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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, 2002 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 1-7908
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ADAMS RESOURCES & ENERGY, INC.
------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 74-1753147
- ---------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Post Oak Parkway Ste 2700, Houston, Texas 77027
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(Address of principal executive office & Zip Code)
Registrant's telephone number, including area code (713) 881-3600
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares of Common Stock of the Registrant, par value $.10 per
share, outstanding at November 12, 2002 was 4,217,596.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- --------------------------
2002 2001 2002 2001
-------------- ----------- ----------- ------------
REVENUES:
Marketing........................................... $ 1,777,899 $3,819,207 $ 614,398 $ 1,228,761
Transportation...................................... 27,308 26,015 9,426 8,135
Oil and gas......................................... 3,047 5,588 1,144 1,315
------------- ---------- ----------- ------------
1,808,254 3,850,810 624,968 1,238,211
------------- ---------- ----------- ------------
COSTS AND EXPENSES:
Marketing........................................... 1,769,814 3,814,924 612,422 1,227,933
Transportation...................................... 24,227 23,684 8,382 7,596
Oil and gas......................................... 2,008 2,252 734 557
General and administrative.......................... 6,346 6,511 1,712 2,075
Depreciation, depletion and amortization............ 3,762 5,112 1,470 1,683
------------- ---------- ----------- ------------
1,806,157 3,852,483 624,720 1,239,844
------------- ---------- ----------- ------------
Operating earnings (loss).............................. 2,097 (1,673) 248 (1,633)
Other income (expense):
Interest income .................................... 80 318 34 50
Interest expense.................................... (96) (107) (8) (62)
------------- ---------- ----------- ------------
(16) 211 26 (12)
------------- ---------- ----------- ------------
Earnings (loss) before income taxes.................... 2,081 (1,462) 274 (1,645)
Income tax provision (benefit) 742 (527) 85 (596)
------------- ---------- ----------- ------------
Earnings (loss) before cumulative effect of
accounting change................................... 1,339 (935) 189 (1,049)
Cumulative effect of accounting change,
net of tax.......................................... - 55 - -
------------- ---------- ----------- ------------
Net earnings (loss).................................... $ 1,339 $ (880) $ 189 $ (1,049)
============= ========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Before cumulative effect of accounting change.......... $ .32 $ (.22) $ .05 $ (.25)
Cumulative effect of accounting change................. - .01 - -
Basic and diluted net earnings (loss)
------------- ---------- ----------- ------------
per common share.................................... $ .32 $ (.21) $ .05 $ (.25)
============= ========== =========== ============
Dividends per common share............................. $ - $ - $ - $ -
============= ========== =========== ============
The accompanying notes are an integral part of these financial statements.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- Marketing
Marketing division revenues, operating earnings and supplemental volume
and price information is presented below. Amounts shown for revenues, operating
earnings and depreciation are presented as follows (IN THOUSANDS):
Nine Months Ende Three Months Ended
September 30, September 30,
------------------------ ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $1,777,899 $3,819,207 $614,398 $1,228,761
Operating earnings $ 6,799 $ 2,265 $ 1,632 $ 175
Depreciation $ 1,286 $ 2,018 $ 344 $ 653
Supplemental volume and price information for the marketing
division is as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Wellhead Purchases - Per day (1)
Crude oil 105,600 bbls 134,300 bbls 96,700 bbls 133,000 bbls
Natural gas 530,000 mcf 793,000 mcf 422,000 mcf 801,000 mcf
Average Purchase Price
Crude oil - per barrel $ 23.49 $ 26.29 $ 26.59 $ 25.10
Natural gas - per mcf $ 2.89 $ 4.62 $ 3.05 $ 2.74
- ------------------------------------
(1) Reflects the volume purchased from third parties at the well head level.
Gross revenues for the marketing operations decreased by $2 billion or
53 percent and $615 million or 50 percent for the comparative nine month and
three month periods, respectively. Such decline resulted from a combination of
price and volume reductions. As shown above, during the nine-month period,
average crude oil prices declined by 11 percent to $23.49 per barrel while
average natural gas prices declined 37 percent to $2.89 per mcf. For the
comparative current three-month period, average prices stabilized and actually
experienced a slight increase. The most significant factor affecting revenues
however was volume reductions, which occurred at both the wellhead level and at
bulk physical pipeline locations. Commencing in the fourth quarter of 2001,
management decided to focus on niche markets in its area of strength and as a
result, reduced the overall scope and transaction
-3-
volume of its marketing operation. The primary purpose of this initiative was
threefold. First was to improve profitability. Second was to reduce the level of
price risks associated with operations and third, respond to heightened industry
credit concerns following the bankruptcy of Enron Corp. The Company believes its
third quarter marketing results evidence the successful achievement of these
objectives.
Marketing division operating earnings improved in 2002 because of four
primary factors, two affecting last year's results and two originating with 2002
results. In the second quarter of 2001, the Company sustained an operating loss
of $1,055,000 when results were negatively affected by a sudden and dramatic
weakening of inter-month crude oil price spreads. Leading up to mid March 2001,
the Company's trading strategy was premised on current month crude oil prices
being higher or stronger than succeeding month prices. When this situation
reversed in late March 2001 (the current month price being lower than the next
month's price), the Company chose to liquidate certain positions, necessitating
a $1,375,000 charge to first half 2001 earnings. Adverse market conditions
continued to hamper earnings recovery in the second quarter of 2001 because of
the inherent time lag in reducing crude oil acquisition costs. Crude oil is
normally purchased under 30-day evergreen contracts, while the resale of crude
oil varies from day to day. Beginning in May 2001, the Company began to
systematically cancel its crude oil acquisition contracts in accordance with the
allowed terms. However, it wasn't until July of 2001 that earnings began to
stabilize. Then, following the events of September 11, 2001, crude oil prices
declined resulting in a $4.2 million third quarter 2001 write-down in the
carrying value of crude oil inventory.
For 2002, operating earnings benefited from the implementation of the
Company's marketing strategy and increased prices for crude oil. Domestic prices
rose from the $19 per barrel range at year-end 2001 to the $25 per barrel range
by June 2002. The Company chose to liquidate lower priced inventory into a
relatively high value market which increased operating margins by $1.1 million
during the first quarter of 2002. Prices remained strong during the third
quarter of 2002 and as of September 30, 2002 the Company held approximately
158,000 barrels of crude oil inventory valued at approximately $28.36 per
barrel. The Company continues to implement its strategy to streamline the scope
of operations, and seek additional efficiencies in 2003.
