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 SEPTEMBER 30, 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 September 30, 2001: 22,731,994.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
SEPTEMBER 30, 2001 DECEMBER 31,
(UNAUDITED) 2000
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 311,636 $ 158,977
Trade Receivables 4,536,533 5,239,769
Inventories 909,784 960,494
------------------ ------------------
Total Current Assets 5,757,953 6,359,240
REFINERY PLANT, PIPELINE AND EQUIPMENT 17,447,905 17,248,891
Less: Accumulated Depreciation (6,603,779) (5,570,930)
------------------ ------------------
Net Plant, Pipeline and Equipment 10,844,126 11,677,961
AL MASANE PROJECT 35,575,850 35,304,240
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,210,980 1,282,142
OTHER ASSETS 466,684 543,864
------------------ ------------------
TOTAL ASSETS $ 56,286,841 $ 57,598,695
================== ==================
LIABILITIES
CURRENT LIABILITIES
Accounts Payable-Trade $ 5,361,160 $ 5,306,121
Accrued Liabilities 1,522,051 1,259,272
Accrued Liabilities in Saudi Arabia 1,062,375 1,062,375
Notes Payable 12,093,780 11,923,780
Current Portion of Long-Term Debt 7,862,983 8,060,981
------------------ ------------------
Total Current Liabilities 27,902,349 27,612,529
ACCRUED LIABILITIES IN SAUDI ARABIA 1,030,588 841,489
DEFERRED REVENUE 131,794 131,401
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 854,993 999,011
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,431,994 shares in 2001
and 22,488,994 shares in 2000 2,243,199 2,248,899
ADDITIONAL PAID-IN CAPITAL 36,401,306 36,523,606
ACCUMULATED DEFICIT (12,277,251) (10,758,240)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (137) --
------------------ ------------------
Total Stockholders' Equity 26,367,117 28,014,265
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,286,841 $ 57,598,695
================== ==================
</Table>
See notes to consolidated financial statements.
-1-
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEP. 30, 2001 SEP. 30, 2000 SEP. 30, 2001 SEP. 30, 2000
------------- ------------- ------------- -------------
REVENUES
Refined Product Sales $ 6,769,237 $ 11,095,240 $ 22,006,952 $ 31,542,686
Processing Fees 707,489 669,000 2,670,975 1,690,063
------------- ------------- ------------- -------------
7,476,726 11,764,240 24,677,927 33,232,749
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 6,539,332 11,496,474 21,997,442 31,322,327
General and Administrative 953,467 988,054 2,501,118 2,641,433
Depreciation 346,381 291,871 1,037,889 754,335
------------- ------------- ------------- -------------
7,839,180 12,776,399 25,536,449 34,718,095
------------- ------------- ------------- -------------
OPERATING LOSS (362,454) (1,012,159) (858,522) (1,485,346)
OTHER INCOME (EXPENSE)
Interest Income 10,572 25,736 34,310 92,056
Interest Expense (253,266) (291,384) (1,008,071) (757,738)
Minority Interest 45,583 37,873 144,019 96,038
Foreign Exchange Transaction Gain (Loss) 107,487 (9,030) 32,485 (27,384)
Miscellaneous Income 43,691 49,968 136,768 86,730
------------- ------------- ------------- -------------
(45,933) (186,837) (660,489) (510,298)
------------- ------------- ------------- -------------
NET LOSS $ (408,387) $ (1,198,996) $ (1,519,011) $ (1,995,644)
============= ============= ============= =============
NET LOSS PER COMMON SHARE:
Basic and Diluted $ (0.02) $ (0.05) $ (0.07) $ (0.09)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic and Diluted 22,765,451 22,788,994 22,781,146 22,634,379
============= ============= ============= =============
</Table>
See notes to consolidated financial statements.
