1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR QUARTER ENDING MARCH 31, 2001
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 [ ]
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at March 31, 2001: 22,788,994.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31, 2001 DECEMBER 31,
(UNAUDITED) 2000
-------------- ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 144,127 $ 158,977
Trade Receivables 4,819,212 5,239,769
Inventories 545,892 960,494
------------ ------------
Total Current Assets 5,509,231 6,359,240
REFINERY PLANT, PIPELINE AND EQUIPMENT 17,310,550 17,248,891
Less: Accumulated Depreciation (5,916,911) (5,570,930)
------------ ------------
Net Plant, Pipeline and Equipment 11,393,639 11,677,961
AL MASANE PROJECT 35,387,171 35,304,240
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,279,038 1,282,142
OTHER ASSETS 505,718 543,864
------------ ------------
TOTAL ASSETS $ 56,506,045 $ 57,598,695
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable-Trade $ 5,047,845 $ 5,306,121
Accrued Liabilities 1,305,120 1,259,272
Accrued Liabilities in Saudi Arabia 1,062,375 1,062,375
Notes Payable 11,973,780 11,923,780
Current Portion of Long-Term Debt 8,071,504 8,060,981
------------ ------------
Total Current Liabilities 27,460,624 27,612,529
ACCRUED LIABILITIES IN SAUDI ARABIA 855,149 841,489
DEFERRED REVENUE 122,793 131,401
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 956,340 999,011
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,488,994 shares in 2001
and 2000 2,248,899 2,248,899
ADDITIONAL PAID-IN CAPITAL 36,523,606 36,523,606
ACCUMULATED DEFICIT (11,661,366) (10,758,240)
------------ ------------
Total Stockholders' Equity 27,111,139 28,014,265
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,506,045 $ 57,598,695
============ ============
See notes to consolidated financial statements.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
REVENUES
Refined Product Sales $ 7,295,822 $ 10,050,805
Processing Fees 1,064,701 517,945
------------ ------------
8,360,523 10,568,750
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 7,952,108 9,903,130
General and Administrative 700,784 776,982
Depreciation 345,983 219,882
------------ ------------
8,998,875 10,899,994
------------ ------------
OPERATING LOSS (638,352) (331,244)
OTHER INCOME (EXPENSE)
Interest Income 11,646 20,992
Interest Expense (351,342) (204,524)
Minority Interests 42,671 15,386
Foreign Exchange Transaction Gain 4,850 --
Miscellaneous Income 27,401 22,782
------------ ------------
(264,774) (145,364)
------------ ------------
NET LOSS $ (903,126) $ (476,608)
============ ============
NET LOSS PER COMMON SHARE:
Basic $ (0.04) $ (0.02)
============ ============
Diluted $ (0.04) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 22,788,994 22,325,148
============ ============
Diluted 22,788,994 22,325,148
============ ============
See notes to consolidated financial statements.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
JANUARY 1, 2001 22,488,994 $ 2,248,899 $ 36,523,606 $(10,758,240) $ 28,014,265
Net Loss -- -- -- (903,126) (903,126)
------------ ------------ ------------ ------------ ------------
MARCH 31,2001 22,488,994 $ 2,248,899 $ 36,523,606 $(11,661,366) $ 27,111,139
============ ============ ============ ============ ============
See notes to consolidated financial statements.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------------------
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
OPERATING ACTIVITIES
Net Loss $ (903,126) $ (476,608)
Adjustments for Non-Cash Transactions
Depreciation 345,983 219,882
(Decrease) in Deferred Revenue (8,608) (8,608)
Effects of Changes in Operating Assets and Liabilities
Decrease (Increase) in Trade Receivables 420,557 (338,152)
Decrease in Inventories 414,602 316,807
Decrease (Increase) in Other Assets 38,146 (51,122)
(Decrease) in Accounts Payable and Accrued Liabilities (212,428) (566,326)
Increase in Accrued Liabilities in Saudi Arabia 13,660 12,875
Other (42,673) 27,503
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 66,113 (863,749)
----------- -----------
INVESTING ACTIVITIES
Proceeds from Sale of Short-Term Investments -- 20,597
Purchase of Business (Net of Cash Acquired) -- (2,279,665)
Additions to Al Masane Project (82,931) (110,350)
Additions to Refinery Plant, Pipeline and Equipment (61,659) (261,599)
Reduction in Mineral Properties in the United States 3,104 18,734
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (141,486) (2,612,283)
----------- -----------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 87,526 1,781,827
Reduction of Notes Payable and Long-Term Obligations (27,003) (178,335)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 60,523 1,603,492
----------- -----------
NET DECREASE IN CASH (14,850) (1,872,540)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 158,977 3,934,313
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 144,127 $ 2,061,773
=========== ===========
See notes to consolidated financial statements.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and the Company's December 31, 2000 Annual Report on Form 10-K.