The second significant factor for 2002 was the initiation of fee income
totaling $2,433,000 earned during the first six months of the year. This fee
originated pursuant to the terms of an agreement to dissolve the
Williams-Gulfmark Energy Company joint venture effective November 1, 2001. The
Company originally entered into the joint venture with a third party for the
purpose of purchasing, distributing, and marketing crude oil in the offshore
Gulf of Mexico region. The venture allowed the Company to combine its marketing
expertise with the larger trade credit capabilities afforded by the co-venture
participant. Effective with November 2001 business, the Company began to earn
fees approximating $400,000 per month based on certain volumes of crude oil
being purchased by the former co-venture participant in the offshore Gulf of
Mexico region. Unfortunately effective with July 2002 business, credit
constraints caused the former venture participant to substantially curtail its
purchases of the crude oil. As a result, the Company recorded no fee income
during the third quarter of 2002. See also Note 5 to Consolidated Financial
Statements.
-4-
- Transportation
Transportation revenues and operating earnings were as follows (IN
THOUSANDS):
Nine Months Ended Increase Three Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
------------------------ ---------- -------------------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 27,308 $ 26,015 4.9% $ 9,426 $ 8,135 15.8%
Operating earnings $ 1,805 $ 1,083 66.6% $ 518 $ 122 324.5%
Depreciation $ 1,276 $ 1,248 2.2% $ 526 $ 417 26.1%
As shown above, transportation revenues improved during the comparative
current third quarter as the Company experienced a pick-up in demand from its
petrochemical industry customer base. Because of the fixed cost component of
operating expenses, comparative third quarter operating earnings increased at a
relatively faster rate than revenues. Operating earnings are also improved in
2002 due to cost cutting measures instituted in early 2001. Absent increased
revenues however, the trend of improved earnings did not extend beyond the first
quarter of 2002 as the effects of an approximate $85,000 per month or 42 percent
increase in insurance rates took effect consistent with industry trends.
The Company's transportation operation is dependent upon the
petrochemical sector of the United States economy. For the past 21 months,
demand has generally been reduced. The recent activity pick-up appears to be
holding however, and the Company is hopeful about sustained demand through the
fourth quarter of 2002.
- Oil and Gas
Oil and gas division revenues and operating earnings are primarily a
function of crude oil and natural gas prices and volumes. Comparative amounts
for revenues, operating earnings and depreciation and depletion are as follows
(IN THOUSANDS):
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues........................... $ 3,047 $ 5,588 $ 1,144 $ 1,315
Operating earnings (loss).......... $ (161) $ 1,490 $ (190) $ 145
Depreciation and depletion......... $ 1,200 $ 1,846 $ 600 $ 613
-5-
Comparative volume and price information is a follows:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Crude oil
Volume 39,600 bbls 50,900 bbls 13,200 bbls 14,200 bbls
Average price per barrel $ 24.52 $ 29.50 $ 24.50 $ 31.97
Natural gas
Volume 710,000 mcf 809,000 mcf 262,000 mcf 249,800
mcf
Average price per mcf $ 2.73 $ 4.99 $ 3.10 $ 3.38
Volume and price declines for both crude oil and natural gas were the
direct cause of reduced earnings from oil and gas exploration and production
during 2002. Included in 2002 operating expenses are $354,000 of dry hole costs
of which $123,000 were incurred during the third quarter. While the Company
strives to reduce operating expenses, it will continue to incur development and
exploration costs in order to boost oil and gas revenues and productive
capacity. This year through September 2002, the Company successfully completed
eleven wells with four dry holes and two wells currently shut in pending further
evaluation. One of the third quarter wells was drilled in the Giddings field of
Lee County, Texas. This reentry and horizontal sidetracking of an existing well
is currently producing 400 barrels of crude oil and 1.5 million cubic feet of
natural gas per day. Two additional wells are planned in this area during the
remainder of 2002 and 2003.
Participation in the drilling of two development wells in Brazoria
County, Texas is also expected. The first well on this prospect was spud in
October 2002 and is currently drilling. Seven prospects have been identified and
will be drilled contingent on the success of the first two wells. A number of
other projects are also planned including the participation in 3D seismic shoots
in Calcasieu Parish, Louisiana and Chambers County Texas. The Company has also
committed to participate in the drilling of multiple prospects in Calcasieu
Parish area of Louisiana. The Company generally participates in such ventures
with its Chairman and President, K. S. Adams, Jr., and certain of his
affiliates. The terms of such participation are no better than those afforded
other non-affiliated working interest owners. See also Note 6 to Consolidated
Financial Statements.
- Outlook
For the short term, the marketplace for energy continues to be
difficult as sellers of crude oil and natural gas are seeking financial security
above all other factors. However, the Company believes its position within the
marketplace has stabilized and continued adversity is not anticipated. In the
longer-term view, the Company continues to believe the present energy market
turmoil will have a positive impact on its business. In recent years, an
increase in the number of industry participants has caused margins to shrink. As
competitors have withdrawn, some varying improvement in margins has resulted.
While it remains difficult to generate significant marketing profits, management
believes the Company is one of the industry survivors positioned for long-term
profit growth.
If most recent trends hold within the transportation segment, the
Company foresees a return to more sound results with annual transportation
operating earnings in the $2-3 million range. For oil and
-6-
gas, the Company has worked to stabilize normal production declines and hold
down costs. However, the time frame to find and develop production is longer
term in nature. Thus, the Company does not foresee a change in the short-term
trend line for oil and gas division results.
One area of anticipated earnings improvement is through the reduction
in future general and administrative expenses. Because of the recent turmoil
caused by Enron and others, and the related expansion of securities rules and
regulations, the Company expended $1.1 million or 53 percent of pre-tax earnings
on legal, consulting and accounting fees during the first nine months of 2002 in
response to these issues. While the Company will continue to incur such
compliance costs, the future level of such expenditures is expected to diminish.
Liquidity and Capital Resources
During the first nine months of 2002, the Company's cash flow from
operations before working capital items totaled $16,313,000. The Company
utilized such funds to make $3,810,000 in capital expenditures including $38,000
for marketing equipment, $1,876,000 for transportation equipment and $1,896,000
for oil and gas drilling activities. The remaining $12.5 million of cash flow
before working capital items was used to boost cash reserves and generally
improve liquidity. For the remainder of 2002, the Company anticipates spending
approximately $1.1 million on oil and gas exploration projects with only
limited, if any, other capital additions anticipated.
