TOR Minerals International 10Q 2010 Q3 Quarterly report

United States Securities and Exchange Commission Washington, D. C. 20549 ____________________________ FORM 10-Q ____________________________
(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010 OR
[__]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________

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 (Issuer’s telephone number) ____________________________
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 [X]				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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [__]		Accelerated filer [__]	Non-accelerated filer [__]			Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [__]				No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Class Common Stock, $0.25 par value				Shares Outstanding as of October 31, 2010 1,909,188

Table of Contents

Part I - Financial Information
			Page No.
Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Statements of Operations -- Three and nine months ended September 30, 2010 and 2009	3
		Condensed Consolidated Statements of Comprehensive Income (Loss) -- Three and nine months ended September 30, 2010 and 2009	4
		Condensed Consolidated Balance Sheets -- September 30, 2010 and December 31, 2009	5
		Condensed Consolidated Statements of Cash Flows -- Nine months ended September 30, 2010 and 2009	6

	Notes to the Condensed Consolidated Financial Statements		7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		19

Item 4.	Controls and Procedures		30

Part II - Other Information

Item 6.	Exhibits		31

Signatures			31

Forward Looking Information

Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in market price for TiO₂ pigments, 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” 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
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended September 30,				Nine Months Ended September 30,
		2010		2009		2010		2009
NET SALES	$	7,543	$	6,441	$	22,327	$	17,798
Cost of sales		6,234		5,492		17,765		15,170
GROSS MARGIN		1,309		949		4,562		2,628
Technical services and research and development		66		54		184		146
Selling, general and administrative expenses		846		687		2,666		2,423
OPERATING INCOME		397		208		1,712		59
OTHER INCOME (EXPENSE):
Interest income		-		-		-		2
Interest expense		(110)		(159)		(343)		(407)
Gain (loss) on foreign currency exchange rate		(53)		(5)		(47)		37
Other, net		-		-		-		4
INCOME (LOSS) BEFORE INCOME TAX		234		44		1,322		(305)
Income tax expense (benefit)		(2)		61		32		(11)
NET INCOME (LOSS)	$	236	$	(17)	$	1,290	$	(294)
Less: Preferred Stock Dividends		15		15		45		45
Income (Loss) Available to Common Shareholders	$	221	$	(32)	$	1,245	$	(339)

Income (loss) per common share:
Basic	$	0.12	$	(0.02)	$	0.66	$	(0.18)
Diluted	$	0.09	$	(0.02)	$	0.51	$	(0.18)
Weighted average common shares outstanding:
Basic		1,908		1,891		1,899		1,891
Diluted		2,586		1,891		2,455		1,891

See accompanying notes.

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

		Three Months Ended September 30,				Nine Months Ended September 30,
		2010		2009		2010		2009
NET INCOME (LOSS)	$	236	$	(17)	$	1,290	$	(294)
OTHER COMPREHENSIVE INCOME, net of tax
Currency translation adjustment, net of tax:
Net foreign currency translation adjustment gain (loss)		1,162		362		1,252		162
Other comprehensive income, net of tax		1,162		362		1,252		162
COMPREHENSIVE INCOME (LOSS)	$	1,398	$	345	$	2,542	$	(132)

See accompanying notes.

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

		September 30, 2010		December 31, 2009
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	564	$	1,002
Trade accounts receivable, net		4,016		3,380
Inventories		10,403		9,101
Other current assets		888		540
Total current assets		15,871		14,023
PROPERTY, PLANT AND EQUIPMENT, net		18,901		18,800
OTHER ASSETS		45		53
Total Assets	$	34,817	$	32,876

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,075	$	1,452
Accrued expenses		1,443		1,036
Notes payable under lines of credit		1,529		3,313
Export credit refinancing facility		477		-
Current deferred tax liability		50		60
Current maturities - capital leases		68		140
Current maturities of long-term debt – financial institutions		211		435
Total current liabilities		5,853		6,436
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES
Capital leases		20		49
Long-term debt – financial institutions		1,254		1,477
Long-term debt – convertible debentures, net		1,197		1,122
DEFERRED TAX LIABILITY		664		577
Total liabilities		8,988		9,661
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A 6% convertible preferred stock $.01 par value: authorized, 5,000 shares; 200 shares issued and outstanding at 9/30/2010 and 12/31/2009		2		2
Common stock $1.25 par value: authorized, 6,000 shares; 1,909 and 1,891 shares issued and outstanding at 9/30/2010 and 12/31/2009, respectively		2,386		2,363
Additional paid-in capital		25,308		25,214
Accumulated deficit		(6,562)		(7,807)
Accumulated other comprehensive income:
Cumulative translation adjustment		4,695		3,443
Total shareholders' equity		25,829		23,215
Total Liabilities and Shareholders' Equity	$	34,817	$	32,876

See accompanying notes.

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

		Nine Months Ended September 30,
		2010		2009
*CASH FLOWS FROM OPERATING ACTIVITIES:*
Net Income (Loss)	$	1,290	$	(294)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,421		1,340
Share-based compensation		91		78
Warrant interest expense		50		27
Deferred income taxes		32		(17)
Provision for bad debts		-		(61)
Changes in working capital:
Trade accounts receivables		(640)		(384)
Inventories		(827)		2,056
Other current assets		(339)		(324)
Accounts payable and accrued expenses		972		(1,436)
Net cash provided by operating activities		2,050		985

*CASH FLOWS FROM INVESTING ACTIVITIES:*
Additions to property, plant and equipment		(1,026)		(807)
Proceeds from sales of property, plant and equipment		17		-
Net cash used in investing activities		(1,009)		(807)

*CASH FLOWS FROM FINANCING ACTIVITIES:*
Net (payments on) proceeds from lines of credit		(1,725)		926
Net proceeds from (payments on) export credit refinancing facility		477		(432)
Payments on capital lease		(96)		(4)
Payments on long-term bank debt		(399)		(1,208)
Proceeds from convertible debentures		-		1,500
Proceeds from the issuance of common stock, and exercise of common stock options		51		-
Preferred stock dividends paid		(45)		(45)
Net cash (used in) provided by financing activities		(1,737)		737
Effect of exchange rate fluctuations on cash and cash equivalents		258		(213)
Net (decrease) increase in cash and cash equivalents		(438)		702
Cash and cash equivalents at beginning of year		1,002		191
Cash and cash equivalents at end of period	$	564	$	893

Supplemental cash flow disclosures:
Interest paid	$	343	$	377

See accompanying notes.

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

Note 1.

