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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 0-6247
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ARABIAN AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
10830 NORTH CENTRAL EXPRESSWAY SUITE 175
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 692-7872
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
(Title Of Class)
COMMON STOCK, PAR VALUE $0.10 PER SHARE
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Indicate by check mark whether the registrant (l) 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 [ ] No [X]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Number of shares of registrant's Common Stock, par value $0.10 per
share, outstanding as of November 25, 2003: 22,731,994.
The aggregate market value on June 28, 2002 of the registrant's voting
securities held by non-affiliates was $1,906,191.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this report.
PART I
ITEM 1. BUSINESS.
GENERAL
Arabian American Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products and developing mineral
properties in Saudi Arabia and the United States. All of its mineral properties
are presently undeveloped and require significant capital expenditures before
beginning any commercial operations. The Company's undeveloped mineral interests
are primarily located in Saudi Arabia.
United States Activities. The Company's domestic activities are
primarily conducted through a wholly owned subsidiary, American Shield Refining
Company (the "Refining Company"), which owns all of the capital stock of Texas
Oil and Chemical Co. II, Inc. ("TOCCO"). TOCCO owns all of the capital stock of
South Hampton Refining Company ("South Hampton"), and South Hampton owns all of
the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State"). South
Hampton owns and operates a specialty petrochemical products refinery near
Silsbee, Texas that is one of the largest manufacturers of pentanes consumed
domestically. Gulf State owns and operates three pipelines which connect the
South Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The Company also directly owns approximately 51% of the capital stock of a
Nevada mining company, Pioche-Ely Valley Mines, Inc. ("Pioche"). Pioche does not
conduct any substantial business activities. See Item 2. Properties.
Saudi Arabian Activities. The Company holds a thirty (30) year mining
lease (which commenced on May 22, 1993) covering an approximate 44 square
kilometer area in the Al Masane area in southwestern Saudi Arabia. The Company
has the option to renew or extend the term of the lease for additional periods
not to exceed twenty (20) years. The Company was granted exploration licenses
for the other areas in southwestern Saudi Arabia which have expired.
In 1999, the Company applied for an exploration license covering an
area of approximately 2,850 square kilometers surrounding the mining lease area,
where it has previously explored with the written permission of the Saudi
Ministry of Petroleum and Mineral Resources.
Mexico Activities. TOCCO acquired 92% of the issued and outstanding
shares of common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a
specialty petrochemical products refining company, from Spechem, S.A. de. C.V.
on January 25, 2000 at a purchase price of $2.5 million. The refinery is located
in Coatzacoalcos, on the Yucatan Peninsula near Veracruz, Mexico. An
administrative office is located in Mexico City.
See Item 2. Properties for additional discussions regarding all of the
Company's properties and financing of the Al Masane project.
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Note 12 to the Company's Consolidated Financial Statements contains
information regarding the Company's industry segments and geographic financial
information for the years ended December 31, 2002, 2001 and 2000. In addition,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of the Company's liquidity, capital
resources and operating results.
INTERNATIONAL OPERATIONS
A substantial portion of the Company's mineral properties and related
interests, and one of its specialty petrochemical refineries, are located in
Saudi Arabia and Mexico, respectively. The Company's international operations
involve additional risks not generally associated with domestic operations, any
of which could have a material and adverse affect on the Company's business,
financial condition or results of operations, including a heightened risk of the
following:
Economic and Political Instability; Terrorist Acts; War and Other
Political Unrest. The U.S. military action in Iraq, the terrorist attacks that
took place in the United States on September 11, 2001, the potential for
additional future terrorist acts and other recent events, have caused
uncertainty in the world's financial markets and have significantly increased
global political, economic and social instability, including in Saudi Arabia, a
country in which the Company has substantial interests and operations. It is
possible that further acts of terrorism may be directed against the United
States domestically or abroad, and such acts of terrorism could be directed
against the properties and personnel of companies such as the Company. The
Company's operations in Saudi Arabia and elsewhere could be further adversely
affected by post-war conditions in Iraq if armed hostilities, acts of terrorism
or other unrest persist. Recent acts of terrorism and threats of armed conflicts
elsewhere in the Middle East could also limit or disrupt the Company's
operations.
War and other political unrest also may cause unforeseen delays in the
development of the Company's mineral properties and related interests located in
Saudi Arabia, and interruption in the operation of the Company's specialty
petrochemical refinery located in Mexico, and may pose a direct security risk to
such interests and operations.
Such economic and political uncertainties may materially and adversely
affect the Company's business, financial condition or results of operations in
ways that cannot be predicted at this time.
Termination of Mining Lease; Expropriation or Nationalization of
Assets. The Company's mining lease for the Al Masane area in Saudi Arabia is
subject to the risk of termination if the Company does not comply with its
contractual obligations. See Item 2. Properties. Further, the Company's foreign
assets are subject to the risk of expropriation or nationalization. If a dispute
arises, the Company may have to submit to the jurisdiction of a foreign court or
panel or may have to enforce the judgment of a foreign court or panel in that
foreign jurisdiction.
Compliance with Foreign Laws. Because of the Company's substantial
international operations, its business is affected by changes in foreign laws
and regulations (or interpretation
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of existing laws and regulations) affecting both the mining and petrochemical
industries, and foreign taxation. The Company will be directly affected by the
adoption of rules and regulations (and the interpretations of such rules and
regulations) regarding the refining of specialty petrochemical products and the
exploration and development of mineral properties for economic, environmental
and other policy reasons. The Company may be required to make significant
capital expenditures to comply with non-U.S. governmental laws and regulations.
It is also possible that these laws and regulations may in the future add
significantly to the Company's operating costs or may significantly limit its
business activities. Additionally, the Company's ability to compete in the
international market may be adversely affected by non-U.S. governmental
regulations favoring or requiring the awarding of leases, concessions and other
contracts or exploration licenses to local contractors or requiring foreign
contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction.
Other Difficulties and Risks Associated with International Operations.
The Company also may experience difficulty in managing and staffing operations
across international borders, particularly in remote locations. Additional risks
associated with the Company's international operations, any of which could
disrupt the Company's operations, include changing political conditions, foreign
and domestic monetary policies, international economics, world metal price
fluctuations, foreign currency fluctuations, foreign taxation, foreign exchange
restrictions, trade protective measures and tariffs.
COMPETITION
The Company competes in both the petrochemical and mining industries.
Accordingly, the Company is subject to intense competition among a large number
of companies, both larger and smaller than the Company, many of which have
financial and other resources (including facilities and personnel) greater than
the Company. In the specialty products and solvents markets, the Refining
Company has one principal and one other competitor. Generally, good economic
conditions have meant strong demand for its specialty products and solvents. The
acquisition of Coin is intended to strengthen the Refining Company's position in
the market in Mexico and allow it to pursue increased sales volumes in the
United States. All of the Refining Company's raw materials are purchased on the
open market. The cost of these materials is a function of spot market oil and
gas prices, which were down in 1998, began rising in mid-1999 and continued to
rise dramatically throughout 2000. The prices peaked in late 2000 and then
returned to more traditional levels throughout 2001 and 2002. During the latter
part of 2002 and early 2003, prices rose upon speculation that the Iraqi freedom
action would disrupt supplies.
ENVIRONMENTAL MATTERS
In 1993, while remediating a small spill area, the Texas Commission on
Environmental Quality ("TCEQ"), formerly the Texas Natural Resources
Conservation Commission ("TNRCC"), required South Hampton to drill a well to
check for groundwater contamination under the spill area. Two pools of
hydrocarbons were discovered to be floating on the groundwater at a depth of
approximately 25 feet. One pool is under the site of a former gas processing
plant owned and operated by Sinclair, Arco and others before its purchase by
South Hampton in 1981. The other pool is under the South Hampton facility. Tests
conducted at that time determined that hydrocarbons are contained on the
property and are not moving in any
3
direction. The recovery process was initiated in June 1998 and approximately
$53,000 was spent setting up the system. The recovery is proceeding as planned
and is expected to continue for several years until the pools are reduced to an
acceptable level. Expenses of recovery and periodic migration testing will be
recorded as normal operating expenses. Expenses for future year's recovery are
expected to stabilize and be less per annum than the initial set up cost,
although there can be no assurance of this effect. Consulting engineers estimate
that as much as 20,000 barrels of recoverable material may be available to South
Hampton for use in its refining process, but no reduction has been made in the
accrual for remediation costs due to the uncertainties relating to the recovery
process. South Hampton drilled additional wells in 2001 and 2002 to further
delineate the boundaries of the pools and to ensure that, with the additional
rainfall experienced in 2001 and 2002, movement had not taken place. These tests
confirmed that no movement of the hydrocarbon pools had taken place. As a result
of the investigation, the current action plan was deemed acceptable. South
Hampton investigated a potential chemical dump site on the refinery property
relating to ownership by Arco in the 1950's. The investigation indicates no
further action is required and the TCEQ was so notified. South Hampton continues
to remediate the site of a pipeline leak and spill which occurred in 2001. The
affected site contains less than one-eight acre of land and the cost is being
covered by insurance. Also, see Item 3. Legal Proceedings.
The Clean Air Act Amendments of 1990 have had a positive effect on the
Refining Company's business as plastics manufacturers are searching for ways to
use more environmentally acceptable solvents in their processes. Plastics
manufacturers have historically used C6 hydrocarbons (hexanes) as coolants and
catalyst carrying agents. There is a current trend among plastics manufacturers
toward the use of lighter and more recoverable C5 hydrocarbons (pentanes) which
are a large part of the Refining Company's product line. Management believes its
ability to manufacture high quality solvents in the C5 hydrocarbon market will
provide a basis for growth over the next few years; however, there can be no
assurance that such growth will occur. While the refinery continues to
manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The Aromax(R) unit, which was jointly developed with Chevron Research
Company, has the ability to convert C6 hydrocarbons into benzene and other more
valuable aromatic compounds, which is one of the reasons the Refining Company
initially participated in the Aromax(R) development project. Also, see Item 2.
Properties.
PERSONNEL
The Company's officers who are resident in the United States are Mr.
John A. Crichton, Chairman of the Board, and Mr. Drew Wilson, Jr., Secretary and
Treasurer. Mr. Hatem El-Khalidi, the Company's President and Chief Executive
Officer, supervises the Company's 28 employees in Saudi Arabia, consisting of
the office personnel and field crews who conduct exploration and related
activities. The Refining Company employs 89 persons.
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ITEM 2. PROPERTIES.
UNITED STATES SPECIALTY PRODUCTS REFINERY
South Hampton owns and operates a specialty products refinery near
Silsbee, Texas. The refinery presently consists of eight operating units which,
while interconnected, make distinct products through differing processes: (i) a
pentane-hexane unit; (ii) a catalytic reformer; (iii) an aromatics fractionation
unit; (iv) a cyclopentane unit; (v) an Aromax(R) unit; (vi) an aromatics
hydrogenation unit; and (vii) two specialty fractionation units. All of these
units are currently in operation, except as noted below.
The pentane-hexane unit's design capacity is approximately 2,500
barrels per day ("BPD") of feedstock. The unit averaged 2,000 barrels per stream
day during 2002. The unit consists of a series of fractionation towers and
hydrotreaters capable of producing high purity solvents which are sold primarily
to expandable polystyrene and high density polyethylene producers. South Hampton
purchases most of its feedstock for this unit on the spot market.
The catalytic reforming unit is a standard industry design using a
platinum-rhenium catalyst which produces an aromatics concentrate sold as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 800 BPD. The
unit is operated as a source of hydrogen for the pentane-hexane unit and
operates in tandem with the Aromax(R) unit as feedstock balances dictate. The
unit's average production was 441 barrels per stream day in 2002.
The aromatics fractionation unit consists of two towers and has a
design capacity of 750 BPD. The unit processes an aromatic feedstock stream into
three specialized aromatic solvents used in various applications such as
pesticides, paints and coatings and adhesives. This unit is leased to a customer
for its own use pursuant to a contract providing for the payment of a minimum
daily charge.
The cyclopentane unit consists of three specialized fractionation
towers designed to produce a consistently high quality product which is used in
the expandable polystyrene industry. The design capacity of the cyclopentane
unit is 400 BPD. The unit operates according to the feedstock supplied by the
pentane-hexane unit and averaged 250 barrels of production per stream day during
2002.
The Aromax(R) unit is the world's first commercial unit using a
proprietary process of Chevron Research Company to produce a high benzene
content product which is sold as feedstock to refiners operating benzene
extraction units. The process converts petroleum naphtha into liquid
hydrocarbons having a high aromatic hydrocarbon content. The Aromax(R) unit's
design capacity is 400 BPD and uses a by-product from the pentane-hexane unit as
feedstock. The unit's average production throughput during 2002 was 106 barrels
per stream day. Chevron Research Company has agreed to continue development of
the Aromax(R) process. The unit continues to successfully operate as designed.
The aromatics hydrogenation unit was modified and expanded during the
first half of 2000, at a cost of approximately $1.5 million, to meet the needs
of a new, long-term toll processing customer. The unit now consists of a
hydro-desulphurization reactor with an
5
adjoining stripper tower and a new hydro-treater section with an adjoining
stripper/fractionation tower. The unit, which has a design capacity of 300 BPD,
was constructed to produce a specialty product using a proprietary process and
is under contract with the customer for a ten year period. The unit became
operational in June 2000 and, after the normal start-up adjustments, has
performed as intended.
The specialty fractionation unit consists of a single fractionation
tower and has a design capacity of 500 BPD. This unit was leased to a customer
for its own use pursuant to a contract providing for the payment of a minimum
daily charge. The unit was idled during the middle of 2001 and is available for
use for other purposes in the future. Several proposed projects are being
evaluated which would make use of the existing equipment primarily to increase
the capacity of existing operations.
The specialty solvents fractionation unit consists of three
fractionation towers, two of which operate under vacuum. The design capacity of
this unit is 1,000 BPD. This unit processes a specialized high purity feedstock
into four high purity white oil solvents. This unit is leased to a customer for
its own use pursuant to a contract providing for the payment of a minimum daily
charge.
South Hampton owns approximately 100 storage tanks with a total
capacity of approximately 320,000 barrels. The refinery is situated on 125 acres
of land, approximately 70 acres of which are developed. South Hampton purchased
an additional eight acres in 2000. South Hampton also owns a truck and railroad
loading terminal consisting of eight storage tanks, a rail spur and truck and
tank car loading facilities.
As a result of various expansion programs and the toll processing
contracts, essentially all of the standing equipment at South Hampton is
operational. South Hampton has surplus equipment in storage on site with which
to assemble additional processing units, such as a hydrocracking unit with a
2,000 BPD capacity.
Gulf State owns and operates three 8 inch pipelines aggregating
approximately 50 miles in length that connect South Hampton's refinery to a
natural gas line, to South Hampton's truck and rail loading terminal and to a
marine terminal owned by an unaffiliated third party. South Hampton leases
storage facilities at the marine terminal.
MEXICO SPECIALTY PRODUCTS REFINERY
The Mexico specialty petrochemical refinery is similar to South
Hampton's refinery in Silsbee, Texas, and produces high purity solvents which
are used in the expandable polystyrene and polystyrene foam industries. These
solvents are additionally approved and used by developers of high-density
polyethylene manufacturing processes for use in their licensed units. Coin
markets its products in Mexico, Latin America and the United States. With this
acquisition, the Company believes its refining operations are a significant
supplier of high purity solvents in those markets. Coin employs 23 persons.
Coin's operations are dependent upon Pemex (Mexican government owned vendor) for
its feedstock supply. Coin is currently in negotiations with Pemex to secure a
purchase contract for feedstock. The Mexico refinery was shut down for most of
2000 and 2001 due to the high cost of feedstock and low margins and
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operated at approximately 50% of capacity during most of 2002. Future run rates
will depend upon market conditions, feedstock prices and feedstock availability.
SAUDI ARABIA MINING PROPERTIES
Al Masane Project
The Al Masane project, consisting of a mining lease area of
approximately 44 square kilometers, contains extensive ancient mineral workings
and smelters. From ancient inscriptions in the area, it is believed that mining
activities went on sporadically from 1000 BC to 700 AD. The ancients are
believed to have extracted mainly gold, silver and copper.
Initial Exploration Work and Prior Feasibility Studies. The Saudi
Arabian government granted the Company exploration licenses for the Al Masane
and Wadi Qatan areas in 1971. Subsequently, the Company conducted substantial
geological and geophysical activities in these areas. Core drilling and studies
by independent consulting firms concluded that Al Masane's copper, zinc, gold
and silver prospects could be put in production sooner than the nickel prospect
at Wadi Qatan. Metallurgical tests also showed difficulty in separating the
nickel at Wadi Qatan. During 1977, a pre-feasibility mining study was conducted
at Al Masane by the mining consulting firm of Watts, Griffis and McOuat Limited
of Toronto, Canada ("WGM"). WGM recommended an extensive development program for
the Al Masane prospect.
Phase I of WGM's recommended Al Masane development program was
completed in April 1981. It involved construction of underground tunnels
parallel to the ore bodies totaling 3.9 kilometers in length from which
extensive underground core drilling was done in order to prove the quantity and
quality of the ore reserves. This work was financed primarily with an $11
million interest-free loan from the Saudi Arabian Ministry of Finance. As a
result of this work, WGM concluded that sufficient ore reserves had been
established to justify completion of a fully bankable feasibility study to
determine the economic potential of establishing a commercial mining and ore
treatment operation at Al Masane. WGM and SNC/GECO of Montreal, Canada conducted
this study in 1982. They concluded that the Al Masane deposits would support
commercial production of copper, zinc, gold and silver and recommended
implementation of Phase II of the Al Masane development program, which would
involve the construction of mining, ore treatment and support facilities. WGM's
September 1984 reevaluation of the project resulted in no substantial changes of
their initial conclusions and recommendations.
