Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
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, 2003
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
-------------------
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
-------------------
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 [X] No [ ]
---------------------
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. [X]
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 December 31, 2003: 22,731,994.
The aggregate market value on June 30, 2003 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.
TABLE OF CONTENTS
ITEM NUMBER AND DESCRIPTION
PART I
ITEM 1. BUSINESS
General.....................................................................................1
International Operations....................................................................2
Competition.................................................................................3
Environmental Matters.......................................................................3
Personnel...................................................................................4
Available Information.......................................................................4
ITEM 2. PROPERTIES
United States Specialty Products Refinery...................................................5
Mexico Specialty Products Refinery..........................................................6
Saudi Arabia Mining Properties..............................................................7
United States Mineral Interests............................................................14
Offices....................................................................................14
ITEM 3. LEGAL PROCEEDINGS...........................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.........................................................................18
ITEM 6. SELECTED FINANCIAL DATA.....................................................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General....................................................................................19
Liquidity and Capital Resources............................................................20
Results of Operations......................................................................22
Critical Accounting Policies...............................................................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................27
ITEM 9A. CONTROLS AND PROCEDURES.....................................................................27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................28
ITEM 11. EXECUTIVE COMPENSATION......................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................................................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................35
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 owns approximately 93% 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. 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.
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, 2003, 2002 and 2001. In addition,
see Item 7. Management's Discussion
1
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 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
2
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 tended down during 1998, began rising in mid-1999 and
continued to rise dramatically throughout the year 2000. The prices peaked in
late 2000 and returned to more traditional levels throughout 2001 and 2002.
During the latter part of 2002 and early 2003, prices rose upon speculation the
Iraqi freedom action would disrupt supplies. Prices remained at the historically
higher prices throughout 2003, peaking again in January 2004 before falling back
to more moderate levels.
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 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,
3
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 94 persons.
AVAILABLE INFORMATION
The Company will provide paper copies of this Annual Report on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and
amendments to those reports, all as filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, free of charge upon written or
oral request to Arabian American Development Company, 10830 North Central
Expressway, Suite 175, Dallas, Texas 75231, (214) 692-7872. The Company does not
maintain an Internet website.
4
ITEM 2. PROPERTIES.
UNITED STATES SPECIALTY PRODUCTS REFINERY
South Hampton owns and operates a specialty petrochemical 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 2,083 barrels per stream
day during 2003. 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 460 barrels per stream day in 2003.
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. The aromatics fractionation unit
was shut down in September 2003 and is currently idle. It is being marketed to
other potential toll processing customers but no plans have been identified for
use of the equipment.
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 271 barrels of production per stream day during
2003.
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 2003 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 consists of a hydro-desulphurization
reactor with an 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
5
product using a proprietary process and is under contract with a long-term toll
processing customer for a ten year period.
The specialty fractionation unit consists of a single fractionation
tower and has a design capacity of 500 BPD. This unit is currently idle. 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 owns 133 acres of land,
approximately 78 acres of which are developed. 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 products 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. In 2003, Coin secured a purchase contract with Pemex for
feedstock.
The Mexico refinery was shut down much of 2000 and 2001 due to the high
cost of feedstock and low margins. During the fourth quarter of 2001, the
refinery began to operate at reduced rates and in the first quarter of 2002 was
running at capacity. The refinery operated at about 50% capacity during much of
2002. The refinery shut down in early 2003 and remained idle until September
2003. The refinery was shut down again briefly in early 2004 but resumed
operations in March 2004.
As discussed in Note 18 to the Company's Consolidated Financial
Statements, subsequent to December 31, 2003 a creditor initiated a mortgage
foreclosure proceeding against Coin that resulted in a court ordered award of
Coin's plant facilities to the creditor. The legal transfer of ownership has yet
to occur and management cannot predict when such transfer will occur.
6
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 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:
7
RESERVES 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. 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
8
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 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
9
1994 feasibility study. Based on the 1996 update, WGM believed that the economic
analysis showed that the project remained viable.
In March 2004, 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,
2002 and 2003. The new price assumptions are averages over the projected
ten-year life of the mine and are $1.04 per pound for copper, $.61 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, 2003, approximately $543,000 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.
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
10
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 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 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
11
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."
On February 23, 2004, the Company's President received a letter from
the Deputy Minister of Petroleum and Mineral Resources stating that the Council
of Ministers had issued a resolution, dated November 17, 2003, which directed
the Minister, or whomever he may designate, to discuss with the President of the
Company the implementation of a work program, similar to that which is attached
to the Company's mining lease, to start during a period not to exceed two years,
and the payment of the past due surface rentals. If agreeable, a document
is to be signed to that effect. The resolution stated further that, if no
agreement is reached, the Ministry of Finance will give the Council of Ministers
its recommendation regarding the $11 million loan granted to the Company.
After discussions with the Deputy Minister, the Company President
responded, in a letter to the Minister dated March 23, 2004, that the Company
will agree to abide by the resolution and will start implementing the work
program to build the mine, treatment plant and infrastructure within two years
from the date of the signed agreement. The work program was prepared by the
Company's technical consultants and was attached to the letter. The Company also
will agree to pay the past due surface rentals, which now total approximately
$586,000, in two equal installments, the first on December 31, 2004 and the
second on December 31, 2005 and will continue to pay the surface rentals as
specified in the Mining Lease Agreement. On May 15, 2004, an agreement was
signed with the Ministry covering these provisions. In the event the Company
does not start to implement the program during the two-year period, the matter
will be referred to the concerned parties to seek direction in accordance with
the Mining Code and other concerned codes.
The Company intends to make preparations to start to implement the work
program, which will take approximately twenty-two months to complete, after
which commercial production can begin. The Company plans to update the
feasibility study, and, if positive, will attempt to locate a joint venture
partner to manage the project and attempt to obtain acceptable financing to
commercially develop the program now that the price of zinc, copper, gold and
silver have increased significantly. 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.
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. The mining code has been revised and was recently
presented to the Council of Ministers for approval.
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
12
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 approved.
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 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.
13
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 presently a
defendant in four lawsuits filed by former employees of South Hampton and other
refineries. The suits primarily 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. South Hampton is vigorously defending itself against these claims and
believes it has adequate insurance coverage to protect it financially from any
damage awards that might be incurred.
In addition, South Hampton is a defendant in a lawsuit filed in
September 2001 alleging that the plaintiff became ill from exposure to asbestos
while employed by South Hampton from 1961 through 1975. Mediation occurred
during 2003 in which the plaintiff made a financial offer of $200,000. South
Hampton counter-offered a structured settlement of $90,000. To date the
plaintiff has not accepted or rejected the counter-offer or withdrawn their
$200,000 settlement offer. A new trial date has been set for September 2004.
South Hampton has named additional parties in the case. It is uncertain at this
time if the case will reach trial as the other parties have requested a change
of venue. The consolidated financial statements do not include any amounts
related to this case.
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, October 2, 2003 and November 4, 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 improve 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.
On February 23, 2004, by court order, a creditor was awarded Coin's
plant facilities as a result of a mortgage foreclosure proceeding. See Note 18
to the Company's Consolidated Financial Statements.
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 2003.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock has traded on the OTC Bulletin Board and the
Pink Sheets at various times during the last two fiscal years 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, 2003
First Quarter ended March 31, 2003 $0.04 $0.04
Second Quarter from April 1, 2003 to May 27, 2003 $0.06 $0.05
Pink Sheets
------------------
High Low
------ -----
Second Quarter from May 28, 2003 to June 30, 2003 $0.06 $0.06
Third Quarter ended September 30, 2003 $0.06 $0.03
Fourth Quarter ended December 31, 2003 $0.07 $0.05
OTC Bulletin Board
------------------
High Low
------ -----
Fiscal Year Ended December 31, 2002
First Quarter ended March 31, 2002 $0.21 $0.19
Second Quarter to 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 December 31, 2003, there were 750 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.
