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 JUNE 30, 2005
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
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip code)
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 June 30, 2005: 22,731,994.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 1,652,677 $ 623,202
Trade Receivables, Net 3,796,529 3,198,081
Financial Contracts 21,861 --
Inventories 1,350,048 1,243,693
----------- ------------
Total Current Assets 6,821,115 5,064,976
PLANT, PIPELINE AND EQUIPMENT 16,077,689 14,536,618
Less: Accumulated Depreciation (9,356,214) (9,044,884)
----------- ------------
Net Plant, Pipeline and Equipment 6,721,475 5,491,734
AL MASANE PROJECT 36,527,268 36,420,565
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,057,972 1,058,102
OTHER ASSETS 459,898 581,258
----------- ------------
TOTAL ASSETS $54,018,976 $ 51,047,883
=========== ============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 1,297,903 $ 2,649,899
Accrued Interest 319,392 4,133,964
Accrued Liabilities 1,533,480 1,145,399
Accrued Liabilities in Saudi Arabia 2,515,646 2,749,128
Notes Payable 11,025,833 11,025,833
Notes Payable to Stockholders 565,000 718,000
Current Portion of Long-Term Debt 1,227,065 3,071,161
----------- ------------
Total Current Liabilities 18,484,319 25,493,384
LONG-TERM DEBT 3,136,397 4,915,534
DEFERRED REVENUE 153,830 175,141
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 813,246 816,879
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,431,994 shares in 2005 and 2004 2,243,199 2,243,199
ADDITIONAL PAID-IN CAPITAL 36,512,206 36,512,206
ACCUMULATED DEFICIT (7,324,221) (19,108,460)
----------- ------------
Total Stockholders' Equity 31,431,184 19,646,945
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,018,976 $ 51,047,883
=========== ============
See notes to consolidated financial statements.
1
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES
Petrochemical Product Sales $19,735,554 $11,663,469 $36,086,333 $21,481,626
Processing Fees 853,501 1,010,696 1,888,215 1,816,568
----------- ----------- ----------- -----------
20,589,055 12,674,165 37,974,548 23,298,194
OPERATING COSTS AND EXPENSES
Cost of Petrochemical Product
Sales and Processing 17,422,591 11,278,418 29,863,725 21,274,499
General and Administrative 1,100,024 879,414 2,126,630 1,768,040
Depreciation 162,598 190,894 311,330 437,451
----------- ----------- ----------- -----------
18,685,213 12,348,726 32,301,685 23,479,990
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 1,903,842 325,439 5,672,863 (181,796)
OTHER INCOME (EXPENSE)
Interest Income 9,888 7,080 18,499 14,468
Interest Expense (200,181) (210,615) (428,492) (411,587)
Minority Interest 1,535 2,116 3,634 4,600
Miscellaneous Income (Expense) 28,427 15,669 50,811 63,087
----------- ----------- ----------- -----------
(160,331) (185,750) (355,548) (329,432)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 1,743,511 139,689 5,317,315 (511,228)
INCOME TAXES 227,500 -- 348,600 --
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 1,516,011 139,689 4,968,715 (511,228)
DISCONTINUED OPERATIONS
Income (Loss) from Operations of Coin 502,724 (196,911) 989,856 (568,943)
Gain on Disposal of Coin 5,825,668 -- 5,825,668 --
----------- ----------- ----------- -----------
GAIN FROM DISCONTINUED OPERATIONS 6,328,392 (196,911) 6,815,524 (568,943)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 7,844,403 $ (57,222) $11,784,239 $(1,080,171)
=========== =========== =========== ===========
Basic and Diluted Earnings
per Common Share
Income (Loss) from Continuing Operations $ 0.067 $ 0.006 $ 0.218 $ (0.023)
Discontinued Operations 0.278 (0.009) 0.300 (0.025)
----------- ----------- ----------- -----------
Net Income (Loss) $ 0.345 $ (0.003) $ 0.518 $ (0.048)
=========== =========== =========== ===========
Basic and Diluted Weighted Average Number
of Common Shares Outstanding 22,731,994 22,731,994 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 SIX MONTHS ENDED JUNE 30, 2005
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ----------- ------------ -----------
DECEMBER 31, 2004 22,431,994 $2,243,199 $36,512,206 $(19,108,460) $19,646,945
Net Income -- -- -- 11,784,239 11,784,239
---------- ---------- ----------- ------------ -----------
JUNE 30, 2005 22,431,994 $2,243,199 $36,512,206 $ (7,324,221) $31,431,184
========== ========== =========== ============ ===========
See notes to consolidated financial statements.