The Company continued its exploration work at Al Masane after 1984.
Consequently, WGM upwardly revised its reserve estimates in 1989 and again
concluded that a proposed mining operation was economically viable as well as
having high potential for the discovery of additional ore zones.
Current Feasibility Studies. The Saudi government granted the Company a
mining lease for the Al Masane area on May 22, 1993. The Company subsequently
commissioned WGM to prepare a new fully bankable feasibility study to be used to
obtain financing for commercial development of the project. The study, which was
completed in 1994, contained specific recommendations to insure that project
construction was accomplished expeditiously and
7
economically. The engineering design and costing portions of the study were
performed by Davy International of Toronto, Canada ("Davy"). WGM and Davy
updated this study in 1996. A summary of the studies' findings are as follows:
The Al Masane ore is located in three mineralized zones known as
Saadah, Al Houra and Moyeath. The following table sets forth a summary of the
diluted minable, proven and probable ore reserves at the Al Masane project,
along with the estimated average grades of these reserves:
RESERCE COPPER ZINC GOLD SILVER
ZONE (TONNES) (%) (%) (G/T) (G/T)
---- -------- ------ ---- ----- ------
Saadah..................................... 3,872,400 1.67 4.73 1.00 28.36
Al Houra................................... 2,465,230 1.22 4.95 1.46 50.06
Moyeath.................................... 874,370 0.88 8.92 1.29 64.85
--------- ---- ---- ---- -----
Total................................. 7,212,000 1.42 5.31 1.19 40.20
For purposes of calculating proven and probable reserves, a dilution of
5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra and
Moyeath zones was assumed. A mining recovery of 80% has been used for the Saadah
zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the amount
of wallrack adjacent to the ore body that is included in the ore extraction
process.
Proven reserves are those mineral deposits for which quantity is
computed from dimensions revealed in outcrops, trenches, workings or drillholes,
and grade is computed from results of detailed sampling. For ore deposits to be
proven, the sites for inspection, sampling and measurement must be spaced so
closely and the geologic character must be so well defined that the size, shape,
depth and mineral content of reserves are well established. Probable reserves
are those for which quantity and grade are computed from information similar to
that used for proven reserves, but the sites for inspection, sampling and
measurement are farther apart or are otherwise less adequately spaced. However,
the degree of assurance, although lower than that for proven reserves, must be
high enough to assume continuity between points of observation.
The metallurgical studies conducted on the ore samples taken from the
zones indicated that 87.7% of the copper and 82.6% of the zinc could be
recovered in copper and zinc concentrates. Overall, gold and silver recovery
from the ore was estimated to be 77.3% and 81.3%, respectively, partly into
copper concentrate and partly as bullion through cyanide processing of zinc
concentrates and mine tailings. Further studies recommended by consultants may
improve those recoveries and thus the potential profitability of the project,
however, there can be no assurances of this effect.
The mining and milling operation recommended by WGM for Al Masane would
involve the production of 2,000 tonnes of ore per day (700,000 tonnes per year),
with a mine life of over ten years. Annual production is estimated to be 34,900
tonnes of copper concentrate (25% copper per tonne) containing precious metal
and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total output per
year of gold and silver is estimated to be 22,000 ounces of gold and 800,000
ounces of silver from the copper concentrate and bullion produced. The
construction of mining, milling and infrastructure facilities is estimated to
take 21 months to complete.
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Construction necessary to bring the Al Masane project into production includes
the construction of a 2,000 tonne per day concentrator, infrastructure with a
300 man housing facility and the installation of a cyanidation plant to increase
the recovery of precious metals from the deposit. Project power requirements
will be met by diesel generated power.
WGM recommended that the Al Masane reserves be mined by underground
methods using trackless mining equipment. Once the raw ore is mined, it would be
subjected to a grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc concentrate,
copper concentrate and dore bullion. The copper and zinc concentrates also
contain valuable amounts of gold and silver. These concentrates and the dore
bullion to be produced from the cynidization plant are estimated to be 22,000
ounces of gold and 800,000 ounces of silver and will be sold to copper and zinc
custom smelters and refineries worldwide. After the smelter refining process,
the metals could be sold by the Company or the smelter for the Company's account
in the open market.
In the 1994 feasibility study, WGM stated that there is potential to
find more reserves within the lease area, as the ore zones are all open at
depth. Further diamond drilling, which will be undertaken by the Company, is
required to quantify the additional mineralization associated with these zones.
A significant feature of the Al Masane ore zones is that they tend to have a
much greater vertical plunge than strike length; relatively small surface
exposures such as the Moyeath zone are being developed into sizeable ore
tonnages by thorough and systematic exploration. Similarly, systematic
prospecting of the small gossans in the area could yield significant tonnages of
new ore.
The 1996 update showed the estimated capital cost to bring the project
into operation to be $89 million. At a production rate of 700,000 tonnes per
year, the operating cost of the project (excluding concentrate freight, ship
loading, smelter charges, depreciation, interest and taxes) was estimated to be
$38.49 per tonne of ore milled.
WGM prepared an economic analysis of the project utilizing cash flow
projections. A base case was prepared that included those project elements which
were most likely to be achieved. WGM believed that a majority of the base case
assumptions used in the 1994 feasibility study remained valid, including the ore
reserves, mill feed grade, production rate, metal recoveries and concentrate
grade and smelter returns. Metal prices, capital costs, operating costs and the
corporate structure were adjusted to reflect more current information. Capital
and operating costs were adjusted in conformity with the updated estimates
prepared by Davy.
The base case assumed the corporate structure of the entity to be
formed to operate the project would be owned 50% by the Company and 50% by Saudi
Arabian investors and that the owners of this entity would contribute an
aggregate of $26 million to the cost of the project. The base case further
assumed financing for the project from commercial loans in the aggregate amount
of $25 million bearing interest at the rate of 8% per year and a loan in the
amount of $38 million from the Saudi Industrial Development Fund ("SIDF")
repayable in equal annual installments over the initial life of the mine. Cash
generated by the operation of the project would contribute the remainder of the
project financing. The base case assumed that the $11 million loan outstanding
to the Saudi Arabian government would be paid by the Company in accordance with
a repayment schedule to be agreed upon with the Saudi Arabian government
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from the Company's share of the project's cash flows. Based on these
assumptions, and assuming the average prices of metal over the life of the mine
to be $1.05 per pound for copper, $.60 per pound for zinc, $400 per ounce of
gold and $6.00 per ounce of silver, WGM's economic analysis of the 1996 base
case showed the project would realize an internal rate of return of 13.1%, the
Company's and the Saudi Arabian investors' internal rates of return would be
27.3% and 12.1%, respectively, and projected net cash flow (after debt
repayment) from the project of $95.1 million. The 1994 feasibility study base
case showed the project would realize a 14.05% internal rate of return. Cash
flow under the base case is exclusive of income tax as the base case assumes
that any such tax would be paid by individual investors and not by the project.
Assuming a 10% discount rate, the net present value of the project as shown in
the 1996 update was $12.16 million compared to the $15.5 million net present
value of the project shown in the 1994 feasibility study. Based on the 1996
update, WGM believed that the economic analysis showed that the project remained
viable.
In August 2003, for purposes of estimating future cash flows, the price
assumptions contained in the WGM 1996 report were updated by an independent
consultant, who had previously prepared updated cash flow projections in 2000
and 2002. The new price assumptions are averages over the projected life of the
mine and are $1.04 per pound for copper, $.60 per pound for zinc, $375 per ounce
for gold and $5.50 per ounce for silver. Copper and zinc comprise in excess of
80% of the expected value of production. Although these prices are lower than
those used in the 1996 WGM report, due to the decline in the open market prices
for the minerals during the past several years, the project remains viable.
Mining Lease. As the holder of the Al Masane mining lease, the Company
is solely responsible to the Saudi Arabian government for the rental payments
and other obligations provided for by the mining lease and repayment of the
previously discussed $11 million loan. The Company's interpretation of the
mining lease is that repayment of this loan will be made in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from the
Company's share of the project's cash flows. The initial term of the lease is
for a period of thirty (30) years from May 22, 1993, with the Company having the
option to renew or extend the term of the lease for additional periods not to
exceed twenty (20) years. Under the lease, the Company is obligated to pay
advance surface rental in the amount of 10,000 Saudi riyals (approximately
$2,667 at the current exchange rate) per square kilometer per year
(approximately $117,300 annually) during the period of the lease. At December
31, 2002, approximately $425,000 of rental payments were in arrears. In
addition, the Company must pay income tax in accordance with the income tax laws
of Saudi Arabia then in force and pay all infrastructure costs. The Saudi
Arabian Mining Code provides that income tax will not be due during the first
stage of mining operations, which is the period of five years starting from the
earlier of (i) the date of the first sale of products or (ii) the beginning of
the fourth year since the issue of the mining lease. The lease gives the Saudi
Arabian government priority to purchase any gold production from the project as
well as the right to purchase up to 10% of the annual production of other
minerals on the same terms and conditions then available to other similar buyers
and at current prices then prevailing in the free market. Furthermore, the lease
contains provisions requiring that preferences be given to Saudi Arabian
suppliers and contractors, that the Company employ Saudi Arabian citizens and
provide training to Saudi Arabian personnel.
Reference is made to the map on page 15 of this Report for information
concerning the location of the Al Masane project.
Project Financing. As detailed above, the estimated total capital cost
to bring the Al Masane project into production is $89 million. The Company does
not presently have sufficient funds to bring this project into production. Also,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a further discussion of these matters.
10
Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company with
the Saudi Arabian Mining Company, a corporation wholly owned by the Saudi
Arabian government ("Ma'aden"), as successor to and assignee of the mining
interests formerly held by the Petroleum Mineral Organization ("Petromin").
Ma'aden is the Saudi Arabian government's official mining company. In 1994, the
Company received instructions from the Saudi Ministry of Petroleum and Mineral
Resources stating that it is possible for the Company to form a Saudi company
without Petromin (now Ma'aden), but the sale of stock to the Saudi public could
not occur until the mine's commercial operations were profitable for at least
two years. The instructions added that Petromin (now Ma'aden) still had the
right to purchase shares in the Saudi public stock company any time it desires.
Title to the mining lease and the other obligations specified in the mining
lease would be transferred to the Saudi public stock company. However, the
Company would remain responsible for the repaying the $11 million loan to the
Saudi Arabian government.
In order to commercially develop the Al Masane project, the Company
entered into a joint venture arrangement with Al Mashreq Company for Mining
Investments ("Al Mashreq"), a Saudi limited liability company owned by Saudi
Arabian investors (including certain of the Company's shareholders). The
partners formed The Arabian Shield Company for Mining Industries Ltd., a Saudi
limited liability company ("Arabian Mining"), which was officially registered
and licensed in August 1998 to conduct business in Saudi Arabia and authorized
to mine and process minerals from the Al Masane lease area. Arabian Mining
received conditional approval for a $38.1 million interest-free loan from SIDF,
and deposited $26 million of equity capital into its bank account.
Due to the severe decline in the open market prices for the minerals to
be produced by the Al Masane project and the financial crisis affecting
southeast Asia in 1998, SIDF and other potential lenders required additional
guarantees and other financing conditions which were unacceptable to the Company
and Al Mashreq. As a consequence, Al Mashreq withdrew from the joint venture and
all equity capital was returned.
By letter dated May 11, 1999, the Company informed the Ministry of
Petroleum and Mineral Resources (the "Ministry") that the recent sharp drop in
the market prices of the metals to be produced from the mine at Al Masane, as a
result of the economic crisis in southeast Asia, made implementation of the
development of the mine uneconomical at that time and that, as a result, the
Company would delay implementation of the project until metal prices recovered.
The Ministry notified the Company one year later that it must
immediately implement the project and in the Fall of 2000 further notified the
Company that the project should be immediately implemented or the mining lease
would be terminated. A second notice from the Ministry several weeks later
stated that the Committee of the Supreme Council of Petroleum and Minerals in
Saudi Arabia had recommended giving the Company six months to take positive
steps to implement the project. A written notice from the Ministry in the Summer
of 2001 stated that the Council of Ministers of Saudi Arabia had issued a
resolution in which it refused the Company's request to postpone implementation
of the project, that the Company must start implementation of the project within
six months of the date of the resolution and that, if the project was not then
started, the Ministry was authorized to begin procedures to terminate the
11
mining lease. Subsequent correspondence from the Ministry in the Fall and Winter
of 2001 and into 2002 reiterated the threat to terminate the mining lease if the
project was not immediately implemented. A letter from the Ministry in March
2002 stated that the six-month period to implement the project had expired
without the Company taking positive steps towards that end.
The Company has vigorously contested the legality of the threats of the
Ministry to terminate the Company's mining lease. The Company has written
numerous letters to the Ministry, and the Company and its Saudi Arabian legal
advisors also have had meetings with officials of the Ministry. In September
2002, the Company sent a letter to Saudi Arabian Crown Prince Abdullah Ben Abdul
Aziz, in his capacity as Deputy Chairman of the Saudi Supreme Council of
Petroleum and Minerals (the King of Saudi Arabia is the chairman), in which the
Company contested the legality of the threats of the Ministry to terminate the
mining lease and requested his advice. As stated in its letters to the Ministry
and the Crown Prince, the Company believes that the Ministry's letters to the
Company asking for the implementation of the project, without any regard to
metal market conditions, is contrary to the Saudi Mining Code and the mining
lease agreement. In addition, the Company has had correspondence and a meeting
with the United States Ambassador to Saudi Arabia where the Company presented
its opinion regarding the legality of the Ministry's actions. This opinion also
was conveyed in a letter to the United States Secretary of Commerce, who replied
that the United States Embassy is working to set up meetings with Saudi Arabian
government officials in an effort to resolve the matter. The Secretary of
Commerce assured the Company that the Department of Commerce has a strong
commitment in helping United States companies whenever possible. In a further
letter from the Department of Commerce, signed by William H. Lash III, Assistant
Secretary for Market Access and Compliance, dated March 6, 2003, he stated the
following: "After investigating the matter, the U.S. Embassy in Riyadh has been
informed by the Ministry of Petroleum that it did not cancel your mining lease.
According to the Ministry, it is waiting development of the site by Arabian
American Development Company."
The Ministry has not informed the Company that it will not terminate
the mining lease. To date, the Company has not received a written notice of
termination of the mining lease. An order of termination of the mining lease by
the Minister can be appealed to the Board of Lease Appeals, in accordance with
Article (55) of the Saudi Mining Code, which is an independent Board, chosen
regardless of nationality, from eminent and highly reputable jurists and judges
experienced in international law and problems relating to leases.
When the market prices for the minerals to be produced by the Al Masane
project rise to acceptable levels, plans to implement the project will be
resumed. At that time, the Company will attempt to locate a joint venture
partner, form a joint venture and, together with the joint venture partner,
attempt to obtain acceptable financing to commercially develop the project.
There can be no assurances that the Company would be able to locate a joint
venture partner, form a joint venture or obtain financing from SIDF or any other
sources. In the meantime, the Company intends to maintain the Al Masane mining
lease through the payment of the annual advance surface rental, the
implementation of a drilling program to attempt to increase proven and probable
reserves and to attempt to improve the metallurgical recovery rates beyond those
stated in the feasibility study, which may improve the commercial viability of
the project.
The Minister of Petroleum and Mineral Resources announced on April 2,
2002 that a new revised Saudi Arabian Mining Code would be issued, which would
expedite the issuance of licenses and has new incentives to encourage investment
by the private sector, both Saudi and foreign, in the development of mineral
resources in Saudi Arabia. To date, the mining code has not been revised.
12
Other Exploration Areas in Saudi Arabia
During the course of its exploration and development work in the Al
Masane area, the Company has carried on exploration work in other areas in Saudi
Arabia. In 1971, the Saudi Arabian government awarded the Company exclusive
mineral exploration licenses to explore and develop the Wadi Qatan area in
southwestern Saudi Arabia. The Company was subsequently awarded an additional
license in 1977 for an area north of Wadi Qatan at Jebel Harr. These licenses
have expired.
In 1999, the Company applied for an exploration license covering an
area of approximately 2,850 square kilometers, which surrounds the Al Masane
mining lease area and includes the Wadi Qatan and Jebel Harr areas. This area is
referred to as the Greater Al Masane area. The Company has been authorized in
writing by the Saudi Arabian government to carry out exploration work in the
area. Previous exploration work has been carried on and paid for by the Company.
The application for the new exploration licenses is still pending and is
expected to be acted upon after the new Saudi Arabian Mining Code is issued.
Reference is made to the map on page 15 of this Report for information
concerning the location of the foregoing areas.
Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in
southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are
approximately 30 kilometers east of the Al Masane area. These areas consist of
40 square kilometers, plus a northern extension of an additional 13 square
kilometers. The Company's geological, geophysical and limited core drilling
disclosed the existence of massive sulfides containing an average of 1.2%
nickel. Reserves for these areas have not yet been classified and additional
exploration work is required. When the Company obtains an exploration license
for the Wadi Qatan and Jebel Harr areas, the Company intends to continue its
exploratory drilling program in order to prove whether enough ore reserves exist
to justify a viable mining operation, however there is no assurance that a
viable mining operation could be established.
