customer’s request and the Customer will be responsible to bear the exchange risk for the life of the FCY LAI .

Early settlement

Premature settlement of the FCY LAI is normally not permitted. If an early retirement of FCY LAI is allowed, an appropriate compensation charge (conclusively calculated by the Bank) will be levied for exchange differences/costs.

The Bank reserves its overriding right to demand for cash cover to cover any shortfall in view of exchange rate factors/variations.

In the event of prepayment, an amount equivalent to the funding loss shall be imposed. If the making of a repayment leaves a residual balance which is not in the Bank’s opinion a marketable amount, the Bank may by notice in writing to the Customer demands immediate repayment of such residue.

This facility, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand. This shall be notwithstanding anything to the contrary herein contained in this Facilities Offer Letter and whether it is prior to the time for annual review.

Export Credit Refinancing Scheme (Pre/Post Shipment)

Availability

The Bank may, at its sole and absolute discretion, refuse to allow drawings under this Export Credit Refinancing Scheme (Pre/Post Shipment) facility if the drawee is considered by the Bank to be unacceptable and/or if the transaction in question does not meet the Bank’s operational requirements in respect of this Export Credit Refinancing Scheme (Pre/Post Shipment) facility.

Interest

Interest is charged at 1.00% above Export Import Bank of Malaysia Berhad’s (Exim Bank) funding rate, currently at 3.60% per annum. The effective rate is therefore 4.60% per annum, subject to fluctuations at Exim Bank’s discretion.

Procedures of the ECR Scheme are subject to conditions and guidelines laid down from time to time by Exim Bank.

Bank Guarantees

Commission

Commission of not less than 0.10% per month (or part thereof) subject to a minimum of RM200.00 shall be charged for the full liability period (inclusive of any claims period and/or limitation of action period) of Guarantees issued.

Content of Guarantees

All Guarantees issued by us must bear an expiry date and claims period.
The Bank is at liberty to refuse to issue any particular guarantee which wording and effect is not acceptable to The Bank.
Amendments made to any Guarantee are for the Bank’s own requirements only. In no case shall the Bank be obliged to advise or assess if any provisions therein are appropriate for the Customer’s purpose in relation to the underlying transaction guaranteed.

Other Conditions

Guarantees issued to or on behalf of non-residents are subject to foreign exchange administration rules prevailing from time to time. It shall be the Customer’s responsibility to ensure compliance with any notification/registration requirements, unless the Bank expressly agrees to ensure compliance of the same on the Customer’s behalf.
Financial Guarantees to be issued favouring non-residents shall be subject to the Customer’s confirmation (which Customer is deemed to give when applying for such Guarantees) that the underlying facility secured is obtained in compliance with the prevailing foreign exchange administration rules.
Where the Bank agrees to transmit any Guarantee to the beneficiary, it shall be at the applicant’s cost and the Bank shall not be liable for any failure or delay or loss in transit.
Where the Bank agrees to transmit any Guarantee to the beneficiary, it shall be the Customer’s cost and expense. The Bank shall not be liable for any failure or delay or loss in transit of the Guarantee.

Payment Terms

Should there be a claim on any Guarantee by the beneficiary for payment, the Bank may immediately debit the amount payable under such Guarantee from any of the Customer’s accounts with the Bank without reference to the Customer and without being required to first pay on the Guarantee from the Bank’s own funds. The Customer shall arrange to have funds available therefor.
The facility remains subject to the Bank’s immediate right to settlement/cash cover on demand, as stated in the terms of the Customer’s Counter Indemnity or Blanket Counter Indemnity (as the case may be) in the event of any claims being made under any Guarantee issued.
Nothing herein shall require payment on a Guarantee to have been made by the Bank from its own funds before it is entitled to rely on any of its rights.

Release of Customer’s Liability

The Customer shall remain liable to the Bank for each Guarantee until the expiry of one (1) calendar month;-

a) After the date of return of the Guarantee for cancellation, or

b) After the date of receipt of a written notification from the beneficiary confirming the Bank is completely discharged from all liabilities under the Guarantee.

Termination at Customer’s Request

At the Customer’s request, the Facility may be terminated with release of applicable security where there are no outstanding liabilities or potential liabilities under any of the Guarantees as determined by the Bank.

The facility, in accordance with banking practice, is subject to the Bank’s customary overriding right of suspension, withdrawal and repayment of demand. This shall be notwithstanding anything to the contrary herein contained in this Facilities Offer Letter and whether it is prior to the time for annual review.