18
See Note 10 to the Company's Consolidated Financial Statements for
information about stock options outstanding at December 31, 2003.
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):
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 39,625 $ 36,753 $ 32,713 $ 42,612 $ 27,791
Net Income (Loss) $ (3,505) $ 692 $ (2,601) $ (4,288) $ 2,740
Net Income (Loss) Per Share-Diluted $ (.15) $ .03 $ (.11) $ (.19) $ .12
Total Assets (at December 31) $ 52,672 $ 55,621 $ 55,748 $ 57,599 $ 52,848
Notes Payable (at December 31) $ 11,744 $ 11,744 $ 11,744 $ 11,924 $ 11,874
Current Portion of Long-Term Debt (at
December 31) $ 3,170 $ 7,127 $ 7,599 $ 8,061 $ 677
Total Long-Term Obligations
(at December 31) $ -- $ -- $ -- $ -- $ 4,314
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.
19
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.
Specialty Petrochemicals Segment. Historically, this segment has
contributed substantially all of the Company's internally generated cash flows.
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. 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. During 2003, the industry again experienced tighter
margins resulting from the rise in feedstock prices. Feedstock prices remained
at historically higher prices throughout 2003 which resulted in operating losses
for the segment in 2003. After January 2004, feedstock prices began to fall back
to more moderate levels.
South Hampton obtains its feedstock requirements from a sole source
vendor. At April 30, 2004 South Hampton owed this supplier approximately
$7,000,000. As discussed in Note 19, on May 7, 2004, South Hampton and a major
supplier signed a letter of intent whereby the supplier will purchase up to
$1,800,000 of capital equipment for use by South Hampton to facilitate the
execution of a new processing agreement between a large customer and South
Hampton.
South Hampton entered into a $3.25 million revolving credit agreement
in September 1999 with a bank, which terminated on June 15, 2003. On July 29,
2003 a Purchase and Sale Agreement was negotiated with the same bank. The terms
and conditions of this agreement are discussed in Note 4 to the Company's
Consolidated Financial Statements.
In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into a $3.5 million loan agreement in December
1999 with a commercial lending company. This agreement is discussed in Note 8 to
the Company's Consolidated Financial Statements. The loan was paid in full in
2003.
At December 31, 2003 Coin had two loans payable to Mexican banks in the
outstanding principal amounts of $1,125,725 and $2,044,096. The terms and
conditions of these loans are discussed in Note 8 to the Company's Consolidated
Financial Statements. Also, as discussed in Note 18 to the Company's
Consolidated Financial Statements, the creditor of the $1,125,725 loan initiated
a mortgage foreclosure proceeding subsequent to December 31, 2003 that resulted
in a court ordered award of the plant facilities to the creditor.
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 $933,000 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 $1,158,000).
20
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.
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, 2003 of $16,557,704
and had an excess of current liabilities over current assets of $25,828,242 at
December 31, 2003. As discussed in Notes 2 and 8 to the Company's
Consolidated Financial Statements, the Company was in default of various loan
agreements totaling $17,974,211, including accrued interest. All of these
matters raise substantial doubt about the Company's ability to continue as a
going concern.
21
The table below summarizes the following contractual obligations of the
Company:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS YEARS 5 YEARS
----------------------- ----- ------ --------- ----- -------
Long-Term Debt Obligations 3,169,821 3,169,821 --- --- ---
Capital Lease Obligations --- --- --- --- ---
Operating Lease Obligations 4,860,007 937,265 1,534,060 746,020 1,642,662
Purchase Obligations --- --- --- --- ---
Other Long-Term Liabilities Reflected on the Company's
Balance Sheet under GAAP --- --- --- --- ---
---------------------------------------------------------------------
Total 8,029,828 4,107,086 1,534,060 746,020 1,642,662
RESULTS OF OPERATIONS
Comparison of the Years 2003 to 2002
Specialty Petrochemicals Segment. Total refined product sales increased
approximately 10% or $3.1 million in 2003, despite a reduction in sales by Coin
of approximately $1.9 million. Cost of sales (excluding depreciation) increased
approximately 21% or $6.3 million in 2003, which includes a reduction in Coin's
cost of sales of approximately $1.4 million. 2003 was a difficult year for the
Refining Company and for the petrochemical industry. Feedstock prices fluctuated
by as much as 25% in early to mid-2003 and were near historical highs at year
end. Feedstock price variability made preparation and planning difficult.
However, product sales volumes remained relatively stable and at year end were
within 2% of the 2002 levels. Gross sales of refined products (excluding Coin)
were up by 17% in 2003 over 2002 largely due to increased selling prices. Gross
feedstock costs were approximately $6.6 million, or 38%, higher in 2003 than in
2002. A result of these factors was a reduction of gross margin on sales of $1.6
million in 2003 from 2002, a 12% decrease. The feedstock hedging program, which
the Refining Company had maintained for the previous two years, was discontinued
in mid-2003 due to the consolidation of the industry's petroleum trading
business. Many of the remaining energy trading firms prefer to do business on a
much larger scale than the Refining Company desires, and therefore a suitable
trading partner was not available for much of the year. This situation was
resolved in late 2003 and the hedging strategy was renewed for 2004.
The other factor having a large effect on the Refining Company's
performance during 2003 was the high cost of natural gas throughout the summer
months of 2003. National gas prices are traditionally lower during the summer
months as demand falls and injection into storage is done ratably throughout the
warmer months. Lower than normal storage levels in early 2003 resulted in there
being a higher than normal injection rate during the summer months to replenish
storage reserves. This higher injection rate, in addition to perceived market
shortages, kept prices 50% higher throughout the 2003 summer months than was
experienced in 2002. Natural gas is the Refining Company's single largest
operating expense and the increased market prices for this fuel gas increased
operating costs by approximately $1.0 million for 2003 over 2002.
22
Toll processing continued to be a steady revenue source for the
Refining Company during 2003. While the toll processing customers continued to
operate at high levels, the loss of a major customer in late 2003 caused tolling
fees to be reduced by 6% to $3.9 million in 2003 compared to $4.1 million in
2002.
General and administrative expenses of the specialty petrochemicals
segment increased approximately $35,000 or 1% in 2003 compared to 2002. Lower
insurance premiums in 2003 resulted from the segment's excellent safety record.
In early 2004, the refinery achieved a milestone by completing three years
without a lost time accident. Interest expense decreased in 2003 to $1.2 million
from $1.3 million in 2002.
The Mexico refinery operated at about 50% of capacity during much of
2002 and was shut down in early 2003 and remained idle until September 2003 when
it resumed operations. The refinery was shut down briefly in early 2004 but in
March 2004 resumed operations. This refinery is now delivering product to the
largest consumer of pentanes in Mexico.
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 $9.0
million at December 31, 2003. These loss carryforwards expire during the years
2004 through 2023.
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 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
23
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.
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 adoption of SAFS No. 143 at January 1, 2003 did not have a
material impact on the Company's Consolidated Financial Statements.