3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net Income (Loss) $11,784,239 $(1,080,171)
Adjustments to Reconcile Net Income (Loss)
To Net Cash Provided by Operating Activities:
Depreciation 311,330 611,631
Decrease in Deferred Revenue (21,311) (12,356)
Unrealized Gain on Financial Contracts (195,111) (123,100)
Gain on Disposal of Coin (5,825,668) --
Changes in Operating Assets and Liabilities:
Increase in Trade Receivables (598,448) (476,612)
(Increase) Decrease in Inventories (106,355) 19,871
Increase in Other Assets (96,171) (7,312)
Increase (Decrease) in Accounts Payable and Accrued Liabilities (25,167) 1,069,571
Increase (Decrease) in Accrued Interest (580,967) 411,241
Increase (Decrease) in Accrued Liabilities in Saudi Arabia (233,482) 109,520
Other (3,633) (12,870)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,409,256 509,413
----------- -----------
INVESTING ACTIVITIES
Additions to Al Masane Project (106,703) (212,585)
Additions to Plant, Pipeline and Equipment (1,541,071) (278,301)
Reduction in Mineral Properties in the United States 130 543
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,647,644) (490,343)
----------- -----------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 1,300,000 53
Reduction of Notes Payable and Long-Term Obligations (3,032,137) (34,502)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (1,732,137) (34,449)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,029,475 (15,379)
CASH AT BEGINNING OF PERIOD 623,202 177,716
----------- -----------
CASH AT END OF PERIOD $ 1,652,677 $ 162,337
=========== ===========
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. For additional information
please refer to the consolidated financial statements and footnotes thereto
and to Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's December 31, 2004 Annual
Report on Form 10-K/A-1.
These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiary,
American Shield Refining Company (the "Petrochemical Company"or "ASRC"),
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, until June 9, 2005, approximately
99.9% of the capital stock of Productos Quimicos Coin, S.A. de. C.V.
("Coin"), a specialty petrochemical products company located near
Coatzacoalcos, Mexico. South Hampton owns all of the capital stock of Gulf
State Pipe Line Company, Inc. ("Gulf State"). The Company also owns
approximately 55% of the capital stock of a Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche"), which does not conduct any
substantial business activity. The Petrochemical Company and its
subsidiaries constitute the Company's Specialty Petrochemicals Segment.
Pioche and the Company's mineral properties in Saudi Arabia constitute its
Mining Segment.
2. INVENTORIES
Inventories include the following:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Feedstock $ 731,593 $ --
Petrochemical products 618,455 1,243,693
---------- ----------
$1,350,048 $1,243,693
========== ==========
Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market, for inventory in the United States, and
on the average cost method, or market, for inventory held in Mexico. At
June 30, 2005, current cost exceeded LIFO value by approximately $415,000.
At December 31, 2004, current cost exceeded the LIFO value by approximately
$344,000.
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 six months ended June 30, 2005 and 2004, respectively.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Continuing Operations
Income (Loss) from Continuing Operations $ 1,516 $ 140 $ 4,969 $ (511)
======= ======= ======= =======
Weighted Average Shares Outstanding:
Basic and Diluted 22,732 22,732 22,732 22,732
======= ======= ======= =======
Income (Loss) Per Share from Continuing
Operations:
Basic and Diluted $ 0.067 $ 0.006 $ 0.218 $(0.022)
======= ======= ======= =======
5
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Discontinued Operations
Gain (Loss) from Discontinued Operations $ 6,328 $ (197) $ 6,816 $ (569)
======= ======= ======= =======
Weighted Average Shares Outstanding:
Basic and Diluted 22,732 22,732 22,732 22,732
======= ======= ======= =======
Gain (Loss) Per Share from Discontinued
Operations:
Basic and Diluted $ 0.278 $(0.009) $ 0.300 $(0.025)
======= ======= ======= =======
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Total Operations
Net Income (Loss) $ 7,844 $ (57) $11,784 $(1,080)
======= ======= ======= =======
Weighted Average Shares Outstanding:
Basic and Diluted 22,732 22,732 22,732 22,732
======= ======= ======= =======
Net Income (Loss) Per Share:
Basic and Diluted $ 0.345 $(0.003) $ 0.518 $(0.048)
======= ======= ======= =======
For the three and six months ended June 30, 2005 and 2004, options for
400,000 shares and 445,000, respectively, were excluded from diluted shares
outstanding because their effect was antidilutive.