Total Gross Foreign Exchange Contract Limit

( inclusive of marked-to-market losses incurred from time to time )

Utilisation and determination of limit

The Bank reserves the right at its discretion to decide:

whether or not any utilisation of the facility may be made; and
to specify further conditions on which utilisation may be made.

The amount of any and each utilisation of the facility or the aggregate amount and value thereof for determining the available limit or if a call for cash cover is required shall be calculated by the Bank, whose calculation shall be conclusive.

Cash cover

The Bank shall have an overriding right to call for cash cover on demand if in its view a negative foreign exchange position requires such cover, and/ or to close out any or all contracts outstanding at any time, without further reference to you and to demand settlement of the balance due.
The right to call for cash cover is in addition to and without prejudice to any relevant rights contained in the English Law IFEMA.

Contract forms

FEX transactions are governed by the conditions appearing in and on the reverse of the standard contract form. The Customer agrees to check the same upon receipt, and sign the copy and return it to the Bank forthwith.

Exchange Control Regulations

FEX transactions are subject to applicable Exchange Control Regulations as amended from time to time.

The determination whether the tenure or amount of any FEX transaction is permitted under the Foreign Exchange Administration Rules shall be made by the Bank in good faith, and shall be binding on the Customer. The Bank shall have no liability to the Customer as a result of any determination so made.

Where an FEX transaction is required to be registered with Bank Negara Malaysia (“BNM”), the Customer shall be responsible to register the same (and provide evidence thereof as the Bank may require), unless the Bank had expressly agreed to submit the registration on the Customer’s behalf.

If prior registration/permission is required before entering into a FEX transaction, the Bank may decline to enter into any such FEX transaction if the Customer is unable to furnish such BNM registration/permission to the Bank.

All FEX transactions entered into between the parties shall be to hedge underlying trade transactions and other permitted purposes, and not for speculative purposes.

Either party may electronically record all telephonic conversations and any such tape recordings may be submitted in evidence in any proceedings for any purpose relating to an FEX transaction. Neither party shall be obliged to maintain such recordings for the availability of the other.

Upon request, the Customer shall provide the Bank with documentary evidence of underlying commitments to support the FEX transactions.

This may be required before transacting or at any time prior to the maturity of the FEX transaction, whether the FEX transaction is based on a firm commitment or on anticipatory basis. Satisfactory documentary evidence may also be required where the Customer seeks to cancel or extend any FEX transaction.

The Bank shall have the right to unwind or cancel any FEX transactions immediately if the underlying contract therefore does not materialise, or if satisfactory documentary evidence is not furnished when requested.

Without prejudice to anything herein contained, the Bank reserves the right (and without need for reference to the Customer) to:

reduce the amount of a FEX transaction where the amount of receipts/payments on the underlying transaction for firm hedges is reduced to less than the amount of the FEX transaction;
adjust the maturity date of a FEX transaction where the Bank is satisfied that the due or expected date of payment/receipt of the underlying transaction for firm hedges has changed, provided always that the new maturity date does not exceed the period permitted under Foreign Exchange Administration Rule and other relevant rules/laws;

and any differences arising therefrom shall be payable by the Customer and may be debited to the Customer’s current or other accounts notwithstanding that the day originally stipulated for settlement may not have arrived.

The Bank is obliged to report any cancellation of FEX transactions or if it is of the view that the proceeds thereof are not used for the intended purpose or where otherwise required by the BNM under the prevailing Foreign Exchange Administration Rules.

English Law IFEMA

In the absence of an executed agreement governing the FEX transactions, the latest published English Law IFEMA terms shall apply. Each utilisation of the Foreign Exchange Contract Limit (whether or not the relevant IFEMA Document has been signed) shall be deemed to be subject to and shall be subject to the English Law IFEMA terms unless the relevant Confirmation/contract specifies to the contrary.

In the event of any conflict between the terms of this facility letter, those of the English Law IFEMA and the standard contracts terms, the terms shall prevail in the following order:-

(a) the terms of the latest published English law IFEMA (a copy is available on request)

(b) the terms of this facility letter; and lastly

The Bank shall have the right to set-off from or debit any amount due from any of the Customer’s accounts with the Bank and/or the HSBC Group.

[ end of Annexure I]

GENERAL TERMS APPLICABLE TO THE FACILITIES

(an integral part of the Facilities Offer Letter)

Review of Facilities

The Bank may charge a facilities management fee annually (for assessing and tailoring facilities to suit changing requirements of customers) or upon amendment of existing facilities, which charges shall be paid before any of the facilities are utilised and if remaining unpaid shall be debited without further notice to the Customer’s current/disbursement/other account opened by the Bank for the purpose. Notwithstanding these charges, the Bank reserves the absolute discretion to exercise its remedies provided hereunder and/or whether to grant, vary, restructure, adjust or otherwise modify any facility or its terms, and/or temporary excess or temporary drawing against uncleared effects.