Greater Al Masane. On June 22, 1999, the Company submitted a formal
application for a five-year exclusive mineral exploration license for the
Greater Al Masane area of approximately 2,850 square kilometers, which surrounds
the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr
areas. The Company previously worked in the Greater Al Masane area after
obtaining written authorization from the Saudi Ministry of Petroleum and Mineral
Resources and has expended over $3 million on exploration work. Geophysical,
geochemical and geological work and diamond core drilling on the Greater Al
Masane area has revealed mineralization similar to that discovered at Al Masane.
A detailed exploration program and expenditures budget accompanied the
application. The Company indicated on its application that it would welcome the
participation of Ma'aden in this license. Ma'aden, which has expressed an
interest in the Greater Al Masane area, also was informed by the Company that
its participation as a joint venture partner in the license would be welcomed.
As previously stated, the Company does not possess current formal
exploration licenses for any of the above areas. The absence of such licenses
creates uncertainty regarding the Company's rights and obligations, if any, in
these areas. The Company believes it has satisfied
13
the Saudi Arabian government's requirements in these areas and that the
government should honor the Company's claims. If the Saudi Arabian government
does not issue the Greater Al Masane exploration license, the Company believes
that it will be entitled to a refund of the approximately $3 million it has
expended on exploration work in the area, since the Company was authorized by
the Saudi Arabian government to carry out exploration work in this area while
waiting for the exploration license to be issued.
UNITED STATES MINERAL INTERESTS
The Company's mineral interests in the United States are its ownership
interests in Pioche. Pioche has been inactive for many years.
Nevada Mining Properties. Pioche's properties include 48 patented and 5
unpatented claims totaling approximately 1,500 acres. All the claims are located
in the Pioche Mining District, Lincoln County, Nevada. There are prospects and
mines on these claims that previously produced silver, gold, lead, zinc and
copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and
replacement deposits in carbonate rocks (limestone and dolomites). There is a
300-ton-a-day processing mill on property owned by Pioche. The mill is not
currently in use and a significant expenditure would be required in order to put
the mill into continuous operation, if commercial mining is to be conducted on
the property.
OFFICES
The Company has a year-to-year lease on space in an office building in
Jeddah, Saudi Arabia, used for office occupancy. The Company also leases a house
in Jeddah that is used as a technical office and for staff housing. The Company
continues to lease office space in Dallas, Texas on a month-to-month basis. It
also owns a base camp and accompanying facilities and equipment at the Al Masane
project site.
14
[MAP]
15
ITEM 3. LEGAL PROCEEDINGS.
South Hampton, together with several other companies, is a defendant in
six pending lawsuits filed by former employees of South Hampton and other
refineries. In each of these suits the plaintiff claims illnesses and diseases
resulting from alleged exposure to chemicals, including benzene, butadiene
and/or isoprene, during their employment. The plaintiffs claim the defendant
companies engaged in the business of manufacturing, selling and/or distributing
these chemicals in a manner which subjected each and all of them to liability
for unspecified actual and punitive damages. Two additional lawsuits were filed
in March and May 2003 with similar claims. South Hampton intends to vigorously
defend itself against these lawsuits and believes it has adequate insurance
coverage to protect it financially from any damage awards that might be
incurred. South Hampton settled three similar lawsuits in 2002 by agreeing to
pay $22,500 to settle one of these lawsuits and agreeing to pay a total of
$60,000 and $100,000 in quarterly payments by October 2002 and June 2003,
respectively, to settle the other two lawsuits.
South Hampton also is a defendant in a lawsuit filed in September 2001,
which alleges that the plaintiff became ill from exposure to asbestos while
employed by South Hampton from 1961 through 1975. The plaintiff is seeking
unspecified amounts and the matter is set for trial in January 2004. South
Hampton is vigorously defending itself against the claim. If this matter is
resolved in an adverse manner, it could have a material adverse effect on South
Hampton's operating results and cash flows in a future reporting period.
In August 1997, the Executive Director of the TCEQ, formerly the TNRCC,
filed a preliminary report and petition with the TCEQ alleging that South
Hampton violated various TCEQ rules, TCEQ permits issued to South Hampton, a
TCEQ order issued to South Hampton, the Texas Water Code, the Texas Clean Air
Act and the Texas Solid Waste Disposal Act. The violations generally relate to
the management of volatile organic compounds in a manner that allegedly violates
the TECQ's air quality rules and the storage, processing and disposal of
hazardous waste in a manner that allegedly violates the TCEQ's industrial and
hazardous waste rules. The TCEQ's Executive Director recommended that the TCEQ
enter an order assessing administrative penalties against South Hampton in the
amount of $709,408 and order South Hampton to undertake such actions as are
necessary to bring its operations at its refinery and its bulk terminal into
compliance with Texas Water Code, the Texas Health and Safety Code, TCEQ rules,
permits and orders. Appropriate modifications were made by South Hampton where
it appeared there were legitimate concerns. A preliminary hearing was held in
November 1997, but no further action was taken at that time.
On February 2, 2000, the TCEQ amended its pending administrative
enforcement action against South Hampton to add allegations dating through May
21, 1998 of 35 regulatory violations relating to air quality control and
industrial solid waste requirements. The TCEQ proposed that administrative
penalties be increased to approximately $765,000 and that certain corrective
action be taken.
On December 13, 2001, the TCEQ notified South Hampton that it found
several alleged violations of TCEQ rules during a record review in October 2001
and proposed a settlement for $59,375. South Hampton settled this particular
claim in April 2002 for approximately $5,900.
16
In April 2003 South Hampton received a revised Notice of Violation from
the TCEQ. Various claims of alleged violation were dropped, modified and added
in the revised report and the total dollar amount of the proposed administrative
penalty was reduced to approximately $690,000. On May 25, 2003, a settlement
hearing with the TCEQ was held and additional information was submitted on June
2, 2003. South Hampton believes that the revised notice contains incorrect
information and erroneously delineates as ongoing problems matters that were
corrected immediately upon discovery several years ago. South Hampton intends to
continue to vigorously defend itself in this matter. Negotiations between South
Hampton and the TCEQ are expected to continue in order to reach a final
settlement.
By letter dated March 11, 2003, the Company was advised that the
Division of Enforcement of the Securities and Exchange Commission ("SEC") was
conducting an informal, non-public inquiry concerning disclosure matters
relating to the Al Masane project and the Ministry's threatened termination of
the Al Masane mining lease. The Company fully cooperated with the SEC in the
conduct of the investigation, which became a formal investigation.
On October 16, 2003, without admitting or denying any findings of fact
or conclusions of law, the Company agreed to a cease-and-desist order with the
SEC settling alleged violations of the federal securities laws asserted by the
SEC relating to developments not previously disclosed concerning the Company's
mining lease for the Al Masane area of Saudi Arabia. In connection with the
settlement, the Company agreed to (i) cease and desist from violating certain
provisions of the Securities Exchange Act of 1934 and (ii) comply with certain
undertakings designed to improved its reporting and record keeping practices and
enhance its internal accounting controls.
On the same date, without admitting or denying any findings of fact or
conclusions of law, the Company's President and Chief Executive Officer, Hatem
El-Khalidi, agreed to a cease-and-desist order with the SEC settling alleged
violations of the federal securities laws relating to the same matter and
agreeing to pay a $25,000 penalty. In connection with the settlement, Mr.
El-Khalidi agreed to cease and desist from violating certain provisions of the
Securities Exchange Act of 1934.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 2002.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock traded on the OTC Bulletin Board and the
Pink Sheets (from May 22, 2002 through September 30, 2002) under the symbol:
ARSD. The following table sets forth the range of high and low bid prices for
each quarter as reported by the OTC Bulletin Board and the Pink Sheets. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
OTC Bulletin Board
----------------------
High Low
---- ---
Fiscal Year Ended December 31, 2001
First Quarter ended March 31, 2001 $0.44 $0.23
Second Quarter ended June 30, 2001 $0.35 $0.23
Third Quarter ended September 30, 2001 $0.31 $0.22
Fourth Quarter ended December 31, 2001 $0.23 $0.11
Fiscal Year Ended December 31, 2002
First Quarter ended March 31, 2002 $0.21 $0.19
Second Quarter through May 21, 2002 $0.15 $0.09
Pink Sheets
----------------------
High Low
---- ---
Second Quarter from May 22, 2002 to June 30, 2002 $0.15 $0.11
Third Quarter ended September 30, 2002 $0.12 $0.11
OTC Bulletin Board
----------------------
High Low
---- ---
Fourth Quarter ended December 31, 2002 $0.08 $0.07
At November 25, 2003, there were 753 record holders of the Company's
common stock. The Company has not paid any dividends since its inception and, at
this time, does not have any plans to pay any dividends in the foreseeable
future. The provisions of the Refining Company agreements with its lender
restrict the declaration and payment of dividends and other distributions to an
amount not exceeding $50,000 per month, provided there is no event of default
under the relevant loan agreement. See Note 8 to the Company's Consolidated
Financial Statements.
See Note 10 to the Company's Consolidated Financial Statements for
information about stock options outstanding at December 31, 2002.
18
ITEM 6. SELECTED FINANCIAL DATA.
The following is a five-year summary of selected financial data of the
Company (in thousands, except per share amounts):
2002 2001* 2000 1999 1998
------- ------- ------- ------- -------
Revenues $36,753 $32,713 $42,612 $27,791 $25,089
Net Income (Loss) $ 692 $(2,601) $(4,288) $ 2,740 $ 3,442
Net Income (Loss) Per Share-Diluted $ .03 $ (.11) $ (.19) $ .12 $ .16
Total Assets (at December 31) $55,621 $55,748 $57,599 $52,848 $46,683
Notes Payable (at December 31) $11,744 $11,744 $11,924 $11,874 $11,874
Current Portion of Long-Term Debt
(at December 31) $ 7,127 $ 7,599 $ 8,061 $ 677 $ --
Total Long-Term Obligations (at
December 31) $ -- $ -- $ -- $ 4,314 $ 1,953
*As restated, see Note 2 of the Company's Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Statements in Items 7 and 7A, as well as elsewhere in, or incorporated
by reference in, this Annual Report on Form 10-K regarding the Company's
financial position, business strategy and plans and objectives of the Company's
management for future operations and other statements that are not historical
facts, are "forward-looking statements" as that term is defined under applicable
Federal securities laws. In some cases, "forward-looking statements" can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Annual Report on Form 10-K, all of which are
difficult to predict and many of which are beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in two business segments, specialty petrochemicals
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.
19
Specialty Petrochemicals Segment. Historically, this segment has
contributed substantially all of the Company's internally generated cash flows.
However, significant increases in the prices of feedstock and natural gas
resulted in a loss from operations in 2000 of $2.8 million which, in turn,
resulted in violations of certain loan agreement covenants and a lack of
liquidity. Beginning in February 2001, the decline of feedstock and natural gas
prices returned the Refining Company to a positive cash flow, which it attained
for the remainder of 2001 and throughout 2002. Demand for specialty solvents,
while not enough to justify operating the plant at capacity, was strong enough
to cover fixed and variable costs. The toll processing segment of the business
remained strong throughout 2001 and 2002 and contributed to the Refining
Company's steady performance. When the economy returns to a growth position,
profitability is expected to return to the levels seen in previous growth years.
In the latter part of 2001 and periodically in 2002, customer demand required
that product be imported from its Mexico refinery in order to meet sales
commitments.
South Hampton entered into a $3.25 million credit agreement in
September 1999 with Southwest Bank of Texas, N.A., located in Houston, Texas
(the "Bank"), which terminated on June 15, 2003. On July 29, 2003 a Purchase and
Sale Agreement was negotiated. The terms and conditions of these agreements are
discussed in Note 8 to the Company's Consolidated Financial Statements. At
December 31, 2002, South Hampton was not in compliance with covenants contained
in the loan agreement relating to (i) the delivery of audited financial
statements and (ii) exceeding the limits on dividends payable to its parent
company. In the event this segment were to undertake a major capital
expenditure, such as construction of a new facility, financing for this activity
would most likely come from some combination of internal resources, a debt
placement with a financial institution or a joint venture partner. Any major
capital expenditure requires the Bank's advance review and approval.
In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into a $3.5 million credit agreement in December
1999 with Heller Financial Leasing, Inc. The credit agreement is evidenced by a
47 month promissory note bearing interest at the rate of 10.55% per annum. The
terms and conditions of this credit agreement are discussed in Note 8 to the
Company's Consolidated Financial Statements. The credit agreement is secured by
a pledge of all of the capital stock of South Hampton and Gulf State, a first
lien on all of South Hampton's and Gulf State's present and future machinery and
equipment and a ground lease relating to South Hampton's real property, and is
guaranteed by the Company, the Refining Company and TOCCO. At December 31, 2002,
South Hampton and Gulf State were not in compliance with covenants contained in
the loan agreement relating to (i) the delivery of audited financial statements
and (ii) exceeding the limits on dividends payable to its parent company.
At December 31, 2002 Coin had two loans payable to Mexican banks in the
outstanding principal amounts of $1,171,007 and $2,044,093, respectively. The
first loan is payable in monthly payments through October 2004 and bears
interest at the rate of 5% per annum. The second loan is payable in quarterly
payments through March 2007 and bears interest at the LIBOR rate plus seven
points (LIBOR was 1.382% at December 31, 2002). Both loans are collateralized by
all of the assets of Coin, including the plant located in Coatzacoalcos, near
Veracruz, Mexico. At December 31, 2002, Coin was in default of the loan
covenants under both loans as a result of not having made its monthly and
quarterly payments.
20
The provisions of the Refining Company agreements with the Bank
restrict the declaration and payment of dividends and other distributions to an
amount not exceeding $50,000 per month, provided there is no event of default
under the relevant loan agreement. See Note 8 to the Company's Consolidated
Financial Statements.
Mining Segment. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As discussed in
Item 2. Properties, implementation of the project has been delayed until the
open market prices for the minerals to be produced by the mine improve. At that
time, the Company will attempt to locate a joint venture partner, form a joint
venture and, together with the joint venture partner, attempt to obtain
acceptable financing to commercially develop the project. There is no assurance
that a joint venture partner can be located, a joint venture formed or, if it is
formed, that the joint venture would be able to obtain acceptable financing for
the project.
Management also is addressing two other significant financing issues
within this segment. These issues are the $11.0 million note payable due the
Saudi Arabian government and accrued salaries and termination benefits of
approximately $943,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed accrued salary and
termination benefits of approximately $1,113,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. The Company remains active in
Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to
date, management believes that as long as the Company diligently attempts to
explore and develop the Al Masane project no repayment demand will be made. The
Company has communicated to the Saudi government that its delay in repaying the
note is a direct result of the government's lengthy delay in granting the Al
Masane lease and requested formal negotiations to restructure this obligation.
Based on its interpretation of the Al Masane mining lease and other documents,
management believes the government is likely to agree to link repayment of this
note to the Company's share of the operating cash flows generated by the
commercial development of the Al Masane project and to a long-term installment
repayment schedule. In the event the Saudi government were to demand immediate
repayment of this obligation, which management considers unlikely, the Company
would be unable to pay the entire amount due. If a satisfactory rescheduling
agreement could be reached, and there are no assurances that one could be, the
Company believes it could obtain the necessary resources to meet the rescheduled
installment payments by making certain changes at the Refining Company.
21
With respect to the accrued salaries and termination benefits due
employees working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.
At this time, the Company has no definitive plans for the development
of its domestic mining assets. It periodically receives proposals from outside
parties who are interested in possibly developing or using certain assets.
Management will continue to review these proposals as they are received, but at
this time does not anticipate making any significant domestic mining capital
expenditures or receiving any significant proceeds from the sale or use of these
assets.
If the Company seeks additional outside financing, there is no
assurance that sufficient funds can be obtained. It is also possible that the
terms of any additional financing that the Company would be able to obtain would
be unfavorable to the Company and its existing shareholders.
The report of the Company's independent auditors states that the
Company had incurred cumulative losses through December 31, 2002 of $13,052,341
and had an excess of current liabilities over current assets of $23,127,040 at
December 31, 2002. As discussed in Notes 3 and 8 to the Company's Consolidated
Financial Statements, the Company was not in compliance with certain covenants
in its loan agreements. All of these matters raise substantial doubt about the
Company's ability to continue as a going concern.
RESULTS OF OPERATIONS
Comparison of the Years 2002 to 2001
Specialty Petrochemicals Segment. Total refined product sales increased
approximately 13% or $3.7 million in 2002, with $1.2 million of the increase due
to the revenues of Coin. Cost of sales (excluding depreciation) increased
approximately $1.7 million or 6% in 2002, including $0.9 million attributable to
Coin. During 2002, the Refining Company operating results improved significantly
over 2001 results. Cash flow for the U.S. refining operation increased
approximately 85% to $2.8 million in 2002 from $1.5 million in 2001. The
increase in cash flow was attributable to several factors. Gross sales of the
products rose by 8% to $29.9 million from $27.7 million in 2001. The average
selling prices of the products decreased by $ .11 per gallon but volume
increased by almost 15% or 3.5 million gallons. The increase in volume was
spread over the entire year with no individual quarter showing an unusually high
number. Although the average final selling prices were lower for 2002 than for
2001, feedstock prices were also lower which contributed to a net increase in
gross profit on refined product sales (excluding depreciation) of $1.9 million.
Feedstock prices were moderate for much of the year due to a successful hedging
program which kept feedstock costs to the refinery at favorable levels.
Also contributing to the increased performance of the refining
operation were the increased toll processing fees for the year 2002. Fees rose
from $3.7 million in 2001 to $4.1 million in 2002, an 11% increase. Toll
processing customer volume demand also increased in 2002. While the toll
processing agreements provide for minimum fees, which protects the
22
Refining Company during business slowdowns, it is more advantageous to operate
the equipment at higher volumes in order to earn higher fees.