These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiaries,
American Shield Refining Company (the "Refining Company") and American Shield
Coal Company (the "Coal Company"). The Refining Company 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 South Hampton owns all of the capital stock of Gulf State Pipe
Line Company, Inc. ("Gulf State"). TOCCO also owns 92% of the capital stock
of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a specialty petrochemical
products refining company located near Veracruz, Mexico, which was purchased
on January 25, 2000 for $2.5 million. The Company also owns approximately 51%
of the capital stock of Pioche-Ely Valley Mines, Inc. ("Pioche"), which owns
mining properties in Nevada. The Refining Company and its subsidiaries
constitute the Company's Specialty Petrochemicals or Refining Segment. The
Coal Company, Pioche and the Company's mineral properties in Saudi Arabia
constitute its Mining Segment.
2. INVENTORIES
Inventories include the following:
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Refined products $ 545,892 $ 960,494
=========== ===========
Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market. At March 31, 2001 and December 31, 2000,
current cost exceeded LIFO value by approximately $103,000 and $178,000,
respectively.
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, 2001 and 2000, respectively.
Three Months Ended March 31,
----------------------------
2001 2000
----------- -----------
Net Loss $ (903) $ (477)
========== ==========
Weighted average shares outstanding - basic and diluted 22,789 22,325
========== ==========
Net Loss per share:
Basic $ (.04) $ (.02)
========== ==========
Diluted $ (.04) $ (.02)
========== ==========
In the three months ended March 31, 2001 and 2000, options for 872,000 shares
and 1,570,000 shares, respectively, were excluded from diluted shares
outstanding because their effect was antidilutive.
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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, miscellaneous income and minority interest.
Information on the segments is as follows:
Three Months ended March 31, 2001 Refining Mining Total
- --------------------------------- ------------ ------------ ------------
Revenue from external customers $ 8,360,523 $ -- $ 8,360,523
Depreciation 345,401 582 345,983
Operating loss (585,280) (53,072) (638,352)
Total assets $ 18,697,922 $ 37,808,123 $ 56,506,045
Three Months ended March 31, 2000 Refining Mining Total
- --------------------------------- ------------ ------------ ------------
Revenue from external customers $ 10,568,750 $ -- $ 10,568,750
Depreciation 219,315 567 219,882
Operating loss (281,942) (49,302) (331,244)
Total assets $ 19,697,443 $ 38,443,256 $ 58,140,699
Information regarding foreign operations for the three months ended March
31, 2001 and 2000 follows (in thousands). Revenues are attributed to
countries based upon the origination of the transaction.
Three Months ended March 31,
----------------------------
2001 2000
------- -------
Revenues
United States $ 7,849 $ 8,614
Mexico 512 1,955
Saudi Arabia -- --
------- -------
$ 8,361 $10,569
======= =======
Long-lived Assets
United States $ 7,148 $ 6,400
Mexico 5,525 5,129
Saudi Arabia 37,818 37,163
------- -------
$50,491 $48,692
======= =======
5. LEGAL PROCEEDINGS
South Hampton, together with several other companies, is a defendant in five
lawsuits filed in Jefferson County and Orange County, Texas filed in the
period from December 1997 to December 2000 by former employees of the
southeast Texas plants of the Goodyear Tire & Rubber Company, Dupont,
Atlantic Richfield and South Hampton. In each of these suits, the plaintiff
claims illnesses and diseases resulting from alleged exposure to chemicals,
including benzene, butadiene and/or isoprene, during their employment. The
plaintiffs claim the defendant companies engaged in the business of
manufacturing, selling and/or distributing these chemicals in a manner which
subjected each and all of them to liability for unspecified actual and
punitive damages. One of the lawsuits brought in Jefferson County, Texas has
been settled, with South Hampton contributing $10,000 toward such
settlement. South Hampton intends to vigorously defend itself against the
remaining lawsuits.