Variation of Terms

Notwithstanding anything to the contrary, the Bank may in its absolute discretion without discharging any of the Customer’s liabilities herein and/or under the security documents vary or add to the terms herein.

Variations include, but are not limited to

rates of interest (including overdue and excess interest), additional interest commission, commitment fees, and other banking charges (including varying the mode or method of calculating interest, commission or such other charges or otherwise)
the amount or form of the Facilities granted so as to convert or cancel one or more facility or create two or more facilities comprised in the Facilities (provided always at the applicable rate of interest)

Except for fluctuations to the Base Lending Rate or otherwise expressly provided, variations or additions shall take effect upon notice to the Customer.

Events Of Default

Without prejudice to the Bank’s customary overriding right of suspension, withdrawal and repayment on demand, the Facilities may be immediately suspended or terminated and all sums (including contingent sums) payable on demand in the event:‑

the Customer defaults in the payment of any sum due under the Facilities (whether installments, interest or otherwise); or
the Customer has given incomplete, misleading or incorrect material information to the Bank in relation to procuring the provision or continued provision of the Facilities, or the Customer’s account is conducted in an unsatisfactory manner; or
the Customer fails to observe or perform any of your covenants or obligations to the Bank; or
any of the Customer’s declarations, representation or warranties shall be untrue or incorrect; or
the Customer breaches any of the warranties/covenants contained herein or in the security documents; or
the Customer is unable to pay its debts or suspend payments thereof; or
a petition is presented and not withdrawn or stayed by an order of Court within a period of thirty (30) days of its presentment or an order is made or resolution passed for the Customer’s winding-up, dissolution or liquidation; or
the Customer enters into composition or arrangement with or for the benefit of its creditors, or commences a meeting for the purpose of making or proposing and/or entering into any arrangement with or for the benefit of its creditors; or
a receiver or other similar officer is appointed over the whole or any part of the Customer’s assets or undertaking; or
the Customer ceases or threatens to cease to carry on business, or disposes or threatens to dispose of the whole or a substantial part of its undertaking or assets; or
for any reason any guarantee or security given for the repayment of the Facilities shall be challenged, terminated or lapse for any reason whatsoever or if the guarantor or security provider shall be in default under the terms of such guarantee or security or dies or becomes of unsound mind or is wound up or commits any act of bankruptcy or similar thereto; or
the Customer alleges that all or a material part of these terms or any security document have ceased to be of full force or effect; or
any of the Customer’s other indebtedness (whether incurred jointly or individually) to the Bank or to HSBC Amanah Malaysia Berhad or any other third party or parties becomes capable in accordance with the relevant terms thereof of being accelerated in repayment or declared due prematurely by reason of the Customer’s default or failure to make any payment in respect thereof on the due date for each payment or if due on demand when demanded or any security for such indebtedness becomes enforceable; or
where the purpose of the facility is to finance acquisition of property, the Customer or any other party to the sale and purchase agreement commits or threatens to commit a breach of any term, stipulation, covenant or undertaking contained in such agreement, or if a petition is presented for the winding-up of the developer of the property (where applicable) being financed; or
if the Customer, any security provider or a Related Corporation (as defined in the Companies Acts 1965) is under investigation under the provisions of Part IX of the Companies Act 1965 or any securities legislation and regulations in force from time to time: or
in the Bank’s opinion, there is any change or threatened change in circumstances which would materially and adversely affect the Customer’s business or financial condition or ability to perform its obligations under this Facilities Offer Letter or any other agreement with the Bank, including, if the Customer is not listed entity or is a limited liability partnership, any change or threatened change in its single largest shareholder or directors; or
in the Bank’s opinion, there is any change or threatened change in circumstances which materially and adversely affect the ability of any guarantor or security provider to perform its obligations under any security given to the Bank; or
if, by reason of any change after the date of this Facilities Offer Letter is applicable law, regulation or regulatory requirement or, in the interpretation or application thereof of any governmental or other authority charged with the administration thereof it shall become unlawful for the Bank to comply with its obligations herein or to continue to make available Facilities.

The events of default are more comprehensively dealt within the security documentation.

If there are circumstances likely to lead to events of default among other things due to irregularities in the Customer’s financial affairs or your inability to meet its indebtedness to the Bank, it is proposed that the Customer contact the Bank for an early appraisal of your commitment.

