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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
--------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
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 the Registrant's Common Stock (par value $0.10 per share),
outstanding at March 31, 2004: 22,731,994.
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 DECEMBER 31,
(UNAUDITED) 2003
-------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 295,028 $ 177,716
Trade Receivables, Net 3,128,670 2,810,858
Inventories 1,041,667 656,481
------------ -----------
Total Current Assets 4,465,365 3,645,055
REFINERY PLANT, PIPELINE AND EQUIPMENT 18,538,412 18,406,665
Less: Accumulated Depreciation (9,987,699) (9,659,837)
------------ ------------
Net Plant, Pipeline and Equipment 8,550,713 8,746,828
AL MASANE PROJECT 36,323,467 36,165,120
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,211,049 1,211,674
OTHER ASSETS 811,075 472,572
------------ ------------
TOTAL ASSETS $ 53,792,917 $ 52,672,497
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 9,321,948 $ 7,587,963
Accrued Interest 3,703,555 3,467,657
Accrued Liabilities 911,881 832,236
Accrued Liabilities in Saudi Arabia 2,765,913 2,671,840
Notes Payable 11,025,833 11,025,780
Notes Payable to Stockholders 718,000 718,000
Current Portion of Long-Term Debt 3,187,725 3,169,821
------------ ------------
Total Current Liabilities 31,634,855 29,473,297
DEFERRED REVENUE 150,838 166,543
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 832,472 834,956
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,431,994 shares in 2004
and 2003 2,243,199 2,243,199
ADDITIONAL PAID-IN CAPITAL 36,512,206 36,512,206
ACCUMULATED DEFICIT (17,580,653) (16,557,704)
------------ ------------
Total Stockholders' Equity 21,174,752 22,197,701
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,792,917 $ 52,672,497
============ ============
See notes to consolidated financial statements.
1
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31
---------------------------
2004 2003
---- ----
REVENUES
Refined Product Sales $ 10,109,715 $ 7,818,643
Processing Fees 805,872 1,081,192
------------ --------------
10,915,587 8,899,835
OPERATING COSTS AND EXPENSES
Cost of Refined Product Sales
and Processing 10,263,926 8,472,397
General and Administrative 958,864 957,148
Depreciation 333,647 342,855
------------ --------------
11,556,437 9,772,400
------------ --------------
OPERATING LOSS (640,850) (872,565)
OTHER INCOME (EXPENSE)
Interest Income 7,388 8,612
Interest Expense (397,770) (367,545)
Minority Interest 2,484 1,880
Foreign Exchange Transaction Loss (24,143) (119,654)
Miscellaneous Income 29,942 28,959
------------ --------------
(382,099) (447,748)
------------ --------------
NET LOSS BEFORE INCOME TAXES $ (1,022,949) $ (1,320,313)
INCOME TAX EXPENSE -- --
------------ --------------
NET LOSS $ (1,022,949) $ (1,320,313)
============ ==============
Basic and Diluted Net Loss
per Common Share $ (0.05) $ (0.06)
============ ==============
Basic and Diluted Weighted Average Number
of Common Shares Outstanding 22,731,994 22,731,994
============ ==============
See notes to consolidated financial statements.
2
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
COMMON STOCK ADDITIONAL
------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
DECEMBER 31, 2003 22,431,994 $2,243,199 $36,512,206 $(16,557,704) $22,197,701
Net Loss -- -- -- (1,022,949) (1,022,949)
------------ ---------- ----------- ------------ ------------
MARCH 31, 2004 22,431,994 $2,243,199 $36,512,206 $(17,580,653) $21,174,752
============ ========== =========== ============ ============
See notes to consolidated financial statements.
3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net Loss $(1,022,949) $(1,320,313)
Adjustments to Reconcile Net Loss
To Net Cash Provided by Operating Activities:
Depreciation 333,647 342,855
(Decrease) Increase in Deferred Revenue (15,705) 19,215
Unrealized Gain on Feedstock Swap Agreements (280,182) --
Changes in Operating Assets and Liabilities:
Increase in Trade Receivables (317,812) (142,118)
Decrease (Increase) in Inventories (385,186) 104,879
Decrease (Increase) in Other Assets (58,321) 56,237
Increase in Accounts Payable and Accrued Liabilities 1,813,630 764,501
Increase in Accrued Interest 235,898 310,851
Increase in Accrued Liabilities in Saudi Arabia 94,073 32,341
Other (8,269) (1,879)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 388,824 166,569
----------- -----------
INVESTING ACTIVITIES
Additions to Al Masane Project (158,347) (68,347)
Additions to Refinery Plant, Pipeline and Equipment (131,747) (35,649)
(Additions to) Reduction in Mineral Properties in the United States 625 (278)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (289,469) (104,274)
----------- -----------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 17,957 --
Reduction of Notes Payable and Long-Term Obligations -- (179,727)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,957 (179,727)
----------- -----------
NET INCREASE (DECREASE) IN CASH 117,312 (117,432)
CASH AT BEGINNING OF PERIOD 177,716 319,171
----------- -----------
CASH AT END OF PERIOD $ 295,028 $ 201,739
=========== ===========
See notes to consolidated financial statements.