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 JUNE 30, 2005 PETROCHEMICAL MINING TOTAL
- -------------------------------- ------------- ----------- -----------
Revenue from external customers $21,299,734 $ -- $21,299,734
Depreciation 162,598 -- 162,598
Operating income (loss) 2,069,299 (171,804) 1,897,495
Total assets $13,848,181 $40,170,795 $54,018,976
THREE MONTHS ENDED JUNE 30, 2004 PETROCHEMICAL MINING TOTAL
- -------------------------------- ------------- ----------- -----------
Revenue from external customers $13,458,652 $ -- $13,458,652
Depreciation 277,882 102 277,984
Operating income (loss) 402,378 (143,236) 259,142
Total assets $13,047,388 $40,083,865 $53,131,253
6
SIX MONTHS ENDED JUNE 30, 2005 REFINING MINING TOTAL
- ------------------------------ ----------- --------- -----------
Revenue from external customers $40,017,224 $ -- $40,017,224
Depreciation 311,330 -- 311,330
Operating income (loss) 6,206,434 (294,441) 5,911,993
SIX MONTHS ENDED JUNE 30, 2004 REFINING MINING TOTAL
- ------------------------------ ----------- --------- -----------
Revenue from external customers $24,374,239 $ -- $24,374,239
Depreciation 611,427 204 611,631
Operating loss (61,035) (320,673) (381,708)
Information regarding foreign operations for the three and six months ended
June 30, 2005 and 2004 follows (in thousands). Revenues are attributed to
countries based upon the origination of the transaction.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
REVENUES
United States $20,589 $12,675 $37,975 $23,298
Mexico 711 784 2,042 1,076
Saudi Arabia -- -- -- --
------- ------- ------- -------
$21,300 $13,459 $40,017 $24,374
======= ======= ======= =======
LONG-LIVED ASSETS
United States $ 7,779 $ 5,241
Mexico -- 4,392
Saudi Arabia 38,959 38,809
------- -------
$46,738 $48,442
======= =======
5. LEGAL PROCEEDINGS
South Hampton is presently a defendant in two lawsuits. One of the
lawsuits, which is filed in Madison County, Illinois, and which includes up
to 70 other defendants, primarily claims illness and disease resulting from
alleged exposure to chemicals, including benzene, butadiene and/or
isoprene, during employment at various occupations. The plaintiff claims
that the companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected it to liability
for unspecified actual and punitive damages. South Hampton does not believe
the plaintiff in the Illinois lawsuit ever came in contact with its
products and is vigorously defending itself against this claim. The Company
also believes it has adequate insurance coverage to protect it financially
from any damage award that might be incurred. The Company was involved in
five similar lawsuits which were filed in September of 2004 and voluntarily
dismissed by the plaintiffs in June of 2005.
The second lawsuit filed in Jefferson County, Texas, in September 2001,
alleges that the plaintiff became ill from exposure to asbestos while
employed by South Hampton from 1961 through 1975. Due to the time period in
which the claimant was allegedly injured, the Company was unable to locate
insurance coverage for this particular suit. South Hampton has negotiated
and is about to enter into a settlement agreement with the plaintiff in
order to eliminate its risk in this matter.
A notice of non-suit was filed in April of 2005 by the Plaintiff's attorney
for an additional lawsuit which was filed on May 29, 2003 and alleged that
the plaintiff was exposed to asbestos containing products in his duties as
a welder, pipefitter assistant, laborer, floor hand and mud hand/derrick
hand from 1950 - 1984.
In August 1997, the Executive Director of the Texas Commission on
Environmental Quality (TCEQ), filed a preliminary report and petition with
the TCEQ alleging that South Hampton violated various TCEQ rules, TCEQ
permits issued to South Hampton, a TCEQ order issued to South Hampton, the
Texas Water Code, the Texas Clean Air Act and the Texas Solid Waste
Disposal Act. The violations generally relate to the management of volatile
organic compounds in a manner that allegedly violates the TCEQ's air
quality rules and the storage, processing and disposal of hazardous waste
in a manner that allegedly violates the
7
TCEQ's industrial and hazardous waste rules. The TCEQ's Executive Director
recommended that the TCEQ enter an order assessing administrative penalties
against South Hampton in the amount of $709,408 and order South Hampton to
undertake such actions as are necessary to bring its operations at its
facility and its bulk terminal into compliance with Texas Water Code, the
Texas Health and Safety Code, TCEQ rules, permits and orders. Appropriate
modifications were made by South Hampton where it appeared there were
legitimate concerns. A preliminary hearing was held in November 1997, but
no further action was taken at that time. On February 2, 2000, the TCEQ
amended its pending administrative enforcement action against South Hampton
to add allegations dating through May 21, 1998 of 35 regulatory violations
relating to air quality control and industrial solid waste requirements.
The TCEQ proposed that administrative penalties be increased to
approximately $765,000 and that certain corrective action be taken. Again,
appropriate modifications were made by South Hampton where it appeared
there were legitimate concerns. In April 2003, South Hampton received a
revised Notice of Violation from the TCEQ. Various claims of alleged
violation were dropped, modified and added in the revised report and the
total dollar amount of the proposed administrative penalty was reduced to
approximately $690,000. On May 25, 2003, a settlement hearing with the TCEQ
was held and additional information was submitted on June 2, 2003, October
2, 2003 and November 4, 2003. South Hampton believes that the revised
notice contains incorrect information and erroneously delineates as ongoing
problems matters that were corrected immediately upon discovery several
years ago. South Hampton has continued to communicate with the TCEQ
concerning ongoing emission control facility upgrades which are being
implemented independently of this action and the Company intends to
continue to vigorously defend itself against the outstanding Notice of
Violation. Negotiations between South Hampton and the TCEQ are expected to
continue in order to reach a final settlement.