-2-
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL
------------ ------------ ------------ ------------ ------------- ------------
JANUARY 1, 2001 22,488,994 $ 2,248,899 $ 36,523,606 $(10,758,240) $ -- $ 28,014,265
Common Stock Cancelled
In Exchange for Receivable (57,000) (5,700) (122,300) -- -- (128,000)
COMPREHENSIVE INCOME (LOSS)
Net Loss -- -- -- (1,519,011) -- (1,519,011)
Fair Value of Cash Flow Hedge -- -- -- -- (137) (137)
------------ ------------ ------------ ------------ --------- ------------
Total Comprehensive
Income (Loss) (1,519,148)
------------ ------------ ------------ ------------ --------- ------------
SEPTEMBER 30, 2001 22,431,994 $ 2,243,199 $ 36,401,306 $(12,277,251) $ (137) $ 26,367,117
============ ============ ============ ============ ========= ============
</Table>
See notes to consolidated financial statements.
-3-
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
NINE MONTHS ENDED
------------------------------
SEP. 30, 2001 SEP. 30, 2000
------------- -------------
OPERATING ACTIVITIES
Net Loss $ (1,519,011) $ (1,995,644)
Adjustments for Non-Cash Transactions
Depreciation 1,037,889 754,335
Abandoned Mining Claims 67,560 --
Increase (Decrease) in Deferred Revenue 393 (25,825)
Effects of Changes in Operating Assets and Liabilities
Decrease (Increase) in Trade Receivables 703,236 (398,759)
Decrease (Increase) in Inventories 50,710 (232,984)
Decrease (Increase) in Other Assets 77,180 (106,488)
Increase in Accounts Payable and Accrued Liabilities 317,681 2,337,868
Increase in Accrued Liabilities in Saudi Arabia 61,099 30,410
Other (149,058) (216,798)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 647,679 146,115
------------- -------------
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 (271,610) (329,655)
Additions to Refinery Plant, Pipeline and Equipment (199,014) (2,674,956)
Reduction in Mineral Properties in the United States 3,602 18,896
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (467,022) (5,244,783)
------------- -------------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 229,270 3,167,350
Reduction of Notes Payable and Long-Term Obligations (257,268) (1,798,229)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (27,998) 1,369,121
------------- -------------
NET INCREASE (DECREASE) IN CASH 152,659 (3,729,547)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 158,977 3,934,313
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 311,636 $ 204,766
============= =============
</Table>
See notes to consolidated financial statements.
-4-
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:
<Table>
<Caption>
SEP. 30, 2001 DEC. 31, 2000
------------- -------------
Refined products $ 909,784 $ 960,494
============= =============
</Table>
Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market. At September 30, 2001, current cost
exceeded LIFO value by approximately $30,000. At December 31, 2000, current
cost exceeded LIFO value by approximately $178,000.
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
and nine months ended September 30, 2001 and 2000, respectively.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Loss $ (408) $ (1,199) $ (1,519) $ (1,996)
========== ========== ========== ==========
Weighted average shares outstanding - basic
and diluted 22,765 22,789 22,781 22,634
========== ========== ========== ==========
Net Loss per share:
Basic and diluted $ (.02) $ (.05) $ (.07) $ (.09)
========== ========== ========== ==========
</Table>
In the three and nine months ended September 30, 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.
-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, miscellaneous income and minority interest.
Information on the segments is as follows:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2001 REFINING MINING TOTAL
------------ ------------ ------------
Revenue from external customers $ 7,476,726 $ -- $ 7,476,726
Depreciation 345,799 582 346,381
Operating loss (239,182) (123,272) (362,454)
Total assets $ 17,036,026 $ 39,250,815 $ 56,286,841
</Table>
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2000 REFINING MINING TOTAL
------------ ------------ ------------
Revenue from external customers $ 11,764,240 $ -- $ 11,764,240
Depreciation 291,304 567 291,871
Operating loss (938,019) (74,140) (1,012,159)
Total assets $ 20,310,986 $ 38,736,517 $ 59,047,503
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001 REFINING MINING TOTAL
------------ ------------ ------------
Revenue from external customers $ 24,677,927 $ -- $ 24,677,927
Depreciation 1,036,143 1,746 1,037,889
Operating loss (644,293) (214,229) (858,522)
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2000 REFINING MINING TOTAL
------------ ------------ ------------
Revenue from external customers $ 33,232,749 $ -- $ 33,232,749
Depreciation 752,634 1,701 754,335
Operating loss (1,324,326) (161,020) (1,485,346)
</Table>
Information regarding foreign operations for the three and nine months ended
September 30, 2001 and 2000 follows (in thousands). Revenues are attributed
to countries based upon the origination of the transaction.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES
United States $ 7,172 $ 11,071 $ 23,754 $ 28,470
Mexico 305 693 924 4,763
Saudi Arabia -- -- -- --
---------- ---------- ---------- ----------
$ 7,477 $ 11,764 $ 24,678 $ 33,233
========== ========== ========== ==========
LONG-LIVED ASSETS
United States $ 6,705 $ 7,710
Mexico 5,350 5,698
Saudi Arabia 38,007 37,382
---------- ----------
$ 50,062 $ 50,790
========== ==========
</Table>
-6-
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.