4
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments (consisting
only of normal and recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of Arabian American
Development Company and Subsidiaries financial position and operating
results for the interim period. Interim period results are not necessarily
indicative of the results for the calendar year. Please refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information in the Company's December 31, 2003
Annual Report on Form 10-K.
These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiary,
American Shield Refining Company (the "Refining Company"), which owns all
of the capital stock of Texas Oil and Chemical Company 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"), a specialty petrochemical products
refining company located near Veracruz, Mexico. South Hampton owns all of
the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State").
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. The Refining Company and its
subsidiaries constitute the Company's Specialty Petrochemicals or Refining
Segment. Pioche and the Company's mineral properties in Saudi Arabia
constitute its Mining Segment.
2. INVENTORIES
Inventories include the following:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Refined products $1,041,667 $ 656,481
========== =========
Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market. At March 31, 2004, current cost
exceeded LIFO value by approximately $326,000. At December 31, 2003,
current cost exceeded the LIFO value by approximately $256,000.
3. NET INCOME (LOSS) PER COMMON SHARE
The following table (in thousands, except per share amounts) sets forth
the computation of basic and diluted net income (loss) per share for the
three months ended March 31, 2004 and 2003, respectively.
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Net Loss $ (1,023) $ (1,320)
========= ========
Weighted Average Shares Outstanding:
Basic and Diluted 22,732 22,732
========= ========
Net Loss Per Share:
Basic and Diluted $ (0.05) $ (0.06)
========= ========
In the three months ended March 31, 2004 and 2003, options for 445,000
shares and 810,000, respectively were excluded from diluted shares
outstanding because their effect was antidilutive.
5
4. 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, minority interest, miscellaneous
income and foreign exchange transaction gain or loss. Information on the
segments is as follows:
THREE MONTHS ENDED MARCH 31, 2004 REFINING MINING TOTAL
- --------------------------------- -------- ------ -----
Revenue from external customers $ 10,915,587 $ -- $ 10,915,587
Depreciation 333,545 102 333,647
Operating loss (463,413) (177,437) (640,850)
Total assets $ 13,766,707 $ 40,026,210 $ 53,792,917
THREE MONTHS ENDED MARCH 31, 2003 REFINING MINING TOTAL
- --------------------------------- -------- ------ -----
Revenue from external customers $ 8,899,835 $ -- $ 8,899,835
Depreciation 342,381 474 342,855
Operating loss (758,587) (113,978) (872,565)
Total assets $ 15,644,687 $ 39,601,110 $ 55,245,797
Information regarding foreign operations for the three months ended March
31, 2004 and 2003 follows (in thousands). Revenues are attributed to
countries based upon the origination of the transaction.
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
REVENUES
United States $ 10,624 $ 8,712
Mexico 292 188
Saudi Arabia -- --
--------- ---------
$ 10,916 $ 8,900
========= =========
LONG-LIVED ASSETS
United States $ 5,282 $ 6,398
Mexico 4,479 4,841
Saudi Arabia 38,755 38,318
--------- ---------
$ 48,516 $ 49,557
========= =========
5. 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 the defendant
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.
6
In August 1997, the Texas Commission on Environmental Quality ("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
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 actions be taken. On December 13, 2001, the TCEQ
notified South Hampton that it found several violations of its 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.
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 proposed penalties
and the additional allegations are greatly overstated and intends to
continue to vigorously defend itself against these allegations, the
proposed penalties and proposed corrective actions. Management believes
the penalties will be settled for amounts less than those proposed.
Management has accrued an estimate for a proposed settlement. There are no
assurances that the amounts settled will not be different than the amounts
accrued. Negotiations between South Hampton and the TCEQ are expected to
continue in order to reach a final settlement.
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 8.
6. LONG-TERM DEBT
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.