For comparison purposes, in the only settlement by the Company in recent
history, the TCEQ notified South Hampton on December 13, 2001 that it found
several alleged violations of TCEQ rules during a record review in October
2001 and proposed a settlement for $59,375. South Hampton settled this
particular claim in April 2002 for approximately $5,900. There is no
assurance the outcome of this incident is reflective of the potential
outcome of the currently outstanding allegations.
On February 23, 2004, by court order, a creditor was awarded Coin's plant
facilities as a result of a mortgage foreclosure proceeding. The
foreclosure proceedings were brought about by the lack of activity at the
facility during the 2000-2003 time periods when market conditions did not
allow the Coin facility to be competitive. When the market appeared to be
changing in early 2004, the Company immediately took legal steps to delay
and, if possible, prevent seizure of the plant. The Company remained in
control of the facility and continued its legal challenge to the
foreclosure. On May 19, 2005, Coin, with agreement from the bank,
transferred the facility in Coatzacoalcos to a third party for a
combination of cash and relief from certain liabilities relating to bank
debt and employee severance liabilities. The transfer of the facility
satisfied all liability to the foreclosing bank. On June 9, 2005, the
Company sold the stock in the Mexican corporation (Coin) for a minor
amount. As a result of the matters discussed in Note 8, management recorded
a loss on the foreclosure of the facility with a charge to consolidated
operations of $2,900,964 during the fourth quarter of 2004 and a gain on
the sale of the stock of $5,825,668 in the second quarter of 2005.
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. The loan is collateralized by all
of the Company's "movable and immovable" assets in Saudi Arabia.
On June 30, 2005, the Company signed a $2,000,000 loan agreement to provide
funds for the expansion of one of the toll processing units. The loan will
be repaid over five years with payments to begin the first quarter after
the commencement of operations of the new facilities or no later than
January of 2006. Payments are due quarterly and the note carries an
interest rate of 12% per annum. The contract with the toll processing
customer contains provision for capital recovery to be paid monthly and the
Company intends to apply those payments to retirement of the debt. The loan
is collateralized by the proceeds of the toll processing contract, and by a
second lien on most of the Company's plant and equipment. At June 30, 2005,
$1,200,000 of the loan commitment had been drawn of which $200,000 is
classified as current and $1,000,000 as long term.
On July 29, 2003, a Purchase and Sale Agreement was negotiated with a 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
8
invoice is collected. Under this factoring agreement, the bank agreed to
purchase up to $4.5 million of invoices. For the first six months of 2005,
the average effective interest rate was 14%. In July 2004, the limit of
purchases was raised to $6.0 million by the bank, and in January, 2005 it
was raised again to $8,500,000. At June 30, 2005, approximately $5,351,000
of receivables had been sold and, due to the revolving nature of the
agreement, also remained outstanding. The original agreement restricts the
payment of any dividends to the Company by South Hampton to an amount not
to exceed $50,000 a month, provided that South Hampton is not in default
under the agreement. The Company adhered to this agreement until December
2004 when the first installment of the mining lease payment was due. South
Hampton advanced to the parent Company in the form of a dividend, $260,000,
which was used to pay the installment due. The Bank waived default on this
excess 2004 dividend by letter dated April 6, 2005. The Bank also approved
an amendment raising the total dividends allowed during 2005 to $1,000,000.
The agreement is collateralized by a security interest in South Hampton's
accounts receivable. At June 30, 2005, South Hampton was in compliance with
the provisions of the agreement.
A contract was signed on June 1, 2004 between South Hampton and a supplier
for the purchase of 65,000 barrels per month of natural gasoline on open
account for the period from June 1, 2004 through May 31, 2006 and year to
year thereafter with 30 days written notice of termination by either party.
A provision of the contract states that South Hampton will begin reducing
the current debt to the supplier by $250,000 per quarter beginning July 1,
2004. Therefore, $1.0 million of the balance of approximately $3.05 million
has been classified as current at June 30, 2005. The supplier is currently
the sole provider of the facility's feedstock supply. On June 1, 2005, the
contract was extended to May 31, 2007.
On August 1, 2004, South Hampton entered into a $164,523 capital lease with
Silsbee Trading and Transportation, which is owned by a Company officer,
for the purchase of a diesel powered manlift. The lease is for five years
with title transferring to South Hampton at the end of the term. At June
30, 2005, approximately $21,000 represents unpaid interest, resulting in a
present value of $115,860 of which $27,065 is classified as current.
At March 31, 2005, Coin had a loan to a Mexican bank in the amount of
$2,044,096, payable in quarterly payments through March, 2007, bearing
interest at the LIBOR rate plus seven points (LIBOR was 3.34% at June 30,
2005) and collateralized by a second lien on the plant facilities. The note
balance and unpaid interest of $2,601,587 were removed from the
Consolidated Financial Statements when the stock of Coin was sold on June
9, 2005. See Note 8.