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.
-7-
6. LONG-TERM DEBT
South Hampton entered into a $2.25 million credit agreement in September 1999
with Southwest Bank of Texas, N.A., located in Houston, Texas. An amended
agreement was entered into on June 30, 2000, which increased the total amount
to $3.25 million. A second amended agreement was entered into on May 31, 2001
which extended the due date from May 31, 2001 to July 31, 2001. The debt was
not paid on July 31, 2001. A third amended agreement was entered into on July
31, 2001, which extended the due date to October 31, 2001. The debt was not
paid on October 31, 2001 and an extension of the agreement is currently being
negotiated. At September 30, 2001, the Company was 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. An amended
promissory note dated April 1, 2001 was signed 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. At September 30, 2001, the Company was not in
compliance with certain covenants contained in the loan agreement; therefore
this debt has been classified as a current liability in the financial
statements.
7. HEDGING ACTIVITY
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities", establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
In July and October 2001, the Company entered into two swap agreements to
limit the effect of significant fluctuations in natural gasoline prices. The
agreements expire in January and August 2002. They are designated as cash
flow hedges. The Company's primary source of feedstock is natural gasoline.
The effect of these agreements is to limit the Company's exposure by fixing
the natural gasoline price of approximately 25,000 barrels (1,050,000
gallons) of feedstock per month over the term of the agreements. This amount
of material will approximate 50% of the Company's average monthly sales
volume. The agreements had no cost to the Company. At September 30, 2001, the
July agreement had a negative fair value of approximately $108,000.
8. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" addresses the manner in which certain adjustments to
shareholders' equity are displayed in the financial statements.
Comprehensive income includes net earnings (losses) and items of other
comprehensive income or loss. The following table provides information
regarding comprehensive income, net of tax (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
----- ------- ------- -------
Net loss $(408) $(1,199) $(1,519) $(1,996)
Other comprehensive loss:
Unrealized loss on derivatives
held as cash flow hedges (108) -- (108) --
Reclassification adjustment for
gains realized (29) -- (29) --
----- ------- ------- -------
Other comprehensive loss (137) -- (137) --
----- ------- ------- -------
Comprehensive loss $(545) $(1,199) $(1,656) $(1,996)
===== ======= ======= =======
</Table>
-8-
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 2001 allowing a return to positive cash
flows in February. 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, beginning in July 2001, to
protect the operations from extreme fluctuations in the price of its feedstock
purchases by hedging approximately 50% of its needs through July 2002. In
addition, the purchase price of natural gas, which is used as fuel gas, has
recently been fixed by agreement for the period from July 2001 through March
2002.
As mentioned in Note 6, South Hampton was not in compliance with certain
covenants contained in two loan agreements at September 30, 2001, and
therefore, the creditors have the right to declare the debt to be immediately
due and payable. If this were to occur, the Company would currently be unable
to pay the entire amount due.
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
-9-
for the above are currently being studied. In the meantime, the Company intends
to maintain the Al Masane mining lease through the payment of the annual advance
surface rental, the implementation of a drilling program to attempt to increase
proven and probable reserves and to attempt to improve the metallurgical
recovery rates, which may improve the commercial viability of the project.