Early termination event

If in the Bank’s opinion, circumstances have arisen which materially and adversely affect the reputation of, and/or otherwise bring negative publicity to, the Bank or HSBC Group, by reason of the provision or continued provision of the Facilities, the Bank is entitled to exit the Facilities and to require you to fully pay and discharge all your outstanding obligations under the Facilities within such period of time as stated in the Bank’s written notice to the Customer, failing which the Bank is entitled to call an event of default for non-payment by the Customer.

Other Terms and Conditions

1) Payment of outgoings for property charged as security (where applicable)

The Customer undertake to forward to the Bank on a regular basis for the Bank’s records, the receipts the Customer receives for payments of quarterly Municipal Assessment and Annual Quit Rent in respect of the property charged.

2) Availability

Availability of the Facilities is subject to legal documentation having been completed to the satisfaction of the Bank. If security documentation cannot be perfected for any reason within 3 months of the acceptance date of this Facilities Offer Letter, the Bank reserves the right to withdraw the Facilities offered without further reference to the Customer. In any event, any part of the Facilities not drawn down within 12 months from the date hereof shall be automatically cancelled.

3) Fees and charges

The Bank shall charge at its absolute discretion, where applicable, fees as follows:

Facility Arrangement Fee; and/or

Facility Management Fee;

which charges shall be paid before any Facilities is utilised and if remaining unpaid shall be debited without further notice to the Customer’s current/disbursement/other account whether or not opened by the Bank for the purpose. Please refer to the Bank’s standard Tariff and Charges (available for download at www.hsbc.com.my ) subject to variation from time to time. If there is any conflict between the said Tariff and Charges and any fees and charges specifically stated herein, the fees and charges specifically stated herein shall prevail. (If the Customer is a “small and medium enterprise” within the National SME Development Council’s definition, such fees and charges shall not apply to the Customer.)

Notwithstanding these charges, the Bank reserves the absolute discretion whether to grant or otherwise any facility, restructuring / adjustment of facility and/or temporary excess or temporary drawing against uncleared effects.

4) Legal expenses and other charges

All stamp duty and solicitors’ fees that is payable (assessed on a ‘solicitor and client’ basis) incurred by the bank:

i) In connection with or incidental to the provision for the Facilities; and/or

ii) In its enforcement of its rights under any of the Facilities or any security provided;

shall be payable by the Customer.

Such amounts may be debited without prior notice to the Customer’s current or other account(s) or a disbursement/suspense account opened by the Bank for the purpose.

5) Insurance of property charges as security (where applicable)

The insurable risks of the Customer’s business and the properties charged or secured to the Bank are to be arranged by the Bank and insured with HSBC Amanah Takaful (Malaysia) Sdn Bhd or the Bank’s other panel insurers. If the Customer and/or the charger are not agreeable to such insurance with HSBC Amanah Takaful (Malaysia) Sdn Bhd, the Customer is to kindly advise its Relationship Manage or the Bank’s Corporate Credit Administration Department.

If the Customer, or the proprietor, as the case may be, fails to insure or fails to continue to insure the properties, the Bank may but shall not be under any duty to, take up or pay the premium for such insurance and any moneys expended thereto may be debited to any of the Customer’s accounts with the Bank.

6) Inspection and valuation of property charged as security (where applicable)

Inspection and valuation of any property charged or forming security shall be at least once in every three years by the Bank’s or by a firm on the Bank’s panel of valuers, the cost in connection therewith being for the Customer’s account and such costs or any moneys expended thereto may be debited to any of the Customer’s accounts with the Bank.

7) Security denominated in foreign currency (where applicable)

In the case of foreign currency denominated security, the rate of exchange to be applied for the conversion of such currency shall be our spot rate of exchange (as conclusively determined by the Bank) for purchasing such currency on the date of settlement and in the event of a shortfall, the Customer will promptly pay to the Bank such additional amount as makes the net amount received by the Bank equal to the full amount payable by the Customer or the security provider, as the case may be.

8) Withholding or deduction

All payments by the Customer under the Facilities are to be made in immediately available funds free and clear of and without any withholding or deduction for any and all present or future taxes, duties or other such levies.

If the Customer is compelled by law to make any such withholding or deductions, the Customer will pay to the Bank such additional amounts required to enable the Bank to receive the amount which would be payable if no such withholding or deduction had been required.

The Customer shall provide the Bank with evidence that such taxes, duties or other such levies have been paid by forwarding the Bank official receipts within 30 days of payment.