South Hampton entered into a $3.25 million revolving credit agreement with
a bank in September 1999, which terminated on June 15, 2003. On July 29,
2003 a Purchase and Sale Agreement was negotiated with the same bank
whereby the bank will purchase the accounts receivable of South Hampton at
a 15% discount. The discounted amount is returned to South Hampton, less
fees, when the invoice is collected. Under this factoring agreement, the
bank has agreed to purchase up to $4.5 million of invoices. The initial
proceeds of the agreement were used to retire the revolving credit
agreement in 2003. Management expects the fees and interest charged by the
bank in this arrangement will equate to an effective interest rate of
approximately 9.0%. At March 31, 2004, approximately $2,642,000 of
receivables had been sold and, due to the revolving nature of the
agreement, also remained outstanding. The agreement imposes limitations on
dividends payable to the Company by South Hampton. At March 31, 2004,
South Hampton was in compliance with these limitations.
In connection with the acquisition of the common stock of Coin, 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 pledged to
the bank under the revolving credit agreement mentioned in the preceding
paragraph. The loan was paid in full in 2003.
At March 31, 2004, Coin had two loans payable to Mexican banks in the
outstanding principal amounts of $1,143,629 and $2,044,096. The first loan
is payable in monthly payments through October 2004 and 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 1.09% at March 31, 2004). Both loans are
collateralized by all of the assets of Coin, including the
7
plant located near Veracruz. At March 31, 2004, Coin was in default of the
loan covenants under both loans as a result of not having made its monthly
and quarterly payments. As a result, the loans are classified as current
in the financial statements. Unpaid interest and penalty interest of
$764,453 and $2,136,106, respectively, are included in accrued interest at
March 31, 2004. As discussed in Notes 5 and 8, the creditor of the first
loan initiated a mortgage foreclosure proceeding that resulted in a court
ordered public auction of the plant facilities on February 23, 2004.
7. DERIVATIVE INSTRUMENTS
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.
South Hampton periodically enters into financial instruments to hedge the
cost of natural gasoline, the primary source of feedstock, and natural
gas, the fuel needed to operate the plant. These derivative agreements are
not designated as hedges. 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 South Hampton'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 and
sale of natural gas. These contracts expire in September 2004 and March
2005 and cover approximately 72% of the average monthly fuel requirements.
In the first quarter of 2004, South Hampton entered into five feedstock
swap agreements that expire through June 2004. For the three months ended
March 31, 2004 and 2003, the net realized gain from the derivative
agreements was $9,240 and $49,552, respectively. There was an unrealized
gain of $280,182 for the three months ended March 31, 2004. There was no
unrealized gain or loss for the three months ended March 31, 2003.
8
NOTE 8 - 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 March 31, 2004 consolidated financial
statements:
PRO FORMA
MARCH 31, ADJUSTED
2004 AS PRO FORMA MARCH 31,
REPORTED ADJUSTMENT 2004
------------ ------------ -------------
ASSETS
Current assets $ 4,465,365 $ - $ 4,465,365
Refinery plan, pipeline and equipment, net 8,550,713 (4,479,526) 4,071,187
Other Assets 40,776,839 - 40,776,839
------------ ------------ -------------
Total assets $ 53,792,917 $ (4,479,526) $ 49,313,391
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 31,634,855 $ (1,908,082) $ 29,726,773
Deferred revenue 150,838 - 150,838
Minority interest in consolidated subsidiaries 832,472 - 832,472
Stockholders' equity 21,174,752 (2,571,444) 18,603,308
------------ ---------- -------------
Total liabilities and stockholders' equity $ 53,792,917 $ (4,479,526) $ 49,313,391
============ ============ =============
Revenues $ 10,915,587 $ - $ 10,915,587
Operating costs and expenses 11,556,437 - 11,556,437
------------ ------------ -------------
Operating loss (640,850) - (640,850)
Other income (expense) (382,099) (2,571,444) (2,953,543)
------------ ------------ -------------
Loss before income taxes (1,022,949) (2,571,444) (3,594,393)
Income tax expense - - -
------------ ------------ -------------
Net loss $ (1,022,949) $ (2,571,444) $ (3,594,393)
============ ============ =============
Basic and diluted net loss per common share $ (0.05) $ (0.11) $ (0.16)
============ ============ =============
9. 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 and to secure outstanding
debts for feedstock purchased from the supplier, South Hampton will
execute a mortgage covering most of the refinery's equipment. The mortgage
is expected to be executed in July 2004. The supplier is currently the
sole provider of the refinery's feedstock supply. At May 31, 2004, South
Hampton owed the supplier approximately $6.3 million.