Going Concern

The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2010, the Company was not in compliance with the Consolidated Fixed Charge Ratio and the Consolidated Funded Debt to EBITDA Ratio covenants under our US Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (the “Bank”) as of December 31, 2008 and March 31, 2009. As a result, the Bank notified the Company of its decision to terminate the Credit Agreement.

As reported in the Company’s Form 8-K filed with the SEC on October 4, 2010, the Bank extended the maturity date on our Line of Credit (the “Line”) from August 15, 2010 to February 15, 2011. As a result, all of the Company’s debt owed to the Bank matures on February 15, 2011. The Company repaid the outstanding balance on its two Term Loans with the Bank in 2009, and at September 30, 2010, the Company had $500,000 drawn on the Line. In addition, the Company was in compliance with the revised financial covenants for each quarter ended from June 30, 2009 through September 30, 2010.

The Company is working diligently to establish a corporate lending relationship with a new financial institution for the Company’s US operations prior to February 15, 2011, the revised maturity date under the Credit Agreement, to refinance outstanding debt with the Bank prior to its revised maturity. However, there can be no assurance that the Company will be able to successfully refinance the debt due to the Bank. If the Company is unable to refinance the debt due to the Bank prior to its revised maturity or if the Company defaults under the terms of the Credit Agreement prior to its revised maturity and the Bank were to accelerate the maturity of such indebtedness, the Company does not have sufficient liquidity to pay off the indebtedness owed to the Bank, and the Bank would be entitled to exercise all of its rights and remedies as a secured lender under the Credit Agreement.

The Company’s two subsidiaries, TOR Minerals Malaysia, Sdn. Bhd. (“TMM”) and TOR Processing and Trade, BV (“TPT”) have short-term credit facilities and term loans at banks in Malaysia and the Netherlands, respectively. At September 30, 2010, TMM’s borrowings under the credit facilities and term loans with HSBC Bank Malaysia, Bhd. (“HSBC”) and RHB Bank, Bhd. (“RHB”) totaled $543,000 and TPT’s borrowings under the credit facility and term loans with Rabobank totaled $2,362,000. TMM’s credit facilities with HSBC matured on October 31, 2010 and TPT’s credit facility with Rabobank, which was renewed on January 1, 2010, has no stated maturity date.

Additionally, the credit facilities with HSBC, RHB and Rabobank are subject to demand provisions and are subject to certain subjective acceleration covenants based on the judgment of the banks. While the banks have made no indication that they will demand payment of the debt in Malaysia or in the Netherlands, in light of the Company’s liquidity difficulties, there can be no assurances that this debt will not be called for payment or that any stated maturity date in a renewal or amendment to these credit facilities will be extended for a sufficient amount of time to allow the Company to meet its commitments under the facilities or find alternate financing arrangements.

The events described above raise doubt about the Company’s ability to continue as a going concern. Our ability to continue to operate as a going concern is dependent on our ability to successfully establish a corporate lending relationship with a new financial institution for the US operation, and/or raise sufficient new capital and improve our operating cash flows to a sufficient level.

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

Note 2.

Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim condensed consolidated financial statements include the consolidated accounts of TOR Minerals International, Inc. and its wholly-owned subsidiaries with all significant intercompany transactions eliminated. In our opinion, 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 financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009, in our Annual Report on Form 10-K filed with the SEC on March 24, 2010. Operating results for the three month and nine month periods ended September 30, 2010, are not necessarily indicative of the results for the year ending December 31, 2010.

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 tax benefit of $12,000 and state income tax expense of $3,000, respectively, and foreign deferred tax expense of approximately $7,000 for the three month period ended September 30, 2010, compared to a foreign deferred tax expense of approximately $61,000 for the same three month period in 2009. For the nine month period ended September 30, 2010, we recorded state tax expense of $8,000 and foreign deferred tax expense of $24,000, compared to a foreign deferred tax benefit of $13,000 and state income tax expense of $2,000 during the same period of 2009. Taxes are based on an estimated annualized consolidated effective rate of 2.4% for the year ending December 31, 2010.

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, 2006 through December 31, 2009. Our state returns, which are filed in Texas, Ohio and Michigan, are subject to examination for the tax years ended December 31, 2005 through December 31, 2009. Our tax returns in various non-US jurisdictions are subject to examination for various tax years ended December 31, 2004 through December 31, 2009.

As of January 1, 2010, we did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2010. In addition, we did not recognize any interest and penalties in our consolidated financial statements during the three and nine month periods ended September 30, 2010. 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)

Recently Adopted and Recently Issued Accounting Standards

Transfers and Servicing, Accounting for Transfers of Financial Assets

In December 2009, the Financial Accounting Standards Board (the “FASB”) issued guidance addressing the accounting for transfers of financial assets. This guidance became effective for the Company on January 1, 2010. The guidance changes how companies account for transfers of financial assets and eliminates the concept of qualifying special-purpose entities. Adoption of the guidance did not have an impact on the Company’s results of operations, financial position or liquidity.

Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities

In December 2009, the FASB issued guidance relating to improvements to financial reporting by enterprises involved with variable interest entities. This guidance became effective for the Company on January 1, 2010 and requires the enterprise to qualitatively assess if it is the primary beneficiary of a variable-interest entity (VIE), and, if so, the VIE must be consolidated. Adoption of the standard did not have a material impact on the Company’s results of operations, financial position or liquidity.

The Company reviewed all other significant newly issued accounting pronouncements and concluded that they are either not applicable to the Company’s business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

Note 3.

Long-Term Debt

A summary of long-term debt to financial institutions follows:

		(Unaudited)
(In thousands)		September 30,		December 31,
		2010		2009
Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at September 30, 2010, due April 1, 2013, secured by a Caterpillar front-end loader.	$	66	$	84
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 7.8% at September 30, 2010, due July 1, 2029, secured by TPT's land and office building purchased July 2004. (367 Euro)		500		547
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.6% at September 30, 2010, due January 31, 2030, secured by TPT's land and building purchased January 2005. (365 Euro)		498		543
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2010, due July 31, 2015, secured by TPT's assets. (246 Euro)		335		406
U.S. Dollar term note payable to a Malaysian bank, secured by TMM's property, plant and equipment, matured June 30, 2010.		-		191
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 1.625% at September 30, 2010, due May 30, 2011, secured by TMM's property, plant and equipment.		66		141
Total		1,465		1,912
Less current maturities		211		435
Total long-term debt and notes payable - financial institutions	$	1,254	$	1,477

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

US Bank Credit Facility and Term Loans

Bank of America Credit Facility and Term Loans

On April 30, 2009, we and the Bank amended the Credit Agreement. Under the terms of the amended credit agreement, subject to our compliance with the terms and conditions contained in the amendment, including revised financial covenants, the Bank agreed not to exercise any of its rights or remedies relating to the existing events of default under the Credit Agreement. We also agreed that we will use all proceeds in excess of $1 million that we received after May 1, 2009 from the issuance of any of our capital stock, from capital contributions in respect to our capital stock, from the issuance of debentures or the incurrence of permitted subordinated indebtedness (as defined in the Credit Agreement) to prepay the loans and other obligations under the Credit Agreement. As a result, the Company applied $500,000 received from the sale of Debentures to its outstanding real estate loan with the Bank in August 2009.