General and administrative expenses for this segment increased
approximately 10% in 2002 from 2001 due primarily to increased costs of
insurance and legal fees. Interest expense decreased in 2002 to $1.3 million
from $1.5 million in 2001. The net result of the increase in refined product
sales, toll processing fees and the decrease in feedstock costs, due both to
market conditions and to hedging, was that operating income for the refining
operation rose by $1.9 million in 2002.
Mining Segment and General Corporate Expenses. None of the Company's
other operations generate significant operating or other revenues. The minority
interest amount represents the Pioche and Coin minority stockholders' share of
the losses from the Pioche and Coin operations. Pioche losses are primarily
attributable to the costs of maintaining the Nevada mining properties.
The Company had net operating loss carryforwards of approximately $18
million at December 31, 2002. These loss carryforwards expire during the years
2003 through 2020.
Comparison of the Years 2001 to 2000
Specialty Petrochemicals Segment. Total refined product sales decreased
approximately 28% or $11.3 million in 2001, with $4.7 million of the decrease
due to the reduced revenues of Coin. Cost of sales (excluding depreciation)
decreased approximately $12.4 million or 30% in 2001, including $4.5 million
attributable to Coin. The reduction in sales was primarily due to lower sales
volumes in the weaker economy of 2001. In 2000, substantial volumes were
imported from the Mexico refinery to meet volume demands from U.S. customers. As
the economy grew weaker in 2001, the economic incentive to import product went
away and the Refining Company relied upon production from the U.S. plant to meet
U.S. sales. Average sale prices rose 4% across product lines. Even though the
volume was down, the Refining Company returned to positive cash flow in February
2001 due to the drop in feedstock prices and the return of adequate margins on
sales. Average feedstock prices dropped approximately 14% in 2001 from the prior
year.
The Refining Company arranged two financial swap agreements in July and
October 2001 to protect its feedstock prices from sudden increases. While the
swaps were looked upon as insurance against possible sudden and extreme price
increases in the market due to terrorist activity or other unforeseen events,
the actual market prices worked against the Refining Company's position in the
swaps by falling below the positions taken. The feedstock costs for the last six
months of 2001 were approximately $340,000 higher than they would have been had
the swaps not been in place.
The toll processing business continued to be important to the segment's
business in meeting its profitability and cash flow goals. The processing fees
increased from $2.3 million in 2000 to over $3.7 million in 2001. This 59%
increase was due in part to increased throughput and also to a full year's fees
from a unit that was built and became operational in late 2000.
23
General and administrative expenses for this segment increased slightly
in 2001 from 2000. Interest expense rose in 2001 to $1,460,000 from $984,000 in
2000. This 48% increase was due primarily to the addition of debt for the
purchase of Coin in late January 2000, for Coin's existing debt, which in 2000
resulted in eleven months of expense instead of a full year and for penalty
interest on Coin's delinquent debt. The increase in miscellaneous income in 2001
of $22,200 was due primarily to reduced commission expenses.
Mining Segment and General Corporate Expenses. None of the Company's
other operations generate significant operating or other revenues. The minority
interest amount represents the Pioche and Coin minority stockholders' share of
the losses from the Pioche and Coin operations. Pioche losses are primarily
attributable to the costs of maintaining the Nevada mining properties.
The Company had net operating loss carryforwards of approximately $20
million at December 31, 2001, of which approximately $414,000 is limited to the
Refining Company's future taxable income. These loss carryforwards expire during
the years 2002 through 2020.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" (SFAS No. 143), that established uniform methodology for
accounting for estimated costs associated with legal obligations related to
retirement of assets. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the effect of this
statement.
In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4,
(Reporting Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for
Intangible Assets of Motor Carriers), No. 64, (Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements), Amendment of FASB Statement No. 13
(Accounting for Leases) and Technical Corrections. This statement eliminates the
current requirement that gains and losses on debt extinguishment must be
classified as extraordinary items in the income statement. Instead, such gains
and losses will be classified as extraordinary items only if they are deemed to
be unusual and infrequent, in accordance with the current GAAP criteria for
extraordinary classification. In addition, SFAS 145 eliminates an inconsistency
in lease accounting by requiring that modification of capital leases that result
in reclassification as operating leases be accounted for consistent with
sale-leaseback accounting rules. The statement also contains other
nonsubstantive corrections to authoritative accounting literature. The changes
related to debt extinguishment will be effective for fiscal years beginning
after May 15, 2002, and the changes related to lease accounting will be
effective for transactions occurring after May 15, 2002. The Company does not
believe the adoption of SFAS No. 145 will have a material impact on the
Company's financial position, results of operations or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" (FAS 148), which amends Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirement of FAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of FAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
adoption of FAS 148 did not have a material impact on the Company's consolidated
balance sheet or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. In particular, SFAS No. 149 (i)
24
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in SFAS No. 133, (ii)
clarifies when a derivative contains a financing component, (iii) amends the
definition of an underlying derivative to conform it to the language used in
FASB Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (iv)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003. The
Company does not believe the adoption of SFAS No. 149 will have a material
impact on the Company's financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES
Recoverability of Investments
Management periodically reviews and evaluates the recoverability of the
Company's investments, which primarily include its mineral exploration and
development projects. The significant judgment required in management's
recoverability assessment is the determination of the fair value of the
investment. Accounting standards require that if the sum of the future cash
flows expected to result from a company's asset, undiscounted and without
interest charges, is less than the reported value of the asset, an asset
impairment must be recognized in the financial statements. The amount of
impairment to recognize is calculated by subtracting the fair value of the asset
from the reported value of the asset. The recoverability of the carrying values
of the Company's development properties are assessed by comparing the carrying
values to estimated future net cash flows from each property. The Company's most
significant asset is the Al Masane mining project in Saudi Arabia. In August
2003, for purposes of estimating future cash flows, the price assumptions
contained in the 1996 update to the Al Masane project's feasibility study, which
was prepared by WGM, were updated by an independent consultant. See Item 2.
Properties. These price assumptions are averages over the projected life of the
Al Masane mine and are $1.04 per pound for copper, $.60 per pound for zinc, $375
per ounce for gold and $5.50 per ounce for silver. Copper and zinc comprise in
excess of 80% of the expected value of production. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values based on market comparables. Using these price assumptions, no
asset impairments existed.
The Company assesses the carrying values of its assets on an ongoing
basis. Factors which may affect carrying values include, but are not limited to,
mineral prices, capital cost estimates, the estimated operating costs of any
mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that, particularly in the event of a
prolonged period of depressed mineral prices, the Company will not be required
to take a material write-down of any of its mineral properties.
Environmental Liabilities
The refining operations by South Hampton are subject to the rules and
regulations of the TCEQ, which inspects the operations at various times for
possible violations relating to air, water and industrial solid waste
requirements. As noted in Item 1. Business and Item 3. Legal Proceedings,
evidence of groundwater contamination was discovered in 1993. The recovery
process, initiated in 1998, is proceeding as planned and is expected to continue
for several years.
25
Also, in 1997 the TCEQ notified South Hampton of several alleged violations
relating to air quality rules and the storage, processing and disposal of
hazardous waste. Some claims have been dropped, some have been settled and
others continue to be negotiated. It is the Company's policy to accrue
remediation costs based on estimates of known environmental remediation
exposure. At December 31, 2002, a liability of $200,000 has been accrued to
cover future estimated costs of these environmental issues.
Foreign Currency and Operations
The Company has undeveloped mining interests in Saudi Arabia and a
majority interest in a refining company in Mexico. These interests are subject
to foreign laws and foreign conditions, with the attendant varying risks and
advantages. Foreign exchange controls, foreign legal and political concepts,
foreign government instability, international economics and other factors create
risks not necessarily comparable with those involved in doing business in the
United States. Any changes in these conditions and influences could have a
material adverse effect on the Company's financial condition, operating results
and cash flows.
The functional currency for each of the Company's two foreign
operations is the U.S. dollar. Transaction gains or losses, as a result of
remeasuring from the local currency to the U.S. dollar, are reflected in the
statements of operations as a foreign exchange transaction gain or loss. The
Company does not employ any practices to minimize foreign currency risks. The
exchange rate of the Saudi riyal to the U.S. dollar has not changed in many
years, but there is no guarantee that this will not change. The foreign exchange
transaction gains and losses as reflected in the statements of operations are a
result of changes in the exchange rate of the Mexican peso to the U.S. dollar,
which does fluctuate periodically. These changes have not been material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in the Company's financial instruments
represents the potential loss resulting from adverse changes in interest rates,
foreign currency rates and commodity prices. The Company's exposure to interest
rate changes results from its variable rate debt instruments which are
vulnerable to changes in short term United States prime interest rates. At
December 31, 2002 and 2001, the Company had $5.8 million and $6.8 million,
respectively, in variable rate debt outstanding. A hypothetical 10% change in
interest rates underlying these borrowings would result in annual changes in the
Company's earnings and cash flows of approximately $34,300 and $47,200 at
December 31, 2002 and 2001, respectively.
The Company is also exposed to market risk in the exchange rate of the
Saudi Arabian riyal and the Mexican peso as measured against the United States
dollar. The Company does not view these exposures as significant and has not
acquired or issued any foreign currency derivative financial instruments.
The Refining Company purchases all of its raw materials, consisting of
feedstock and natural gas, on the open market. The cost of these materials is a
function of spot market oil and gas prices. As a result, the Refining Company's
revenues and gross margins could be affected by changes in the price and
availability of feedstock and natural gas. As market conditions dictate, the
Refining Company from time to time will engage in various hedging techniques
26
including swap agreements. The Refining Company does not use such financial
instruments for trading purposes and is not a party to any leveraged
derivatives.
At December 31, 2002, the Refining Company had two financial swap
agreements in effect which expired in January 2003. No swap agreements are
currently in effect. The swap agreements covered approximately 20% to 40% of the
Refining Company's average monthly feedstock needs. Market risk is estimated as
a hypothetical 10% increase in the cost of feedstock over the market price
prevailing on December 31, 2002. Assuming 2003 total refined product sales
volumes at the same rate as 2002, such an increase would result in an increase
in the cost of feedstock of approximately $1.7 million in fiscal 2003, before
considering the effect of the swap agreements outstanding as of December 31,
2002.
At December 31, 2001, the Refining Company had two financial swap
agreements in effect, one of which expired in January 2002 and the other of
which expired in July 2002. The Refining Company entered into another swap
agreement in February 2002 which remained in effect for the remainder of 2002.
The swap agreements covered approximately 50% of the Refining Company's average
monthly feedstock needs. Market risk is estimated as a hypothetical 10% increase
in the cost of feedstock over the market price prevailing on December 31, 2001.
Assuming 2002 total refined product sales volumes at the same rate as 2001, such
an increase would result in an increase in the cost of feedstock of
approximately $1.105 million in fiscal 2002, before considering the effect of
the swap agreements outstanding as of December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company and the financial statement
schedules, including the independent auditor's report thereon, are included
elsewhere in this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The disclosure required by this item has been previously reported by
the Company by a Current Report on Form 8-K dated January 31, 2003, a Current
Report on Form 8-K/A dated January 31, 2003 and a Current Report on Form 8-K
dated June 16, 2003.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following tables sets forth the name and age of each director of
the Company, the date of his election as a director and all other positions and
offices with the Company presently held by him.
NAME; BUSINESS EXPERIENCE; DATE OF
OTHER DIRECTORSHIPS AGE ELECTION
- -------------------------------------------------------------- --- --------
John A. Crichton.............................................. 87 May 1967
Chairman of the Board of the Company since 1967;
Chief Executive Officer of the Company from 1967 to
February 1994
Hatem El-Khalidi.............................................. 79 April 1968
President of the Company since 1975; prior to 1975
Vice President of the Company; Chief Executive
Officer of the Company since February 1994
Mohammed O. Al-Omair.......................................... 60 May 1993
Executive Vice President, Saudi Fal Group of Companies,
Riyadh, Saudi Arabia since 1985 (investments); President,
Advanced Systems Ltd., Riyadh, Saudi Arabia since 1985
(mainframe computers)
Ghazi Sultan.................................................. 66 Sept. 1993
Chairman, Sultan Group of Companies, Jeddah, Saudi Arabia
since 1987 (investments and marble mining); Director
General, Safwah Company, Jeddah, Saudi Arabia since 1987
(investments); Deputy Minister of Petroleum and Mineral
Resources of the Kingdom of Saudi Arabia 1966-1987
Each director of the Company is elected annually to serve until his
successor is elected and qualified. Each person listed in the foregoing table
has served as a director since the date of election indicated. In connection
with an increase in the number of positions on the Board of Directors in 1993,
at the request of Sheik Fahad Al-Athel, the Company appointed Mohammed O.
Al-Omair, who had served as a director of the Company from November 1989 to
March 1991, to fill one of the newly-created vacancies. See Item 3. Legal
Proceedings for a discussion of the cease and desist order entered into with the
SEC enjoining Mr. El-Khalidi from future violations of the federal securities
laws.
28
The following table sets forth the name of each executive officer of
the Company, his age and all the positions and offices with the Company held by
him:
Name Positions Age
- ---- --------- ---
John A. Crichton Chairman of the Board and Director 87
Hatem El-Khalidi President, Chief Executive Officer and Director 79
Drew Wilson, Jr. Secretary and Treasurer 70
Nicholas N. Carter President - TOCCO 56
Each executive officer of the Company serves for a term extending until
his successor is elected and qualified. Information concerning Messrs. Crichton
and El-Khalidi is set forth above. Mr. Wilson is a certified public accountant.
Mr. Wilson has served as Secretary and Treasurer of the Company since November
1986, and has worked as an independent public accountant since 1975. Mr. Carter
has been President of TOCCO and its subsidiaries since 1987, prior to which time
he served from October 1983 as Treasurer and Controller of those companies. Mr.
Carter has been employed by TOCCO and its subsidiaries since 1977.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. To the best of the Company's
knowledge, during the fiscal year ended December 31, 2002, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following information summarizes annual compensation for services
in all capacities to the Company for the fiscal years ended December 31, 2002,
2001 and 2000 of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES LONG-TERM
OTHER ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PLAN COMPENSATION
PRINCIPAL POSITION(1) YEAR ($) (2) ($) ($) ($) SARS (#) PAYOUTS($) ($) (3)
- --------------------- ---- ------ --- --- --- -------- ---------- -------
Hatem El-Khalidi, 2002 $ 72,000 -- -- -- -- -- $ 8,000
President and Chief 2001 $ 72,000 -- -- -- -- -- $ 8,000
Executive Officer 2000 $ 72,000 -- -- -- -- -- $ 8,000
Nicholas N. Carter 2002 $124,500 $21,700 -- -- -- -- --
President, TOCCO 2001 $ 81,575 $30,200 -- -- -- -- --
2000 $ 83,769 $40,500 -- -- -- -- --
29
- -------------
(1) Except for Mr. Carter, no executive officer of the Company had total
annual salary and bonus in excess of $100,000 during the fiscal year
ended December 31, 2002.
(2) Includes $55,898, $61,947 and $44,904 in compensation for the fiscal
years ended December 31, 2002, December 31, 2001 and December 31, 2000,
respectively, that was deferred at the election of Mr. El-Khalidi. All
present deferred compensation owing to Mr. El-Khalidi aggregating
$844,516 is considered, and future deferred compensation owing to Mr.
El-Khalidi, if any, will be considered payable to Mr. El-Khalidi on
demand.
(3) Includes $8,000 in termination benefits for each of the fiscal years
ended December 31, 2002, December 31, 2001 and December 31, 2000,
respectively, that was accrued for Mr. El-Khalidi in accordance with
Saudi Arabian employment laws. The total amount of accrued termination
benefits due to Mr. El-Khalidi as of December 31, 2002 was $268,000.
In accordance with Saudi Arabian employment laws, the Company is
required to accrue termination benefits for Mr. El-Khalidi. The amount accrued
for the benefit of Mr. El-Khalidi is based on the number of years of service and
compensation. Accrued benefits are payable upon termination of employment.
The Company has engaged in other transactions and entered into other
arrangements, directly or indirectly, with its officers and directors, the
primary purpose of certain of which was to provide additional compensation to
such persons. See "Certain Relationships and Related Transactions."
The Company is authorized to pay its non-employee directors a fee of
$200 for each Board meeting and $100 for each committee meeting which they
attend, in addition to reimbursing them for expenses incurred in connection with
their attendance.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR VALUES
The following table shows information concerning the exercise of stock
options during the fiscal year ended December 31, 2002 by the executive officers
named in the Summary Compensation Table and the estimated value of unexercised
options held by such individuals at year-end:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FY-END(#) FY-END ($)(1)
NAME EXERCISE (#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ ----------- ------------------------- -------------------------
Hatem El-Khalidi........... 0 0 400,000/0 $0/0
Nicholas N. Carter......... 0 0 0/0 $0/0
- -----------------
(1) Based on the closing price of $.04 of the Company's Common Stock on the
OTC Bulletin Board on December 31, 2002.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of November 25, 2003, information as
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to beneficially own more than 5% of the Company's outstanding
Common Stock, by each of the Company's executive officers named in the Summary
Compensation Table, by each of the Company's directors and by all directors and
executive officers of the Company as a group.