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 adoption of SFAS
No. 145 at January 1, 2003 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN
45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit and warranty
obligations. It also clarifies that at the time a company issues a guarantee, a
company must recognize an initial liability for the fair value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The provisions of FIN 45
relating to initial recognition and measurement must be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
the initial recognition and measurement provisions did not have a significant
impact on the Company's financial condition or results of operations. The
disclosure requirements of FIN 45 were effective for both interim and annual
periods that end after December 15, 2002. The adoption of FIN 45 did not have a
material impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" and in December 2003, issued FIN 46R, which superceded FIN 46
(collectively FIN 46) to address perceived weaknesses in the accounting and
financial reporting for investments or interests in entities commonly known as
special purpose or off-balance-sheet entities. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 was required to be applied to preexisting
entities of the Company as of the beginning of the first quarter after June 15,
2003. FIN 46 was required to be applied to all new entities with which the
Company became involved beginning February 1, 2003. Provisions of FIN 46R are
applicable to all entities subject to the Interpretation no later than the end
of the first quarter after March 15, 2004. The adoption of FIN 46 did not have a
material impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement was developed to respond to concerns expressed by users of financial
statements about issuers' classification in the statement of financial position
of certain financial instruments that have characteristics of both liabilities
and equity but that have been presented either entirely as equity or between the
liabilities section and the equity section of the statement of financial
position ("mezzanine equity"). This Statement also addresses questions about the
classification of certain financial instruments that embody obligations to issue
equity shares. SFAS No. 150 aims to eliminate diversity in practice by requiring
certain types of "freestanding" financial instruments, such as mandatorily
redeemable instruments, to be reported as liabilities. Preferred dividends on
these instruments are now classified as interest expense. Retroactive
reclassification of amounts reported in historical financial statements for
periods prior to the effective date of SFAS No. 150 is not permitted. The
provisions of SFAS No. 150, which also include a number of new disclosure
requirements, was effective for instruments entered into or modified after May
31, 2003 and pre-existing instruments as of the beginning of the first interim
period that commenced after June 15, 2003. The adoption of SFAS No. 150 did not
have a material impact on the Company's consolidated financial position.
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
24
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 March 2004, 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 ten-year life of the Al Masane mine and are $1.04
per pound for copper, $.61 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.
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, 2003, 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.
25
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, 2003 and 2002, the Company had $2.5 million and $5.8 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 $18,200 and $34,300 at
December 31, 2003 and 2002, 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
including swap and option 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, 2003, the Refining Company had natural gas option
agreements in effect expiring in September 2004 and March 2005. Additionally,
in the first quarter of 2004 the Refining Company entered into five feedstock
swap agreements that expire through June 2004. The options and swap agreements
cover approximately 72% of the average monthly fuel stock requirements. Market
risk is estimated as a hypothetical 10% increase in the cost of natural gas and
feedstock over the market price prevailing on December 31, 2003. Assuming 2004
total refined product sales volumes at the same rate as 2003, such an increase
would result in an increase in the cost of natural gas and feedstock of
approximately $3.5 million in fiscal 2004, before considering the effect of the
option and swap agreements outstanding as of December 31, 2003.
At December 31, 2002, the Refining Company had two feedstock swap
agreements in effect which expired in January 2003. 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.
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.
26
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.
ITEM 9A. CONTROLS AND PROCEDURES.
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 Company's
disclosure controls and procedures, as of the end of the period covered by this
report. Based upon that evaluation, the President and Chief Executive Officer
and Treasurer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective such
that information relating to the Company (including its consolidated
subsidiaries) required to be disclosed in the Company's Securities and Exchange
Commission reports (i) is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms and (ii) is accumulated and communicated to the Company's management,
including the President and Chief Executive Officer and Treasurer, as
appropriate to allow timely decisions regarding required disclosure.
During the quarter ended December 31, 2003, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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; OTHER DIRECTORSHIPS AGE DATE OF 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 September 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.
The Board of Directors of the Company has an Audit Committee which is
currently composed of Messrs. Ghazi Sultan and Mohammed O. Al-Omair. The Board
has determined that each of the members of the Audit Committee meets the
Securities and Exchange Commission and National Association of Securities
Dealers standards for independence. The Board has also determined that Mohammed
O. Al-Omair meets the Securities and Exchange Commission criteria of an "audit
committee financial expert."
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 71
Nicholas N. Carter President - TOCCO 57
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.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer and controller, and to persons performing similar functions. A copy of
the Code of Ethics has been filed as an exhibit to this Annual Report on Form
10-K.
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, 2003, 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, 2003,
2002 and 2001 of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company:
29
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, 2003 $ 72,000 -- -- -- -- -- $8,000
President and Chief 2002 $ 72,000 -- -- -- -- -- $8,000
Executive Officer 2001 $ 72,000 -- -- -- -- -- $8,000
Nicholas N. Carter 2003 $113,874 $26,250 -- -- -- -- --
President, TOCCO 2002 $ 84,500 $61,700 -- -- -- -- --
2001 $ 81,575 $30,200 -- -- -- -- --
(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, 2003.
(2) Includes $37,639, $55,898 and $61,947 in compensation for the fiscal years
ended December 31, 2003, December 31, 2002 and December 31, 2001,
respectively, that was deferred at the election of Mr. El-Khalidi. All
present deferred compensation owing to Mr. El-Khalidi aggregating 882,155
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, 2003, December 31, 2002 and December 31, 2001, 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, 2003 was $276,000.
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 $100 for each committee meeting which they
attend, in addition to reimbursing them for expenses incurred in connection with
their attendance.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES
The following table shows information concerning the exercise of stock
options during the fiscal year ended December 31, 2003 by the executive officers
named in the Summary Compensation Table and the estimated value of unexercised
options held by such individuals at year-end:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FY-END(#) FY-END ($)(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 $.05 of the Company's Common Stock on the
Pink Sheets on December 31, 2003.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 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%
c/o Saudi Fal
P. O. Box 4900
Riyadh, Saudi Arabia 11412
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 *
c/o Saudi Fal
P. O. Box 4900
Riyadh, Saudi Arabia 11412
Ghazi Sultan..................................................... 25,000 *
P.O. Box 5360
Jeddah, Saudi Arabia 21422
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
December 31, 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.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, PRICE OF OUTSTANDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS COLUMN(a))
PLAN CATEGORY (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 45,000 $78,750 0
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Total 45,000 $78,750 0
- ----------------------------------------------------------------------------------------------------------------------
32
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 2003 and 2002, the Company made payments of
approximately $17,800 and $17,700, respectively, for such purposes. As of
December 31, 2003, Pioche owed the Company $222,863 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 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 2003, South Hampton incurred product transportation costs of
approximately $388,000 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 had a 50%
equity interest. Mr. Crain resigned on January 2, 2004 as an officer of TOCCO
and a co-owner of STTC. Pursuant to a lease agreement, South Hampton leases
transportation equipment from STTC at a rate of approximately $32,800 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 95% 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 operated on a month-to-month basis until January 1, 2004, when a new
five year agreement was entered into.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The table below sets forth the fees that Moore Stephens Travis Wolff,
LLP billed the Company for the audit of its financial statements for the fiscal
years ended December 31, 2003 and 2002 and the review of its financial
statements for the quarterly periods in the year ended December 31, 2003, and
all other fees Moore Stephens Travis Wolff, LLP billed the Company for services
rendered during the fiscal years ended December 31, 2003 and December 31, 2002,
respectively:
2003 2002
-------- --------
Audit Fees $ 96,874 $113,339
Audit-Related Fees $ 0 $ 0
Tax Fees $ 0 $ 0
All Other Fees $ 2,500 $ 0
33
Under its charter, the Audit Committee must pre-approve all auditing
services and permitted non-audit services (including the fees and terms thereof)
to be performed for the Company by its independent auditor, subject to the de
minimis exceptions for non-audit services under the Securities Exchange Act of
1934, as amended, which are approved by the Audit Committee prior to the
completion of the audit. The Audit Committee may delegate authority to grant
pre-approvals of audit and permitted non-audit services to subcommittees,
provided that decisions of the subcommittee to grant pre-approvals must be
presented to the full Audit Committee at its next scheduled meeting. During
2003, each new engagement of Moore Stephens Travis Wolff, LLP was approved in
advance by the Audit Committee.