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 5 unpatented claims
totaling approximately 1,500 acres in Lincoln County, Nevada. In August 2001, 75
unpatented claims were abandoned since they were deemed to have no future value
to Pioche. 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 $1,030,000).
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 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.
-10-
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended September 30, 2001,
total revenues decreased approximately $4,288,000 ($1,230,000 attributable to
Coin) or 36%, while the cost of sales (excluding depreciation) decreased
approximately $4,957,000 ($1,187,000 attributable to Coin) or 43% from the same
period in 2000. Consequently, the total gross profit margin in the third quarter
of 2001 increased approximately $669,000 compared to the same period in 2000.
This includes Coin's gross profit margin, which decreased approximately $43,000.
In the nine months ended September 30, 2001, total revenues decreased
approximately $8,555,000 ($3,839,000 attributable to Coin) or 26%, while the
cost of sales (excluding depreciation) decreased approximately $9,325,000
($3,662,000 attributable to Coin) or 30% from 2000. Consequently, the total
gross profit margin in 2001 decreased approximately $770,000. 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 few months 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 remained at this level for the balance of the first
quarter of 2001 and decreased to the $.55 to $.65 per gallon range in the second
and third quarters 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 $4.50 per MMBTU by the end of the
second quarter of 2000. The gas market prices have currently dropped to about
$2.20 per MMBTU after reaching a peak of $9.94 per MMBTU in January 2001, and
are expected to remain strong for the remainder of this year. The drop in 2001
sales volume is a result of the slower economy and the decision by the Company
to concentrate its business only on those high quality customers who value the
service the Company provides and the high quality of its products.
To avoid a repeat of the rapid rise in feedstock costs that occurred in the
winter of 2000, the Company has hedged approximately 50% of its needs through
July 2002. The hedge is not designed to totally lock in feed costs but is
designed to slow any significant price changes so that corresponding changes in
product prices have time to take effect. Management feels that the hedged
feedstock prices will allow the Company to remain competitive throughout the
remainder of 2001 and into 2002. Management has also hedged 50% of its natural
gas needs until April 2002 to avoid the rapid and unrecoverable expense that was
experienced last winter. If the market opportunity is available a larger
percentage may be fixed. The hedging programs began in July and August 2001 and
will be continued and modified as necessary to help stabilize performance in the
future.
Toll processing fee income increased approximately $38,000 and $981,000 in
the third quarter and the first nine months of 2001, respectively over the same
prior year periods, which has helped to offset the feedstock cost 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 four
different entities. While some of the contracts are being renewed on a
year-to-year basis, the outlook on all the contracts is that they will be
longer-term operations.
Administrative expenses in the third quarter and the first nine months of
2001 for this segment were lower than in the same prior year periods by
approximately $35,000 and $140,000, respectively due primarily to management's
efforts to reduce all possible costs. Sales of the Company's prime products
remain stable. Industry observers maintain that the demand for product volume
will increase in the second or third quarter of 2002. The Company believes it is
positioned to achieve acceptable cash flow and profitability when the chemical
industry rebounds.
The Mexico refinery was shut down in August 2000, due to the increased
feedstock and natural gas costs, with cash flow coming only from brokerage
sales. The refinery has recently operated for short periods to insure mechanical
integrity in preparation for full time operations. The market for its products
remains weak and under priced and the Company has made progress in changing its
product mix to better match the current domestic demand. The market share in
Mexico has been maintained with production from the Silsbee refinery. 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 plant economics are being evaluated
and it is expected that the plant will operate approximately 50% of the time in
the fourth quarter of 2001.
-11-
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, there were no asset
impairments.
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.
-12-
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) - Third Amendment to Loan Agreement dated as of July 31, 2001 between
South Hampton Refining Company and Southwest Bank of Texas, N.A., together with
related Promissory Note.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
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: November 12, 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
-13-
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 (a) - Third Amendment to Loan Agreement dated as of July 31, 2001
between South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note.
</Table>