A key factor in the Company's reported cash flows before working
capital items is the cash flow impact of risk management activities. As
reflected in the accompanying Statement of Cash Flows, during the nine months of
2002, the Company converted $10,630,000 of net risk management assets to cash.
As a result, reported net risk management assets of $14,523,000 as of December
31, 2001 were reduced to net risk management assets of $3,893,000 as of
September 30, 2002. See also Note 4 to the accompanying Financial Statements.
- Banking Relationships
The Company's primary bank loan agreement, with Bank of America,
provides for two separate lines of credit with interest at the bank's prime rate
minus 1/4 of 1 percent. The working capital loan provides for borrowings up to
$7,500,000 based on 80 percent of eligible accounts receivable and 50 percent of
eligible inventories. Available capacity under the line is calculated monthly
and as of September 30, 2002 was established at $7,500,000. The oil and gas
production loan provides for flexible borrowings subject to a borrowing base
established semi-annually by the bank. The borrowing base was established at
$4,000,000 as of September 30, 2002. The line of credit loans are scheduled to
expire on October 29, 2003, with the then present balance outstanding converting
to a term loan payable in 12 equal quarterly installments. As of September 30,
2002, bank debt outstanding under the Company's two revolving credit facilities
totaled $11,475,000.
The Company's Gulfmark Energy, Inc. subsidiary maintains a separate
banking relationship with BNP Paribas in order to support its crude oil
purchasing activities. In addition to providing letters of credit, the facility
also finances up to $6,000,000 of crude oil inventory and certain accounts
receivable associated with crude oil sales. Such financing is provided on a
demand note basis with interest at the bank's prime rate plus 1 percent. As of
September 30, 2002 the Company had $2.2 million of eligible borrowing capacity
under this facility. No working capital advances were outstanding as of
September 30, 2002. Letters of credit outstanding under this facility totaled
approximately $17.7 million as of
-7-
September 30, 2002. BNP Paribas has the right to discontinue the issuance of
letter of credit under this facility without prior notification to the Company.
The Company's Adams Resources Marketing subsidiary also maintains a
separate banking relationship with BNP Paribas in order to support its natural
gas purchasing activities. In addition to providing letters of credit, the
facility finances up to $4,000,000 of general working capital needs on a demand
note basis. No working capital advances were outstanding under this facility as
of September 30, 2002. Letters of credit outstanding under this facility totaled
approximately $10 million as of September 30, 2002. BNP Paribas has the right to
discontinue the issuance of letter of credit under this facility without prior
notification to the Company.
Refer also to the "Liquidity and Capital Resources" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 for
additional discussion of the Company's banking relationships and other matters.
Critical Accounting Policies and Use of Estimates
- Fair Value Accounting
As an integral part of its marketing operation, the Company enters into
certain forward commodity contracts that are required to be recorded at fair
value in accordance with EITF 98-10 and Statement of Financial Accounting
Standards No. 133. Management believes this required accounting, commonly called
mark-to-market accounting creates variations in reported earnings and the
reported earnings trend. Under mark-to-market accounting, significant levels of
earnings are recognized in the period of contract initiation rather than the
period when the service is provided and title passes from supplier to customer.
As it affects the Company's operation, management believes mark-to-market
accounting impacts reported earnings and the presentation of financial condition
in three important ways.
1. Gross margins, derived from certain aspects of the Company's
ongoing business, are front-ended into the period in which
contracts are executed. While there is no particular pattern to
the timing of contract execution, it does tend to occur in
clusters during those periods of time when the Company's end-user
natural gas customers in New England perceive prices to be
advantageous. Meanwhile, personnel and other costs associated with
servicing accounts are expensed as incurred during the period of
physical product flow and title passage.
2. Mark-to-market earnings are calculated based on stated contract
volumes. One of the significant risks associated with the
Company's business is to convert stated contract or planned
volumes into actual physical commodity movement volumes without a
loss of margin. Again the planned profit from such commodity
contracts is bunched and front-ended into one period while the
risk of loss associated with the difference between actual vs
planned production or usage of oil and gas falls in a subsequent
period.
3. Cash flows, by their nature, track with physical movements and
passage of title. Mark-to-market accounting, on the other hand,
creates a mismatch between reported earnings and cash
-8-
flows. This complicates and confuses the picture of stated
financial conditions and liquidity.
The Company attempts to mitigate the above described risks by only
entering into contracts where current market quotes in actively traded, liquid
markets, are available to determine the fair value of contracts. In addition,
substantially all of the Company's forward contracts are less than 18 months in
duration. However, the reader is cautioned to develop a full understanding how
fair value or mark-to-market accounting creates differing reported results
relative to those which would be presented under conventional accounting
protocol.
- Trade Accounts
Accounts receivable and accounts payable typically represent the single
most significant assets and liabilities of the Company. Particularly within the
Company's energy marketing and oil and gas exploration and production
operations, there is a high degree of interdependence with and reliance upon
third parties, (including transaction counterparties) to provide adequate
information for the proper recording of amounts receivable or payable.
Substantially all such third parties are larger firms providing the Company with
the source documents for recording trade activity. It is commonplace for these
entities to retroactively adjust or correct such documents. This typically
requires the Company to either absorb, benefit from, or pass along such
corrections to another third party.
Due to (a) the volume of transactions, (b) the complexity of
transactions and (c) the high degree of interdependence with third parties, this
is a difficult area to control and manage. The Company manages this process by
participating in a monthly settlement process with each of its counterparties.
Ongoing account balances are monitored monthly and the Company attempts to gain
the cooperation of such counterparties to reconcile outstanding balances. The
Company also places great emphasis on collecting cash balance due and paying
only bonafide properly supported claims. In addition, the Company maintains and
monitors its bad debt allowance and accrues for open items due. A degree of risk
remains, however, simply due to the custom and practices of the industry.
- Oil and Gas Reserve Estimate
The value of capitalized cost of oil and gas exploration and production
related assets are dependent on underlying oil and gas reserve estimates.
Reserve estimates are based on many judgmental factors. The accuracy of reserve
estimates depends on the quantity and quality of geological data, production
performance data and reservoir engineering data, as well as the skill and
judgment of petroleum engineers in interpreting such data. The process of
estimating reserves involves continual revision of estimates (usually on an
annual basis) as additional information is made available through drilling,
testing, reservoir studies and acquiring historical pressure and production
data. Estimated future oil and gas revenue calculations are also based on
estimates by petroleum engineers as to the timing of oil and gas production, and
there is no assurance that the actual timing of production will conform to or
approximate such estimates. Also, certain assumptions must be made with respect
to pricing. The Company's estimates assume prices will remain constant from the
date of the engineer's estimates, except for changes reflected under natural gas
sales contracts. There can be no assurance that actual future prices will not
vary as industry conditions, governmental regulation and other factors impact
the market price for oil and gas.