In August 1997, the Texas Natural Resource Conservation Commission ("TNRCC")
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 the operations at
its refinery 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. South Hampton
feels the penalty is greatly overstated and intends to vigorously defend
itself against it. A preliminary hearing was held in November 1997, but no
further action has been taken.
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On February 2, 2000, the TNRCC 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 TNRCC proposes that administrative penalties be increased to
approximately $765,000 and that certain corrective action be taken. South
Hampton intends to vigorously defend itself against these additional
allegations, the proposed penalties and proposed corrective actions.
In May 1991, the Company filed a complaint with the U.S. Department of Justice
("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"). The Company's
complaint alleged various violations of the Foreign Corrupt Practices Act
("FCPA") by Hunt, at the Company's detriment, in obtaining its 1981 Petroleum
Production Sharing Agreement ("PSA") in Yemen. The DOJ requested additional
documentation regarding the Company's allegations in 1995 that the Company
provided in early 1996. In late 1996, the DOJ advised the Company that the
documents presented did not provide sufficient evidence of any criminal activity
and that the DOJ did not intend to pursue the investigation. In December 1996,
after providing the DOJ with additional legal analyses, the Company's
representatives were told that the DOJ would take a more aggressive stance if
additional legal evidence was presented to the DOJ. In an effort to comply with
the DOJ's request, in 1997 the Company requested certain documents from the
Central Intelligence Agency ("CIA") under the Freedom of Information Act
("FOIA"). The Company believes the requested documents may contain the
evidentiary information that the DOJ needs to properly and sufficiently evaluate
the Company's compliant against Hunt. The CIA refused to either confirm or deny
the existence of the requested information. After exhausting its administrative
appeals, the Company filed suit against the CIA in early 1998 in the U.S.
District Court for the Northern District of Texas seeking a judicial
determination of the Company's FOIA request. The Company argued that the FOIA
specifically prohibits any agency from using Executive Order 12958, relating to
classification of documents, and the FOIA to conceal criminal activity, in this
instance Hunt's violation of the FCPA. Following a February 1999 hearing, the
Court rejected the Company's arguments and issued a summary judgment in favor of
the CIA. The Company filed an appeal with the U.S. Court of Appeals for the
Fifth Circuit, which on January 28, 2000 rejected the Company's appeal. The
Company believes that this could be a landmark case. As a consequence, on April
22, 2000, it filed a writ of certiorari with the United States Supreme Court in
which the Company argued that the District and Appellate Courts erred in their
judgments. The Company has requested the Supreme Court to issue its ruling that
the matter be remanded to the trial court with instructions that the CIA review
its own documents to determine if any information requested by the Company
should not have been classified but handed over the Company for use in the
pursuit of its case with the DOJ against Hunt for conspiracy and violation of
the FCPA. On July 1, 2000, the Supreme Court assigned Cause No. 00-17 to the
Company's Petition. On October 2, 2000, the Supreme Court denied the Company's
Petition without giving any opinion. The Company has requested and will continue
to request additional documents from both the CIA and DOJ under appropriate
provisions of the FOIA and may seek judicial review in the event its requests
are denied. In the event the Company is able to provide the DOJ with appropriate
legal evidence and the DOJ prevails in any FCPA action against Hunt regarding
the PSA, the Company would then institute an appropriate action against Hunt in
accordance with the provisions of the Victim Restitution Act. Based on the
advice of its counsel, the Company believes that it would be entitled to
restitution of monies lost as a result of the wrongdoing by Hunt, if Hunt is
convicted under the FCPA. The Company further believes, based on such advice,
that the amount of restitution could include all of the profits received by Hunt
from its Yemen operations and also could include proceeds from the sale of a
portion of Hunt's interest in the PSA. However, there can be no assurance that
the DOJ will pursue or obtain a conviction of Hunt regarding the PSA under the
FCPA and no assurance that the Company would receive or be entitled to receive
any restitution as a result of any such conviction. The cost to the Company of
these pursuits is minimal.
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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 case, "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. However, significant increases in the prices of feedstock and
natural gas resulted in a loss from operations in 2000 of $2.8 million which, in
turn, resulted in violations of certain loan agreement covenants and a lack of
liquidity. These prices have declined in early 2001 allowing a return to
positive cash flows in February and Mach 2001. Feedstock prices, in particular,
have declined so that operating margins are returning to sustainable levels.
Sales are currently sustainable and there has been little downturn in demand.