TOCCO recorded a loss on foreclosure in the fourth quarter of 2004 related
to a loan from a Mexican bank holding a first lien on the plant facilities.
Unpaid interest on this loan of $529,797 was extinguished by the transfer
of the Coin facility on May 19, 2005. See Note 8.
In June of 2005, TOCCO paid dividends to ASRC in amounts sufficient to
repay loans to the President of $53,000 and his wife of $100,000 and a
stockholder of $100,000, including all accrued interest. A loan of $565,000
with a stockholder remains outstanding. At June 30, 2005, the Company has a
liability to its President and Chief Executive Officer of approximately
$1,229,000 for accrued salary and termination benefits which are included
in Accrued Liabilities in Saudi Arabia in the Consolidated Balance Sheet.
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 treatment.
On January 30, 1992, the Board of Directors of TOCCO adopted a resolution
authorizing the establishment of a commodities trading account to take
advantage of opportunities to lower the cost of feedstocks and natural gas
for its subsidiary, South Hampton. The policy adopted by the Board
specifically prohibits the use of the account for speculative transactions.
The operating guidelines adopted by management generally limit exposures to
50% of the monthly feed volumes to the facility for up to six months
forward and up to 100% of the natural gas requirements. Except in rare
cases, the account uses options and
9
financial swaps to meet the targeted goals. These derivative agreements are
not designated as hedges per SFAS 133, as amended. The Company had option
contracts outstanding as of June 30, 2005 covering various natural gas
price movement scenarios through October of 2005 and covering from 50% to
100% of the natural gas requirements for each month. As of the same date,
the Company had committed to financial swap contracts for up to 50% of its
required monthly feed stock volume with settlement dates through June of
2005. For the six months ended June 30, 2005 and 2004, the net realized
gain from the derivative agreements was $837,000 and $506,270,
respectively. There was an estimated unrealized gain for the six months
ended June 30, 2005 and 2004 of approximately $195,000 and $123,000,
respectively. The realized and unrealized gains are recorded in Cost of
Petrochemical Product Sales and Processing for the periods ended June 30,
2005 and 2004.
8. DISCONTINUED OPERATIONS
A creditor (bank) of Coin, holding a first lien, initiated a mortgage
foreclosure proceeding that resulted in the 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 in partial settlement of the
outstanding debt owed by Coin. The court order required legal transfer of
the assets to the creditor within three days; however, the transfer was
delayed by the legal filings of the Company. Ultimately, management and
Coin's legal counsel were unable to determine if or when the legal transfer
of ownership would occur. As a result, management recorded the loss on the
foreclosure of the facility with a charge to consolidated operations of
$2,900,964 during the fourth quarter of 2004. In April 2005, management
ceased operating the plant and shut down the facility. In late April, 2005,
management met with a third party who had a contract with the Mexican bank
to take over the Coin facility in the event the foreclosure proceedings
were completed and an agreement was reached whereby the Company would sign
appropriate documentation transferring title to the facility in exchange
for relief from certain outstanding liabilities. In exchange for an orderly
and clean transfer of title, the Company received relief from the remaining
outstanding bank interest and penalties of approximately $530,000, was
relieved of severance liabilities of approximately $160,000 due the
remaining employees at the Coatzacoalcos location, and received $100,000
cash with which to satisfy miscellaneous expenses associated with closing
the Mexico City office. Documentation was completed and signed on May 19,
2005.
On June 9, 2005, the Company sold the stock in the Mexican corporation to
an independent third party in Mexico and essentially ceased all operations
in the country. The stock was sold for an immaterial amount and the sale
was designed to allow the third party to make use of the accumulated tax
losses. The Company recorded a gain on disposal of Coin of approximately
$5.9 million. There are no material continuing liabilities associated with
the Company's prior ownership of the Coin operation.
9. SUBSEQUENT EVENTS
In July, 2005, the Company entered into discussions with its bank to
replace the Purchase and Sale Agreement (see Note 6) with a line of credit.
The bank has agreed to re-structure the relationship and documentation is
expected to be completed in the third quarter 2005.
On August 9, 2005 the Company reached an agreement with the plaintiff in
the Jefferson County, Texas lawsuit. Payments of $100,000 each will be made
on September 1, and December 1, 2005 in final settlement of the case.
Documentation is expected to be completed in August, 2005.
10
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 Petrochemical 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 all of the Company's internally generated cash flows.
Throughout the 1990's the Petrochemical Company enjoyed the benefits of
economic expansion in the US and relatively low and stable energy prices.