9) Maintenance of shareholding (applicable if third party security, guarantee and/or letter of awareness is provided by the Customer’s related company)

The relevant related company of the Customer within the same group of companies shall undertake not to divest its shareholding or any part thereof in the Customer or the security provider or guarantor (as applicable) without first obtaining the Bank’s consent.

10) Increased costs

If the effect of any, or a change in any, law or regulation is to increase the cost to the Bank of advancing, maintaining or funding this Facilities or to reduce effective return to the Bank, the Bank reserves the right to require payment on demand of such amounts as the Bank considers necessary to compensate us therefore.

11) Non-contravention of legislation prohibiting connected party lending

Please note that applicable banking legislation has imposed certain prohibitions on the Bank providing banking facilities to persons related to its officers, directors or employees, and that of its holding company, The Hong Kong and Shanghai Banking Corporation Limited (incorporated in Hong Kong SAR). These are section 47 of the Financial Services Act 2013 (“FSA”) read with the Guidelines on Credit Transactions and Exposures with Connected Parties issued by Bank Negara Malaysia, and also Section 83 of the Banking Ordinance of Hong Kong SAR (collectively, the “Prohibitions”).

In acknowledging/accepting this Facilities Offer Letter, the Customer is to advise the Bank whether the Customer is in any way connected to any of the Bank’s officers, directors or employees, and/or the directors or employees of The Hong Kong and Shanghai Banking Corporation Limited within the meaning of the Prohibitions, and in the absence thereof, the Customer represent it is not so connected.

The Customer is required to immediately advise the Bank in writing should such relationships creating a prohibited lending under the aforesaid Prohibitions be established subsequent to the acceptance of the Facilities.

(Please note that for the purposes of the FSA, “officer” encompasses “any employee of the financial institution” and that “director” and “officer” also includes a spouse, child or parent of a director or officer. The texts and summary clarifications of these Prohibitions will be made available upon request.)

12) Terms and conditions in other documentation

Other terms and conditions as contained in the Bank’s legal or security documentation (“Other Documentation”) executed or to be executed by the Customer shall apply. In the event of any inconsistency between the terms of this Facilities Offer Letter will prevail

For avoidance of doubt, additional, modified, or other terms and conditions to those stated herein may be advised by the Bank’s solicitors and may be contained in those other documents when formalising such documentation on the Bank’s behalf.

The Customer is to carefully read and understand all terms and should obtain independent legal advice thereto before signing.

13) Default/Late Payment Interest not otherwise provided for

Where a specific default, excess or late payment interest rate is not otherwise provided for under the terms of any specific facility, the Bank may charge the following for any payments that are overdue, or if payable on demand, from the date the amount is stated to be due pursuant to such demand:

For Ringgit-denominated facilities or amounts, or after any amounts due in other currencies are converted to Ringgit 1% per annum above the interest rate applicable for the particular facility, or if none, 3.50 % above the Bank’s prevailing Base Lending Rate or such other rate as may be determined by the Bank from time to time.

For non-Ringgit-denominated facilities or amounts, before the amounts due are converted to Ringgit 1% per annum above the interest rate applicable for the particular facility, or if none, 3.50% above the Bank’s prevailing Cost of Funds (for such tenor as selected by the Bank) or such other rate as may be determined by the Bank from time to time.

Such interest shall be capitalised and added for all purposes to the principal or overdue sum, as the case may be for that facility, and shall bear interest at the relevant applicable rate notwithstanding any demand by the Bank and/or cessation of the banker and customer relationship for whatever reason and before as well as after judgment.

14) Priorities

Subject to the provision of the security documents (where applicable), if any amount received or recovered in respect of the Customer’s liabilities hereunder or any part thereof is less than the amount then due, the Bank shall apply that amount to interest, profit, principal or any other amount then due and payable in such proportions and order of priority and generally in such manner as the Bank may determine.

15) Repayments generally and ascertaining of limits

Unless otherwise provided, interest due shall be capitalised and added for all purposes to the principal sum and shall bear interest at the relevant applicable rate notwithstanding any demand by the Bank and/or cessation of the banker and customer relationship for whatever reason and before as well as after judgment.

Any amounts of interest or other non-principal sums debited to your accounts which is capitalised shall be not affect the determining whether the principal limit under any security given for the Facilities has been exceeded or not.

16) Bankers common law rights applicable

The Bank may combine, consolidate or merge all or any of the Customer’s accounts and may set off or transfer any sum outstanding to the credit of any such accounts with the Bank in or towards the satisfaction of any of the Customer’s liabilities under the Facilities.

The Bank may also debit any of the Customer’s accounts in respect of amounts payable under any security documents or security for the Facilities if the security party fails to make any required payments thereunder.