On September 28, 2009 we amended the Credit Agreement with the Bank to extend the maturity date on the Line and Term Loan from October 1, 2009 to February 15, 2010. Under the terms of the amendment, the interest rate on the Line and the Term Loan was increased from prime plus two and one-half percent to prime plus three percent. In addition, the Line was reduced from $2,500,000 to $2,250,000. On February 12, 2010, we amended the Credit Agreement with the Bank to extend the maturity date on the Line from February 15, 2010 to August 15, 2010.

On September 30, 2010, we amended the Credit Agreement with the Bank to extend the maturity date on the Line from August 15, 2010 to February 15, 2011. Under the terms of the amendment, the Line was reduced from $2,250,000 to $1,500,000 (subject to a defined borrowing base) and the interest rate remained at Prime plus three percent. The loan covenant regarding the current ratio remained unchanged at 1.0 to 1.0 and the fixed charge coverage increased from 0.85 to 1.0 to 1.10 to 1.0. As a result of this amendment, all of our debt owed to the Bank will mature on February 15, 2011, provided, if we default on obligations contained in the amendment, the Bank will have the rights and remedies available to it under the Credit Agreement and applicable law. The Line is secured by the accounts receivable and inventory of the US Operation.

At September 30, 2010, the financial covenants were as follows:

Covenants to be based solely on the results of the US operation
Current Ratio – Maintain a ratio of current assets to current liabilities of at least 1.0 to 1.0 (1.65 to 1.0 as of the quarter ended September 30, 2010)
Fixed Charge Coverage Ratio – Maintain a fixed charge coverage ratio of at least 1.1 to 1.0 (6.65 to 1.0 for the quarter ended September 30, 2010)

At September 30, 2010, the outstanding balance on the Credit Agreement consisted of $500,000 on the Line and we had $1,000,000 available on that date based on eligible accounts receivable and inventory borrowing limitations. The interest rate on the Line was 6.25% at September 30, 2010.

Six-percent Convertible Subordinated Debentures

As reported in the Company’s Form 8-K filed with the SEC on May 6, 2009, the Company’s Board of Directors authorized the issuance of its six-percent (6%) convertible subordinated debentures with detachable warrants (the “Debentures”) for the purpose of refinancing, in whole or in part, its debt to the Bank and for general corporate purposes. Under the current authorization, the Company received, on May 4, 2009, $1 million from the sale of Debentures due May 4, 2016, from three of the Company’s directors.

As reported in the Company’s Form 10-Q filed with the SEC on August 10, 2009, the Company received proceeds of $500,000 from the sale of additional Debentures to six additional accredited investors, one of which is a director and another of which is a greater than 5% shareholder. As noted above, under the terms of the Credit Agreement, the Company applied the $500,000 received from the sale of Debentures to its outstanding real estate loan with the Bank in August 2009.

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

Other Term Loans

On March 31, 2008, we entered into a term loan with Holt Financing in the amount of $120,000. The proceeds of the loan were used to purchase a new Caterpillar front-end loader. The loan provides for amortization over five years with interest fixed at a rate of 5.24%. Monthly principal and interest payments commenced on May 1, 2008, and will continue through April 1, 2013. The monthly principal and interest payment is $2,275. The loan balance at September 30, 2010 was $66,000.

Netherlands Bank Credit Facility, Mortgage and Term Loan

On March 20, 2007, our subsidiary, TPT, entered into a short-term credit facility (the “Credit Facility”) with Rabobank which increased TPT’s line of credit from Euro 650,000 to Euro 1,100,000. The Credit Facility was renewed on January 1, 2010 and has no stated maturity date. The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (currently at 7.3%), is secured by TPT’s accounts receivable and inventory. At September 30, 2010, TPT had utilized Euro 755,000 ($1,029,000) of its short-term credit facility.

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

Malaysian Bank Credit Facility and Term Loan

The Company’s subsidiary, TMM, is negotiating with HSBC Bank Malaysia Berhad (“HSBC”) to extend the maturity date of its banking facility which matured on October 31, 2010. The facility with HSBC includes the following in Malaysian Ringgits (“RM”): (1) a banker’s acceptance (“BA”) of RM 500,000; (2) an export line (“ECR”) of RM 2,500,000; and (3) a foreign exchange contract limit of RM 5,000,000 ($162,000, $809,000 and $1,619,000, respectively).

TMM is currently in the process of renewing its banking facility with RHB Bank Berhad (“RHB”) which matured on October 31, 2009. The RHB facility includes the following: (1) an overdraft line of credit up to RM 1,000,000; (2) an ECR of RM 9,300,000; and (3) a foreign exchange contract limit of RM 25,000,000 ($324,000, $3,011,000 and $8,094,000, respectively).

The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments. At September 30, 2010, TMM had utilized RM 1,472,000 ($477,000) of the ECR facilities.

TMM is currently negotiating with both HSBC and RHB to renew or amend the credit facilities to provide for, among other things, an extended stated maturity date of both bank facilities. The Company is confident that the bank facilities will be renewed; however, there can be no assurance that the facilities will be renewed, amended or extended or as to the terms and conditions of the extension of the facility. If these lenders are unwilling to extend the maturity dates of these facilities, TMM may not have sufficient liquidity to pay off this indebtedness.

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

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

Note 4.

Series A Convertible Preferred Stock Dividend

On September 5, 2010, the Company declared a dividend, in the amount of $15,000, or $0.075 per share, for the quarterly period ended September 30, 2010, payable on October 1, 2010, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on September 5, 2010.

Note 5.

Fair Value Measurements

The following table presents the Company’s financial assets and financial liabilities that are measured and recognized at fair value on a recurring basis, classified under the appropriate level of fair value hierarchy, as of September 30, 2010. The Company did not hold any non-financial assets and/or non-financial liabilities subject to fair value measurements at September 30, 2010.