In 2000, energy prices became more volatile and the economy slowed, and the
Company suffered operating losses as the petrochemical industry struggled
to adjust to the new environment. Beginning in February 2001, the decline
of feedstock and natural gas prices returned the Petrochemical Company to a
positive cash flow, which it attained for the remainder of 2001 and
throughout 2002. Demand for specialty solvents, while not enough to justify
operating the plant at capacity, was strong enough to cover fixed and
variable costs. The toll processing segment of the business remained strong
throughout 2001 and 2002 and contributed to the Petrochemical Company's
steady performance. The Company also was able to successfully hedge its
feedstock and a portion of its fuel gas to dampen the effects of the new
volatility in the energy markets. During 2003, the industry again
experienced tighter margins resulting from the rise in feedstock prices and
unfortunately, due to increased scrutiny of the industry after the Enron
fiasco, several of the Company's trading partners in the hedging program
dropped out of the business and the Company was again at the mercy of
rising petroleum costs. Feedstock prices remained at historically higher
prices throughout 2003 and flat demand would not allow accompanying rises
in selling prices and therefore resulted in operating losses for the
segment in 2003. After January 2004, feedstock prices temporarily began to
fall back to more moderate levels and at the same time the Company was able
to establish a trading relationship with an international integrated oil
concern. When oil prices began their dramatic rise in 2004, the Company had
financial swaps in place which gave it protection against sudden and
volatile price swings in feedstock prices and to a lesser extent, fuel gas
costs. Product demand also grew in 2004 and has continued into 2005. These
conditions have allowed the Petrochemical Company to report significant
earnings and to prepare to meet continued volatility of the markets in the
future.
South Hampton obtains its feedstock requirements from a sole source vendor.
On May 7, 2004, South Hampton and the supplier signed a letter of intent
whereby the supplier would assist with the capital required to expand a
toll processing unit for a large customer. As security for the funds used
to purchase the capital equipment and to secure outstanding debts for
feedstock purchased from the supplier, South Hampton executed a mortgage in
June 2004 covering most of the existing facility's equipment. South Hampton
elected not to take advantage of the equipment financing portion of the
agreement but continues to purchase feedstock through the vendor and
continues to secure those purchases with a lien on fixed assets.
A contract was signed on June 1, 2004 between South Hampton and the
supplier for the purchase of 65,000 barrels per month of natural gasoline
on open account for the period from June 1, 2004 through May 31, 2006 and
year to year thereafter with 30
11
days written notice of termination by either party. On June 1, 2005, the
contract was extended through May 31, 2007. A provision of the contract
states that South Hampton will begin reducing the current debt to the
supplier by $250,000 per quarter beginning July 1, 2004. Therefore, $1
million of this debt has been classified as current at June 30, 2005. The
supplier is currently the sole provider of the feedstock supply. At June
30, 2005, South Hampton owed the supplier approximately $3.05 million.
On August 1, 2004, South Hampton entered into a capital lease with Silsbee
Trading and Transportation, which is owned by an officer of the Company,
for the purchase of a diesel powered manlift. The lease is for five years
with title transferring to South Hampton at the end of the term.
As mentioned in Note 6 to the consolidated financial statements, Coin was
not in compliance with certain covenants contained in its loan agreements
at March 31, 2005, and therefore, its creditors had the right to declare
the debt to be immediately due and payable. If this had occurred, Coin
would have been unable to pay the entire amount due. On February 23, 2004,
the Coin plant facilities were awarded to a creditor in a foreclosure
hearing. The foreclosure was contested successfully until early 2005. On
May 19, 2005 the facility was transferred to the acquiror and on June 9,
2005 the stock in Coin was sold. See Note 8 to the consolidated financial
statements.
MINING SEGMENT. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is
a net user of the Company's available cash and capital resources.
Implementation of the project has been delayed over the last five years
because the open market prices for the metals were not sufficient to
attract the additional investment required to achieve production. As the
world economy and metal prices have improved over the last year, the
investment viability has improved and steps are being taken to take
advantage of the improved investment climate.
On February 23, 2004, the Company's President received a letter from the
Deputy Minister of Petroleum and Mineral Resources of the Kingdom of Saudi
Arabia 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 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 agreed to pay the past due surface rentals, which
were a total of approximately $586,000, in two equal installments, the
first on December 31, 2004 and the second on December 31, 2005 and to
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 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 paid $266,000 of the back payments on
January 3, 2005, and is scheduled to pay the remaining $320,000 on December
31, 2005.
The Company is making preparations to implement the work program. After
initialization, the program will take approximately twenty-two months to
complete, after which commercial production would begin. The Company, on
April 20, 2005, signed an agreement with SNC-Lavalin Engineering and
Construction Company of Toronto, Canada, to update the feasibility study.
The updated study will allow the Company to pursue potential joint venture
partners to manage the project and to obtain acceptable financing to
commercially develop the program. The prices of zinc, copper, gold and
silver have increased significantly over the last two years. The updated
study is expected to be completed by early in the third quarter of 2005.
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. Without a joint venture, the
work program cannot be accomplished as planned. Financing for the updated
feasibility study was provided by an advance from a major shareholder.