34
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, 2003 and 2002.
Consolidated Statements of Operations for the three years
ended December 31, 2003.
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2003.
Consolidated Statements of Cash Flows for the three years
ended December 31, 2003.
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, 2003.
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)).
35
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) - 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(f) - 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)).
10(g) - 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(h) - 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)).
36
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10(i) - 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(j) - 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(k) - 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(l) - 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(m) - 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)).
10(n) - 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. (incorporated by reference to Exhibit
10(s) to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 (File No. 0-6247)).
10(o) - Equipment Lease Agreement dated November 14, 2003, between
Silsbee Trading and Transportation Corp. and South Hampton
Refining Company.
10(p) - Pledge Agreement dated as of May 15, 2001, by Arabian
American Development Company, American Shield Refining
Company, Fahad Al-Athel, Hatem El-Khalidi, Ingrid El-Khalidi
and Preston Peak.
14 - Code of Ethics for Senior Financial Officers.
37
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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 Exhibit 21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 0-6247)).
24 - Power of Attorney (set forth on the signature page
hereto).
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 October 16, 2003.
- Current Report on Form 8-K dated December 29, 2003.
38
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
Dated: June 22, 2004 By: /s/ Hatem El-Khalidi
---------------------------------------
Hatem El-Khalidi
President and Chief Executive Officer
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 June 22, 2004.
SIGNATURE TITLE
--------- -----
/s/ Hatem El-Khalidi President, Chief Executive Officer and Director
- ----------------------------------------- (principal executive officer)
Hatem El-Khalidi
/s/ Drew Wilson, Jr. Secretary and Treasurer
- ----------------------------------------- (principal financial and accounting officer)
Drew Wilson, Jr.
/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
39
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm .................. F-1
Consolidated Balance Sheets at December 31, 2003 and 2002 ................ F-3
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001 ................ F-5
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001 ................ F-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001 ................. F-7
Notes to Consolidated Financial Statements ............................... F-8
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm on Schedules ..... F-29
Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 2003 .......................... F-30
INDEX TO SUPPLEMENTAL INDEPENDENT AUDITORS' REPORTS
Independent Auditors' Report on Productos Quimicos Coin, S.A. DE D.V.
For the Financial Statements at December 31, 2003 .................... F-31
Independent Auditors' Report on Productos Quimicos Coin, S.A. DE D.V.
For the Financial Statements at December 31, 2002 ..................... F-32
40
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, 2003 and
2002 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. 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, 2003 and 2002, or for the three years in the
period ended December 31, 2003, the statements of which reflect total assets
constituting 5% and 6%, respectively, and total revenues constituting 3%, 10%
and 5%, 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, 2003 and 2002 and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 2003 in conformity with U. S. generally accepted
accounting principles.
F-1
As discussed in Note 18, subsequent to year-end, a Coin creditor initiated a
mortgage foreclosure proceeding that resulted in a court ordered award of Coin's
plant facilities to the creditor. The legal transfer of ownership has yet to
occur and management cannot predict when such transfer will occur.
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, 2003 of
$16,557,704 and had an excess of current liabilities over current assets of
$25,828,242 at December 31, 2003. As discussed in Notes 2 and 8 to the
consolidated financial statements, at December 31, 2003, the Company was in
default of various loan agreements totaling $17,974,211, including accrued
interest. If resolution with the Company's creditors 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.
/S/ MOORE STEPHENS TRAVIS WOLFF, LLP
Dallas, Texas
March 24, 2004
(except for Note 19,
as to which the date
is May 15, 2004)
F-2
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
ASSETS 2003 2002
------------ ------------
CURRENT ASSETS
Cash $ 177,716 $ 319,171
Trade receivables, net 2,810,858 4,549,369
Inventories 656,481 900,061
------------ ------------
Total current assets 3,645,055 5,768,601
REFINERY PLANT, PIPELINE AND EQUIPMENT - AT COST 18,406,665 18,250,302
LESS ACCUMULATED DEPRECIATION (9,659,837) (8,294,753)
------------ ------------
REFINERY PLANT, PIPELINE AND EQUIPMENT, NET 8,746,828 9,955,549
AL MASANE PROJECT 36,165,120 35,818,157
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,211,674 1,211,010
OTHER ASSETS 472,572 436,244
------------ ------------
TOTAL ASSETS $ 52,672,497 $ 55,620,809
============ ============
F-3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31,
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 7,587,963 $ 4,217,014
Accrued interest 3,467,657 2,558,478
Accrued liabilities 832,236 759,591
Accrued liabilities in Saudi Arabia 2,671,840 2,490,005
Notes payable 11,025,780 11,025,780
Notes payable to stockholders 718,000 718,000
Current portion of long-term debt 3,169,821 7,126,773
------------- -------------
Total current liabilities 29,473,297 28,895,641
DEFERRED REVENUE 166,543 177,806
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 834,956 844,298
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized, 40,000,000 shares of $.10
par value; issued and outstanding, 22,431,994 shares
in 2003 and 2002 2,243,199 2,243,199
Additional paid-in capital 36,512,206 36,512,206
Accumulated deficit (16,557,704) (13,052,341)
------------- -------------
Total stockholders' equity 22,197,701 25,703,064
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,672,497 $ 55,620,809
============= =============
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,
2003 2002 2001
----------- ----------- -----------
Revenues
Refined product sales $35,760,439 $32,638,719 $28,982,357
Processing fees 3,864,294 4,114,281 3,730,311
----------- ----------- -----------
39,624,733 36,753,000 32,712,668
Operating costs and expenses
Cost of refined product sales and processing 36,374,346 29,529,641 28,833,062
General and administrative 4,387,957 4,087,875 3,717,822
Depreciation 1,367,218 1,414,202 1,381,469
----------- ----------- -----------
42,129,521 35,031,718 33,932,353
----------- ----------- -----------
Operating income (loss) (2,504,788) 1,721,282 (1,219,685)
Other income (expense)
Interest income 31,954 37,621 44,534
Interest expense (1,244,749) (1,354,042) (1,506,544)
Minority interest 9,343 9,064 145,649
Foreign exchange transaction gain (loss) 149,551 240,106 (104,979)
Miscellaneous income 53,826 38,032 40,007
----------- ----------- -----------
(1,000,575) (1,029,219) (1,381,333)
----------- ----------- -----------
Income (loss) before income taxes (3,505,363) 692,063 (2,601,018)
Income tax expense - - -
----------- ----------- -----------
Net income (loss) $(3,505,363) $ 692,063 $(2,601,018)
=========== =========== ===========
Basic and diluted net income (loss) per common share $ (0.15) $ 0.03 $ (0.11)
=========== =========== ===========
Basic and diluted weighted average number of common
shares outstanding 22,731,994 22,731,994 22,768,858
=========== =========== ===========
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
---------- ---------- ----------- -------------- -----------
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
Net loss - - - (3,505,363) (3,505,363)
---------- ---------- ----------- -------------- -----------
DECEMBER 31, 2003 22,431,994 $2,243,199 $36,512,206 $ (16,557,704) $22,197,701
========== ========== =========== ============== ===========
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,
2003 2002 2001
----------- --------- -----------
Operating activities
Net income (loss) $(3,505,363) $ 692,063 $(2,601,018)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,367,218 1,414,202 1,381,469
Increase (decrease) in deferred revenue (11,263) 56,934 (10,529)
Unrealized (gain) loss on feedstock swaps - (505,890) 505,890
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables (1,511,489) (111,807) 802,207
(Increase) decrease in inventories 243,580 (176,748) 237,181
(Increase) decrease in other assets (36,328) 51,581 56,039
(Decrease) increase in accounts payable and accrued
liabilities 3,443,594 (871,743) (396,490)
Increase in accrued interest 909,179 801,590 1,051,184
Increase in accrued liabilities in
Saudi Arabia 181,835 63,898 276,910
Other (11,476) (74,447) (43,694)
----------- --------- -----------
Net cash provided by operating activities 1,069,487 1,339,633 1,259,149
----------- --------- -----------
Investing activities
Additions to Al Masane Project (346,963) (202,016) (544,568)
Additions to refinery plant, pipeline and equipment (156,363) (545,939) (455,472)
(Additions to) reduction in mineral properties in
the United States (664) (41) 71,173
----------- --------- -----------
Net cash used in investing activities (503,990) (747,996) (928,867)
----------- --------- -----------
Financing activities
Additions to notes payable and long-term obligations - 299,236 285,940
Reduction of notes payable and long-term obligations (706,952) (771,231) (575,670)
----------- --------- -----------
Net cash used in financing activities (706,952) (471,995) (289,730)
----------- --------- -----------
Net increase (decrease) in cash (141,455) 119,642 40,552
Cash at beginning of year 319,171 199,529 158,977
----------- --------- -----------
Cash at end of year $ 177,716 $ 319,171 $ 199,529
=========== ========= ===========
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 - CONTINUED
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"). 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, 2003 and 2002, 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.