Management expects adequate margins throughout the remainder of 2001, although
there can be no assurance of this effect, and has taken steps to protect the
operations from extreme fluctuations in natural gas prices over the next 12
months. A return to normal profitability is expected in the second quarter,
although there is no assurance that this will occur.
This business segment entered into a $3.25 million credit agreement in
September 1999 with Southwest Bank of Texas, N.A., located in Houston, Texas.
The Company is not in compliance with certain covenants contained in the loan
agreement. In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into the $3.5 million credit agreement in
December 1999 with Heller Financial Leasing, Inc. The credit agreement is
secured by a pledge of all of the capital stock of South Hampton and Gulf State,
a first lien on all of South Hampton's and Gulf State's present and future
machinery and equipment and a ground lease relating to South Hampton's real
property, and is guaranteed by the Company, the Refining Company and TOCCO. At
March 31, 2001, the Company was not in compliance with certain covenants
contained in the loan agreement, however, an amended promissory note dated April
1, 2001 is presently being circulated for signatures that requires an interest
only payment on April 1, 2001, two consecutive monthly installment payments of
$25,000 each commencing on May 1, 2001, and the remaining principal and interest
payable in thirty-one (31) consecutive monthly installments commencing July 1,
2001.
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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. 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 the Saudi
Industrial Development Fund ("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 Eastern
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 that the joint venture was
dissolved and that implementation of the project would be delayed until open
market prices for the minerals to be produced by the Al Masane project improve
to the average price levels experienced during the period from 1988 through
1997. At that time, the Company will attempt to locate a joint venture partner,
form a joint venture and, together with the joint venture partner, attempt to
obtain acceptable financing to commercially develop the project. There can be no
assurances that the Company will be able to locate a joint venture partner, form
a joint venture or obtain financing from SIDF or any other sources. Financing
plans for the above are currently being studied. In the meantime, the Company
intends to maintain the Al Masane mining lease through the payment of the annual
advance surface rental, the implementation of a drilling program to attempt to
increase proven and probable reserves and to attempt to improve the
metallurgical recovery rates beyond those stated in the feasibility study, which
may improve the commercial viability of the project at lower metal prices than
those assumed in the feasibility study.
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. The Company previously
worked the Greater Al Masane Area after obtaining written authorization from the
Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3
million in exploration work. Geophysical and geochemical work and diamond core
drilling on the Greater Al Masane area has revealed mineralization similar to
that discovered at Al Masane. 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.
The Company's mineral interests in the United States include its
ownership interests in the Coal Company and Pioche. The Coal Company's sole
remaining asset is its net operating loss carryforward of approximately $5.9
million at December 31, 2000 and its future, if any, is uncertain. Pioche has
been inactive for many years. Its properties include 48 patented and 80
unpatented claims totaling approximately 3,500 acres in Lincoln County, Nevada.
There are prospects and mines on these claims that previously produced silver,
gold, lead, zinc and copper.
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 $1,062,000 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 $855,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. The Company remains active in
Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to
date, management believes that as long as the Company diligently attempts to
explore and develop the Al Masane project no repayment demand will be made. The
Company has communicated to the Saudi government that its delay in repaying the
note is a direct result of the government's lengthy delay in granting the Al
Masane lease and 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
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note to the Company's share of the operating cash flows generated by the
commercial development of the Al Masane project and to a long-term installment
repayment schedule. In the event the Saudi government were to demand immediate
repayment of this obligation, which management considers unlikely, the Company
would be unable to pay the entire amount due. If a satisfactory rescheduling
agreement could not reached, and there are no assurances that one could be, the
Company believes it could obtain the necessary resources to meet the rescheduled
installment payments by making certain changes at the Refining Company.
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 salary and social security benefits for these
employees currently total approximately $108,000 per year.