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED(1) OF CLASS
- ---------------------------------------------------------------- ------------ --------
Fahad Mohammed Saleh Al-Athel................................... 3,586,468 15.8%
P. O. Box 61659
Riyadh, Saudi Arabia
Mohammad Salem ben Mahfouz...................................... 1,500,000 6.6%
c/o National Commercial Bank
Jeddah, Saudi Arabia
Harb S. Al Zuhair............................................... 1,300,000 5.7%
P.O. Box 3750
Riyadh, Saudi Arabia
Prince Talal Bin Abdul Aziz..................................... 1,272,680 5.6%
P. O. Box 930
Riyadh, Saudi Arabia
Hatem El-Khalidi................................................ 474,000(2) 2.0%
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
John A. Crichton................................................ 650 *
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
Mohammed O. Al-Omair............................................ 25,000 *
P.O. Box 4900
Riyadh, Saudi Arabia
Ghazi Sultan.................................................... 25,000 *
P.O. Box 5360
Jeddah, Saudi Arabia
Nicholas N. Carter.............................................. 34,500 *
P.O. Box 1636
Silsbee, Texas 77656
All directors and executive officers as a group (6 persons)..... 584,150(3) 2.5%
31
- ---------------
(1) Unless otherwise indicated, to the knowledge of the Company, all shares
are owned directly and the owner has sole voting and investment power.
(2) Includes 400,000 shares which Mr. El-Khalidi has the right to acquire
through the exercise of presently exercisable stock options. Excludes
385,000 shares owned by Ingrid El-Khalidi, Mr. El-Khalidi's wife, and
443,000 shares owned by relatives of Hatem El-Khalidi.
(3) Includes 425,000 shares which certain directors and executive officers
have the right to acquire through the exercise of stock options or
other rights exercisable presently or within 60 days. Excludes 385,000
shares owned by Ingrid El-Khalidi, the wife of Hatem El-Khalidi, the
President, Chief Executive Officer and a director of the Company, and
443,000 shares owned by relatives of Hatem El-Khalidi.
Based on its stock ownership records, the Company believes that, as of
November 25, 2003, Saudi Arabian stockholders currently hold approximately 61%
of the Company's outstanding Common Stock, without giving effect to the exercise
of presently exercisable stock options held by certain of such stockholders.
Accordingly, if all or any substantial part of the Saudi Arabian stockholders
were considered as a group, they could be deemed to "control" the Company as
that term is defined in regulations promulgated by the SEC. Although they have
orally waived their rights, certain of the Company's Saudi Arabian stockholders
are parties to written agreements providing them with the right to purchase
their proportionate share of additional shares sold by the Company.
The management of the Company has welcomed the substantial stock
investment by its Saudi stockholders. Saudi investors have contributed vitally
needed capital to the Company since 1974. Whether the Company's Saudi
stockholders will be a continuing source of future capital is not known at this
time. In confronting the need for additional funds, management of the Company
will follow the policy of considering all potential sources consistent with
prudent business practice and the best interests of all its stockholders. In the
course of considering methods of future financing and other matters relating to
the operations of the Company, management of the Company anticipates that in the
ordinary course of business it will receive recommendations and suggestions from
its principal stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company directly owns approximately 51% of the outstanding capital
stock of Pioche. Mr. John A. Crichton is currently a director and President of
Pioche, and Mr. Hatem El-Khalidi is currently a director and Executive Vice
President of Pioche. The Company is providing the funds necessary to cover the
Pioche operations. During 2002 and 2001, the Company made payments of
approximately $17,700 and $10,300, respectively, for such purposes. As partial
consideration for the forgiveness of indebtedness, in July 1990 Pioche granted
the Company an option to purchase an additional 720,000 shares of its Common
Stock at an exercise price of $.20 per share, which option expired on June 1,
2002. As of December 31, 2002, Pioche owed the Company $204,519 as a result of
advances made by the Company. The indebtedness bears no interest.
Pursuant to a sharing arrangement, the Company and its subsidiaries
share personnel, office space and other overhead expenses in Dallas, Texas with
Mr. John A. Crichton, Chairman
32
of the Board of the Company. Monthly rental on the office space is approximately
$1,600. The Company pays approximately $1,100 per month for rent and
approximately $980 per month for personnel and other overhead expenses pursuant
to such arrangement.
During 2002, South Hampton incurred product transportation costs of
approximately $397,000 with Silsbee Trading and Transportation Corp. ("STTC"), a
private trucking and transportation carrier in which Nicholas N. Carter, the
President of TOCCO, and Richard Crain, Vice President of TOCCO, each have a 50%
equity interest. Pursuant to a lease agreement, South Hampton leases
transportation equipment from STTC at a rate of approximately $32,300 per month,
subject to adjustment. Under the lease arrangement, STTC provides the
transportation equipment and all normal maintenance on such equipment and South
Hampton provides the drivers, fuel, management of transportation operations and
insurance on the transportation equipment. Approximately 98% of STTC's income
will be derived from such lease arrangement. The Company believes that the terms
of the lease arrangement are no less favorable in any material respect than
those which could be obtained from an unaffiliated third party. The lease
agreement is currently operating on a month-to-month basis while renewal options
are being evaluated.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and Treasurer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the President and Chief Executive Officer
and Treasurer concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information relating to the
Company (including its consolidated nonsubsidiaries) required to be included in
the Company's periodic SEC filings. There have been no significant changes in
the Company's internal controls or in other factors which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. The following financial statements are filed with this Report:
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets dated December 31, 2002 and 2001.
Consolidated Statements of Operations for the three years
ended December 31, 2002.
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2002.
Consolidated Statements of Cash Flows for the three years
ended December 31, 2002.
Notes to Consolidated Financial Statements.
2. The following financial statement schedules are filed with
this Report:
Schedule II -- Valuation and Qualifying Accounts for the three
years ended December 31, 2002.
3. Independent Auditors' Report covering the financial statements
of Productos Quimicos Coin, S.A. de C.V.
4. The following documents are filed or incorporated by reference
as exhibits to this Report. Exhibits marked with an asterisk
(*) are management contracts or a compensatory plan, contract
or arrangement.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3(a) - Certificate of Incorporation of the Company as amended through
the Certificate of Amendment filed with the Delaware Secretary of
State on July 19, 2000 (incorporated by reference to Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 0-6247)).
3(b) - Bylaws of the Company, as amended through March 4, 1998
(incorporated by reference to Exhibit 3(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
34
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(a) - Contract dated July 29, 1971 between the Company, National Mining
Company and Petromin (incorporated by reference to Exhibit 10(a)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 0-6247)).
10(b) - Loan Agreement dated January 24, 1979 between the Company,
National Mining Company and the Government of Saudi Arabia
(incorporated by reference to Exhibit 10(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
10(c) - Mining Lease Agreement effective May 22, 1993 by and between the
Ministry of Petroleum and Mineral Resources and the Company
(incorporated by reference to Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
10(d) - Stock Option Plan of the Company, as amended (incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 (File No. 0-6247)).*
10(e) - 1987 Non-Employee Director Stock Plan (incorporated by reference
to Exhibit 10(e) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 (File No. 0-6247)).*
10(f) - Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).*
10(g) - Agreement dated March 10, 1988 between Chevron Research Company
and South Hampton Refining Company, together with related form of
proposed Contract of Sale by and between Chevron Company and
South Hampton Refining Company (incorporated by reference to
Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (File No. 0-6247)).
10(h) - Addendum to the Agreement Relating to AROMAX(R) Process - Second
Commercial Demonstration dated June 13, 1989 by and between
Chevron Research Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(h) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
35
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(i) - Vehicle Lease Service Agreement dated September 28, 1989 by and
between Silsbee Trading and Transportation Corp. and South
Hampton Refining Company (incorporated by reference to Exhibit
10(i) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-6247)).
10(j) - Letter Agreement dated May 3, 1991 between Sheikh Kamal Adham and
the Company (incorporated by reference to Exhibit 10(j) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 (File No. 0-6247)).
10(k) - Promissory Note dated February 17, 1994 from Hatem El-Khalidi to
the Company (incorporated by reference to Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 (File No. 0-6247)).
10(l) - Letter Agreement dated August 15, 1995 between Hatem El-Khalidi
and the Company (incorporated by reference to Exhibit 10(l) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 0-6247)).
10(m) - Letter Agreement dated August 24, 1995 between Sheikh Kamal Adham
and the Company (incorporated by reference to Exhibit 10(m) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 0-6247)).
10(n) - Letter Agreement dated October 23, 1995 between Sheikh Fahad
Al-Athel and the Company (incorporated by reference to Exhibit
10(n) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-6247)).
10(o) - Letter Agreement dated November 30, 1996 between Sheikh Fahad
Al-Athel and the Company (incorporated by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 0-6247)).
10(p) - Stock Purchase Agreement dated as of January 25, 2000 between
Spechem, S.A. de. C.V. and Texas Oil and Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-6247)).
36
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(q) - Loan and Security Agreement dated as of December 30, 1999 by and
among Heller Financial Leasing, Inc., South Hampton Refining
Company and the Gulf State Pipe Line Company, Inc., together with
related Promissory Note, Guaranty made by the Company, Guaranty
made by American Shield Refining Company, Guaranty made by Texas
Oil and Chemical Co. II, Inc., Pledge Agreement made by Texas Oil
and Chemical Co. II, Inc., Pledge Agreement made by South Hampton
Refining Company, Ground Lease, Sub-Ground Lease and Hazardous
Materials Indemnity Agreement (incorporated by reference to
Exhibit 10(q) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 (File No. 0-6247)).
- (a) Agreement dated as of April 1, 2001 among South Hampton
Refining Company, Gulf State Pipe Line Company and Heller
Financial Leasing, Inc., together with Amended and Restated
Promissory Note (incorporated by reference to Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (File No. 0-6247)).
10(r) - Loan Agreement dated as of September 30, 1999 between South
Hampton Refining Company and Southwest Bank of Texas, N.A.,
together with related Promissory Note, Security Agreement,
Arbitration Agreement and Guaranty Agreement made by Texas Oil
and Chemical Co. II, Inc. (incorporated by reference to Exhibit
10(r) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-6247)).
- (a) First Amendment to Loan Agreement dated June 20, 2000 between
South Hampton Refining Company and Southwest Bank of Texas, N.A.,
together with related Promissory Note, Security Agreement,
Arbitration Agreement and Guaranty Agreement made by Texas Oil
and Chemical Co. II, Inc. (incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 (File No. 0-6247)).
- (b) Second Amendment to Loan Agreement dated as of May 31, 2001
between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No.
0-6247)).
37
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
- (c) Third Amendment to Loan Agreement dated as of July 31, 2001
between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 (File No.
0-6247)).
- (d) Fourth Amendment to Loan Agreement dated as of October 31,
2001 between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(r)(d) to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 (File No.
0-6247)).
- (e) Fifth Amendment to Loan Agreement dated as of December 31,
2001 between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(r)(e) to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 (File No.
0-6247)).
- (f) Sixth Amendment to Loan Agreement dated as of April 30, 2002
between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2002 (File No.
0-6247)).
- (g) Seventh Amendment to Loan Agreement dated as of August 31,
2002 between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note (incorporated
by reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002 (File No.
0-6247)).
- (h) Eighth Amendment to Loan Agreement dated as of December 31,
2002 between South Hampton Refining Company and Southwest Bank of
Texas. N.A., together with related Promissory Note.
- (i) Ninth Amendment to Loan Agreement dated as of February 28,
2003 between South Hampton Refining Company and Southwest Bank of
Texas. N.A., together with related Promissory Note.
38
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
- (j) Tenth Amendment to Loan Agreement dated as of April 30, 2003
between South Hampton Refining Company and Southwest Bank of
Texas. N.A., together with related Promissory Note.
10(s) - Purchase and Sale Agreement/Security Agreement dated July 29,
2003 between Southwest Bank of Texas, N.A. and South Hampton
Refining Company, together with related Restricted Payments
Letter Agreement and Guaranty of Texas Oil & Chemical Co. II,
Inc.
16 - Letter re change in certifying accountant (incorporated by
reference to Exhibit 16 to the Company's Current Report on Form
8-K/A dated January 31, 2003 (File No. 0-6247)).
21 - Subsidiaries (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (File
No. 0-6247)).
31.1 - Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The following reports on Form 8-K were filed during the last quarter of the
period covered by this Report:
- Current Report on Form 8-K dated December 23, 2002.
39
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Arabian American
Development Company, a Delaware corporation, and the undersigned directors and
officers of Arabian American Development Company, hereby constitutes and
appoints John A. Crichton its or his true and lawful attorney-in-fact and agent,
for it or him and in its or his name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to this
Report, and to file each such amendment to the Report, with all exhibits
thereto, and any and all other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorney-in-fact
and agent full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as it or he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent may lawfully do or cause
to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARABIAN AMERICAN DEVELOPMENT
COMPANY
By: /s/ HATEM EL-KHALIDI
-------------------------------------
Hatem El-Khalidi
President and Chief Executive Officer
Dated: December 15, 2003
40
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company in the capacities indicated on December 15, 2003.
SIGNATURE TITLE
--------- -----
/s/ HATEM EL-KHALIDI
- ---------------------------- President, Chief Executive Officer and Director
Hatem El Khalidi (principal executive officer)
/s/ DREW WILSON, JR.
- ---------------------------- Secretary and Treasurer (principal financial and
Drew Wilson, Jr. accounting officer)
/s/ JOHN A. CRICHTON
- ---------------------------- Chairman of the Board and Director
John A. Crichton
/s/ MOHAMMED O. AL-OMAIR
- ---------------------------- Director
Mohammed O. Al-Omair
/s/ GHAZI SULTAN
- ---------------------------- Director
Ghazi Sultan
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Arabian American Development Company and Subsidiaries
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Arabian American
Development Company and Subsidiaries (the "Company") as of December 31, 2002 and
2001 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Productos Quimicos Coin S.A. de. C.V. (Coin), a majority-owned
subsidiary, as of December 31, 2002 and 2001, or for the years then ended, the
statements of which reflect total assets and revenues constituting ten percent
and five percent, respectively, of the consolidated totals. These statements
were audited by other auditors whose report thereon has been furnished to us and
our opinion, insofar as it relates to amounts included for Coin, is based solely
on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Arabian American
Development Company and Subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 6, the Company was notified by the Ministry of Petroleum
and Mineral Resources of Saudi Arabia (the Ministry) that if the Company could
not commence the implementation of the Al Masane project that the Ministry
intended to terminate the lease. As discussed in Note 6, the Company is in
continued negotiations with the Ministry and to date, has not received a formal
written notice of the cancellation of the Company's lease.
F-1
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements, the Company incurred cumulative losses through December 31, 2002 of
$13,052,341 and had an excess of current liabilities over current assets of
$23,127,040 at December 31, 2002. As discussed in Notes 3 and 8 to the
consolidated financial statements, the Company was not in compliance with
certain covenants in its loan agreements. If resolution with the lender is not
achieved, and the Company does not generate positive cash flow adequate for its
operations and loan obligations, the Company will have to raise debt or equity
capital. There is no assurance that debt financing or capital would be
available. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated the consolidated balance sheet as of December 31, 2001, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 2001.
/s/ MOORE STEPHENS TRAVIS WOLFF, LLP
Dallas, Texas
October 16, 2003
F-2
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
ASSETS 2002 2001
------------ ------------
(Restated,
See Note 2)
CURRENT ASSETS
Cash and cash equivalents $ 319,171 $ 199,529
Trade receivables 4,549,369 4,437,562
Inventories 900,061 723,313
------------ ------------
Total current assets 5,768,601 5,360,404
REFINERY PLANT, PIPELINE AND EQUIPMENT - AT COST 18,250,302 17,704,363
LESS ACCUMULATED DEPRECIATION (8,294,753) (6,945,934)
------------ ------------
REFINERY PLANT, PIPELINE AND EQUIPMENT, NET 9,955,549 10,758,429
AL MASANE PROJECT 35,818,157 35,498,808
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,211,010 1,210,969
OTHER ASSETS 436,244 487,825
------------ ------------
TOTAL ASSETS $ 55,620,809 $ 55,747,683
============ ============
F-3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31,
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------ ------------
(Restated,
See Note 2)
CURRENT LIABILITIES
Accounts payable $ 4,217,014 $ 5,197,981
Accrued interest 2,558,478 1,756,888
Accrued liabilities 759,591 650,367
Fair value of feedstock swaps -- 505,890
Accrued liabilities in Saudi Arabia 2,490,005 2,308,774
Notes payable 11,743,780 11,743,780
Current portion of long-term debt 7,126,773 7,598,768
------------ ------------
Total current liabilities 28,895,641 29,762,448
DEFERRED REVENUE 177,806 120,872
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 844,298 853,362
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized, 40,000,000 shares of
$.10 par value; issued and outstanding,
22,431,994 shares in 2002 and 2001 2,243,199 2,243,199
Additional paid-in capital 36,512,206 36,512,206
Accumulated deficit (13,052,341) (13,744,404)
------------ ------------
Total stockholders' equity 25,703,064 25,011,001
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,620,809 $ 55,747,683
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(RESTATED,
SEE NOTE 2)
Revenues
Refined product sales $ 32,638,719 $ 28,982,357 $ 40,267,342
Processing fees 4,114,281 3,730,311 2,344,469
------------ ------------ ------------
36,753,000 32,712,668 42,611,811
Operating costs and expenses
Cost of refined product sales and processing 30,035,531 28,327,172 40,715,332
General and administrative 4,087,875 3,717,822 3,665,642
Depreciation 1,414,202 1,381,469 1,258,953
------------ ------------ ------------
35,537,608 33,426,463 45,639,927
------------ ------------ ------------
Operating income (loss) 1,215,392 (713,795) (3,028,116)
Other income (expense)
Interest income 37,621 44,534 104,795
Interest expense (1,354,042) (1,506,544) (1,411,912)
Minority interest 9,064 145,649 126,537
Foreign exchange transaction gain (loss) 240,106 (104,979) (96,044)
Miscellaneous income 38,032 40,007 16,696
Unrealized gain (loss) on feedstock swaps 505,890 (505,890) --
------------ ------------ ------------
(523,329) (1,887,223) (1,259,928)
------------ ------------ ------------
Income (loss) before income taxes 692,063 (2,601,018) (4,288,044)
Income tax expense -- -- --
------------ ------------ ------------
Net income (loss) $ 692,063 $ (2,601,018) $ (4,288,044)
============ ============ ============
Basic and diluted net income (loss) per common share $ 0.03 $ (0.11) $ (0.19)
============ ============ ============
Basic and diluted weighted average number of common
shares outstanding 22,731,994 22,768,858 22,673,033
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
JANUARY 1, 2000 22,019,994 $ 2,201,999 $ 36,101,506 $ (6,855,342) $ 31,448,163
Common stock issued
on debt conversion 469,000 46,900 422,100 -- 469,000
Net loss -- -- -- (4,288,044) (4,288,044)
------------ ------------ ------------ ------------ ------------
DECEMBER 31, 2000 22,488,994 2,248,899 36,523,606 (11,143,386) 27,629,119
Common stock cancelled
in settlement of receivable (57,000) (5,700) (11,400) -- (17,100)
Net loss* -- -- -- (2,601,018) (2,601,018)
------------ ------------ ------------ ------------ ------------
DECEMBER 31, 2001* 22,431,994 2,243,199 36,512,206 (13,744,404) 25,011,001
Net income -- -- -- 692,063 692,063
------------ ------------ ------------ ------------ ------------
DECEMBER 31, 2002 22,431,994 $ 2,243,199 $ 36,512,206 $(13,052,341) $ 25,703,064
============ ============ ============ ============ ============
* Restated, see Note 2.