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
12
sector, both Saudi and foreign, in the development of mineral resources in
Saudi Arabia. The mining code was revised, approved by the Council of
Ministers, and issued by Royal Decree prior to the end of 2004.
The Company has communicated to the Minister of Petroleum and Mineral
Resources that the unreasonable delay in granting of the mining lease from
1983 to 1993 and the unreasonable threat of cancellation during 2000 to
2003, which was lifted in 2004, were the underlying reasons for the
Company's losses while maintaining its legal position in Saudi Arabia, and
which further caused the severe drop in the share price of its stock. A
request for fair compensation was made by the Company and denied by the
Ministry, as was a request for arbitration. The Company is consulting with
counsel on further steps which might be taken, however any such action
would not affect the Company's right to implement the Al Masane 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 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 may be acted upon now that the new Saudi Arabian Mining
Code is issued, but there can be no assurance that this will happen.
Management also is addressing two other significant financing issues within
this segment. These issues are the $11 million note payable to the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $947,000 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 $1,229,000).
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 Ministry of Finance and National Economy
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. 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 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. In August 2004, the Company
exercised its option to purchase 720,000 shares of the common stock of
Pioche at $0.20 a share for a total amount of $144,000. Pioche agreed to
accept payment for the stock purchase by the cancellation of $144,000 of
debt it owed to the Company. This purchase increased the Company's
ownership interest in Pioche to approximately 55.01%.
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
13
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, to proceed with the
development of the mining segment, either foreign or domestic, 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.
The Company's management and Board of Directors have many years of
experience in the exploration for, and development of, mineral prospects in
various parts of the world. Two members of the Board are geologists, and a
third is a petroleum engineer. Neither management nor the Board members
have personally operated a mine on a day to day basis, nor have they
marketed the product of a mining operation. The Company intends to hire
qualified and experienced managers for the operation at the appropriate
time. In addition, the Company has from time to time employed various
respected engineering and financial advisors to assist in development and
evaluation of the project. The consultants currently being employed to
update the feasibility of the project are SNC-Lavalin of Toronto, Canada.
Company management may not be totally aware in detail of the specific
requirements related to working within this industry. Therefore, there is
risk the decisions and choices may not take into account standard
engineering or management approaches mineral exploration companies commonly
use. If these issues are not correctly handled, the operations, earnings
and ultimate financial success of the Mining Segment could suffer
irreparable harm due to management's lack of experience in this portion of
the development of the project. The amount of risk will ultimately depend
upon the Company's skill in using consultants and in hiring experienced
personnel to manage the operation.
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended June 30, 2005, total
petrochemical product sales and processing fees from continuing operations
increased approximately $7,915,000 or 62%, while the cost of petrochemical
sales and processing (excluding depreciation) increased approximately
$6,144,000 or 54% from the same period in 2004. Consequently, the total
gross profit margin on revenue in the second quarter of 2005 increased
approximately $1,771,000 or 127% compared to the same period in 2004.
Sales from discontinued operations for the quarter decreased approximately
$74,000 or 9%, while its cost of sales (excluding depreciation) decreased
approximately $277,000 or 40%. Discontinued operations had a positive gross
profit margin on product sales in this quarter of approximately $302,000,
compared to a positive gross profit margin of approximately $99,000 in the
same quarter in 2004.
In the six months ended June 30, 2005, total petrochemical product sales
and processing fees from continuing operations increased approximately
$14,676,000 or 63%, while the cost of petrochemical sales and processing
(excluding depreciation) increased approximately $8,589,000 or 40% from the
same period in 2004. Consequently, the total gross profit margin on
petrochemical product sales and processing in the first six months of 2005
increased approximately $6,087,000 compared to the same period in 2004. The
cost of petrochemical product sales and processing and gross profit margin
for the six months ended June 30, 2005 include an estimated unrealized gain
of approximately $195,000 on the derivative agreements.
Sales from discontinued operations increased approximately $966,000 or 90%,
while its cost of sales (excluding depreciation) increased approximately
$204,000 or 21%. Therefore, discontinued operations had a gross profit
margin on product sales for the six months of approximately $886,000,
compared to a gross profit margin of approximately $123,000 for the same
period in 2004.
The Petrochemical segment completed a de-bottlenecking project on the
solvents unit during the later part of the first quarter of 2005. The
project added two new, larger fractionation towers and divided the solvent
production into two trains. The total capacity of the unit was increased by
approximately 30% and was functional by March 31, 2005. The Company has
experienced typical mechanical reliability issues since the startup with
the increased volume and is resolving those as they arise, but is generally
satisfied with the performance of the additional equipment. The project
cost approximately $1.5 million and was accomplished using current
maintenance department employees. No reportable injuries were recorded
during the effort.