	September 30, 2010
(In thousands)	Balance at September 30, 2010		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset for foreign currency derivative financial instruments (including forward contracts)	$	30	$	-	$	30	$	-

Our foreign currency derivative financial instruments mitigate foreign exchange risks and include forward contracts.

The fair value of the Company’s debt is based on estimates using standard pricing models that take into account the present value of future cash flows as of the balance sheet date. The computation of the fair value of these instruments is generally 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, 2010				December 31, 2009
(In thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion	$	1,465	$	1,198	$	1,912	$	1,603
Long-term debt – convertible debentures		1,500		720		1,500		569
	$	2,965	$	1,918	$	3,412	$	2,172

The carrying amounts reported in the balance sheet for cash and cash equivalents, trade receivables, payables and accrued liabilities, accrued income taxes and short-term borrowings approximate fair value 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 6.

Capital Lease

On June 27, 2005, TPT entered into a financial lease agreement with De Lage Landen Financial Services, BV for equipment related to the production of ALUPREM. The cost of the equipment under the capital lease is included in the balance sheets as property, plant and equipment and was $381,181. Accumulated amortization of the leased equipment at September 30, 2010 was approximately Euro 148,000 ($202,000). Amortization of assets under capital leases is included in depreciation expense. The capital lease is in the amount of Euro 377,351 including interest of Euro 62,113 (implicit interest rate 6.3%) and Euro 238 in executory costs. The lease term is 72 months with equal monthly installments of Euro 5,241 ($7,144). The net present value of the lease at September 30, 2010 was Euro 41,000 ($56,000).

On October 30, 2007, the Company entered into a financial lease agreement with Dell Financial Services for two computer servers. The cost of the equipment under the capital lease, in the amount of $12,420, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2010 was approximately $13,000. The capital lease is in the amount of $13,217 including interest of $800 (implicit interest rate 4.1%). The lease matured September 30, 2010.

On March 13, 2008, the Company entered into a financial lease agreement with Toyota Financial Services for a forklift. The cost of the equipment under the capital lease, in the amount of $26,527, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2010 was approximately $11,000. The capital lease is in the amount of $31,164 including interest of $4,637 (implicit interest rate 6.53%). The lease term is 60 months with equal monthly installments of $519. The net present value of the lease at September 30, 2010 was $14,000.

On September 24, 2009, the Company entered into a financial lease agreement with Sympatec for a particle analyzer. The cost of the equipment under the capital lease, in the amount of $68,722, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2010 was approximately $8,000. The capital lease is in the amount of $74,220 including interest of $5,498 (implicit interest rate 14.45%). The lease matured August 24, 2010.

On August 1, 2010, the Company entered into a financial lease agreement with Dell Financial Services for new computer servers. The cost of the equipment under the capital lease, in the amount of $19,093, is included in the balance sheets as property, plant and equipment. Accumulated amortization of the leased equipment at September 30, 2010 was not significant. The capital lease is in the amount of $20,698 including interest of $1,605 (implicit interest rate 5.3%). The lease term is 36 months with equal monthly installments of $575. The net present value of the lease at September 30, 2010 was $18,000.

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

Note 7.

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,
		2010		2009		2010		2009
Numerator:
Net Income (Loss)	$	236	$	(17)	$	1,290	$	(294)
Preferred Stock Dividends		(15)		(15)		(45)		(45)
Numerator for basic earnings per share - income (loss) available to common shareholders		221		(32)		1,245		(339)
Effect of dilutive securities:		-		-		-		-
Numerator for diluted income (loss) per share - loss available to common shareholders after assumed conversions	$	221	$	(32)	$	1,245	$	(339)
Denominator:
Denominator for basic income (loss) per share - weighted-average shares		1,908		1,891		1,899		1,891
Effect of dilutive securities:
Employee stock options		12		-		11		-
Detachable warrants		666		-		545		-
Dilutive potential common shares		678		-		556		-
Denominator for diluted income (loss) per share - weighted-average shares and assumed conversions		2,586		1,891		2,455		1,891
*Basic income (loss) per common share*	$	0.12	$	(0.02)	$	0.66	$	(0.18)
*Diluted income (loss) per common share*	$	0.09	$	(0.02)	$	0.51	$	(0.18)

Excluded from the computation of diluted earnings per share were a total of 111,000 common shares related to the 200,000 convertible preferred shares at September 30, 2010 and 2009. The convertible preferred shares were not included in the computation of diluted earnings per share as the effect would be antidilutive.

Approximately 153,000 and 155,000 employee stock options were excluded from the computation of diluted earnings per share for the three and nine month periods ended September 30, 2010, respectively; and approximately 175,000 were excluded for the same three and nine month periods of 2009. The employee stock options were excluded as the effect would be antidilutive.

For the three and nine month periods ended September 30, 2010 and 2009, approximately 315,000 and 881,000 of shares of common stock, respectively, exercisable under the warrants were excluded from the computation of diluted earnings per share as the effect would be antidilutive.

For the three and nine month periods ended September 30, 2009, approximately 566,000 shares of common stock convertible under debentures were excluded from the computation of diluted earnings per share as the effect would be antidilutive.

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

Note 8.

Segment Information

The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments. All United States manufacturing is done at the facility located in Corpus Christi, Texas. Foreign manufacturing is done by the Company’s wholly-owned subsidiaries, TMM, located in Malaysia, and TPT, located in the Netherlands. A summary of the Company’s manufacturing operations by geographic area 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, 2010*
Net Sales:
Customer sales	$	4,753	$	1,953	$	837	$	-	$	7,543
Intercompany sales		-		575		1,254		(1,829)		-
Total Net Sales	$	4,753	$	2,528	$	2,091	$	(1,829)	$	7,543

Location profit (loss)	$	94	$	308	$	(125)	$	(41)	$	236

*September 30, 2009*
Net Sales:
Customer sales	$	4,243	$	1,577	$	621	$	-	$	6,441
Intercompany sales		6		290		909		(1,205)		-
Total Net Sales	$	4,249	$	1,867	$	1,530	$	(1,205)	$	6,441

Location profit (loss)	$	(17)	$	51	$	21	$	(72)	$	(17)
As of and for the nine months ended:
*September 30, 2010*
Net Sales:
Customer sales	$	13,951	$	6,122	$	2,254	$	-	$	22,327
Intercompany sales		24		1,532		3,896		(5,452)		-
Total Net Sales	$	13,975	$	7,654	$	6,150	$	(5,452)	$	22,327

Location profit (loss)	$	587	$	665	$	(27)	$	65	$	1,290

Location assets	$	11,811	$	7,733	$	15,273	$	-	$	34,817

*September 30, 2009*
Net Sales:
Customer sales	$	12,049	$	4,194	$	1,555	$	-	$	17,798
Intercompany sales		6		1,633		2,333		(3,972)		-
Total Net Sales	$	12,055	$	5,827	$	3,888	$	(3,972)	$	17,798

Location profit (loss)	$	(159)	$	(128)	$	(66)	$	59	$	(294)

Location assets	$	11,935	$	8,338	$	13,545	$	-	$	33,818

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

Product sales of inventory between Corpus Christi, TPT and TMM are based on inter-company pricing, which includes an inter-company profit margin. In the geographic information, the location 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 US parent company and between subsidiaries are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consisted of synthetic rutile (“SR”), HITOX and ALUPREM.