-9-
The Company follows the successful efforts method of accounting, so
only costs associated with producing oil and gas wells are capitalized. However,
estimated oil and gas reserve quantities are the basis for the rate of
amortization under the Company units of production method for depreciating,
depleting and amortizing of oil and gas properties. Estimated oil and gas
reserve values also provide the standard for the Company's periodic review of
oil and gas properties for impairment.
- Contingencies
From time to time as incident to its operations, the Company becomes
involved in various accidents, lawsuits and/or disputes. Primarily as an
operator of an extensive trucking fleet, the Company is a party to motor vehicle
accidents, worker compensation claims or other items of general liability as
would be typical for the industry. In addition, the Company has extensive
operations that must comply with a wide variety of tax laws, environmental laws
and labor laws, among others. Should an incident occur, management will evaluate
the claim based on its nature, the facts and circumstances and the applicability
of insurance coverage. To the extent management believes that such event may
impact the financial condition of the Company, management will estimate the
monetary value of the claim and make appropriate accruals or disclosure as
provided in the guidelines of Statement of Financial Accounting Standards No. 5.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, including adverse changes in
interest rates and commodity prices.
- Interest Rate Risk
Total long-term debt at September 30, 2002 included $11,475,000 of
floating rate debt. As a result, the Company's annual interest costs fluctuate
based on interest rate changes. Because the interest rate on the Company's
long-term debt is a floating rate, the fair value approximates carrying value as
of September 30, 2002. A hypothetical 10 percent adverse change in the floating
rate would not have had a material effect on the Company's results of operations
for the nine month period ending September 30, 2002.
- Commodity Price Risk
The Company's major market risk exposure is in the pricing applicable
to its marketing and production of crude oil and natural gas. Realized pricing
is primarily driven by the prevailing spot prices applicable to oil and gas.
Commodity price risk in the Company's marketing operations represents the
potential loss that may result from a change in the market value of an asset or
a commitment. From time to time, the Company enters into forward contracts to
minimize or hedge the impact of market fluctuations on its purchases of crude
oil and natural gas. The Company may also enter into price support contracts
with certain customers to secure a floor price on the purchase of certain
supply. In each instance, the Company locks in a separate matching price support
contract with a third party in order to minimize the risk of these financial
instruments. Substantially all forward contracts fall within a 6-
-10-
month to 1-year term with no contracts extending longer than three years in
duration. The Company monitors all commitments, positions and endeavors to
maintain a balanced portfolio.
Certain forward contracts are recorded at fair value, depending on
management's assessments of numerous accounting standards and positions that
comply with generally accepted accounting principles. The revaluation of such
contracts is recognized in the Company's results of operations. Current market
quotes from actively traded, liquid markets are used to determine the
undiscounted fair value of the contracts, which are reflected on the Company's
balance sheet as risk management assets and liabilities. Risk management assets
and liabilities are classified as short- or long-term depending on contract
terms. The net unrealized gains and losses related to the valuation of these
contracts are included in marketing revenues on the accompanying statement of
earnings. The estimated future net cash inflow based on year-end market prices
is $1,686,000 for the remainder of 2002, $2,105,000 for 2003 and $102,000 for
2004. The estimated future cash inflow approximates the net fair value recorded
in the Company's risk management assets and liabilities.
The following table illustrates the factors that impacted the change in
the net value of the Company's risk management assets and liabilities for the
nine months ended September 30, 2002 and 2001, respectively. (IN THOUSANDS)
2002 2001
---- ----
Net fair value on January 1,........................................... $ 14,523 $ 2,801
Activity during 2001
- Cash received from settled contracts............................ (11,681) (4,360)
- Net realized loss from prior years' contracts................... (110) 1,387
- Net unrealized gain from prior years' contracts................. 513 1,200
- Net unrealized gain from current year contracts ................ 648 7,527
---------- ---------
Net fair value on September 30, ....................................... $ 3,893 $ 8,555
========== =========
Historically, prices received for oil and gas production have been
volatile and unpredictable. Price volatility is expected to continue. From
January 1, 2001 through September 30, 2002, natural gas price realizations
ranged from a monthly low of $1.96 per Mcf to a monthly high of $9.10 per Mcf.
Oil prices ranged from a low of $17.55 per barrel to a high of $31.71 per barrel
during the same period. A hypothetical 10 percent adverse change in average
natural gas and crude oil prices, assuming no changes in volume levels, would
have reduced earnings by approximately $114,000 and $131,000, respectively, for
the comparative nine month periods ended September 30, 2002 and 2001.
Forward-Looking Statements--Safe Harbor Provisions
This quarterly report for the period ended September 30, 2002 contains
certain forward-looking statements which are intended to be covered by the safe
harbors provided under Federal securities law and regulation. To the extent such
statements are not recitations of historical fact, forward-looking statements
involve risks and uncertainties. In particular, statements under the captions
(a) Results of Operations, (b) Liquidity and Capital Resources, (c) Critical
Accounting Policies and Use of Estimates, (d) Quantitative and Qualitative
Disclosures about Market Risk, (e) Use of Estimates, (f) Price Risk Management
Activities, and (g) Commitments and Contingencies, among others, contain
forward-
-11-
looking statements. Where the Company expresses an expectation or belief to
future results or events, such expression is made in good faith and believed to
have a reasonable basis in fact. However, there can be no assurance that such
expectation or belief will actually result or be achieved.
A number of factors could cause actual results or events to differ
materially from those anticipated. Such factors include, (a) general economic
conditions, (b) fluctuations in hydrocarbon prices and margins, (c) variations
between crude oil and natural gas contract volumes and actual delivery volumes,
(d) unanticipated environmental liabilities or regulatory changes, (e)
counterparty credit default, (f) inability to obtain bank and/or trade credit
support, (g) availability and cost of insurance, (h) changes in tax laws, and
(i) the availability of capital, among others.