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, 2003, 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.
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
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 2003 include the pay-off
of South Hampton's $3.25 million revolving bank note with proceeds from
sales of accounts receivables under a Purchase and Sale Agreement with
the bank. In 2001, such activities include the cancellation of 57,000
shares of common stock in exchange for a $128,000 receivable from an
officer of the Company.
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 issueable 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 subsidiary's 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.
Saudi Arabian investors, including certain members of the Company's
board of directors, own approximately 61% of the Company's outstanding
common stock at December 31, 2003.
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.
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
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 (SFAS) No.
123, as amended by Statement of Financial Accounting Standards 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 Nos. 138 and 149, 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. SFAS No.
133, as amended, was adopted by the Company on January 1, 2001 and SFAS
No. 149 was adopted on June 30, 2003.
The Company has periodically entered into commodity swap derivative
agreements to decrease the price volatility of its natural gasoline
feedstock requirements and has entered into option contracts to
decrease the price volatility of its natural gas fuel stock
requirements in 2003. These derivative agreements were not designated
as hedges by the Company. (See Note 17.)
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, 2003 and 2002 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 adoption of SFAS No. 143 at January 1, 2003 did not
have a material impact on the consolidated financial statements.
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
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
only if they are deemed to be unusual and infrequent, in accordance
with the current GAAP criteria for extraordinary classification. In
addition, SFAS No. 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 adoption of SFAS No. 145 at January 1, 2003 did not have a
material impact on the Company's financial position, results of
operations or cash flows.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34". FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit and warranty obligations. It also
clarifies that at the time a company issues a guarantee, a company must
recognize an initial liability for the fair value of the obligations it
assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The provisions of FIN 45
relating to initial recognition and measurement must be applied on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and measurement
provisions did not have a significant impact on the Company's financial
condition or results of operations. The disclosure requirements of FIN
45 were effective for both interim and annual periods that end after
December 15, 2002. The adoption of FIN 45 did not have a material
impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" and in December 2003, issued FIN 46R, which
superceded FIN 46 (collectively FIN 46) to address perceived weaknesses
in the accounting and financial reporting for investments or interests
in entities commonly known as special purpose or off-balance-sheet
entities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was required
to be applied to preexisting entities of the Company as of the
beginning of the first quarter after June 15, 2003. FIN 46 was required
to be applied to all new entities with which the Company became
involved beginning February 1, 2003. Provisions of FIN 46R are
applicable to all entities subject to the Interpretation no later than
the end of the first quarter after March 15, 2004. The adoption of FIN
46 did not have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement was developed to respond to concerns expressed
by users of financial statements about issuers' classification in the
statement of financial position of certain financial instruments that
have characteristics of both liabilities and equity but that have been
presented either entirely as equity or between the liabilities section
and the equity section of the statement of financial position
("mezzanine equity"). This Statement also addresses questions about the
classification of certain financial instruments that embody obligations
to issue equity shares. SFAS No. 150 aims to eliminate diversity in
practice by requiring certain types of "freestanding" financial
instruments, such as mandatorily redeemable instruments, to be reported
as liabilities. Preferred dividends on these instruments are now
classified as interest expense. Retroactive reclassification of amounts
reported in historical financial statements for periods prior to the
effective date of SFAS No. 150 is not permitted. The provisions of SFAS
No. 150, which also include a number of new disclosure requirements,
was effective for instruments entered into or modified after May 31,
2003 and pre-existing instruments as of the beginning of the first
interim period that commenced after June 15, 2003. The adoption of SFAS
No. 150 did not have a material impact on the Company's consolidated
financial position.
NOTE 2 - 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 $25,828,242 at December 31,
2003.
As discussed in Note 8, the Company was in default of various loan
agreements totaling $17,974,211, including accrued interest, and the
plant facilities of Coin have been foreclosed by a creditor (See Note
18). If resolution with the Company's creditors 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 it would be able to do so.
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 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 $933,000 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 $1,158,000). The note payable was originally due in ten
annual installments beginning in 1984. While the Company has not 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,
F-11
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS - CONTINUED
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 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 $.61 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 3 - 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 9% and 10% of the total
product sales in 2002 and in 2001, respectively. No one customer
accounted for more than 10% of sales in 2003. Minimal credit losses
have been incurred. The carrying amount of accounts receivable
approximates fair value at December 31, 2003.
F-12
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - CONCENTRATIONS OF REVENUES AND CREDIT RISK - CONTINUED
South Hampton's operations are dependent upon one major supplier for
its feedstock supply. At December 31, 2003, South Hampton owed the
supplier approximately $5,800,000 for feedstock purchases. This
liability is included in Accounts Payable in the consolidated financial
statements.
Coin's operations are dependent upon Pemex (Mexican government owned
vendor) for its feedstock supply. Coin's operations have been
negatively impacted in 2003, 2002 and 2001 by the inability to obtain
feedstock for production. In 2003, Coin secured a purchase contract
with Pemex for feedstock.
NOTE 4 - SALE OF ACCOUNTS RECEIVABLE
The Company accounts for the transfers of accounts receivable as sales
transactions. South Hampton has an agreement in place with a bank to
sell its U.S. trade receivables on a limited recourse basis up to a
maximum of $4.5 million. As collections reduce previously sold
receivables, South Hampton may replenish these with new receivables. At
December 31, 2003, approximately $3.4 million had been sold and, due to
the revolving nature of the agreement, also remained outstanding. The
initial sales proceeds under this agreement were used to retire the
$3.25 million revolving credit agreement balance outstanding at
December 31, 2002. (See Note 8 E).
The agreement contains restrictions on dividends payable to the Company
by South Hampton and is collateralized by accounts receivable and
inventory. The risk South Hampton bears from bad debt losses on U.S.
trade receivables sold is retained since it holds a retained interest
in the sold receivables of approximately $510,000. Receivables sold may
not include amounts over 90 days past due. Expenses incurred under this
program of approximately $114,000 are included in interest expense in
the statements of operations.
NOTE 5 - INVENTORIES
Inventories include the following at December 31:
2003 2002
-------- --------
Refined products $656,481 $900,061
======== ========
At December 31, 2003 and 2002, current cost exceeded the LIFO value by
approximately $256,000 and $203,000, respectively.
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
F-13
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA -
CONTINUED
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 proposed new Saudi Arabian Mining Code is approved.
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. 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.
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, 2003, approximately $543,000 of rental
payments was 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.
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
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 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.