Note 9.

Stock Options and Equity Compensation Plan

For the three month period ended September 30, 2009, the Company recorded stock-based employee compensation expense of $28,000. For the nine month period ended September 30, 2010 and 2009, the Company recorded stock-based employee compensation expense of $91,000 and $78,000, respectively. This compensation expense is included in the selling, general and administrative expenses in the accompanying consolidated statements of operations.

The Company granted 23,404 and 137,500 options during the nine month periods ended September 30, 2010 and 2009.

As of September 30, 2010, all outstanding options were fully vested, therefore, there is no unrecognized option compensation expense related to non-vested awards.

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

Note 10.

Inventories

A summary of inventory follows:

(In thousands)		September 30,		December 31,
		2010		2009
Raw materials	$	5,440	$	4,178
Work in progress		1,376		1,173
Finished goods		2,952		3,311
Supplies		779		710
Total Inventories		10,547		9,372
Inventory reserve		(144)		(271)
Net Inventories	$	10,403	$	9,101

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

Note 11.

Derivatives and Other Financial Instruments

The Company has exposure to certain risks relating to its ongoing business operations, including financial, market, political and economic risks. The following discussion provides information regarding our exposure to the risks of changing energy prices and 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 natural gas and foreign exchange contracts are used to mitigate uncertainty and volatility, and to cover underlying exposures.

Natural Gas Contracts

We manage the risk of changes in natural gas supply prices at our Corpus Christi operation using derivative financial instruments. Natural gas market prices are volatile and we effectively fix prices for a portion of our natural gas production requirements through the use of swaps. A swap is a contract between us and a third party to exchange cash based on a designated natural gas price. Swap contracts require payment to or from us for the amount, if any, that the monthly published gas prices from the source specified in the contract differ from the prices of the New York Mercantile Exchange (NYMEX) natural gas futures during a specified period. There are no initial cash requirements related to the swap. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. We report the fair value of the derivatives on our balance sheet and changes in fair value are recognized in cost of sales in the period of the change.

On November 18, 2008, the Company entered into a natural gas contract with Bank of America, N.A. for 40,000 MM/Btu’s of natural gas. The contract settled on March 1, 2009 at which time we recorded a net expense of approximately $27,000 as a component of our cost of sales. At September 30, 2010, there were no natural gas contracts outstanding.

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

Foreign Currency Forward Contracts

We manage the risk of changes in foreign currency exchange rates, primarily at our Malaysian operation, through the use of foreign currency contracts. Foreign exchange contracts are used to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates. We report the fair value of the derivatives on our balance sheet and changes in the fair value are recognized in earnings in the period of the change.

At September 30, 2010, we marked these contracts to market, recording $30,000 as a current asset on the balance sheet. For the three and nine month periods ended September 30, 2010, we recorded $30,000 and $143,000, respectively, as a component of our net income. For the three and nine month periods ended September 30, 2009, we recorded $22,000 and $31,000, respectively, as a component of our net loss.

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 Condensed Consolidated Balance Sheet:

(In thousands)
Asset Derivatives
			September 30,		December 31,
Derivative Instrument	Location		2010		2009
Foreign Currency Exchange Contracts	Other Current Assets	$	30	$	3
		$	30	$	3

The following table summarizes the impact of the Company’s derivatives on the condensed consolidated financial statements of operations for the three and nine month periods ended September 30, 2010 and 2009:

			Amount of Gain (Loss) Recognized in Operations (In thousands)
	Location of Gain		Three Months Ended				Nine Months Ended
Derivative	(Loss) on Derivative		September 30,				September 30,
Instrument	Instrument		2010		2009		2010		2009
Natural Gas Swap Contract	Cost of Sales	$	-	$	-	$	-	$	(27)
Foreign Currency Exchange Contracts	Other Income (Expense)		30		22		143		31
		$	30	$	22	$	143	$	4

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

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

We are a global specialty chemical company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders, and flame retardants and other uses in the manufacture of paints, industrial coatings, plastics, and catalysts applications. We have operations in the US, Asia and Europe.

Our US Operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, HALTEX/OPTILOAD and TIOPREM. The facility is also the Global Headquarters for the Company. The Asian Operation, located in Ipoh, Malaysia, manufactures SR, HITOX and TIOPREM and our European Operation, located in Hattem, Netherlands, manufactures Alumina based products.

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 US Dollar.

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.

Following are our results for the three and nine month periods ended September 30, 2010 and 2009. The income (loss) per common share and the weighted average common shares outstanding have been adjusted to reflect the one-for-five reverse stock split which was effective February 19, 2010.

		(Unaudited)
(In thousands, except per share amounts)		Three Months Ended September 30,				Nine Months Ended September 30,
		2010		2009		2010		2009
NET SALES	$	7,543	$	6,441	$	22,327	$	17,798
Cost of sales		6,234		5,492		17,765		15,170
GROSS MARGIN		1,309		949		4,562		2,628
Technical services and research and development		66		54		184		146
Selling, general and administrative expenses		846		687		2,666		2,423
OPERATING INCOME		397		208		1,712		59
OTHER INCOME (EXPENSE):
Interest income		-		-		-		2
Interest expense		(110)		(159)		(343)		(407)
Gain (loss) on foreign currency exchange rate		(53)		(5)		(47)		37
Other, net		-		-		-		4
INCOME (LOSS) BEFORE INCOME TAX		234		44		1,322		(305)
Income tax expense (benefit)		(2)		61		32		(11)
NET INCOME (LOSS)	$	236	$	(17)	$	1,290	$	(294)

Income (loss) per common share:
Basic	$	0.12	$	(0.02)	$	0.66	$	(0.18)
Diluted	$	0.09	$	(0.02)	$	0.51	$	(0.18)

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

2010 Outlook

For the duration of 2010, we anticipate market conditions for our products in certain end markets to continue to improve. Based on our conversations with customers, economic data and information from other market participants, it appears that the worldwide demand in the paint and plastics markets has started to stabilize. We saw significant improvement in our more mature HITOX sales during the last quarter of 2009, which has continued during the first nine months of 2010. In Asia, HITOX sales for in-country use have increased and we are now starting to see production rates for HITOX used in export products increase. In addition to improving market conditions in the US and Asia, HITOX sales are beginning to benefit from further market penetration in niche markets, which we are hopeful will generate additional incremental revenue for HITOX gong forward.