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, 2001,
total revenue decreased approximately $2,200,000 or 21%, while the cost of sales
(excluding depreciation) decreased approximately $1,950,000 from the same period
in 2000. Consequently, the gross profit margin in the first three months of 2001
decreased approximately $257,000 or 39% compared to the same period in 2000. The
primary factor, which has adversely affected the operating results in the last
year, was the dramatic rise in the cost of feedstock. Beginning in late 1999 and
continuing into the first month of 2001, feedstock costs rose in conjunction
with the large increase in crude oil prices worldwide. These costs increased
from $.33 per gallon in the first quarter of 1999 to over $.95 per gallon in the
fourth quarter of 2000, an increase of 188%. The prices peaked in December 2000
and January 2001, and in February they dropped back into the $.70 per gallon
range. They have remained at this level for the balance of the first quarter and
into the second quarter of 2001. The cost of natural gas, which is the single
largest expense other than feedstock costs, also rose in 2000 due to the
increases in worldwide prices. In the second quarter of 1999, the Company was
paying $1.70 per MMBTU for fuel gas, which increased to $5.40 per MMBTU by the
end of the third quarter of 2000. The gas market prices have dropped to about
$5.00 per MMBTU after reaching a peak of $9.94 per MMBTU in January 2001, but
are expected to remain strong for the rest of the year. Management is attempting
to negotiate a fixed price for its gas supply which should allow adequate
margins to continue throughout the usually volatile winter months, but there can
be no assurance of this.
Toll processing fee income of approximately $1,065,000 in the first
three months of 2001 was 106% over the prior year period, which partially offset
the feedstock price increases. This part of the business has steadily increased
and has contributed in large part to offset reductions in earnings and cash
flow. The increase in these fees is primarily due to the addition of a new unit
in May 1999 and an additional unit in July 2000. The Company currently has toll
processing contracts with five different entities.
Administrative expenses in the first three months of 2001 for this
segment were lower by approximately $107,000, due primarily to management's
efforts to reduce all possible costs. Sales of the Company's products remain
stable and expanded marketing efforts have kept the Silsbee refinery at near
capacity since the second quarter of 1997.
At the Mexico refinery, normal operations had to be stopped temporarily
in August 2000, due to the increased feedstock and natural gas costs, with cash
flow coming only from brokerage sales. Process modifications are being designed
which should produce an additional 60,000 gallons per month of premium product
for sale in the U.S., but the proposed work has been postponed and is dependent
on the return of favorable market conditions. Capital costs of approximately
$225,000 are estimated and should pay back in less than one year under normal
conditions. The marketing capability has been upgraded with the addition of
experienced petrochemical sales personnel, which is expected to result in moving
more products to Central and South America. The reorganization of the refinery
in Mexico and the blending of its similar operations with the Silsbee refinery
will continue.
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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 periodically reviews and evaluates its mineral exploration
and development projects as well as its other mineral properties and related
assets. The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 2000, for purposes of estimating future cash
flows, the price assumptions used by its mining consultant were taken from the
projections of a major international metal's company. These latest price
assumptions are averages over the projected life of the Al Masane mine and are
$1.05 per pound for copper, $.60 per pound for zinc, $400 per ounce for gold,
and $6.00 per ounce for silver. For its other mineral properties and related
assets, carrying values were compared to estimated net realizable values on
market comparables. Using these price assumptions, no asset impairments were
evident.
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, the Company will not be required to
take a material write-down of its mineral properties.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDER" PROPOSALS
Any proposal by a shareholder of the Company intended to be presented
at the 2002 annual meeting of shareholders, which is tentatively scheduled
sometime in May 2002, must be received by the Company at its principal executive
office no later than December 3, 2001 for inclusion in the Company"s Proxy
Statement and form of proxy. 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 2002 annual meeting of shareholders,
unless written notice of the matter is delivered to the Company at its principal
executive office no later than February 15, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10 (a) - First Amendment to Loan Agreement between South Hampton
Refining Company and Southwest Bank of Texas, N.A., dated June 20, 2000,
together with related Promissory Note, Security Agreement, Arbitration Agreement
and Guaranty Agreement made to Texas Oil and Chemical Co. II, Inc. The original
Loan Agreement, dated September 30, 1999, was filed as Exhibit 10 (r) to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
2001.
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: May 10, 2001
--------------------
ARABIAN AMERICAN DEVELOPMENT COMPANY
------------------------------------
(Registrant)
/s/ J. A. CRICHTON
------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON, JR.
--------------------
Drew Wilson, Jr. Secretary/Treasurer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 (a) - First Amendment to Loan Agreement between South Hampton Refining
Company and Southwest Bank of Texas, N.A., dated June 20, 2000,
together with related Promissory Note, Security Agreement,
Arbitration Agreement and Guaranty Agreement made to Texas Oil
and Chemical Co. II, Inc. The original Loan Agreement, dated
September 30, 1999, was filed as Exhibit 10 (r) to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.