On February 23, 2004, the Company's President received a letter from
the Deputy Minister of Petroleum and Mineral Resources stating that the
Council of Ministers had issued a resolution, dated November 17, 2003,
which directed the Minister, or whomever he may designate, to discuss
with the President of the Company the implementation of a work program,
similar to that which is attached to the Company's mining lease, to
start during a period not to exceed two years, and the payment of the
past due surface rentals. If agreeable, a document is to be signed to
that effect. The resolution stated further that, if no agreement is
reached, the Ministry of Finance will give the Council of Ministers its
recommendation regarding the $11 million loan granted to the Company.
After discussions with the Deputy Minister, the Company President
responded, in a letter to the Minister dated March 23, 2004, that the
Company will agree to abide by the resolution and will start
implementing the work program to build the mine, treatment plant and
infrastructure within two years from the date of the signed agreement.
The work program was prepared by the Company's technical consultants
and was attached to the letter. The Company also will agree to pay the
past due surface rentals, which now total approximately $586,000, in
two equal installments, the first on December 31, 2004 and the second
on December 31, 2005 and will continue to pay the surface rentals as
specified in the Mining Lease Agreement. On May 15, 2004, an agreement
was signed with the Ministry covering these provisions. In the event
the Company does not start to implement the program during the two-year
period, the matter will be referred to the concerned parties to seek
direction in accordance with the Mining Code and other concerned codes.
The Company intends to make preparations to start to implement the work
program, which will take approximately twenty-two months to complete,
after which commercial production can begin. The Company plans to
update the feasibility study, and, if positive, will attempt to locate
a joint venture partner to manage the project and attempt to obtain
acceptable financing to commercially develop the program now that the
price of zinc, copper, gold and silver have increased significantly.
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. The mining code
has been revised and was recently presented to the Council of Ministers
for approval.
There can be no assurances that the Company will be able to locate a
joint venture partner, form a joint venture or obtain financing
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
from the Saudi Industrial Development Fund ("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. At
December 31, 2003, approximately $543,000 of rental payments was
unpaid.
Deferred exploration and development costs of the Al Masane Project at
December 31, 2003, 2002 and 2001, 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
2003 for 2003 2002 for 2002 2001 for 2001
------------ ---------- ------------ ---------- ------------ ----------
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 -
Other costs:
Labor, consulting
services and project
administration costs $ 21,781,418 $ 346,963 $ 21,434,455 $ 319,349 $ 21,115,106 $ 193,082
Materials and
maintenance 6,175,232 - 6,175,232 - 6,175,232 1,486
Feasibility study 2,907,771 - 2,907,771 - 2,907,771 -
------------ ---------- ------------ ---------- ------------ ----------
Total 30,864,421 346,963 30,517,458 319,349 30,198,109 194,568
------------ ---------- ------------ ---------- ------------ ----------
$ 36,165,120 $ 346,963 $ 35,818,157 $ 319,349 $ 35,498,808 $ 194,568
============ ========== ============ ========== ============ ==========
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.
F-16
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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:
2003 2002
------------ ------------
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
Other 12,500 12,500
------------ ------------
Total $ 11,025,780 $ 11,025,780
============ ============
Notes payable to stockholders:
Secured notes to investors (See Note B) $ 698,000 $ 698,000
Unsecured note to Saudi investor (See Note C) 20,000 20,000
------------ ------------
Total $ 718,000 $ 718,000
============ ============
Long-term debt:
Revolving notes to foreign banks (See Note D) $ 3,169,821 $ 3,215,100
Revolving bank note (See Note E) - 3,250,000
Secured note with commercial lender (See Note F) - 661,673
------------ ------------
Total 3,169,821 7,126,773
Less current portion (3,169,821) (7,126,773)
------------ ------------
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 stockholder 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%. The balance also includes loans payable to the wife of the
Company's President for $100,000 and to a stockholder of the
Company for $100,000 which are due on demand with interest at
9%. All of these loans are secured by a pledge of all shares
of stock of American Shield Refining Company and all shares of
stock of Texas Oil and Chemical Co. II, Inc.
(C) Represents loan payable to a stockholder of the Company, which
is due on demand with interest at 9%.
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
(D) Represents two loans payable to Mexican banks of $1,125,725
and $2,044,096, as of December 31, 2003. The first loan is
payable in monthly payments through October 2004. The second
loan is payable in quarterly payments through March 2007. The
first loan bears interest at 5% and the second loan bears
interest at the LIBOR rate plus seven points (LIBOR was 1.119%
at December 31, 2003). Both loans are collateralized by all of
the assets of Coin including the
F-18
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
plant located in Coatzacoalcos, near Veracruz. Coin was 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 $3,103,009 and $2,275,823 are
included in accrued interest at December 31, 2003 and 2002,
respectively. As discussed in Note 18, the creditor of the
first loan initiated a mortgage foreclosure subsequent to
December 31, 2003.
(E) South Hampton had a $3.25 million revolving credit agreement
with a bank. The agreement was collateralized by a first
security interest in certain of its assets and terminated on
June 15, 2003. South Hampton subsequently entered into a
Purchase and Sale Agreement with the same bank to sell its
accounts receivables. See Note 4.
(F) South Hampton and Gulf State entered into a $3.5 million loan
agreement with a commercial lending company in December 1999
that was collateralized by a first security interest in all of
their assets, except those dedicated to the bank mentioned in
Note E above. The balance outstanding at December 31, 2002 was
retired in 2003.
Interest of $335,397, $552,452 and $455,360 was paid in 2003, 2002, and
2001, respectively.
NOTE 9 - ACCRUED LIABILITIES IN SAUDI ARABIA
Accrued liabilities in Saudi Arabia at December 31 are summarized as
follows:
2003 2002
------------ ------------
Salaries $ 1,407,821 $ 1,397,270
Termination benefits 683,010 658,370
Surface rentals 543,246 425,912
Other liabilities 37,763 8,453
------------ ------------
Total $ 2,671,840 $ 2,490,005
============ ============
NOTE 10 - COMMITMENTS AND CONTINGENCIES
South Hampton has leased, on a month to month basis, various vehicles
and equipment from Silsbee Trading and Transportation Corp. ("STTC"), a
trucking and transportation company currently owned by an officer of
TOCCO at a monthly cost of approximately $32,000. Total rental costs
were approximately $388,000 in 2003, $422,000 in 2002 and $418,000 in
2001. Effective January 1, 2004, South Hampton and STTC entered into a
five year lease agreement requiring a monthly rental of $32,835.
The Company is the holder of the Al Masane mining lease requiring
annual rental payments of approximately $117,300 through 2023, with an
option to extend the lease for an additional twenty years.
Future minimum lease payments under these lease agreements are as
follows:
Year Ended
December 31
-----------
2004 $ 937,265
2005 511,320
2006 511,320
2007 511,320
2008 511,320
Thereafter 1,877,462
----------
Total $4,860,007
==========
South Hampton has guaranteed a $160,000 note payable of a limited
partnership in which it has a 19% interest. Included in Accrued
Liabilities at December 31, 2003 and 2002 is $66,570 related to this
guaranty.
South Hampton, together with several other companies, is presently a
defendant in four lawsuits filed by former employees of South Hampton
and other refineries. The suits primarily 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. A motion
for a summary judgment was granted to South Hampton in October 2003 for
a previous lawsuit. South Hampton is vigorously defending itself
against these claims and believes it has adequate insurance coverage to
protect it financially from any damage awards that might be incurred.
In addition, South Hampton is a defendant in a lawsuit filed in
September 2001 alleging that the plaintiff became ill from exposure to
asbestos while employed by South Hampton from 1961 through 1975.