We introduced TIOPREM, a titanium dioxide colored pigment, into the market in 2008. While the rate of adoption has been slower than we had originally anticipated, customer activity has picked up over the past several months and we are now shipping this product to customers in both the US and Europe.

The second product we recently introduced, OPTILOAD, is a specialty alumina used in high performance flame retardant applications. Our new alumina product offers a high performance, cost effective and environmentally friendly solution for meeting the most stringent flame retardant and smoke suppression standards that are being implemented in the US. This is an emerging market with large growth opportunity in the US during 2010 and beyond.

From the cost side, increases in energy and raw material prices, as well as the continued currency movements, are expected to be a challenge; and while we do not plan to fill the positions eliminated in 2008 and 2009, we have reinstated our employees’ salaries back to the 2008 level. We are committed to securing and improving on the savings realized in 2009 from procurement, overhead and working capital programs and continuing to strengthen the balance sheet using operating cash flows to further reduce debt levels.

Looking to the future

Our strategy focuses on pursuing niche markets for paints, plastics, papers and catalysts applications with high value-added products that produce attractive profit margins and have high barriers to entry by competitors. Our focus is on products that will provide a solid value proposition with our customers and therefore sell at a higher average price and produce more attractive gross margins for us. In addition, the high value-added nature of these products will allow us to create close partnerships with our customers and develop long-term relationships with recurring and predictable revenue streams.

As we look at our HITOX business going forward, we expect our traditional HITOX business to remain tied to the strength of the US and global economy. Our key growth strategy is to introduce newly developed colored pigments that will expand our addressable market and increase our sales potential. We are applying technologies developed in our Netherlands operation to create new high performance fillers and pigments. Unlike our traditional HITOX products, our new products have higher performance characteristics, much broader end market applications and provide for value-added premium pricing.

Actual results could differ materially from those indicated by these forward looking statements because of various risks and uncertainties. See the information under the caption “Forward Looking Information” appearing below the Table of Contents of this report.

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

Results of Operations

Net Sales: Consolidated net sales for the three and nine month periods ended September 30, 2010 increased approximately $1,102,000 or 17% and $4,529,000 or 25%, respectively, as compared to the same three and nine month periods of 2009 when we experienced declines in our consolidated net sales of $1,062,000 or 14% and $3,367,000 or 16%, respectively.

Following is a summary of our consolidated products sales for the three and nine month periods ended September 30, 2010 and 2009 (in thousands). All inter-company sales have been eliminated.

		(Unaudited)
	Three Months Ended September 30,									Nine Months Ended September 30,
Product		2010			2009			Variance			2010			2009			Variance
HITOX	$	2,941	39%	$	2,890	45%	$	51	2%	$	8,939	40%	$	7,673	43%	$	1,266	16%
ALUPREM		2,719	36%		2,266	35%		453	20%		8,038	36%		6,791	38%		1,247	18%
BARTEX		985	13%		705	11%		280	40%		2,804	13%		1,908	11%		896	47%
HALTEX		618	8%		475	7%		143	30%		1,977	9%		1,124	6%		853	76%
TIOPREM		180	3%		2	<1%		178	8900%		266	1%		5	<1%		261	5220%
OTHER		100	1%		103	2%		(3)	-3%		303	1%		297	2%		6	2%
Total	$	7,543	100%	$	6,441	100%	$	1,102	17%	$	22,327	100%	$	17,798	100%	$	4,529	25%

HITOX sales increased 2% and 16% for the three and nine month periods ended September 30, 2010, respectively, as compared to the same periods in 2009 primarily due to an increase in world-wide demand. This compares to a decline of 28% and 32% during the same three and nine month periods ended September 30, 2009, respectively, as a result of the weak North American market and the impact of the global economy.

ALUPREM sales increased 20% during the third quarter of 2010 and 18% for the nine month period ended September 30, 2010, as compared to the same periods of 2009 primarily due to an increase in sales in Europe. This compares to a decrease of 1% and an increase of 9% during the same three and nine month periods of 2009, respectively.

BARTEX sales increased 40% during the third quarter of 2010 and 47% for the nine month period ended September 30, 2010 primarily due to an increase in volume and our customer base. This follows a decline of approximately 5% and 23% during the same three and nine month periods of 2009, respectively, primarily as a result of the downturn in the US economy.

HALTEX sales increased 30% and 76% for the three and nine month periods ended September 30, 2010, respectively. This compares to an increase of 45% and 26% for the same three and nine month periods of 2009, respectively. The year over year increase is related to new business for our standard HALTEX and newer OPTILOAD specialty products which are gaining acceptance in the marketplace.

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

Corpus Christi Operation

Our Corpus Christi 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 Corpus Christi operation for the three and nine month periods ended September 30, 2010 and 2009 (in thousands). All inter-company sales have been eliminated.

		(Unaudited)
	Three Months Ended September 30,									Nine Months Ended September 30,
Product		2010			2009			Variance			2010			2009			Variance
HITOX	$	1,954	41%	$	2,071	49%	$	(117)	-6%	$	6,136	44%	$	5,669	47%	$	467	8%
ALUPREM		974	20%		896	21%		78	9%		2,544	18%		3,094	26%		(550)	-18%
BARTEX		985	21%		705	17%		280	40%		2,804	20%		1,908	16%		896	47%
HALTEX		618	13%		475	11%		143	30%		1,977	14%		1,124	9%		853	76%
TIOPREM		130	3%		-	0%		130	100%		205	2%		3	<1%		202	< 1%
OTHER		92	2%		96	2%		(4)	-4%		285	2%		251	2%		34	14%
Total	$	4,753	100%	$	4,243	100%	$	510	12%	$	13,951	100%	$	12,049	100%	$	1,902	16%

HITOX – Sales in the US, Mexico and South America trailed the third quarter last year 10%, 60% and 13%, respectively, however, HITOX sales in Canada increased 51% resulting in a net decrease of 6% for the quarter as compared to the same period in 2009. This compares to a net decrease in the third quarter of 2009 of 22%. Year to date, HITOX sales increased 8% primarily related to the gradual improvement in the construction industry, as compared to a net decrease of 28% during the same nine month period of 2009. Sales in the US, Canada, Mexico and South America increased 3%, 40%, 18% and 11%, respectively.