Disclosure Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c)) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or procedures or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-12-
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
September 30, December 31,
2002 2001
------------ ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 23,664 $ 14,177
Accounts receivable, net.................................... 127,454 138,926
Inventories................................................. 8,370 10,004
Risk management receivables................................. 7,735 24,700
Income tax receivable....................................... - 3,930
Prepaid and other........................................... 3,240 7,568
------------ ---------------
Total current assets.......................... 170,463 199,305
------------ ---------------
Property and equipment........................................ 75,950 74,188
Less - accumulated depreciation,
depletion and amortization........................... (52,287) (50,289)
------------- ---------------
23,663 23,899
------------ ---------------
Other assets
Risk management assets...................................... 937 3,646
Other assets................................................ 202 177
------------ ---------------
$ 195,265 $ 227,027
============ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 131,534 $ 152,153
Current portion of long-term debt........................... - 1,000
Risk management payables.................................... 4,074 12,028
Accrued and other liabilities............................... 3,356 3,790
------------ ---------------
Total current liabilities............................ 138,964 168,971
Long-term debt, less current maturities....................... 11,475 11,475
Other liabilities
Deferred taxes and other.................................... 3,586 5,590
Risk management liabilities................................ 705 1,795
------------ ---------------
154,730 187,831
------------ ---------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $1.00 par value, 960,000 shares
authorized, none outstanding............................ - -
Common stock, $.10 par value, 7,500,000 shares
authorized, 4,217,596 shares outstanding ............... 422 422
Contributed capital...................................... 11,693 11,693
Retained earnings .......................................... 28,420 27,081
------------ ---------------
Total shareholders' equity .......................... 40,535 39,196
------------ ---------------
$ 195,265 $ 227,027
============ ===============
The accompanying notes are an integral part of these financial statements.
-13-
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
---------------------------
2002 2001
---------- ---------
CASH PROVIDED (USED) BY OPERATIONS:
Net earnings (loss) .......................................................... $ 1,339 $ (880)
Items of income not requiring (providing) cash -
Depreciation, depletion and amortization .................................... 3,762 5,112
Risk management activities ................................................. 10,630 (5,724)
Gains on property sales .................................................... (281) -
Write-off of dry hole costs.................................................. 245 -
Other, net .................................................................. (57) (464)
Decrease (increase) in accounts receivable ................................... 11,472 66,217
Decrease (increase) in inventories ........................................... 1,634 14,661
Decrease (increase) in prepaid and other ..................................... 4,328 (632)
Increase (decrease) in accounts payable ...................................... (20,619) (92,739)
Increase (decrease) in accrued liabilities ................................... (434) (12,448)
Increase in income taxes ..................................................... 1,958 -
---------- ---------
Net cash provided by (used in) operating activities ......................... 13,977 (26,897)
---------- ----------
INVESTING ACTIVITIES:
Property and equipment additions ............................................. (3,810) (1,808)
Proceeds from property sales.................................................. 320 -
---------- ------------
Net cash (used in) investing activities..................................... (3,490) (1,808)
---------- ----------
FINANCING ACTIVITIES:
Borrowings.................................................................... - 3,000
Repayment of debt............................................................. (1,000) -
---------- ----------
Net cash (used in) financing activities...................................... (1,000) 3,000
---------- ----------
Increase (decrease) in cash and cash equivalents................................. 9,487 (25,705)
Cash at beginning of period...................................................... 14,177 36,140
---------- ----------
Cash at end of period............................................................ $ 23,664 $ 10,435
========== ==========
Supplemental disclosure of cash flow information:
Interest paid during the period .............................................. $ 96 $ 107
========== ==========
Income taxes paid during the period........................................... $ 1,575 $ 270
========== ==========
Income tax refund received.................................................... $ 2,783 $ -
========== ==========
The accompanying notes are an integral part of these financial statements.
-14-
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements are unaudited but,
in the opinion of the Company's management, include all adjustments (consisting
of normal recurring accruals) necessary for the fair presentation of its
financial position at September 30, 2002 and December 31, 2001 and its results
of operations for the nine months and three months ended September 30, 2002 and
2001 and its cash flows for the nine months ended September 30, 2002 and 2001.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Securities and Exchange Commission
rules and regulations. Although the Company believes the disclosures made are
adequate to make the information presented not misleading, it is suggested that
these consolidated financial statements be read in conjunction with the
financial statements, and the notes thereto, included in the Company's latest
annual report on Form 10-K. The interim statement of operations is not
necessarily indicative of results to be expected for a full year.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Adams Resources & Energy, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") after elimination of all significant intercompany
accounts and transactions. In the compilation of these statements, the Company's
share of oil and gas joint interests are including using pro-rata consolidation
and its interest in a 50% owned crude oil marketing joint venture is included
using the equity method of accounting. See Note 5 to Consolidated Financial
Statements.
Nature of Operations
The Company is engaged in the business of crude oil, natural gas and
petroleum products marketing, as well as tank truck transportation of liquid
chemicals and oil and gas exploration and production. Its primary area of
operation is within a 1,000 mile radius of Houston, Texas and the New England
region of the United States with respect to certain natural gas retail sales
activities.
-15-
Cash and Cash Equivalents
Cash and cash equivalents include any treasury bill, commercial paper,
money market fund or federal fund with a maturity of 30 days or less. Included
in the cash balance at December 31, 2001 is a deposit of $2 million to
collateralize the Company's month-to-month crude oil letter of credit facility.
Inventories
Crude oil and petroleum product inventories are carried at the lower of
cost or market. Petroleum products inventory includes gasoline, lubricating oils
and other petroleum products purchased for resale and are valued at cost
determined on the first-in, first-out basis, while crude oil inventory is valued
at average cost. Materials and supplies are included in inventory at specific
cost, with a valuation allowance provided if needed. Natural gas inventories
purchased to cover forward sales contracts are carried at market. Components of
inventory are as follows (IN THOUSANDS):
September 30, December 31,
2002 2001
---------------- ---------------
Crude oil......................... $ 4,443 $ 6,806
Petroleum products ............... 1,959 1,690
Materials and supplies............ 581 683
Natural gas....................... 1,387 825
----------- ---------------
$ 8,370 $ 10,004
=========== ===============
Property and Equipment
Expenditures for major renewals and betterments are capitalized, and
expenditures for maintenance and repairs are expensed as incurred. Interest
costs incurred in connection with major capital expenditures are capitalized and
amortized over the lives of the related assets. When properties are retired or
sold, the related cost and accumulated depreciation, depletion and amortization
("DD&A") is removed from the accounts and any gain or loss is reflected in
earnings.