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
----------- ----------- -----------
(RESTATED,
SEE NOTE 2)
Operating activities
Net income (loss) $ 692,063 $(2,601,018) $(4,288,044)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,414,202 1,381,469 1,258,953
Increase (decrease) in deferred revenue 56,934 (10,529) (34,434)
Unrealized (gain) loss on feedstock swaps (505,890) 505,890 --
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables (111,807) 802,207 1,029,691
(Increase) decrease in inventories (176,748) 237,181 30,900
Decrease (increase) in other assets 51,581 56,039 (74,761)
(Decrease) increase in accounts payable and accrued
liabilities (871,743) (396,490) 1,752,993
Increase in accrued interest 801,590 1,051,184 549,899
Increase in accrued liabilities in
Saudi Arabia 63,898 276,910 304,823
Other (74,447) (43,694) (102,525)
----------- ----------- -----------
Net cash provided by operating activities 1,339,633 1,259,149 427,495
----------- ----------- -----------
Investing activities
Proceeds from sale of short-term investments -- -- 20,597
Purchase of business (net of cash acquired) -- -- (2,279,665)
Additions to Al Masane Project (202,016) (544,568) (682,905)
Additions to refinery plant, pipeline and equipment (545,939) (455,472) (2,743,405)
(Additions to) reduction in mineral properties in
the United States (41) 71,173 16,866
----------- ----------- -----------
Net cash used in investing activities (747,996) (928,867) (5,668,512)
----------- ----------- -----------
Financing activities
Additions to notes payable and long-term obligations 299,236 285,940 3,338,644
Reduction of notes payable and long-term obligations (771,231) (575,670) (1,872,963)
----------- ----------- -----------
Net cash provided by (used in) financing activities (471,995) (289,730) 1,465,681
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 119,642 40,552 (3,775,336)
Cash and cash equivalents at beginning of year 199,529 158,977 3,934,313
----------- ----------- -----------
Cash and cash equivalents at end of year $ 319,171 $ 199,529 $ 158,977
=========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BUSINESS AND OPERATIONS OF THE COMPANY
Arabian American Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products (also referred to
as the "Refining Segment") and developing mineral properties in Saudi Arabia
and the United States (also referred to as the "Mining Segment"). All of its
mineral properties are presently undeveloped and require significant capital
expenditures before beginning any commercial operations (see Notes 2, 6 and
7).
The Company's Refining Segment activities are primarily conducted through a
wholly-owned subsidiary, American Shield Refining Company (the "Refining
Company"), which owns all of the capital stock of Texas Oil and Chemical Co.
II, Inc. ("TOCCO"). TOCCO owns all of the capital stock of South Hampton
Refining Company ("South Hampton"), and approximately 93% of the capital
stock of Productos Quimicos Coin S.A. de. C.V. ("Coin"), which was acquired
on January 25, 2000 for $2.5 million. South Hampton owns all of the capital
stock of Gulf State Pipe Line Company, Inc. ("Gulf State"). South Hampton
owns and operates a specialty petrochemical products refinery near Silsbee,
Texas that is one of the largest domestic manufacturers of pentanes. Gulf
State owns and operates three pipelines that connect the South Hampton
refinery to a natural gas line, to South Hampton's truck and rail loading
terminal and to a marine terminal owned by an unaffiliated third party. Coin
owns and operates a specialty petrochemical products refinery in
Coatzacoalcos, on the Yucatan Peninsula near Veracruz, Mexico. The Company
also owns approximately 51% of the capital stock of a Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche"), which does not conduct any
substantial business activity. Pioche and the Company's mineral properties
in Saudi Arabia constitute its Mining Segment.
The Company consolidates all subsidiaries for which it has majority
ownership or voting control that is other than temporary. All material
intercompany accounts and transactions are eliminated.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Company's principal
banking and short-term investing activities are with local and national
financial institutions. Short-term investments with an original maturity of
three months or less are classified as cash equivalents. At December 31,
2002 and 2001, there were no cash equivalents or short-term investments.
INVENTORIES - Refined products and feedstock are recorded at the lower of
cost, determined on the last-in, first-out method (LIFO), or market for
inventories in the United States and on the average cost method, or market,
for inventories held in Mexico.
F-8
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - CONTINUED
MINERAL EXPLORATION AND DEVELOPMENT COSTS - All costs related to the
acquisition, exploration, and development of mineral deposits are
capitalized until such time as (1) the Company commences commercial
exploitation of the related mineral deposits at which time the costs will be
amortized, (2) the related project is abandoned and the capitalized costs
are charged to operations, or (3) when any or all deferred costs are
permanently impaired. At December 31, 2002, none of the projects had reached
the commercial exploitation stage. No indirect overhead or general and
administrative costs have been allocated to any of the projects.
REFINERY PLANT, PIPELINE AND EQUIPMENT - Refinery plant, pipeline and
equipment are stated at cost. Depreciation is provided over the estimated
service lives using the straight-line method. Gains and losses from
disposition are included in operations in the period incurred.
OTHER ASSETS - Other assets include catalysts used in refinery operations,
prepaid expenses, a note receivable and certain refinery assets, which are
being leased to a third party.
ENVIRONMENTAL LIABILITIES - Remediation costs are accrued based on estimates
of known environmental remediation exposure. Ongoing environmental
compliance costs, including maintenance and monitoring costs, are expensed
as incurred.
DEFERRED REVENUE - Deferred revenue represents funds advanced by three
suppliers and customers to defray development and processing costs and are
being amortized over five year and 15 year periods.
STATEMENTS OF CASH FLOWS - In the statements of cash flows, cash includes
cash held in the United States and Saudi Arabia. Significant noncash
investing and financing activities in 2001 include the cancellation of
57,000 shares of common stock in exchange for a $128,000 receivable from an
officer of the Company. Transactions in 2000 include the issuance of 469,000
shares of common stock at $1.00 per share for the conversion of $469,000 of
indebtedness.
NET INCOME (LOSS) PER SHARE - The Company computes basic income (loss) per
common share based on the weighted-average number of common shares
outstanding. Diluted income (loss) per common share is computed based on the
weighted-average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if dilutive
potential common shares, consisting of stock options and shares issuable
upon conversion of debt, had been issued (Note 13).
FOREIGN CURRENCY AND OPERATIONS - The functional currency for each of the
Company's subsidiaries is the US dollar. Transaction gains or losses as a
result of remeasuring from the subsidiaries local currency to the US dollar
are reflected in the statements of operations as a foreign exchange
transaction gain or loss. The Company does not employ any practices to
minimize foreign currency risks.
The Company's foreign operations have been, and will continue to be,
affected by periodic changes or developments in the foreign country's
political and economic conditions as well as changes in their laws and
regulations. Any such changes could have a material adverse effect on the
Company's financial condition, operating results or cash flows.
F-9
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - CONTINUED
Saudi Arabian investors, including certain members of the Company's board of
directors, own approximately 62% of the Company's outstanding common stock
at December 31, 2002.
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION - The Company accounts for employee stock options
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 and has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 (Statement No. 123), as amended by
Statement of Financial Accounting Standards No. 148 (Statement No. 148).
Accordingly, the compensation expense of any employee stock options granted
is the excess, if any, of the quoted market price of the Company's common
stock at the grant date over the amount the employee must pay to acquire the
stock. See Note 10 for additional information relating to stock options.
DERIVATIVES - Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 138, establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative instrument's gains and losses to
offset related results on the hedged item in the income statement, to the
extent effective, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. Statement No. 133, as amended, was adopted by the Company on
January 1, 2001.
The Company periodically enters into commodity swap derivative agreements to
decrease the price volatility of its natural gasoline feedstock
requirements. These derivative agreements were not designated as hedges by
the Company. (See Note 16.)
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include cash and cash equivalents, notes payable and long-term debt. The
carrying amount of cash and cash equivalents approximates fair value at
December 31, 2002 and 2001 due to the short-term maturity of these items.
The Company's long-term debt is variable rate debt, and as a result, fair
value approximates carrying value. It is not practical to estimate the fair
value of the Company's notes payable because quoted market prices do not
exist for similar type debt instruments, and there are no available
comparative instruments as a basis to value the notes.
NEW ACCOUNTING STANDARDS - In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143), that
established uniform methodology for accounting for estimated costs
associated with legal obligations related to retirement of assets. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
is in the process of analyzing the effect of this statement.
F-10
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - CONTINUED
In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4, (Reporting
Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for
Intangible Assets of Motor Carriers), No. 64, (Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements), Amendment of FASB Statement No. 13
(Accounting for Leases) and Technical Corrections. This statement eliminates
the current requirement that gains and losses on debt extinguishment must be
classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent, in accordance with the current GAAP
criteria for extraordinary classification. In addition, SFAS 145 eliminates
an inconsistency in lease accounting by requiring that modification of
capital leases that result in reclassification as operating leases be
accounted for consistent with sale-leaseback accounting rules. The statement
also contains other nonsubstantive corrections to authoritative accounting
literature. The changes related to debt extinguishment will be effective for
fiscal years beginning after May 15, 2002, and the changes related to lease
accounting will be effective for transactions occurring after May 15, 2002.
The Company does not believe the adoption of SFAS No. 145 will have a
material impact on the Company's financial position, results of operations
or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133. In particular, SFAS No. 149 (1) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133, (2) clarifies
when a derivative contains a financing component, (3) amends the definition
of an underlying derivative to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003. The
Company does not believe the adoption of SFAS No. 149 will have a material
impact on the Company's financial position, results of operations or cash
flows.
NOTE 2 - RESTATEMENT
During 2002, the Company became aware that the natural gasoline swap
agreements (swap agreements) discussed in Note 16, did not qualify for cash
flow hedge accounting treatment. The following table highlights the effects
of the restatement adjustments on the previously reported consolidated
statement of operations for 2001, accumulated other comprehensive loss and
accumulated deficit. All notes and schedules have been restated as
appropriate.
F-11
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - RESTATEMENT - CONTINUED
Accumulated other Accumulated
Net loss comprehensive loss deficit
December 31, 2001 December 31, 2001 December 31, 2001
----------------- ----------------- -----------------
As previously reported $ (2,095,128) $ (505,890) $ (13,238,514)
Adjustment for fair value of natural
gasoline swaps (505,890) 505,890 (505,890)
------------- ------------- -------------
As restated $ (2,601,018) $ -- $ (13,744,404)
============= ============= =============
Basic and diluted net loss per share:
As previously reported $ (0.09)
Adjustment (0.02)
-------------
As restated $ (0.11)
=============
NOTE 3 - LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, the Company had an excess of current liabilities
over current assets of $23,127,040 at December 31, 2002.
As discussed in Note 8, the Company was not in compliance with certain
covenants in its loan agreements. If resolution with the lenders is not
achieved, and the Company does not continue to generate positive cash flow
adequate for its operations and loan obligations, the Company will have to
raise debt or equity capital. There is no assurance that capital would be
available.
Historically, the Company's cash flows from operating activities have been
insufficient to meet its operating needs, planned capital expenditures and
debt service requirements. The Company has continually sought additional
debt and equity financing in order to fund its mineral development and other
investing activities and experienced difficulties obtaining additional
financing. The Company presently needs additional financing in order to fund
its planned mineral development activities and other activities.
The Company's mining segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is
a net user of the Company's available cash and capital resources. As
discussed in Note 6, the Company intends to take steps to finance commercial
development of the Al Masane mining project. However, there is no assurance
the Company will be able to arrange financing.
Management is also addressing two other significant financing issues within
this segment. These issues are the $11.0 million note payable due the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $943,000 due employees working in Saudi Arabia (this amount
does not include any amounts due the Company's President and Chief Executive
Officer who also primarily works in Saudi Arabia and is owed accrued
salaries and termination benefits of approximately $1,113,000). The note
payable was originally due in ten annual installments beginning in 1984.
While the Company has not
F-12
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS - CONTINUED
made any repayments, it has not received any payment demands or other
communications from the Saudi government regarding the note payable. This is
despite the fact the Company remains active in Saudi Arabia and received the
Al Masane mining lease at a time when it had not made any of the agreed upon
repayment installments. Based on its experience to date, management believes
as long as the Company diligently attempts to explore and develop the Al
Masane project, that no repayment demand will be made. The Company has
communicated to the Saudi government that its delay in repaying the note is
a direct result of the government's lengthy delay in granting the Al Masane
lease and requested formal negotiations to restructure this obligation.
Based on its interpretation of the Al Masane mining lease and other
documents, management believes the government is likely to agree to link
repayment of this note to the operating cash flows generated by the
commercial development of the Al Masane project, which would result in a
long-term installment repayment schedule. In the event the Saudi government
was to demand immediate repayment of this obligation, which management
considers unlikely, the Company would be unable to pay the entire amount
due.
The second issue is the accrued salaries and termination benefits due
employees working in Saudi Arabia. The Company plans to continue employing
these individuals until it is able to generate sufficient excess funds to
begin payment of this liability. Management will then begin the process of
gradually releasing certain employees and paying its obligation as they are
released from the Company's employment.
A significant component of the Company's assets consists of undeveloped
mineral deposits. There is no assurance that the Company will ultimately
successfully develop either the Al Masane project or any of the other
properties discussed in Notes 6 and 7, and if, developed, whether the
mineral acquisition, development and development costs incurred will be
recovered. The recovery of these costs is dependent upon a number of factors
and future events, many of which are beyond the Company's control.
Furthermore, the Company's ability to develop and realize its investment in
these properties is dependent upon (i) obtaining significant additional
financing and (ii) attaining successful operations from one or more of these
projects.
The Company assesses the carrying values of its assets on an ongoing basis.
Factors which may affect carrying values include, but are not limited to,
mineral prices, capital cost estimates, the estimated operating costs of any
mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. Prices currently used to assess recoverability, based on
production to begin no sooner than 2005, are $1.04 per pound for copper and
$.60 per pound for zinc. Copper and zinc comprise in excess of 80% of the
expected value of production. There are no assurances that, particularly in
the event of a prolonged period of depressed mineral prices, the Company
will not be required to take a material write-down of its mineral
properties.
NOTE 4 - CONCENTRATIONS OF REVENUES AND CREDIT RISK
The refining segment sells its products and services to companies in the
chemical and plastics industries. It performs periodic credit evaluations of
its customers and does not require collateral from its customers. The
largest customer accounted for 10% of the total product sales in 2001 and in
2000. No one customer accounted for 10% or more of sales in 2002. Minimal
credit losses have been incurred. The carrying amount of accounts receivable
approximates fair value at December 31, 2002.
F-13
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - CONCENTRATIONS OF REVENUES AND CREDIT RISK - CONTINUED
Coin's operations are dependent upon Pemex (Mexican government owned vendor)
for its feedstock supply. Coin's operations have been negatively impacted in
2002, 2001 and 2000 by the inability to obtain feedstock for production.
Coin is currently in negotiations with Pemex to secure a purchase contract
for feedstock.
NOTE 5 - INVENTORIES
Inventories include the following at December 31:
2002 2001
-------- --------
Refined products $900,061 $723,313
======== ========
At December 31, 2002, current cost exceeded the LIFO value by approximately
$203,000. At December 31, 2001 the LIFO inventory approximated current cost.
NOTE 6 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
In the accompanying consolidated financial statements, the deferred
exploration and development costs have been presented based on the related
projects' geographic location within Saudi Arabia. This includes the "Al
Masane Project" (the "Project") and "Other Interests in Saudi Arabia" which
primarily pertains to the costs of rentals, field offices and camps, core
drilling and labor incurred at the Wadi Qatan and Jebel Harr properties.
In 1971, the Saudi Arabian government awarded the Company exclusive mineral
exploration licenses to explore and develop the Wadi Qatan area in
southwestern Saudi Arabia. The Company was subsequently awarded an
additional license in 1977 for an area north of Wadi Qatan at Jebel Harr.