ALUPREM – US Sales during the third quarter increased 9% as compared to the same three month period in 2009; and, year to date, ALUPREM sales decreased 18% due to lower sales in the first quarter of 2010 as compared to the same period of 2009. The net change in US sales of ALUPREM was due to a change in the order pattern of a significant customer.

BARTEX – Increase in US sales of BARTEX primarily related to an increase in demand from existing customers, as well as new customers.

HALTEX – Increase in US sales of HALTEX primarily related to new business, an increase in demand and the acceptance of our new product, OPTILOAD, in the market place.

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

Netherlands Operation

Our subsidiary in the Netherlands, TPT, manufactures and sells ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our US customers. In addition, TPT purchases HITOX from TMM for distribution in Europe. The following table represents TPT’s ALUPREM and HITOX sales (in thousands) for the three and nine month periods ended September 30, 2010 and 2009 to third party customers. All inter-company sales have been eliminated.

		(Unaudited)
	Three Months Ended September 30,									Nine Months Ended September 30,
Product		2010			2009			Variance			2010			2009			Variance
ALUPREM	$	1,745	89%	$	1,370	87%	$	375	27%	$	5,494	90%	$	3,697	88%	$	1,797	49%
HITOX		187	10%		205	13%		(18)	-9%		596	10%		495	12%		101	20%
TIOPREM		21	1%		2	<1%		19	< 1%		32	<1%		2	<1%		30	< 1%
Total	$	1,953	100%	$	1,577	100%	$	376	24%	$	6,122	100%	$	4,194	100%	$	1,928	46%

ALUPREM –European sales increased 27% and 49% for the three and nine month periods ended September 30, 2010, respectively, primarily due to an increase in volume, customer base and product mix, offset by the negative impact of foreign currency rate fluctuations as the Euro weakened against the USD. During the same three and nine month periods of 2009, European ALUPREM sales decreased 11% and 27%, respectively.

HITOX –European sales decreased 9% during the three month period ended September 30, 2010, as compared to the same period of 2009 primarily due to the negative impact of the foreign currency fluctuations which were partially offset by an increase in volume. For the nine month period ended September 30, 2010, European HITOX sales increased 20% primarily related to gradual improvement in the construction industry, offset by the negative impact of foreign currency fluctuations. This compares to an increase of 16% and a decrease of 30% for the same three and nine month periods of 2009, respectively.

Malaysian Operation

Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third party customers, as well as to our Corpus Christi operation and TPT. The following table represents TMM’s sales (in thousands) for the three and nine month periods ended September 30, 2010 and 2009 to third party customers. All inter-company sales have been eliminated.

		(Unaudited)
	Three Months Ended September 30,									Nine Months Ended September 30,
Product		2010			2009			Variance			2010			2009			Variance
HITOX	$	800	96%	$	614	99%	$	186	30%	$	2,207	98%	$	1,509	97%	$	698	46%
TIOPREM		29	3%		-	0%		29	100%		29	1%		-	0%		29	100%
OTHER		8	1%		7	1%		1	14%		18	1%		46	3%		(28)	-61%
Total	$	837	100%	$	621	100%	$	216	35%	$	2,254	100%	$	1,555	100%	$	699	45%

HITOX – Asian HITOX sales increased 30% and 46% for the three and nine month periods ended September 30, 2010, respectively, primarily due to an increase in volume related to the continuing improvement in the economy and the construction industry in Asia, as well as the positive effect of the foreign currency fluctuations between the Malaysian Ringgit and the USD as the Ringgit has gained in strength against the USD. During the same three and nine month periods of 2009, HITOX sale in Asia decreased 49% and 46%, respectively.

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

Other Consolidated Results

Gross Margin: For the three and nine month periods ended September 30, 2010, gross margin increased approximately 2.7% and 5.6%, respectively. Primary positive factors affecting our gross margin include the mix of products sold during the three and nine month periods compared to the same periods of 2009, as well our efforts to maintain and/or reduce costs and maximize efficiency. Negative factors impacting our gross margin include an increase in the cost of energy and raw materials, as well as the foreign currency fluctuations. However, we are partially offsetting these negative factors by reducing idle plant time resulting from the timing of our SR production at TMM, as well as increasing production at our US operation.

Technical Services and Selling, General, Administrative and Expenses (“SG&A”): Total SG&A expenses increased approximately 23.1% during the three month period ended September 30, 2010 as compared to the same period in 2009 primarily due to an increase in compensation expense and sales expense. For the nine month period ended September 30, 2010, SG&A expenses increased approximately 10.9% primarily related to an increase in sales expense. In February 2009, the Company implemented a 20% salary reduction for management and staff; however, effective January 1, 2010, the Company reinstated these salaries to their previous level.

Interest Expense: Net interest expense for the three and nine month periods ended September 30, 2010 decreased approximately $49,000 and $64,000, respectively, as compared to the same periods of 2009, primarily due to a decrease in long-term debt and our lines of credit, offset by interest on the debentures and warrants issued in 2009.

Income Taxes: Income taxes consisted of federal tax benefit of $12,000 and state income tax expense of $3,000, respectively, and foreign deferred tax expense of approximately $7,000 for the three month period ended September 30, 2010, compared to a foreign deferred tax expense of approximately $61,000 for the same three month period in 2009. For the nine month period ended September 30, 2010, we recorded state tax expense of $8,000 and foreign deferred tax expense of $24,000, compared to a foreign deferred tax benefit of $13,000 and state income tax expense of $2,000 during the same period of 2009. Taxes are based on an estimated annualized consolidated effective rate of 2.4% for the year ending December 31, 2010.

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

Going Concern

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

Long-term Debt

Following is a schedule of our long-term to financial institutions debt.