Oil and gas exploration and development expenditures are accounted for
in accordance with the successful efforts method of accounting. Direct costs of
acquiring developed or undeveloped leasehold acreage, including lease bonus,
brokerage and other fees, are capitalized. Exploratory drilling costs are
initially capitalized until the properties are evaluated and determined to be
either productive or nonproductive. If an exploratory well is determined to be
nonproductive, the capitalized costs of drilling the well are charged to
expense. Costs incurred to drill and complete development wells, including dry
holes, are capitalized.
Producing oil and gas leases, equipment and intangible drilling costs
are depleted or
-16-
amortized over the estimated recoverable reserves using the units-of-production
method. Other property and equipment is depreciated using the straight-line
method over the estimated average useful lives of three to twenty years for
marketing, three to fifteen years for transportation and ten to twenty years for
all others.
The Company is required to periodically review long-lived assets for
impairment whenever there is evidence that the carrying value of such assets may
not be recoverable. This consists of comparing the carrying value of the asset
with the asset's expected future undiscounted cash flows without interest costs.
Estimates of expected future cash flows represent management's best estimate
based on reasonable and supportable assumptions. Proved oil and gas properties
are reviewed for impairment on a field-by-field basis. Any impairment recognized
is permanent and may not be restored.
Revenue Recognition
The Company's natural gas and crude oil marketing customers are
invoiced based on contractually agreed upon terms on a monthly basis. Revenue is
recognized in the month where the physical product is delivered to the customer.
Where required, the Company also recognizes mark-to-market gains and losses
related to its natural gas and crude oil trading activities. A detailed
discussion of the Company's risk management activities are included later in
this footnote.
Customers of the Company's petroleum products marketing subsidiary are
invoiced and revenue is recognized in the period in which the customer
physically takes possession and title of the product at their facility.
Transportation customers are invoiced, and the related revenue is recognized as
the service is completed. Oil and gas revenue from the Company's interest in
producing wells is recognized as title and physical possession of the oil and
gas passes to the purchaser.
Earnings Per Share
The Company computes and presents earnings per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which requires the presentation of basic earnings per share and diluted
earnings per share for potentially dilutive securities. Earnings per share are
based on the weighted average number of shares of common stock outstanding
during the period. Such shares outstanding on both a basic and diluted basis
averaged 4,217,596 for both the nine month and three month periods ended
September 30, 2002 and 2001. There are no potential dilutive securities
outstanding during the periods presented.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and
-17-
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Examples of significant
estimates used in the accompanying consolidated financial statements include the
accounting for depreciation, depletion and amortization, income taxes,
contingencies and price risk management activities.
Price Risk Management Activities
The Company's trading and non-trading transactions give rise to market
risk, which represents the potential loss that may result from a change in the
market value of a particular commitment. The Company closely monitors and
manages its exposure to market risk to ensure compliance with the Company's risk
management policies. Such policies are regularly assessed to ensure their
appropriateness given management's objectives, strategies and current market
conditions.
On January 1, 2001 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 and No. 138. These statements establish
accounting and reporting standards that require every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value, unless the derivative qualifies as a normal purchase or sale.
Changes in fair value are recognized immediately in earnings, unless the
derivatives qualify for cash flow hedge accounting, then the effective portion
of the change in fair value will be deferred in other comprehensive income until
the related hedge item impacts earnings. Based on assessment of Company
contracts as required under SFAS No. 133, the Company recorded net risk
management income of $55,000 (net of $29,000 of income taxes), as a cumulative
affect of change in accounting principle effective January 1, 2001. For the nine
months ended September 30, 2002 and 2001, the Company had no contracts that
qualified for hedge accounting under SFAS 133.
In October 2002 the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") amended and rescinded certain prior consensus related
to the Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. The new ETIF consensus requires: (i) all mark-to-market gains and
losses on trading contracts be shown net in the income statement whether or not
settled physically and (ii) precludes mark-to-market accounting for non-SFAS No.
133 derivatives.
The October EITF consensus is effective October 26, 2002 for new
contracts, and for existing contracts, the consensus becomes effective with
physical periods beginning after December 15, 2002. Upon application of the
latest consensus, the Company will be required to restate to historical cost any
contracts that no longer qualify for mark-to-market treatment. Such restatement
should be recorded as a cumulative effect of our accounting change. Comparative
financial statements for prior periods will be reclassified to conform to the
new consensus. Management does not believe it has any contracts requiring
restatement to historical cost.
-18-
The Company's forward crude oil contracts are considered normal
purchases and sales. Natural gas forward contracts and energy trading contracts
for crude oil and natural gas are recorded at fair value, depending on
management's assessments of numerous accounting standards and positions that
comply with generally accepted accounting principles. The revaluation of such
contracts is recognized in the Company's results of operations in accordance
with EITF 98-10 "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities". Current market quotes from actively traded, liquid
markets are used to determine the fair value of the contracts, which is
reflected on the Company's balance sheet as risk management assets and
liabilities. Regarding net risk management assets, 100% of presented values as
of September 30, 2002 and December 31, 2001 were based on either market
quotations or industry posted prices. Risk management assets and liabilities are
classified as short- or long-term depending on contract terms. The net
unrealized gain or loss from the valuation of these contracts is reflected net
in marketing revenues, on the accompanying statement of earnings. The estimated
future net cash inflow from risk management assets based on the September 30,
2002 valuation is $3,893,000. Of this amount, net cash receipts totaling
$1,686,000 are expected during the remainder of 2002, with $2,105,000 of
expected receipts in 2003 and $102,000 of estimated cash receipts for 2004.