17) Conclusive evidence

A certificate signed by an officer of the Bank as to any amount(s) payable hereunder shall be conclusive evidence save for manifest error.

18) Financial Crime Risk Management Activity

The Bank’s Generic Terms & Conditions (“GTC”) (available at www.hsbc.com.my ) shall apply:

(i) GTC Clause 8 on “Financial Crime Risk Management Activity” is incorporated into this Facilities Offer Letter.

(ii) GTC Clause 8 is to be read together with GTC Clause 40 on “Definitions”.

(iii) GTC Clause 8 and Clause 40 may be amended from time to time in accordance with GTC Clause 7 on “Amendment of Terms & Conditions” and the prevailing version shall apply to this Facilities Offer Letter.

19) Collection, Processing and Sharing of Customer Information

The Bank’s Generic Terms & Conditions (“GTC”) (available at www.hsbc.com.my ) shall apply:

(i) GTC Clause 10 on “Collection, Processing and Sharing of Customer Information” is incorporated into this Facilities Offer Letter.

(ii) GTC Clause 10 is to be read together with GTC Clause 40 of “Definitions”.

(iii) GTC Clause 10 and Clause 40 may be amended from time to time in accordance with GTC Clause 7 on “Amendment o f Terms & Conditions” and the prevailing version shall apply to this Facilities Offer Letter.

20) Credit Reporting Agency

You consent to:

(i) the Bank to carrying out credit checks and obtaining credit reports and information from time to time on the Customer’s business and/or its company and also on any guarantor and security provider; any shareholder (whether direct or indirect, legal or beneficial), director and officer of the Customer, a guarantor and/or a security provider; any partner or member of a partnership; any office-bearer; any signatory; and any other person and/or entity having a relationship to the Customer that is relevant to the Customer’s relationship with the Bank or any other member of HSBC Group (as applicable) (collectively, “ Data Subjects ”) from the Credit Bureau Malaysia and any other credit reporting agencies registered under the Credit Reporting Agency Act 2010 (as listed on the Bank’s website at www.hsbc.com.my); and

(ii) the Credit Bureau Malaysia sourcing and retaining information on the Customer’s business and/or its company and all Data Subjects from any available data source, and disclosing to the Bank any such information as may be requested by the Bank.

The Customer warrants that the Customer has been irrevocably authorised by the Data Subjects to give this consent on their behalf.

21) Tax Compliance

The Bank’s Generic Terms & Conditions (“GTC”) (available at www.hsbc.com.my ) shall apply:

(i) GTC Clause 14 on “Tax Compliance” is incorporated into this Facilities Offer Letter.

(ii) GTC Clause 14 is to be read together with GTC Clause 40 on “Definitions”.

(iii) GTC Clause 14 and Clause 40 may be amended from time to time in accordance with GTC Clause 7 on “Amendment of Terms & Conditions” and the prevailing version shall apply to this Facilities Offer Letter.

22) Conflict & Order of Priority

The Bank’s Generic Terms & Conditions (“GTC”) (available at www.hsbc.com.my ) shall apply:

(i) GTC Clause 32 on “Conflict & Order of Priority” is incorporated into this Facilities Offer Letter.

(ii) GTC Clause 32 is to be read together with GTC Clause 40 on “Definitions”.

(iii) GTC Clause 32 and Clause 40 may be amended from time to time in accordance with GTC Clause 7 on “Amendment of Terms & Conditions” and the prevailing version shall apply to this Facilities Offer Letter.

23) Bearer Shares

If the Customer or a shareholder (whether direct or indirect, legal or beneficial) of the Customer is a company incorporated in a country that permits issuance of bearer shares, the Customer confirms and warrants that neither it nor such shareholder has issued any bearer shares and further undertakes that neither it nor such shareholder will issue or convert any of its shares or such shareholder’s shares (as the case may be) to bearer form without the prior written consent of the Bank, failing which the Bank reserves the right to terminate the banking relationship with the Customer.

24) Notices

Any notice demand or request may be given by ordinary or registered post (not being AR registered post) sent to the Customer at its address herein stated or to its last known address and such notice shall be deemed to have been duly served three (3) days after it is posted notwithstanding that it is returned by the postal authorities undelivered.

Notice as to fluctuation of the Base Lending Rate, variation of interest, commission, fees and all other bank charges may also be effected by a notification of the variation in the periodic statements furnished to the Customer from time to time or by way of an unsigned notice or letter produced by the Bank’s computer or by way of advertisement in any newspaper or by notification at any of the Bank’s premises or in such manner the Bank deems fit and such variation shall take effect from the date stipulated therein.