Mediation occurred during 2003 in which the plaintiff made a financial
offer of $200,000. South Hampton counter-offered a structured
settlement of $90,000. To date the plaintiff has not accepted or
rejected the counter-offer or withdrawn their $200,000 settlement
offer. A new trial date has been set for September 2004. South Hampton
has named additional parties in the case. It is uncertain at this time
if the case will reach trial as the other parties have requested a
change of venue. The consolidated financial statements do not include
any amounts related to this case.
F-19
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - COMMITMENTS AND CONTINGENCIES - CONTINUED
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, October
2 and November 4, 2003. South Hampton believes the original penalty and
the additional allegations are incorrect and intends to continue to
vigorously defend itself against these allegations, the proposed
penalties and proposed corrective actions. 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.
Negotiations between South Hampton and the TCEQ are expected to
continue in order to reach a final settlement.
South Hampton has a liability of $200,000 recorded at December 31, 2003
and 2002, related to these environmental issues. Amounts charged to
expense were approximately $232,500 in 2003, $291,000 in 2002 and
$227,000 in 2001.
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
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 improve its reporting and
F-20
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - COMMITMENTS AND CONTINGENCIES - CONTINUED
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.
NOTE 11 - 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, 2003, 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 had periodically granted stock options to various parties,
including certain officers and directors, who made loans to or
performed critical services for the Company. Most of these options
allowed the parties to purchase common stock for $1.00 per share.
Additional information with respect to all options outstanding at
December 31, 2003, and changes for the three years then ended was as
follows:
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
========== ==========
2002
--------------------------------
Weighted average
Shares exercise price
---------- -----------------
Outstanding at beginning of year 872,000 $ 1.12
Forfeited (62,000) 1.38
---------- ----------
Options at end of year 810,000 $ 1.10
========== ==========
Options exercisable at December 31, 2002 810,000 $ 1.10
========== ==========
F-21
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - STOCK OPTIONS - CONTINUED
2003
-------------------------------
Weighted average
Shares exercise price
---------- ----------------
Outstanding at beginning of year 810,000 $ 1.10
Forfeited (365,000) 1.13
---------- ----------
Outstanding at end of year 445,000 $ 1.08
========== ==========
Options exercisable at December 31, 2003 445,000 $ 1.08
========== ==========
Additional information about stock options outstanding at December 31,
2003 is summarized as follows:
Options outstanding and exercisable
------------------------------------------
Weighted average
-------------------------------
Remaining Exercise
Range of exercise prices Number contractual life price
- ------------------------ ------- ---------------- --------
$1.00 400,000 10 years $1.00
$1.75 45,000 8 years 1.75
------- -----
445,000 $1.08
======= =====
NOTE 12 - INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2003,
2002, and 2001 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:
2003 2002 2001
----------- ---------- ----------
Income taxes at U.S. statutory rate $(1,191,823) $ 235,301 $ (884,346)
State taxes, net of federal benefit 270,844 64,170 174,332
Net operating losses (utilized) expired 3,704,513 155,079 (13,927)
Change in valuation allowance (3,344,171) (799,426) -
Foreign operations losses with no
benefit provided 580,210 337,946 707,309
Other items (19,573) 6,930 16,632
----------- ---------- ----------
Total tax expense $ - $ - $ -
=========== ========== ==========
F-22
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - 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,
----------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Deferred tax liabilities:
Refinery plant, pipeline and equipment $ (396,000) $ (481,000) $ (500,000)
Deferred tax assets:
Accounts receivable 82,000 76,000 69,000
Mineral interests 236,000 236,000 236,000
Accrued liabilities 149,000 123,000 93,000
Net operating loss and contribution
carryforwards 3,389,000 6,837,000 7,493,000
Tax credit carryforwards 212,000 212,000 212,000
Deferred gain on sale of property 63,000 76,000 89,000
Unrealized losses on swap agreements - - 187,000
------------ ------------ ------------
Gross deferred tax assets 4,131,000 7,560,000 8,379,000
Valuation allowance (3,735,000) (7,079,000) (7,879,000)
------------ ------------ ------------
Net deferred tax assets 396,000 481,000 500,000
------------ ------------ ------------
Net deferred taxes $ - $ - $ -
============ ============ ============
The Company has provided a valuation allowance against the deferred tax
assets because of uncertainties regarding their realization.
At December 31, 2003, the Company had approximately $9,000,000 of net
operating loss carryforwards. These carryforwards expire during the
years 2004 through 2023. In addition, the Company has alternative
minimum tax credit carryforwards of approximately $212,000 that may be
carried over indefinitely. During 2003, net operating loss
carryforwards of approximately $11,000,000 expired.
The Company has no Saudi Arabian or Mexican tax liability. At December
31, 2003, Coin had available net operating loss carryforwards and
recoverable tax on assets of approximately $3,537,000 and $533,000,
respectively, expiring through 2013, which are limited to the income of
Coin.
F-23
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - 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, foreign exchange
transaction gain and (loss), miscellaneous income and minority
interest. Information on segments is as follows:
December 31, 2003
-----------------------------------------------
Refining Mining Total
----------- ----------- ------------
Revenue from external customers $39,624,733 $ - $ 39,624,733
Depreciation 1,365,506 1,712 1,367,218
Operating loss (1,749,691) (755,097) (2,504,788)
Total assets $12,787,676 $39,884,821 $ 52,672,497
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) 2,211,310 (490,028) 1,721,282
Total assets $16,114,394 $39,506,415 $ 55,620,809
December 31, 2001
-----------------------------------------------
Refining Mining Total
----------- ----------- ------------
Revenue from external customers $32,712,668 $ - $ 32,712,668
Depreciation 1,379,201 2,268 1,381,469
Operating loss (748,945) (470,740) (1,219,685)
Total assets $16,560,979 $39,186,704 $ 55,747,683
F-24
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - SEGMENT INFORMATION - CONTINUED
Information regarding foreign operations for the years ended December
31, 2003, 2002 and 2001 follows (in thousands). Revenues are attributed
to countries based upon the origination of the transaction.
Year ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues
United States $ 38,852 $ 34,057 $ 31,455
Mexico 773 2,696 1,258
Saudi Arabia - - -
---------- ---------- ----------
$ 39,625 $ 36,753 $ 32,713
========== ========== ==========
Year ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Long-lived assets
United States $ 5,392 $ 6,252 $ 6,739
Mexico 4,567 4,915 5,230
Saudi Arabia 38,596 38,249 37,930
---------- ---------- ----------
$ 48,555 $ 49,416 $ 49,899
========== ========== ==========
NOTE 14 - NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share has been calculated as follows:
2003 2002 2001
----------- ----------- -----------
Basic and diluted
Net income (loss) $(3,505,363) $ 692,063 $(2,601,018)
Weighted average shares outstanding 22,731,994 22,731,994 22,768,858
Per share $ (0.15) $ 0.03 $ (0.11)
In 2003, 2002 and 2001, options for 445,000, 810,000 and 872,000
shares, respectively were excluded from diluted shares outstanding
because their effect was antidilutive .
F-25
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - 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, 2003 (in thousands, except per share data):
Year Ended December 31, 2003
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenues $ 8,900 $ 9,890 $ 10,703 $ 10,132 $ 39,625
Net loss (1,320) (603) (746) (836) (3,505)
Basic and diluted EPS $ (0.06) $ (0.03) $ (0.03) $ (0.03) $ (0.15)
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
NOTE 16 - 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.
At December 31, 2003, the Company has a liability to its President and
Chief Executive Officer of approximately $1,158,000 in accrued salary
and termination benefits, a loan payable to him for $53,000 and a loan
payable to his wife for $100,000. There are also loans payable to two
stockholders of the Company for $465,000 and $100,000.
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 $23,500, $24,700
and $25,500 in 2003, 2002 and 2001, respectively, pursuant to such
arrangement.