These licenses have expired. On June 22, 1999, the Company submitted a
formal application for a five-year exclusive exploration license for the
Greater Al Masane Area of approximately 2,850 square kilometers that
surrounds the Al Masane mining lease area and includes the Wadi Qatan and
Jebel Harr areas. Although a license has not been formally granted for the
Greater Al Masane area, the Company has been authorized in writing by the
Saudi Arabian government to carry out exploration work on the area. The
Company previously worked the Greater Al Masane Area after obtaining written
authorization from the Saudi Ministry of Petroleum and Mineral Resources,
and has expended over $3 million in exploration work. The application for
the new exploration license is still pending and is expected to be acted
upon after the new Saudi Arabian Mining Code is published, which is expected
before the end of 2003. Geophysical and geochemical work and diamond core
drilling on the Greater Al Masane area has revealed mineralization similar
to that discovered at Al Masane. The Company intends to formalize its claims
in these areas.
The Al Masane project, consisting of a mining lease area of approximately 44
square kilometers, contains extensive ancient mineral workings and smelters.
From ancient inscriptions in the area, it is believed that mining activities
went on sporadically from 1000 BC to 700 AD. The ancients are believed to
have extracted mainly gold, silver and copper. The Project includes various
quantities of proved zinc, copper, gold and silver reserves.
F-14
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA - CONTINUED
As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for the rental payments and
other obligations provided for by the mining lease and repayment of the
previously discussed $11 million loan. The Company's interpretation of the
mining lease is that repayment of this loan will be made in accordance with
a repayment schedule to be agreed upon with the Saudi Arabian government
from the Company's share of the project's cash flows. The initial term of
the lease is for a period of thirty (30) years from May 22, 1993, with the
Company having the option to renew or extend the term of the lease for
additional periods not to exceed twenty (20) years. Under the lease, the
Company is obligated to pay advance surface rental in the amount of 10,000
Saudi Riyals (approximately $2,667 at the current exchange rate) per square
kilometer per year (approximately $117,300 annually) during the period of
the lease. At December 31, 2002, approximately $425,000 of rental payments
were in arrears. In addition, the Company must pay income tax in accordance
with the income tax laws of Saudi Arabia then in force and pay all
infrastructure costs. The Saudi Arabian Mining Code provides that income tax
will not be due during the first stage of mining operations, which is the
period of five years starting from the earlier of (i) the date of the first
sale of products or (ii) the beginning of the fourth year since the issue of
the mining lease. The lease gives the Saudi Arabian government priority to
purchase any gold production from the project as well as the right to
purchase up to 10% of the annual production of other minerals on the same
terms and conditions then available to other similar buyers and at current
prices then prevailing in the free market. Furthermore, the lease contains
provisions requiring that preferences be given to Saudi Arabian suppliers
and contractors, that the Company employ Saudi Arabian citizens and provide
training to Saudi Arabian personnel.
Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company
with the Saudi Arabian Mining Company, a corporation wholly owned by the
Saudi Arabian government (Ma'aden), as successor to and assignee of the
mining interests formerly held by the Petroleum Mineral Organization
("Petromin"). Ma'aden is the Saudi Arabian government's official mining
company. In 1994, the Company received instructions from the Saudi Ministry
of Petroleum and Mineral Resources stating that it is possible for the
Company to form a Saudi company without Petromin (now Ma'aden), but the sale
of stock to the Saudi public could not occur until the mine's commercial
operations were profitable for at least two years. The instructions added
that Petromin (now Ma'aden) still had the right to purchase shares in the
Saudi public stock company any time it desires. Title to the mining lease
and the other obligations specified in the mining lease will be transferred
to the Saudi public stock company. However, the Company would remain
responsible for the repaying the $11 million loan to the Saudi Arabian
government.
On May 11, 1999, the Company informed the Ministry of Petroleum and Mineral
Resources that implementation of the Al Masane project would be delayed
until open market prices for the minerals improve. One year later in May
2000, a reply was received from the Ministry notifying the Company that it
must immediately implement the project. In September 2000 the Company was
further notified that the project should be immediately implemented or the
mining lease would be terminated. A second notice from the Ministry several
weeks later stated that the Committee of the Supreme Council of Petroleum
and Minerals in Saudi Arabia had recommended giving the Company six months
to take positive steps to implement the project. Another notice from the
Ministry in August 2001 stated that the Council of Ministers of Saudi Arabia
had issued a resolution in which it refused the Company's request to
postpone implementation of the project, that the Company must start
implementation of the project within six months of the date of the
resolution and that, if the project was not then started, the Ministry was
authorized to begin procedures to terminate the mining lease. Subsequent
correspondence from the Ministry in the Fall of 2001 reiterated the threat
to terminate the mining lease if the project was not immediately
implemented. A letter from the Ministry in
F-15
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA - CONTINUED
March 2002 stated that the six-month period to implement the project had
expired without the Company taking positive steps towards that end. In
September 2002, the Company sent a letter to Saudi Arabian Crown Prince
Abdullah Ben Abdul Aziz, in his capacity as Deputy Chairman of the Saudi
Supreme Council of Petroleum and Minerals (the King of Saudi Arabia is the
chairman), in which the Company contested the legality of the threats of the
Ministry to terminate the mining lease and requested his advice. As stated
in its letters to the Ministry and the Crown Prince, the Company believes
that the Ministry's letters to the Company asking for the implementation of
the project, without any regard to metal market conditions, is contrary to
the Saudi Mining Code and the mining lease agreement. In addition, the
Company has had correspondence and a meeting with the United States
Ambassador to Saudi Arabia where the Company presented its opinion regarding
the legality of the Ministry's actions. This opinion also was conveyed
in a letter to the United States Secretary of Commerce, who replied that the
United States Embassy is working to set up meetings with Saudi Arabian
government officials in an effort to resolve the matter. The Secretary of
Commerce assured the Company that the Department of Commerce has a strong
commitment in helping United States companies whenever possible. To date,
the Company has not received a written notice of termination of the lease.
The Company has vigorously contested the legality of the threats of the
Ministry to terminate the Company's mining lease. Numerous letters have been
written to the Ministry and the Company and its Saudi Arabian legal advisors
also have had meetings with officials of the Ministry. The Company has told
the Ministry that the Al Masane project would experience losses if the
project was implemented since the market prices were still too low. When the
market prices for the minerals rise to acceptable levels, plans to implement
the project will be resumed. At that time, the Company will attempt to
locate a joint venture partner, form a joint venture and, together with the
joint venture partner, attempt to obtain acceptable financing to
commercially develop the project. There can be no assurances that the
Company will be able to locate a joint venture partner, form a joint venture
or obtain financing from SIDF or any other sources. Financing plans for the
above are currently being studied. In the meantime, the Company intends to
maintain the Al Masane mining lease through the payment of the annual
advance surface rental, the implementation of a drilling program to attempt
to increase proven and probable reserves and to attempt to improve the
metallurgical recovery rates, which may improve the commercial viability of
the project.
Deferred exploration and development costs of the Al Masane Project at
December 31, 2002, 2001 and 2000, and the changes in these amounts for each
of the three years then ended are detailed below:
Balance at Balance at Balance at
December 31, Activity December 31, Activity December 31, Activity
2002 for 2002 2001 for 2001 2000 for 2000
----------- ----------- ----------- ----------- ----------- -----------
Property and equipment:
Mining equipment $ 2,160,206 -- $ 2,160,206 -- $ 2,160,206 --
Construction costs 3,140,493 -- 3,140,493 -- 3,140,493 --
----------- ----------- ----------- ----------- ----------- -----------
Total 5,300,699 -- 5,300,699 -- 5,300,699 --
F-16
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA - CONTINUED
Other costs:
Labor, consulting
services and project
administration costs $21,434,455 $ 319,349 $21,115,106 $ 193,082 $20,922,024 $ 681,040
Materials and
maintenance 6,175,232 -- 6,175,232 1,486 6,173,746 1,865
Feasibility study 2,907,771 -- 2,907,771 -- 2,907,771 --
----------- ----------- ----------- ----------- ----------- -----------
Total 30,517,458 319,349 30,198,109 194,568 30,003,541 682,905
----------- ----------- ----------- ----------- ----------- -----------
$35,818,157 $ 319,349 $35,498,808 $ 194,568 $35,304,240 $ 682,905
=========== =========== =========== =========== =========== ===========
The deferred exploration and development costs of the "Other Interests in
Saudi Arabia," in the total amount of approximately $2.4 million, consist of
approximately $1.5 million associated with the Greater Al Masane area and
the balance of approximately $900,000 is associated primarily with the Wadi
Qatan and Jebel Harr areas. In the event exploration licenses for these
areas are not granted, then all or a significant amount of deferred
development costs relating thereto may have to be written off. However, the
Company believes it would be entitled to a refund of the amounts expended
for development costs.
NOTE 7 - MINERAL PROPERTIES IN THE UNITED STATES
The principal assets of Pioche are an undivided interest in 48 patented and
5 unpatented mining claims totaling approximately 1,500 acres, and a 300
ton-per-day mill located on the aforementioned properties in the Pioche
Mining District in southeast Nevada. In August 2001, 75 unpatented claims
were abandoned since they were deemed to have no future value to Pioche. Due
to the lack of capital, the properties held by Pioche have not been
commercially operated for approximately 35 years. The Company had an option,
which expired in June 2002, to acquire 720,000 shares (approximately 10% of
the outstanding shares) of Pioche common stock at $0.20 per share.
NOTE 8 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS
Notes payable, long-term debt and long-term obligations at December 31 are
summarized as follows:
2002 2001
----------- -----------
Notes payable:
Secured note to Saudi Arabian government (See Note A) $11,000,000 $11,000,000
Unsecured demand notes payable to Saudi investors 13,280 13,280
Unsecured notes to foreign investors (See Note B) 618,000 618,000
Other 112,500 112,500
----------- -----------
Total $11,743,780 $11,743,780
=========== ===========
F-17
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS - CONTINUED
Long-term debt:
Revolving notes to foreign banks (See Note C) $ 3,215,100 $ 3,297,401
Revolving bank note (See Note D) 3,250,000 3,043,997
Secured note with commercial lender (See Note E) 661,673 1,257,370
----------- -----------
Total 7,126,773 7,598,768
Less current portion (7,126,773) (7,598,768)
----------- -----------
Total $ -- $ --
=========== ===========
(A) The Company has an interest-free loan of $11,000,000 from the Saudi
Arabia Ministry of Finance and National Economy, the proceeds of which
were used to finance the development phase of the Al Masane Project.
The loan was repayable in ten equal annual installments of $1,100,000,
with the initial installment payable on December 31, 1984. None of the
ten scheduled payments have been made. Pursuant to the mining lease
agreement covering the Al Masane Project, the Company intends to repay
the loan in accordance with a repayment schedule to be agreed upon
with the Saudi Arabian government from its share of cash flows. An
agreement has not yet been reached regarding either the rescheduling
or source of these payments. The loan is collateralized by all of the
Company's "movable and immovable" assets in Saudi Arabia.
(B) Represents loans payable to a shareholder of the Company for $445,000,
and the Company's President for $53,000. The loans are due on demand
with interest payable at the LIBOR rate plus 2%. Also includes new
loans payable in 2001 to a shareholder of the Company for $20,000 and
to the wife of the Company's President for $100,000, both of which are
due on demand with interest at 9%.
(C) Represents two loans payable to Mexican banks of $1,171,007 and
$2,044,093, as of December 31, 2002. The first loan is payable in
monthly payments through 2004. The second loan is payable in quarterly
payments through 2007. The first loan bears interest at 5% and the
second loan bears interest at the LIBOR rate plus seven points (LIBOR
was 1.382% at December 31, 2002). Both loans are collateralized by all
of the assets of Coin including the plant located in Coatzacoalcos,
near Veracruz. Coin is in default of the loan covenants as a result of
not having made its monthly and quarterly payments and therefore the
loans are classified as current in the financial statements. Unpaid
interest and penalty interest of $2,275,823 are included in accrued
interest.
(D) South Hampton entered into a $2.25 million revolving credit agreement
with a bank in September 1999 that is collateralized by a first
security interest in certain of its assets. Interest was payable
monthly at the bank's prime rate plus .5% to January 31, 2003; plus 1%
from February 1, 2003 to March 31, 2003; plus 1.5% from April 1, 2003
to May 26, 2003 and plus 3% from May 27 to June 15, 2003. An amended
agreement was entered into on June 30, 2000, which increased the total
amount to $3.25 million. Amendments two through ten extended the due
dates from May 31, 2001 to June 15, 2003. The agreement contained
various restrictive covenants including the maintenance of various
financial ratios, net worth and parent company distribution
limitations. At December 31, 2002, South Hampton was not in compliance
with the covenant relating to distributions to the parent company, and
therefore, the debt is classified as current in the financial
statements. On July 29, 2003, South Hampton entered into a Purchase
and Sale Agreement (the "Agreement) with the bank, whereby the bank
will purchase the accounts receivable of South Hampton at a 15%
discount. The discounted amount is returned to South Hampton, less
fees, when the invoice is collected.
F-18
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS - CONTINUED
Under this factoring agreement, the Bank has agreed to purchase up to
$4.5 million of invoices. The initial proceeds of the Agreement were
used to retire the $3.25 million revolving bank note. Management
expects the fees and interest charged by the Bank in this arrangement
will equate to an effective interest rate of approximately 9.0%. The
Agreement is secured by cash accounts, accounts receivable and
inventory and imposes limitations on distributions to the parent.
(E) South Hampton and Gulf State entered into a $3.5 million loan
agreement with a commercial lending company in December 1999 that is
collateralized by a first security interest in all of its assets,
except those dedicated to the bank mentioned in Note D above. Interest
is at 10.55% per annum. Principal and interest was payable in the
original agreement in 47 consecutive monthly installments of $89,696
from February 1, 2000 through January 2004. In January 2001, South
Hampton and Gulf State advised the lender that certain events of
default had occurred and requested the lender to suspend borrower's
principal payments for the months of December 2000, January, February,
March and April of 2001. During this period, interest only payments
were made. Effective April 1, 2001, an amended and restated promissory
note was executed in the principal amount of $1,627,036 with interest
at 10.55%. For the months of May and June 2001, principal payments of
$25,000 each plus interest were made. With the lender's approval, the
principal payments were adjusted at that time to fully amortize the
outstanding principal balance during or prior to the initial term of
the loan. The new agreement provides for principal and interest
payments in the amount of $58,340 on a monthly basis beginning July 1,
2001 and continuing until January 2004. At December 31, 2002, South
Hampton and Gulf State were not in compliance with a covenant relating
to distributions to the parent company, and therefore, the debt is
classified as current in the financial statements.
Interest of $552,452, $455,360 and $862,013 was paid in 2002, 2001, and
2000, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
South Hampton leases, on a month to month basis, various vehicles and
equipment from a trucking and transportation company owned by two of TOCCO's
officers at a monthly cost of approximately $32,000. Total rental costs were
approximately $422,000 in 2002, $418,000 in 2001 and $405,000 in 2000.
South Hampton has guaranteed a $160,000 note payable of a limited
partnership in which it has a 19% interest.
South Hampton, together with several other companies, is a defendant in six
lawsuits filed in the period from December 1999 to June 2003 by former
employees of South Hampton and other refineries. The suits claim illness and
disease resulting from alleged exposure to chemicals, including benzene,
butadiene and/or isoprene, during their employment. The plaintiffs claim
that the companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected them to liability
for unspecified actual and punitive damages. One previous lawsuit was
settled in 2002 for $22,500. Two other previous lawsuits were settled in
2002 with South Hampton agreeing to pay a total of $60,000 and $100,000 in
quarterly payments by October 2002 and June 2003, respectively. In 2002
three
F-19
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - COMMITMENTS AND CONTINGENCIES - CONTINUED
new lawsuits were filed which contain claims similar to the other suits. Two
lawsuits were filed in March and June 2003 with similar claims. South
Hampton intends to vigorously defend itself against these lawsuits and
believes it has adequate insurance coverage to protect it financially from
any damage awards that might be incurred.
South Hampton is a defendant in a lawsuit filed in September 2001, which
alleges that the plaintiff became ill from exposure to asbestos while
employed by South Hampton from 1961 through 1975. The plaintiff is seeking
unspecified amounts and the matter is set for trial in January 2004. South
Hampton is vigorously defending itself against the claim. It is not
practical to predict the ultimate outcome of the lawsuit. If this matter is
resolved in an adverse manner, it could have a material adverse effect on
South Hampton's operating results and cash flows in a future reporting
period.
At the request of the Texas Commission on Environmental Quality ("TCEQ"),
formerly Texas Natural Resources Conservation Commission ("TNRCC"), South
Hampton drilled a well to check for groundwater contamination under a spill
area. Based on the results, two pools of hydrocarbons were discovered. The
recovery process was initiated in June 1998, and is expected to continue for
several years until the pools are reduced to an acceptable level.
In August 1997, the TCEQ notified South Hampton that it had violated various
rules and procedures. It proposed administrative penalties totaling $709,408
and recommended that South Hampton undertake certain actions necessary to
bring its refinery operations into compliance. The violations generally
relate to various air and water quality issues. Appropriate modifications
have been made by South Hampton where it appeared there were legitimate
concerns.
On February 2, 2000, the TCEQ amended its pending administrative action
against South Hampton to add allegations dating through May 21, 1998 of 35
regulatory violations relating to air quality control and industrial solid
waste requirements. The TCEQ proposed that administrative penalties be
increased to approximately $765,000 and that certain corrective actions be
taken. A further amendment was made by the TCEQ on December 13, 2001 for
further violations relating to air quality control and waste requirements.
The TCEQ proposed that the administrative penalties be increased another
$59,000. South Hampton settled this particular claim with the TCEQ in April
2002 for approximately $5,900.