9
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.
10
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Statements in Part 1, Item 2 as well as elsewhere in, or incorporated by
reference in, this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, all of which
are difficult to predict and many of which are beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in two business segments, specialty petrochemicals
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.
SPECIALTY PETROCHEMICALS SEGMENT. Historically, this segment has
contributed substantially all of the Company's internally generated cash flows
from operating activities and its primary sources of revenue are the specialty
products refineries owned and operated by South Hampton near Silsbee, Texas and
by Coin in Mexico. Beginning in February 2001, the decline of feedstock and
natural gas prices returned the Company to a positive cash flow, which it
attained for the remainder of 2001 and throughout 2002. During 2003, the Company
again experienced tighter margins resulting from the rise in feedstock prices.
These prices remained at historically higher levels 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 May 31, 2004, South Hampton owed this supplier approximately $6.3
million. As discussed in Note 9, on May 7, 2004, South Hampton and this supplier
signed a letter of intent whereby the supplier will purchase up to $1.8 million
of capital equipment for use by South Hampton to facilitate the execution of a
new processing agreement between a large customer and South Hampton.
As mentioned in Note 6, Coin was not in compliance with certain covenants
contained in its loan agreements at March 31, 2004, and therefore, its creditors
have the right to declare the debt to be immediately due and payable. If this
were to occur, Coin would currently be unable to pay the entire amount due. The
plant facilities of Coin have been foreclosed by a creditor (See Note 8).
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. Implementation
of the project has been delayed until the open market prices for the minerals to
be produced by the mine improve.
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 also the payment of the past
11
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 compete, 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 prices 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.
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 in 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. 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. If the Saudi
Arabian government does not issue the exploration license, the Company believes
that it will be entitled to a refund of the monies expended, 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.
Management also is addressing two other significant financing issues
within this segment. These issues are the $11 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 approximately $1,270,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11
million note be incorporated into a loan from the Saudi Industrial Development
Fund ("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 has 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
12
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.
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 obligations as they are released from
the Company's employment.
The Company's mineral interests in the United States are its ownership
interest in Pioche, which has been inactive for many years. Its properties
include 48 patented and 5 unpatented claims totaling approximately 1,500 acres
in Lincoln County, Nevada. There are prospects and mines on these claims that
previously produced silver, gold, lead, zinc and copper. There is also 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.
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 could 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.
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended March 31, 2004,
total refined product sales (including Coin) increased approximately $2,291,000
or 29%, while the cost of sales (excluding depreciation) increased approximately
$1,792,000 or 21% from the same period in 2003. Consequently, the total negative
gross profit margin on product sales in the first quarter of 2004 decreased
approximately $500,000 or 76% compared to the same period in 2003. The cost of
sales and gross profit margin for the quarter ended March 31, 2004 includes an
unrealized gain of approximately $280,000 on feedstock swap agreements. Coin's
sales increased approximately $103,000 or 55%, while its cost of sales increased
approximately $119,000 or 80%. Coin had a positive gross profit margin in this
quarter of approximately $24,000, compared to a positive gross profit margin of
approximately $40,000 in the same quarter in 2003.
The first quarter of 2004 was a difficult period for the Company and the
petrochemical industry in general. Feedstock prices rose to record highs for the
Company at an average of $1.01 per gallon, which was above the previous record
of $0.99 per gallon in February 2003. With feedstock prices rising rapidly, the
Company was unable to raise product prices quickly enough to cover the increased
costs resulting in severe losses in January and, to a lesser extent, February.
By March, the Company had raised product prices and adjusted its business to
cover the increases, which enabled it to attain a positive cash flow position
again. Additionally, by March, feedstock prices were in a moderating downward
trend. The Company also entered into derivative agreements to control the sudden
price spikes and to provide price protection. Management believes that if the
derivative agreements can moderate or slow any changes in the overall cost of
feedstock, product prices could be raised over time to avoid the large losses
experienced in the past. Generally approximately 20% to 40% of the monthly
feedstock requirements are covered at any one time. This ratio cushions the
price increases and allows the Company to experience some benefit when the price
drops.
The price of fuel gas, which is the refining operation's largest single
expense, was also higher during the first quarter of 2004 than in the same
period in 2003; however, through the derivative agreements, the Company capped
the price of its fuel gas at prices 30% to 40% below the cash market. Therefore,
while higher than historically seen, the price of fuel gas to the operation was
not a large factor in the results for the first quarter. The Company also
entered into option contracts for fuel gas in an effort to minimize the impact
of price fluctuations in the market.