South Hampton incurred product transportation costs of approximately
$388,000, $397,000 and $404,000 in 2003, 2002 and 2001, respectively,
with STTC, which is currently owned by an officer of TOCCO. A previous
owner and officer of TOCCO resigned in January 2004.
F-26
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17 - DERIVATIVE INSTRUMENTS
South Hampton periodically enters into financial instruments to hedge
the cost of natural gasoline, the primary source of feedstock, and
natural gas, fuel stock to operate the plant. In 2001 and 2002, South
Hampton entered into three commodity 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 was 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
covered approximately 20% to 40% of the average monthly feedstock
requirements. During the fourth quarter of 2003, South Hampton entered
into option contracts for the purchase/sale of natural gas. These
contracts expire in September 2004 and March 2005 and cover
approximately 72% of the average monthly fuel stock requirements.
For the years ended December 31, 2003, 2002 and 2001 the net realized
gain (loss) from the derivative agreements was ($71,492), $1,032,045
and ($339,507), respectively. There was no unrealized gain (loss) on
the derivative agreements for the year ended December 31, 2003. The
unrealized gain (loss) for the years ended December 31, 2002 and 2001
were $505,890 and ($505,890), respectively.
NOTE 18 - COIN ASSETS SUBJECT TO FORECLOSURE
A creditor of Coin initiated a mortgage foreclosure proceeding that
resulted in a court ordered public auction of the plant facilities in
Mexico on February 23, 2004. As a result, the court awarded the plant
facilities to the creditor. The court order required legal transfer of
the assets to the creditor within three days, however, the transfer has
yet to occur and the Company, management of Coin and Coin's legal
counsel are unable to determine a date certain for the legal transfer
of ownership. As a result, the consolidated financial statements do not
include any adjustments that may result. The following summarizes the
proforma effect of the foreclosure on the December 31, 2003
consolidated financial statements:
PRO FORMA
DECEMBER 31, ADJUSTED
2003 AS PRO FORMA DECEMBER 31,
ASSETS REPORTED ADJUSTMENT 2003
------------- ------------- -------------
Current assets $ 3,645,055 $ -- $ 3,645,055
Refinery plant, pipeline and equipment, net 8,746,828 (4,566,616) 4,180,212
Other assets 40,280,614 -- 40,280,614
------------- ------------- -------------
Total assets $ 52,672,497 $ (4,566,616) $ 48,105,881
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 29,473,297 $ (1,804,195) $ 27,669,102
Deferred revenue 166,543 -- 166,543
Minority interest in consolidated subsidiaries 834,956 -- 834,956
Stockholders' equity 22,197,701 (2,762,421) 19,435,280
------------- ------------- -------------
Total liabilities and stockholders' equity $ 52,672,497 $ (4,566,616) $ 48,105,881
============= ============= =============
Revenues $ 39,624,733 $ -- $ 39,624,733
Operating costs and expenses 42,129,521 -- 42,129,521
------------- ------------- -------------
Operating loss (2,504,788) -- (2,504,788)
Other income (expense) (1,000,575) (2,762,421) (3,762,996)
------------- ------------- -------------
Loss before income taxes (3,505,363) (2,762,421) (6,267,784)
Income tax expense -- -- --
------------- ------------- -------------
Net loss $ (3,505,363) $ (2,762,421) $ (6,267,784
============= ============= =============
Basic and diluted net loss per common share
$ (0.15) $ (0.12) $ (0.27)
============= ============= =============
F-27
NOTE 19 - SUBSEQUENT EVENTS
On May 7, 2004, South Hampton and a major supplier signed a letter of
intent whereby the supplier will purchase up to $1,800,000 of capital
equipment for use by South Hampton to facilitate the execution of a new
processing agreement between a large customer and South Hampton. The
equipment purchased by the supplier will remain the property of the
supplier who will enter into a ground lease for the land upon which the
capital equipment is located. South Hampton and the supplier will also
enter into a throughput arrangement whereby South Hampton will agree to
throughput product (utilizing the purchased capital equipment) from the
supplier at a rate and volume to be negotiated based upon the new
agreement with the customer. The terms of both the throughput
arrangement and the ground lease with the supplier will be five years.
As security for the funds used to purchase the capital equipment, South
Hampton will execute a mortgage covering most of the refinery's land
and equipment. The mortgage is expected to be executed in June 2004.
The supplier is currently the sole provider of the refinery's feedstock
supply. At April 30, 2004, South Hampton owed the supplier
approximately $7,000,000.
On May 15, 2004, the Company signed an agreement with the Saudi
Ministry of Petroleum and Mineral Resources whereby the Company has
been given two years from the date of the agreement to start the
implementation of a work program similar to that which is attached to
the Company's mining lease. The initial implementation was suspended in
1999 due to the worldwide decrease in the price of metals. The Company
also agreed to pay the past due surface rentals, which totaled $568,000
at December 31, 2003, in two equal installments, the first on December
31, 2004 and the second on December 31, 2005. Future annual surface
rentals are to be paid as they become due.
F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES
Arabian American Development Company and Subsidiaries
Dallas, Texas
We have audited the consolidated financial statements of Arabian American
Development Company and Subsidiaries (the "Company") as of December 31, 2003 and
2002 and for each of the three years in the period ended December 31, 2003, and
have issued our report thereon dated March 24, 2004, which included an
explanatory paragraph discussing the uncertainties regarding the Company's
ability to continue as a going concern. 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, 2003, 2002, and 2001 and for the
years then ended, when considered in relation to the basic financial statement
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
March 24, 2004
(except for Note 19,
as to which the date
is May 15, 2004)
F-29
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 2003
Charged
Beginning (credited) Ending
Description balance to earnings Deductions balance
- ----------- ------------ ------------- ------------ -----------
ALLOWANCE FOR DEFERRED
TAX ASSET
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
December 31, 2003 7,079,493 - (3,344,171)(a) 3,735,322
(a) Expiration of carryforwards
(b) Utilization of carryforwards
F-30
INDEPENDENT AUDITOR'S 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, 2003, 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 to the financial statements, 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, 2003 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 23, 2004.
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, 2003, 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.
As a result of the mortgage foreclosure initiated by a Company creditor, as
explained in note 13 to the financial statements, the installations where the
industrial facilities are located, by court resolution, were placed for sale
under public auction on February 23, 2004. As disclosed in note 13B to the
financial statements, on March 3, 2004, the court awarded the industrial
facilities in favor of the creditor. On May 14, 2004, Company's legal
counsel and management concluded that a there is no reasonable basis to estimate
a date for the formal and legal transfer of ownership of the industrial
facilities to the creditor. In the same manner, the terms and conditions, and
the period during which management would continue to operate the industrial
plant, are unknown.
As discussed in note 1 to the financial statements, the Company has reported
accumulated losses for $ 11,456,068 and the statement of financial position
shows excess of current liabilities over current assets for $ 7,478,468.
Moreover, the Company has defaulted in meeting scheduled payments of principal
and interest amounts under certain loan agreements, as discussed in notes 8 and
9 to the financial statements. The default related to a Company creditor gave
origin to the legal transfer of ownership of the industrial facilities mentioned
in the above paragraph. 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 2003, installed production capacity of the Company was used
only partially, representing a cost of maintaining idle the industrial plant as
described in note 1 to the financial statements.
The issues described in the preceding two paragraphs raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of the uncertainties described above.
DESPACHO FREYSSINIER MORIN, S.C.
/s/ C.P. JUAN PABLO SOTO
-----------------------------------
C.P. JUAN PABLO SOTO
PARTNER
Mexico City, Mexico
February 23, 2004, except for
Note 13B, as to which the date is
May 14, 2004
F-31
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-32