Note 3 - Segment Reporting
The Company is primarily engaged in the business of marketing crude
oil, natural gas and petroleum products; tank truck transportation of liquid
chemicals; and oil and gas exploration and production. Information concerning
the Company's various business activities is summarized as follows (IN
THOUSANDS):
-19-
Depreci-
ation,
Segment Depletion Property
Operating and and
Earnings Amorti- Equipment
Revenues (Loss) zation Additions
------------- ---------- ----------- -----------
For the nine months ended
September 30, 2002
Marketing........................ $ 1,777,899 $ 6,799 $ 1,286 $ 38
Transportation................... 27,308 1,805 1,276 1,876
Oil and gas...................... 3,047 (161) 1,200 1,896
------------- ---------- ----------- -----------
$ 1,808,254 $ 8,443 $ 3,762 $ 3,810
============= ========== =========== ===========
For the nine months ended
September 30, 2001
Marketing........................ $ 3,819,207 $ 2,265 $ 2,018 $ 625
Transportation................... 26,015 1,083 1,248 357
Oil and gas...................... 5,588 1,490 1,846 826
------------- ----------- ----------- -----------
$ 3,850,810 $ 4,838 $ 5,112 $ 1,808
============= =========== =========== ===========
For the three months ended
September 30, 2002
Marketing........................ $ 614,398 $ 1,632 $ 344 $ 15
Transportation................... 9,426 518 526 1,414
Oil and gas...................... 1,144 (190) 600 882
------------- ----------- ----------- -----------
$ 624,968 $ 1,960 $ 1,470 $ 2,311
============= =========== =========== ===========
For the three months ended
September 30, 2001
Marketing........................ $ 1,228,761 $ 175 $ 653 $ 149
Transportation................... 8,135 122 417 33
Oil and gas...................... 1,315 145 613 25
------------- ----------- ----------- -----------
$ 1,238,211 $ 442 $ 1,683 $ 207
============= =========== =========== ===========
-20-
Identifiable assets by industry segment are as follows (IN THOUSANDS):
September 30, December 31,
2002 2001
------------- -----------------
Marketing............................ $ 142,136 $ 182,914
Transportation....................... 16,318 14,268
Oil and gas.......................... 11,418 11,265
Other................................ 25,393 18,580
------------ -----------------
$ 195,265 $ 227,027
============ =================
Intersegment sales are insignificant. Other identifiable assets are
primarily corporate cash, accounts receivable, and properties not identified
with any specific segment of the Company's business. All sales by the Company
occurred in the United States.
Earnings from operations by segment represent revenues less operating
costs and expenses and depreciation, depletion and amortization and are
reconciled to earnings from operations before income taxes, as follows (IN
THOUSANDS):
Nine months ended Three months ended
September 30, September 30,
------------------ ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Segment operating earnings .................... $ 8,443 $ 4,838 $ 1,960 $ 442
General and administrative expenses............ (6,346) (6,511) (1,712) (2,075)
--------- --------- --------- ----------
Operating earnings......................... 2,097 (1,673) 248 (1,633)
Interest income ............................... 80 318 34 50
Interest expense .............................. (96) (107) (8) (62)
--------- --------- --------- ----------
Earnings (loss) before income taxes
and cumulative effect of accounting
change................................... $ 2,081 $ (1,462) $ 274 $ (1,645)
========= ========= ========= ==========
Note 4 - Price Risk Management Activities
Certain forward contracts are recorded in the accompanying financial
statements at fair value, depending on management's assessments of numerous
accounting standards and positions that comply with generally accepted
accounting principles. The revaluation of such contracts is recognized in the
Company's results of operations. Current market quotes from actively traded,
liquid markets are used to determine the undiscounted fair value of the
contracts, which are reflected on the Company's balance sheet as risk management
assets and liabilities. Risk management assets and liabilities are classified as
short- or long-term depending on contract terms. The net unrealized gains and
losses related to the valuation of these contracts are reflected in marketing
revenues on the accompanying statement of earnings.
-21-
Note 5 - Marketing Joint Venture
Commencing in May 2000, the Company had entered into a joint venture
arrangement with a third party for the purpose of purchasing, distributing and
marketing crude oil in the offshore Gulf of Mexico region. The intent behind the
joint venture was to combine the Company's marketing expertise with stronger
financial and credit support from the co-venture participant. The venture
operated as Williams-Gulfmark Energy Company pursuant to the terms of a joint
venture agreement. The Company held a 50 percent interest in the net earnings of
the venture and accounted for its interest under the equity method of
accounting. The Company included its net investment in the venture in the
consolidated balance sheet and its equity in the venture's pretax earnings was
included in marketing segment revenues in the consolidated statement of
earnings.
Effective November 1, 2001, the joint venture participants agreed to
dissolve the venture pursuant to the terms of a joint venture dissolution
agreement. As part of the consideration for terminating the joint venture, the
Company receives a monthly per barrel fee to be paid by the former joint venture
co-participant for a period of sixty months on certain barrels purchased by the
participant in the offshore Gulf of Mexico region. Included in 2002 marketing
segment revenues is $2,433,000 of pre-tax earnings derived from this fee. While
the co-venture participant willingly paid this fee through January 31, 2002
activity, effective with February 2002 business, the participant notified the
Company of its intent to withhold the fee until they audited the previous joint
venture activity.
Such audit was conducted in June of 2002 and to the best of
management's knowledge, the audit detected no adverse findings. The joint
venture dissolution agreement does not permit the withholding of fees due, and
the Company intends to pursue its full legal remedies under the agreement. As a
precautionary measure, during the second quarter of 2002, the Company recorded a
$140,000 bad debt provision, which represents the full amount of the currently
uncollected portion of such fees due. Due primarily to credit constraints,
effective with July 2002 business, the co-participant substantially curtailed
its purchase of crude oil in the affected region. As a result, the Company
recorded no fee income during the third quarter of 2002.
Note 6 - Transactions with Related Parties
Sakco, Ltd. ("Sakco"), Kenada Oil & Gas, Ltd. ("Kenada") and Kasco,
Ltd. ("Kasco"), family limited partnerships of which Mr. K. S. Adams, Jr.,
Chairman and President, is a limited partner, Sakdril, Inc. ("Sakdril"), a
wholly owned subsidiary of KSA Industries, Inc., which is a major stockholder of
the Company, and Mr. Adams individually participate as working interest owners
in certain oil and gas wells administered by the Company. Sakco, Kenada, Kasco,
Sakdril and Mr. Adams participated in each of the wells under terms no better
than those afforded other non-affiliated working interest owners. In recent
years, such related party transactions tend to result after management of the
Company has first identified oil and gas prospects of interest. Due to the
Company's capital budgeting constraints, typically the required
-22-
dollar committment to participate in such transactions is greater than the
amount that management is comfortable putting at risk. In such event, the
Company first determines the percentage of the transaction it wants to retain
with one of the related party entities participating in the transaction to the
extent of the excess available. Such related party transactions are individually
reviewed by and are subject to approval by the independent directors on the
Company's Board. As of September 30, 2002, the Company owed a net amount
totaling $232,000 to these related parties. The net amount due was comprised of
$352,000 of oil and gas revenues to be disbursed to such working interest
owners, offset by $120,000 of current joint interest billings due from such
joint interest owners. As of December 31, 2001, the Company owed $233,000 to
these related parties and the related parties owed $251,000 to the Company under
these arrangements.