On April 11, 2003, the TCEQ reduced the penalties to approximately $690,000.
On May 25, 2003, a settlement hearing with the TCEQ was held and additional
information was submitted to the TCEQ on June 2, 2003. Negotiations between
South Hampton and the TCEQ are expected to continue in order to reach a
final settlement. South Hampton believes the original penalty and the
additional allegations are greatly overstated and intends to continue to
vigorously defend itself against these allegations, the proposed penalties
and proposed corrective actions. Management believes the penalties will be
settled for amounts less than those proposed. Management has accrued an
estimate for a proposed settlement. There are no assurances that the amounts
settled will not be different than the amounts accrued.
South Hampton has a liability of $200,000 and $216,840 recorded as of
December 31, 2002 and 2001, respectively, related to these environmental
issues. Amounts charged to expense were approximately $291,000 in 2002,
$227,000 in 2001 and $338,000 in 2000.
F-20
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company was advised by letter dated March 11, 2003 that the Division of
Enforcement of the Securities and Exchange Commission ("SEC") was conducting
an informal, non-public inquiry concerning matters relating to the Al Masane
project and the Ministry's threatened termination of the Al Masane mining
lease. The Company fully cooperated with the SEC in the conduct of the
investigation, which became a formal investigation. The Company reached a
settlement with the SEC relating to this matter and on October 16, 2003, the
Company consented to the entry of an order by the SEC enjoining the Company
from future violations of the federal securities laws. Further, the
Company's President and Chief Executive Officer, Hatem El-Khalidi,
simultaneously settled an SEC complaint filed against him by consenting to
the entry of an order enjoining him from future violations of the federal
securities laws and agreeing to pay a civil penalty of $25,000. Neither the
Company nor Mr. El-Khalidi admitted or denied the allegations of the
complaints.
NOTE 10 - STOCK OPTIONS
STOCK OPTIONS - The Company's Employee Stock Option Plan (the "Employee
Plan") provided for the grant of incentive options at the market price of
the stock on the date of grant and non-incentive options at a price not less
than 85% of the market price of the stock on the date of grant. The Company
had reserved up to 500,000 shares of common stock for grant pursuant to the
Employee Plan. At December 31, 2002, options to purchase 45,000 shares were
outstanding under the Employee Plan. The options vested at such times and in
such amounts as is determined by the Compensation Committee of the Board of
Directors at the date of grant. The Employee Plan was registered with the
Securities and Exchange Commission and expired May 16, 2003.
The Company has periodically granted stock options to various parties,
including certain officers and directors, who have made loans to or
performed critical services for the Company. Most of these options allow the
parties to purchase common stock for $1.00 per share.
Additional information with respect to all options outstanding at December
31, 2002, and changes for the three years then ended was as follows:
2000
-----------------------------
Weighted average
Shares exercise price
---------- ----------------
Outstanding at beginning of year 1,570,000 $ 1.07
Forfeited (698,000) 1.00
---------- --------
Outstanding at end of year 872,000 $ 1.12
========== ========
Options exercisable at December 31, 2000 872,000 $ 1.12
========== ========
2001
-------------------------
Weighted average
Shares exercise price
------- ----------------
Outstanding at beginning and end of year 872,000 $ 1.12
======= ========
Options exercisable at December 31, 2001 872,000 $ 1.12
======= ========
F-21
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - STOCK OPTIONS - CONTINUED
2002
---------------------------
Weighted average
Shares exercise price
-------- ----------------
Outstanding at beginning of year 872,000 $ 1.12
Forfeited (62,000) 1.38
-------- --------
Outstanding at end of year 810,000 $ 1.10
======== ========
Options exercisable at December 31, 2002 810,000 $ 1.10
======== ========
Additional information about stock options outstanding at December 31, 2002
is summarized as follows:
Options outstanding and exercisable
------------------------------------------
Weighted average
------------------------------
Remaining Exercise
Range of exercise prices Number contractual life price
------------------------ ------- ---------------- --------
$1.00 745,000 5.2 years $ 1.00
$1.75 45,000 1.8 years 1.75
$2.88 to $3.75 20,000 .6 years 3.32
------- ------
810,000 $ 1.10
======= ======
NOTE 11 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2002, 2001,
and 2000 differs from the amount computed by applying the applicable U.S.
corporate income tax rate of 34% to net income before income taxes. The
reasons for this difference are as follows:
2002 2001* 2000
----------- ----------- -----------
Income taxes at U.S. statutory rate $ 235,301 $ (884,346) $(1,457,935)
State taxes, net of federal benefit 64,170 174,332 53,886
Net operating losses utilized (644,347) (13,927) --
Net operating losses carried forward -- -- 779,006
Foreign operations losses with no
benefit provided 337,946 707,309 614,808
Other items 6,930 16,632 10,235
----------- ----------- -----------
Total tax expense $ -- $ -- $ --
=========== =========== ===========
*Restated, see Note 2.
F-22
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to significant
portions of Federal and state deferred tax assets and deferred tax
liabilities were as follows:
December 31,
---------------------------------------------------
2002 2001* 2000
------------ ------------ ------------
Deferred tax liabilities:
Refinery plant, pipeline and equipment $ (481,000) $ (500,000) $ (500,000)
Deferred tax assets:
Accounts receivable 76,000 69,000 64,000
Mineral interests 236,000 236,000 236,000
Accrued liabilities 123,000 93,000 89,000
Net operating loss and contribution
carryforwards 6,837,000 7,493,000 9,873,000
Tax credit carryforwards 212,000 212,000 341,000
Deferred gain on sale of property 76,000 89,000 99,000
Unrealized losses on swap agreements -- 187,000 --
------------ ------------ ------------
Gross deferred tax assets 7,560,000 8,379,000 10,702,000
Valuation allowance (7,079,000) (7,879,000) (10,202,000)
------------ ------------ ------------
Net deferred tax assets 481,000 500,000 500,000
------------ ------------ ------------
Net deferred taxes $ -- $ -- $ --
============ ============ ============
*Restated, see Note 2.
The Company has provided a valuation allowance against the deferred tax
assets because of uncertainties regarding their realization.
At December 31, 2002, the Company had approximately $18,000,000 of net
operating loss carryforwards. These carryforwards expire during the years
2003 through 2020. In addition, the Company has alternative minimum tax
credit carryforwards of approximately $212,000 that may be carried over
indefinitely. During 2002, net operating loss carryforwards of approximately
$410,000 expired.
The Company has no Saudi Arabian or Mexican tax liability. At December 31,
2002, Coin has available net operating loss carryforwards and recoverable
tax on assets of approximately $2,340,000 and $483,000, respectively,
expiring through 2012, which are limited to the income of Coin.
NOTE 12 - SEGMENT INFORMATION
As discussed in Note 1, the Company has two business segments. The Company
measures segment profit or loss as operating income (loss), which represents
income (loss) before interest, miscellaneous income and minority interest.
Information on segments is as follows:
F-23
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - SEGMENT INFORMATION - CONTINUED
December 31, 2002
-------------------------------------------------
Refining Mining Total
------------ ------------ ------------
Revenue from external customers $36,753,000 $ -- $ 36,753,000
Depreciation 1,412,389 1,813 1,414,202
Operating income (loss) 1,705,420 (490,028) 1,215,392
Total assets $16,114,394 $ 39,506,415 $ 55,620,809
December 31, 2001 (Restated, see Note 2)
--------------------------------------------------
Refining Mining Total
------------ ------------ ------------
Revenue from external customers $32,712,668 $ -- $ 32,712,668
Depreciation 1,379,201 2,268 1,381,469
Operating loss (243,055) (470,740) (713,795)
Total assets $16,560,979 $ 39,186,704 $ 55,747,683
December 31, 2000
--------------------------------------------------
Refining Mining Total
------------ ------------ ------------
Revenue from external customers $ 42,611,811 $ -- $ 42,611,811
Depreciation 1,256,472 2,481 1,258,953
Operating loss (2,837,864) (190,252) (3,028,116)
Total assets $ 18,733,016 $ 38,865,679 $ 57,598,695
Information regarding foreign operations for the years ended December 31,
2002, 2001 and 2000 follows (in thousands). Revenues are attributed to
countries based upon the origination of the transaction.
Year ended December 31,
---------------------------------
2002 2001 2000
------- ------- -------
Revenues
United States $34,057 $31,455 $36,660
Mexico 2,696 1,258 5,951
Saudi Arabia -- -- --
------- ------- -------
$36,753 $32,713 $42,611
======= ======= =======
Year ended December 31,
---------------------------------
2002 2001 2000
------- ------- -------
Long-lived assets
United States $ 6,252 $ 6,739 $ 7,381
Mexico 4,915 5,230 5,579
Saudi Arabia 38,249 37,930 37,735
------- ------- -------
$49,416 $49,899 $50,695
======= ======= =======
F-24
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share has been calculated as follows:
2002 2001* 2000
------------ ------------ ------------
Basic
Net income (loss) $ 692,063 $ (2,601,018) $ (4,288,044)
Weighted average shares outstanding 22,731,994 22,768,858 22,673,033
Per share $ 0.03 $ (0.11) $ (0.19)
2002 2001* 2000
------------ ------------ ------------
Diluted
Net income (loss) $ 692,063 $ (2,601,018) $ (4,288,044)
Dilutive effect of stock options -- -- --
------------ ------------ ------------
Net income (loss) - diluted $ 692,063 $ (2,601,018) $ (4,288,044)
Weighted average shares outstanding - diluted 22,731,994 22,768,858 22,673,033
Per share - diluted $ 0.03 $ (0.11) $ (0.19)
*Restated, see Note 2
In 2002, 2001 and 2000, options for 810,000, 872,000 and 872,000 shares,
respectively were excluded from diluted shares outstanding because their
effect was antidilutive.
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations shown below are derived from unaudited
financial statements for the eight quarters ended December 31, 2002. The
Company has restated the quarterly information to reflect the adjustments
identified in the restatement of the December 31, 2001 and audit of the
December 31, 2002 financial statements (in thousands, except per share
data):
Year Ended December 31, 2002
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
Revenues $ 8,851 $ 9,079 $ 9,846 $ 8,977 $36,753
Net income (loss) 1,621 551 (16) (1,464) 692
Basic and diluted EPS $ 0.07 $ 0.02 $ (0.00) $ (0.06) $ 0.03
Year Ended December 31, 2001
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenues $ 8,361 $ 8,841 $ 7,477 $ 8,034 $ 32,713
Net loss (903) (207) (545) (946) (2,601)
Basic and diluted EPS $ (0.04) $ (0.01) $ (0.02) $ (0.04) $ (0.11)
F-25
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - RELATED PARTY TRANSACTIONS
In 2001, the Company cancelled a receivable of $128,000 from its President
and Chief Executive Officer taken in payment several years ago for the
purchase of 57,000 shares of common stock at approximately $2.25 per share.
Upon cancellation, the shares were returned to the Company. The Company's
share price at that date was $.30 which resulted in a charge to expense of
approximately $111,000.
Pursuant to a sharing arrangement, the Company shares personnel, office
space and other overhead expenses in Dallas, Texas with the Company's
Chairman of the Board. The Company paid approximately $24,700, $25,500 and
$24,700 in 2002, 2001 and 2000, respectively, pursuant to such arrangement.
South Hampton incurred product transportation costs of approximately
$397,000, $404,000 and $391,000 in 2002, 2001 and 2000, respectively, with a
trucking and transportation company owned by two of TOCCO's officers.
NOTE 16 - NATURAL GASOLINE SWAP AGREEMENTS
South Hampton's primary source of feedstock is natural gasoline. In 2001 and
2002 South Hampton entered into three swap agreements to limit the effect of
significant fluctuations in natural gasoline prices. The last of these
agreements expired in January 2003. In March and April 2003 two new
agreements were entered into with the last agreement expiring on July 31,
2003. The effect of these agreements is to limit the company's exposure by
fixing the natural gasoline price of a portion of its feedstock purchases
over the term of the agreements. The agreements cover approximately 20% to
40% of the average monthly feedstock requirements. For the years ended
December 31, 2002 and 2001, the net recognized gain (loss) from the
agreements was $1,032,045 and $(339,507), respectively. The fair value
liability of the derivative contracts at December 31, 2001 was $505,890.
(See Note 2.) The fair value of the derivative contracts was not material
to the consolidated financial statements at December 31, 2002.
F-26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM ON SCHEDULES
Board of Directors and Stockholder
Arabian American Development Company and Subsidiaries
We have audited the consolidated financial statements of Arabian American
Development Company and Subsidiaries (the Company) as of December 31, 2002 and
2001 and for each of the three years in the period ended December 31, 2002, and
have issued our report thereon dated October 16, 2003. Our audits also include
Schedule II for this Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the Schedule II at December 31, 2002, 2001, and 2000 and for the
years then ended, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be set forth therein.
/s/ MOORE STEPHENS TRAVIS WOLFF, LLP
Dallas, Texas
October 16, 2003
F-27
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 2002
Charged
Beginning (credited) Ending
Description balance to earnings Deductions balance
- ----------- ----------- ----------- ----------- -----------
ALLOWANCE FOR DEFERRED
TAX ASSET
December 31, 2000 $ 8,961,093 $ 1,452,371 $ (212,482)(a) $10,200,982
December 31, 2001* 10,200,982 (165,940) (2,156,123)(a)(b) 7,878,919
December 31, 2002 7,878,919 -- (799,426)(a)(b) 7,079,493
- -------------
(a) Expiration of carryforwards
(b) Utilization of carryforwards
* Restated, see Note 2 to the consolidated financial statements.
F-28
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
PRODUCTOS QUIMICOS COIN, S.A. DE C.V.
MEXICO CITY, MEXICO
We have audited the accompanying statement of financial position of Productos
Quimicos Coin, S.A. de C.V. as of December 31, 2002, and the related statements
of income (loss) and comprehensive income (loss), changes in equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and prepared in accordance with generally accepted accounting
principles. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described by the Company in note 2A1 included below, the accompanying
financial statements are presented using accounting principles generally
accepted in the United States of America and translated into U.S. dollars to
comply with specific request by the shareholders. Separately, the Company has
issued financial statements as of December 31, 2002 and for the year then ended
in conformity with accounting principles generally accepted in Mexico and are
expressed in Mexican currency as to which we have issued a qualified opinion on
February 14, 2003.
As discussed in note 1 to the accompanying financial statements, the Company has
reported accumulated losses for $9,762,125, and the statement of financial
position shows excess of current liabilities over current assets for $6,149,133.
Moreover, the Company has defaulted in meeting scheduled payments of principal
and interest under certain loan agreements, as discussed in notes 8 and 9 to the
accompanying financial statements. Accumulated losses exceed capital stock,
which in conformity with the provisions of Mexican General Corporate Law, these
losses may represent cause for dissolution of the Company as a result of legal
action followed by any business-related third party. Additionally, during the
period January-December 2002, installed production capacity of the Company was
only partially utilized, representing a cost of maintaining idle the industrial
plant as described in note 1 to the accompanying financial statements. As a
result of the preceding issues, the Company may be unable to continue its
operations. The accompanying financial statements have been prepared on the
basis applicable to a going concern and, accordingly, do not purport to give
effect to adjustments relating to the valuation and reclassification of recorded
liabilities that may be necessary in the event the Company could not continue
its operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Productos Quimicos Coin, S.A.
de C.V. as of December 31, 2002, the results of its operations and cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Despacho Freyssinier Morin, S.C.
/s/ C.P. JUAN PABLO SOTO
C.P. Juan Pablo Soto
Partner
Mexico City, Mexico
February 14, 2003
F-29
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
PRODUCTOS QUIMICOS COIN, S.A. DE C.V.
MEXICO CITY, MEXICO
We have audited the accompanying statement of financial position of Productos
Quimicos Coin, S.A. de C.V. as of December 31, 2001, and the related statements
of income (loss) and comprehensive income (loss), changes in equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and prepared in accordance with generally accepted accounting
principles. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described by the Company in note 2A1 included below, the accompanying
financial statements are presented using accounting principles generally
accepted in the United States of America and translated into U.S. dollars to
comply with specific request by the shareholders. Separately, the Company has
issued financial statements as of December 31, 2001 and for the year then ended
in conformity with accounting principles generally accepted in Mexico and are
expressed in Mexican currency as to which we have issued a qualified opinion on
April 19, 2002.
As discussed in note 1 to the accompanying financial statements, the Company has
reported accumulated losses for $8,538,339, and the statement of financial
position shows excess of current liabilities over current assets for $5,510,943.
Moreover, the Company has defaulted in meeting scheduled payments of principal
and interest under certain loan agreements, as discussed in notes 8 and 9 to the
accompanying financial statements. Accumulated losses exceed capital stock,
which in conformity with the provisions of Mexican General Corporate Law, these
losses may represent cause for dissolution of the Company as a result of legal
action followed by any business-related third party. During the period January
through October 2001, no production activities were carried out. These
activities were partially resumed in November. As a result of the preceding
issues, and despite the fact that the Company's holding company decided to
capitalize intercompany debt in the amount of $1,077,823 (purchase of inventory
and working capital), the Company may be unable to continue its operations. The
accompanying financial statements have been prepared on the basis applicable to
a going concern and, accordingly, do not purport to give effect to adjustments
relating to the valuation and reclassification of recorded liabilities that may
be necessary in the event the Company could not continue its operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Productos Quimicos Coin, S.A.
de C.V. as of December 31, 2001, the results of its operations and cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Despacho Freyssinier Morin, S.C.
/s/ C.P. JUAN PABLO SOTO
C.P. Juan Pablo Soto
Partner
Mexico City, Mexico
April 19, 2002
F-30