13
The toll processing fee revenue for the first quarter of 2004 of
approximately $806,000 was a decrease of approximately $275,000 or 25% under the
fees for the same period in 2003. This decrease was primarily caused by the loss
of one of the larger customers in the fourth quarter of 2003. The customer's
feedstock changed and the Company's equipment was no longer suitable to produce
the products they needed. The other large customers are very active and remain
on long-term contracts. While there are some fluctuations in the tolling volumes
that are handled, it has developed into a very steady business over the last
five years.
Interest expense increased as the debt of the Company increased due to the
rising feedstock prices and inadequate cash flow. Other expenses of the Company
remained flat or decreased over the last part of 2003 and in early 2004. The
Company's largest supplier of feedstock has asked for security on the account
because of the large increase in the amounts owed for feedstock purchases over
the last six months. The Company is currently negotiating a security agreement
with the supplier, which will give it a first lien on most of South Hampton's
assets.
Coin restarted production in the first quarter of 2004 after having been
shut down during the latter part of 2003 due to economic reasons. Coin recently
procured a sales contract with the largest user of pentanes in Mexico, which
gave the operation sufficient volume to justify operating on a daily basis.
First quarter cash flow was negative, due primarily to start-up costs and the
weak exchange value of the dollar versus the peso. The refinery currently
continues to move product at a substantial rate into both the Mexican and U.S.
markets. The plant facilities of Coin have been foreclosed by a creditor (See
Note 8).
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 assesses the carrying values of its assets on an ongoing
basis. Factors which may affect the carrying values of the mining properties
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 the recoverability of
the Al Masane project costs, based on production to begin no sooner that 2004,
are $1.04 per pound for copper, $.60 per pound for zinc. Copper and zinc
comprise in excess of 80% of the expected value of production. Using these price
assumptions, there were no asset impairments at March 31, 2004. 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 in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Other than as disclosed, there have been no material changes in the
Company's exposure to market risk from the disclosure included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
ITEM 4. 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 period covered by this report, 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.
14
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to Note 5 to the consolidated financial statements
contained in this Report for a discussion of material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
In 2003 South Hampton entered into a Purchase and Sale Agreement with a
bank to sell its accounts receivable. The agreement contains restrictions on
dividends payable to the Company by South Hampton. (See Note 6 to the
consolidated financial statements).
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the Company's Common Stock repurchases
during the three months ended March 31, 2004:
(c) (d)
Total Number of Shares Maximum Number of
(a) (b) Purchased as Part of Shares that May Yet be
Total Number of Average Price Publicly Announced Purchased Under the
Period Shares Purchased Paid Per Share Plans or Programs Plans or Programs
- ----------------------- ---------------- -------------- ---------------------- ----------------------
January 1, 2004 through
January 31, 2004 -- $ -- -- --
February 1, 2004 through
February 29, 2004 -- $ -- -- --
March 1, 2004 through
March 31, 2004 -- $ -- -- --
------------ ------------- ------------- -------------
Total -- $ -- -- --
============= ============= ============= =============
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Reference is made to Notes 5, 6 and 8 to the consolidated financial
statements and Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in this Report for a discussion of
the $11 million note payable to the Saudi Arabian government and the loans
payable by Coin to Mexican banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
15
ITEM 5. OTHER INFORMATION.
A shareholder of the Company who is interested in submitting a proposal
for inclusion in the Company's proxy materials for the 2004 annual meeting of
shareholders, which is tentatively scheduled sometime in December 2004, must
submit the proposal to the Company at its principal executive office no later
than November 1, 2004. Any such proposal must also comply with the other
requirements of the proxy solicitation rules of the Securities and Exchange
Commission. The Company intends to exercise discretionary voting authority
granted under any proxy, which is executed and returned to the Company on any
matter that may properly come before the 2004 annual meeting of shareholders,
unless written notice of the matter is delivered to the Company at its principal
executive office no later than November 1, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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)).
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)).*
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EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)).
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) - 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(n) - Equipment Lease Agreement dated November 14, 2003, between Silsbee Trading and Transportation Corp. and South Hampton
Refining Company (incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 (File No. 0-6247)).
10(o) - 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 (incorporated by reference to Exhibit 10(p) to the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-6247)).
17
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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.
(a) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2004.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: July 8, 2004 ARABIAN AMERICAN DEVELOPMENT COMPANY
(Registrant)
By: /s/ DREW WILSON, JR.
------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
19