David B. Hurst, Secretary of the Company, is a partner in the law firm
of Chaffin & Hurst. The Company has been represented by Chaffin & Hurst since
1974 and plans to use the services of that firm in the future. Chaffin & Hurst
currently leases office space from the Company. Transactions with Chaffin &
Hurst are on the same terms as those prevailing at the time for comparable
transactions with unrelated entities.
The Company also enters into certain transactions in the normal course
of business with other affiliated entities. These transactions with affiliated
companies are on the same terms as those prevailing at the time for comparable
transactions with unrelated entities.
Note 7 - Commitments and Contingencies
On August 30, 2000 CJC Leasing, Inc. ("CJC"), a wholly owned subsidiary
of the Company previously involved in the coal mining business, received a
"Notice of Taxes Due" from the State of Kentucky regarding the results of a coal
severance tax audit covering the years 1989 through 1993. The audit initially
proposed a tax assessment of $8.3 million plus penalties and interest. This
amount was adjusted downward by the State in August 2002 to $3.4 million plus
penalties and interest. CJC has protested this assessment and has set forth a
number of defenses including that CJC was not a taxpayer engaged in severing
and/or mining coal at anytime during the assessment period. Further, it is CJC's
informed belief that such taxes were properly paid by the third parties that had
in fact mined the coal. Management intends to vigorously defend CJC in this
matter and believes that it will not ultimately have a significant adverse
effect on the Company's financial position or results of operations.
In April 2002, a lawsuit was filed against the Company's wholly owned
subsidiary Gulfmark Energy, Inc. by plaintiffs Kirby Energy LLP and Kirby Black
("Kirby"). Kirby was a commission crude oil purchase representative for the
Company and as such had arranged certain crude oil purchase transactions for the
benefit of the Company that earned Kirby a percentage net profits commission.
Kirby believes the commissions paid to him were less than the amounts provided
for in his contract and has sued for an accounting and actual and punitive
damages. Management intends to vigorously defend this matter and believes that
it will not ultimately have a significant adverse effect on the Company's
financial position or results of operations.
-23-
On July 31, 2002, pursuant to a workmen's compensation claim filed by
the family of a deceased employee, the plaintiffs in the workmen's compensation
case also filed a complaint with the Occupational Safety and Health
Administration ("OSHA"). The OSHA complaint alleging that the Company's wholly
owned subsidiary, Service Transport Company, failed to produce employee exposure
and other records including air sampling data and medical monitoring records
from years 1989 through 1997. The Company responded to the alleged violations
denying that it failed to produce such data. To date, the Company has not
received a response from OSHA and believes it is in compliance with such rules
and regulations.
From time to time as incident to its operations, the Company becomes
involved in various lawsuits and/or disputes. Primarily as an operator of an
extensive trucking fleet, the Company is a party to motor vehicle accidents,
worker compensation claims or other items of general liability as would be
typical for the industry. Except as disclosed herein, management of the Company
is presently unaware of any claims against the Company that are either outside
the scope of insurance coverage, or that may exceed the level of insurance
coverage, and could potentially represent a material adverse effect on the
Company's financial position or results of operations.
Note 8 - Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting and reporting for the impairment of disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The objective of SFAS No. 144 is to establish one accounting
model for long-lived assets to be disposed of by sale as well as resolve
implementation issues related to SFAS No. 121. The Company adopted SFAS No. 144
effective January 1, 2002 with no material impact on its financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." The objective of SFAS No. 143 is to establish an
accounting model for accounting and reporting obligations associated with
retirement of tangible long-lived assets and associated retirement costs. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company intends to adopt SFAS No. 143
effective January 1, 2003. The Company is presently evaluating the effect of
implementing SFAS No. 143 and does not expect the adoption of this standard to
have a material impact on its financial position or results of operations.
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an
-24-
amendment of that statement, SFAS No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends
SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. The provisions related to SFAS No. 13 shall
be effective for transactions occurring after May 15, 2002. All other provisions
shall be effective for financial statements issued on or after May 15, 2002,
with early application encouraged. The Company does not believe that SFAS No.
145 will have a material effect on its results of operations.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally EITF Issue No. 94-3. The Company will adopt the provisions
of SFAS No. 146 for restructuring activities initiated after December 31, 2002.
SFAS No. 146 requires that the liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue No.
94-3, a liability for an exit cost was recognized at the date of commitment to
an exit plan. SFAS No. 146 also establishes that the liability should initially
be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the
timing of recognizing future restructuring costs as well as the amounts
recognized. The Company has not completed its analysis of the impact that SFAS
No. 146 will have on its consolidated financial statements.
-25-
PART II. OTHER INFORMATION
Item 1. - See Note 7 to the Consolidated Financial Statements
Item 2. - None
Item 3. -None
Item 4. - None
Item 6. Exhibits and Reports on Form 8K
a. Exhibits - None.
b. Reports on Form 8-K
A report on Form 8-K was filed on July 18, 2002 to announce a change in
the Company's Certifying Accountants from Arthur Andersen LLP to
Deloitte & Touche LLP.
A report on Form 8-K was filed on August 22, 2002 to submit amended
statements under oath for K. S. Adams, Jr., Chief Executive Officer and
Richard B. Abshire, Chief Financial Officer pursuant to Section
21(a)(1) of the Securities Exchange Act of 1934.
-26-
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.
ADAMS RESOURCES & ENERGY, INC.
(Registrant)
Date: November 13, 2002 By /s/ K. S. Adams, Jr.
------------------------ ------------------------------------
K. S. Adams, Jr.
ADAMS RESOURCES & ENERGY, INC. Chief Executive Officer
(Registrant)
By /s/ Richard B. Abshire
-------------------------------------
Richard B. Abshire
Chief Financial Officer
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ADAMS RESOURCES & ENERGY, INC.
CERTIFICATION PURSUANT TO
17 CFR 240.13A-14
[17 CFR 240.15D-14],
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, K. S. Adams, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adams Resources &
Energy, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 as promulgated under the Securities Exchange Act
of 1934, as amended) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ K. S. Adams, Jr.
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K. S. Adams, Jr.
Chief Executive Officer
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ADAMS RESOURCES & ENERGY, INC.
CERTIFICATION PURSUANT TO
17 CFR 240.13A-14
[17 CFR 240.15D-14],
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard B. Abshire, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Adams Resources &
Energy, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 as promulgated under the Securities Exchange Act
of 1934, as amended) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
(c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Richard B. Abshire
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Richard B. Abshire
Chief Financial Officer
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