25) Payments received to be in gross

All monies received for the purpose of being applied in reduction of any monies owing to the Bank (whether from payments received or from the realisation of any security or otherwise) shall be treated as payments in gross and not as appropriated or attributed to any specific part or item of the monies owing to the Bank, even if appropriated thereto by any person otherwise purportedly entitled to so appropriate.

26) Suspense account

In the advent of any liquidation or analogous thereto, any monies received by the Bank in respect of the Facilities or any security granted may be kept to the credit of a non-interest bearing suspense account for such terms as the Bank deems fit without any obligation in the meantime to apply the same or any part thereof towards settlement of any liabilities due, and the Bank may prove for and agree to accept any distributions in respect of the whole or any part of such money and liabilities in the same manner as if no security had been created.

27) Remedies concurrent

The Bank shall have the right to exercise any rights or remedies available to it under this Facilities Offer Letter, any security or otherwise (including pursuing any right of sale or possession) against the Customer or any party providing security for the Facilities concurrently or successively as it may consider appropriate.

28) Severability

If any provision herein is or becomes prohibited or unenforceable by law or any applicable regulations, the remaining terms shall remain valid and enforceable and/or continue to be valid and enforceable in any other jurisdiction where the law provides that it is valid.

29) Exercise of remedies

The Bank may exercise any right, power or remedy it may have, whether it is stated here or conferred upon it by law even after a delay.

All rights and powers of the Bank in law or equity are exercisable even if they overlap with any rights and powers in these Terms.

If the Bank does not act when it is entitled to, that does not mean it:

i) has agreed to The Customer’s breach; or

ii) has given up its right; or

iii) is prevented from acting later.

Where the Bank has expressly waived a default by the Customer, this shall not impair any right, power or remedy of the Bank for any of the Customer’s other defaults, whether occurring prior or subsequent to the waiver.

30) Interpretation

Unless the context otherwise requires:

words importing the singular number include the plural and vice versa and reference to any gender includes all genders;

headings are for ease of reference only and shall not affect construction of the terms herein;

reference to ‘facility’ shall mean a facility comprised within the Facilities;

references to "the Bank" in this Facilities Offer Letter shall be understood to refer to HSBC Bank Malaysia Berhad;

Where the Customer comprises two (2) or more persons, whether in partnership or otherwise, all covenants and terms shall be made by and be binding upon them jointly and severally.

31) Governing law

Except where expressly provided otherwise for any facility, the terms herein shall be governed by and interpreted in accordance with the laws of Malaysia and the parties agree that the Malaysian courts shall have non-exclusive jurisdiction. The parties irrevocably waive any assertion of forum non conveniens to resolution of dispute in the Malaysian courts.

32) Successors and assigns

This letter shall be binding upon your heirs estate personal representatives and successors in title and on the successors in title and assigns of the Bank. The Customer shall not assign any of its rights or obligations hereunder. Unless expressly agreed otherwise by the Bank, the Bank may assign or transfer all or any part of our rights, benefits and/or obligations under this Facility Offer Letter or in respect of any of the facilities, and any security provided thereto, to any person by delivering to the Customer a notice in writing, or where required, by entry into more formal agreements (which the Customer hereby agrees to execute if so requested by the Bank). Such transfer shall take effect as from the effective date specified in the notice or agreement and we shall thereafter be released from such rights, benefits and/or obligations.

33) Time is of the essence

Time is of the essence but no failure or delay on the Bank’s part to exercise any power, right or remedy hereunder shall operate as a waiver thereof nor shall any single or any partial exercise or waiver of any such power, right or remedy preclude its further exercise or the exercise of any other power, right or remedy. The powers, rights and remedies hereby provided are cumulative and not exclusive of any powers, rights or remedies provided by law.

34) Security by credit balances

Where the Facilities are secured by credit balances in the Customer’s account(s) with the Bank, if the Facilities are extended beyond the expiry/maturity date of the account(s) (such account(s) being a deposit, safekeeping or investment with a stated expiry or maturity, howsoever described) such account(s) may be renewed or extended automatically for such tenure to be agreed by the parties, or in the absence of mutual agreement, at the decision of the Bank, each time it falls due and will remain as continuing security for so long as the Facilities shall remain unpaid.

35) Debiting of accounts held with the Bank for financing under the Import/Export Line

On the maturity date of each financing under the Import/Export Line, the Bank will debit the Customer’s current account with the full amount due to the Bank in respect of each such financing, without reference to the Customer

The Bank reserves the right at its absolute discretion to debit the full amount of each financing before their respective maturity dates together with any bank charges from any of the Customer’s accounts with the Bank without reference to the Customer.