		(Unaudited)
(In thousands)		September 30,		December 31,
		2010		2009
Term note payable to a U.S. equipment financing company, with an interest rate of 5.24% at September 30, 2010, due April 1, 2013, secured by a Caterpillar front-end loader.	$	66	$	84
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 7.8% at September 30, 2010, due July 1, 2029, secured by TPT's land and office building purchased July 2004. (367 Euro)		500		547
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.6% at September 30, 2010, due January 31, 2030, secured by TPT's land and building purchased January 2005. (365 Euro)		498		543
Fixed rate Euro term note payable to a Netherlands bank, with an interest rate of 4.05% at September 30, 2010, due July 31, 2015, secured by TPT's assets. (246 Euro)		335		406
U.S. Dollar term note payable to a Malaysian bank, secured by TMM's property, plant and equipment, matured June 30, 2010.		-		191
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 1.625% at September 30, 2010, due May 30, 2011, secured by TMM's property, plant and equipment.		66		141
Total		1,465		1,912
Less current maturities		211		435
Total long-term debt and notes payable - financial institutions	$	1,254	$	1,477

US Operations

Bank of America Credit Facility and Term Loans

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

At September 30, 2010, the financial covenants were as follows:

Covenants to be based solely on the results of the US operation
Current Ratio – Maintain a ratio of current assets to current liabilities of at least 1.0 to 1.0 (1.65 to 1.0 as of the quarter ended September 30, 2010)
Fixed Charge Coverage Ratio – Maintain a fixed charge coverage ratio of at least 1.1 to 1.0 (6.65 to 1.0 for the quarter ended September 30, 2010)

Six-percent Convertible Subordinated Debentures

Other Term Loans

Netherlands Operation

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

Malaysian Operation

Cash and Cash Equivalents

As noted on the following table, cash and cash equivalents decreased $438,000 for the nine months ended September 30, 2010 as compared to an increase of $702,000 for the nine months ended September 30, 2009.

		(Unaudited)
		Nine Months Ended September 30,
(In thousands)		2010		2009
Net cash provided by (used in)
Operating activities	$	2,050	$	985
Investing activities		(1,009)		(807)
Financing activities		(1,737)		737
Effect of exchange rate fluctuations		258		(213)
Net change in cash and cash equivalents	$	(438)	$	702

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

Operating Activities

Operating activities provided $2,050,000 during the first nine months of 2010 as compared to $985,000 during the same period 2009. Following are the major changes in working capital affecting cash provided by operating activities for the nine month period ended September 30, 2010:

Accounts Receivable: Accounts receivable increased $640,000 as compared to an increase of $384,000 for the same period in 2009. The increase in accounts receivable is primarily due to stronger sales in the third quarter 2010 at each of the Company’s three operations as compared to the fourth quarter 2009. Accounts receivable increased $106,000 at the Corpus Christi operation and $242,000 and $292,000 at TPT and TMM, respectively.
Inventories: Inventories increased $827,000 as compared to a decrease of $2,056,000 for the same period in 2009. Inventories at the Corpus Christi operation increased $101,000 primarily related to an increase in raw materials which was partially offset by a decrease in finished goods. TMM’s increased approximately $846,000 primarily due to the timing of SR production and TPT’s decreased approximately $120,000 primarily due to a decrease in finished goods
Other Current Assets: Other current assets increased $339,000 as compared to an increase of $324,000 for the same period in 2009. At the Corpus Christi operation, prepaid expenses increased $80,000 primarily due to insurance, TPT’s increased $58,000 related to prepaid insurance and pension expense and TMM’s increased $201,000 primarily related to freight.
Accounts Payable and Accrued Expenses: Trade accounts payable and accrued expenses increased $972,000 as compared to a decrease of $1,436,000 for the same period in 2009. Accounts payable and accrued expenses at the Corpus Christi operation increased $431,000 primarily related to the timing of raw material purchases; TPT’s increased $212,000 and TMM’s increased $329,000 primarily relating to raw materials for the production of SR.

Investing Activities

We used cash of $1,009,000 in investing activities during the first nine months of 2010 primarily for the purchase of fixed assets as compared to $807,000 during the same period 2009. Net investments for each of our three locations are as follows:

Corpus Christi Operation: We invested approximately $530,000 primarily related to capital maintenance, production equipment and computer equipment, as compared to $757,000 for the same period in 2009 for equipment related to new process technologies to convert a majority of our production from natural gas to electricity.
Netherlands Operation: We invested approximately $470,000 at TPT for new production equipment, as compared to $45,000 for the same period in 2009.
Malaysian Operation: We invested approximately $9,000 at TMM for new equipment, as compared to $5,000 for the same period in 2009.

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

Financing Activities

We used $1,737,000 in financing activities during the nine month period ended September 30, 2010 as compared to cash provided by financing activities of $737,000 for the same period 2009. Significant factors relating to financing activities include the following:

Lines of Credit: Our borrowings on the domestic line of credit decreased $1,600,000 as compared to an increase of $1,100,000 for the same period 2009 which was primarily used for working capital. Borrowings at TPT decreased approximately $125,000 as compared to a decrease of $174,000 for the same period in 2009.
Export Credit Refinancing Facility (ECR): TMM’s borrowing on the ECR increased $477,000 during the nine month period ended September 30, 2010 for working capital related to the production of SR as compared to a decrease of $432,000 for the same period in 2009.
Capital Leases: Capital leases decreased approximately $96,000 related to lease payments at both the Corpus Christi operation and at TPT during the first nine months of 2010 as compared to a decrease of approximately $4,000 for the same period in 2009.
Long-term Debt – Financial Institutions: Long-term debt decreased approximately $399,000 during the nine month period ended September 30, 2010. Long-term debt decreased $7,000, $90,000 and $302,000 at the Corpus Christi operation, TPT and TMM, respectively. This compares to a decrease in long-term debt of approximately $1,208,000 for the same period in 2009.
6% Convertible Subordinated Debentures: During the first nine months of 2009, we received $1,500,000 related to the sale of our six percent convertible subordinated debentures, of which $500,000 was used to reduce our debt with Bank of America.
Proceeds from Issuance of Common Stock: We received $51,000 from the issuance of common stock during the first nine months of 2010 of which $25,000 related to the exercise of warrants and $26,000 to the exercise of stock options.
Preferred Stock Dividends: We paid dividends of $45,000 on our Series A convertible preferred stock for both the nine month periods ended September 30, 2010 and 2009.

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 2009 Annual Report on Form 10-K except as noted above.

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 Securities and Exchange Commission 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 has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II - Other Information

Item 6.

Exhibits

(a)	Exhibits
	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures:

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

	TOR Minerals International, Inc.
	____________
	(Registrant)

Date:	November 15, 2010	OLAF KARASCH Olaf Karasch President and Chief Executive Officer

Date:	November 15, 2010	BARBARA RUSSELL Barbara Russell Chief Financial Officer

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TOR Minerals International (TORM) Inactive 10-Q2010 Q3 Quarterly report

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