36) Amendments

No amendment modification termination or waiver of any provision of the Facilities Offer Letter nor consent to any departure by the Customer therefrom shall be effective unless the same shall be in writing and signed or executed by the Bank and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given unless expressly stated otherwise in the written notice. No notice to or demand on the Customer in any case shall entitle the Customer to any other further notice or demand in similar or other circumstances.

37) Governmental and Other Approval, Authorities, Licenses and Consents

The Customer shall obtain and maintain in full force and effect all governmental and other approvals, authorities, licenses and consents required in connection with the Facilities and shall do or cause to be done all other acts and things necessary, or desirable for the performance of all the Customer’s obligations pursuant to this Facilities Offer Letter.

38) Goods and Services Tax

If any goods and services tax (“GST”, which expression shall include any tax of a similar nature that may be substituted for it or levied in addition to it) is chargeable by law on any amount paid, transferred or received, or payable, transferable or receivable hereunder, by whatever name called, the Customer shall promptly pay such GST and shall fully indemnify the Bank against such payment or liability (together with any interest, penalty, cost or expenses payable or incurred thereon) if the Bank is required by law to collect and make payment in respect of such GST. The Bank may apply all or part of the balance standing to the credit of any of the Customer’s account(s) in or towards the discharge of any amount so payable by the Customer to the Bank.

[end of Annexure II]

Customer’s acknowledgment/acceptance

We have viewed the foregoing terms of this Letter including the Annexure(s) and agree to the terms thereto.

We acknowledge that notwithstanding anything to the contrary herein contained and whether it is prior to the time for annual review the Facilities may be reviewed at any time and are subject to the Bank’s overriding right of suspension, withdrawal and repayment on demand, as well as the right to call for cash cover or other acceptable security on demand (which shall be in addition, and not subject to, any similar right stipulated for any of the Facilities). Nothing contained in this Letter shall be deemed to impose on the Bank any obligation to make or to continue to make available the Facilities or any advances thereunder to us. We also acknowledge that in the event of a recall of an overdraft facility, we shall be obliged to immediately fund our overdraft account with sufficient funds to meet any un-presented cheques still in circulation and that the Bank is under no obligation whatsoever to issue any notices or requests to us to do so. Any failure on our part to do so will entitle the Bank to refuse payment on such cheques, for which the Bank shall not be liable to us in any way whatsoever.

We confirm our acceptance of the Facilities and that the Bank’s agreement to provide us with the Facilities will not contravene a) the provisions of Section 62 of the Banking and Financial Institutions Act 1989 read with BNM's Guidelines on Credit Transactions and Exposures with Connected Parties, and b) Section 83 of the Banking Ordinance of the Hong Kong Special Administrative Region (‘Prohibitions’).

We acknowledge the Bank’s right to recall the Facilities in the event of any contravention of the said Prohibitions.

We further agree that your Letter embodies in writing all the terms for the Facilities to be granted to us and hereby confirm that any warranties, promises, representations or collateral agreements that may have been made to us, orally or otherwise by you in the course of the pre-contractual negotiations which have not now been included in this Letter shall hereafter be deemed to have lapsed and not legally binding upon you nor shall it be raised as a defence or to support any claim by us in any legal proceedings.

We are responsible for assessing the terms in this Letter and the Facilities and shall seek our own independent legal advice on them.

We acknowledge that we will be opening and/or maintaining my/our main working capital / operating account with you.

It shall be our sole responsibility to register any foreign currency facility granted where it is required to be registered with the Controller of Foreign Exchange before drawdown, in accordance with the Exchange Control Notices. Where we propose to make any prepayments for any foreign currency facility before its due date, it shall be our sole responsibility to register such prepayments with the Controller of Foreign Exchange where required by the Exchange Control Notices.

We undertake that all our FEX transactions shall be to hedge underlying trade transactions and other permitted purposes, and not for speculative purposes. Our FEX transactions shall be in compliance with Malaysian Exchange Control Regulations and supported by appropriate documentation which may be required by the Bank. We acknowledge that where we enter into any FEX transaction, we shall do so in reliance only upon our own judgment and assessment and obtain our own independent advice and not in reliance on any advice of the Bank or its personnel in accordance with Section 7 of IFEMA terms.

We also confirm that the securities list attached to the letter of offer is correct.

.s/s Olaf Karasch

OLAF KARASCH.

Authorised signatories and Company’s Chop

Date: August 24, 2015