The first half of 2005 has seen generally high feedstock prices but they
have fluctuated within a range rather than continuing the steady increase
of the prior year. The Company has been able to keep product prices high
enough to maintain a positive cash flow and cover the higher fuel gas and
transportation costs. Importantly, sales demand has remained high during
the last fifteen
14
months even with the constant price increases to the customers. Management
attributes the strong sales demand to both the stronger general economic
activity of the past year, and to the growth in the industries served by
the petrochemical product lines. Growth of the markets served has generally
been 2% to 3% annually over the last ten years.
For comparison the first half of 2004 was a difficult period for the
Company and the petrochemical industry in general. Feedstock prices rose to
record highs for the Company and, with feedstock prices rising rapidly, the
Company was unable to raise product prices quickly enough to cover the
increased costs. This resulted in severe losses in January and, to a lesser
extent, February. By March, 2004, the Company had raised its product prices
and adjusted its business to cover the increases, which enabled it to
regain a positive cash flow position. Feedstock prices moderated early in
the second quarter 2004 but by the end of the quarter and throughout the
third and fourth quarters the prices were again on the upswing.
Since late 2003, the Company has entered into derivative agreements to
dampen the sudden price spikes and to provide feedstock price protection.
Management believes that if the derivative agreements can moderate rate of
change in the overall cost of feedstock, product prices can be raised
sufficiently as needed to avoid the large losses experienced in the past.
Generally, approximately 50% of the monthly feedstock requirements are
covered at any one time. This ratio cushions the price increases and still
allows the Company to experience partial benefit when the price drops. In
the second quarter of 2005, the natural gasoline derivative agreements had
a realized gain of approximately $476,000 and an estimated unrealized loss
of approximately $69,000 for a total positive effect of approximately
$407,000.
The price of natural gas (fuel gas), which is the petrochemical operation's
largest single expense, continued to be high during the first quarter of
2005 compared to historical levels. The Company has entered into option
contracts for fuel gas through the first quarter of 2006, to attempt to
minimize the impact of price fluctuations in the market. The Company has
also been able to pass through the price increases as they have occurred.
In the second quarter of 2005, the natural gas derivative agreements had a
realized gain of approximately $27,380 and an estimated unrealized gain of
approximately $91,161 for a total positive effect of approximately
$118,541.
The toll processing fee revenue for the second quarter of 2005 of
approximately $854,000 was a decrease of approximately $157,000 or 16%
below the fees for the same period in 2004. The toll processing customers
are very active and remain on long-term contracts. While there are some
fluctuations in the tolling volumes handled, toll processing has developed
into a stable business and the Company intends to continue to develop
opportunities when available. Toll processing fees are expected to rise in
the second half of 2005 when expanded facilities for one of the major
customers are completed. The contract was signed on January 28, 2005 with
the expanded operations to commence within eight months of signing of the
agreement. The revised contract will generate additional processing fees,
contains a capital repayment feature, and carries penalties for being late
in completion of the expansion project. The project is on schedule and is
expected to be completed timely.
Interest expense remained relatively unchanged. The Company's largest
supplier of feedstock asked for security on the account because of the
large increase in the amounts owed for feedstock purchases. While the
volume of feedstocks purchased is rising because of expanded capacity,
significant price changes in the petroleum markets have also increased the
dollar amount of such purchases. The Company negotiated a security
agreement with the supplier, which has solidified the supply of feedstock
to the Company at favorable terms compared to what is otherwise available
in the market. Under the security agreement, the supplier has a first lien
on most of South Hampton's fixed assets.
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'
shares 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 for 2005 are $1.40 per
pound for copper and $.53 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 June 30, 2005. 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.
15
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/A-1 for the fiscal year ended December
31, 2004.
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.
16
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information about the Company's Common Stock
repurchases during the three months ended June 30, 2005:
(a) (c) (d)
Total Number Total Number of Shares Maximum Number of
of (b) Purchased as Part of Shares that May Yet be
Shares Average Price Publicly Announced Purchased Under the
Period Purchased Paid Per Share Plans or Programs Plans or Programs
- ------ ------------ -------------- ---------------------- ----------------------
April 1, 2005 through
April 30, 2005 -- $-- -- --
May 1, 2005 through
May 31, 2005 -- $-- -- --
June 1, 2005 through
June 30, 2005 -- $-- -- --
--- --- --- ---
Total -- $-- -- --
=== === === ===
ITEM 3. DEFAULTS ON 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.
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 annual meeting of
shareholders, which is tentatively scheduled sometime in December 2005,
must submit the proposal to the Company at its principal executive office
no later than September 1, 2005. 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 annual meeting
of shareholders, unless written notice of the matter is delivered to the
Company at its principal executive office no later than September 1, 2005.
17
ITEM 6. 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)).*
10(e) - 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(f) - 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(g) - 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(h) - 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(i) - 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)).
18
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(j) - 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(k) - 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(l) - 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(m) - 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)).
10(n) - Security Agreement and Deed of Trust dated June 1, 2004 between South
Hampton Refining Company and Martin Operating Partnership, L.P.
(incorporated by reference to Exhibit 10(p) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004 (File No.
0-6247)).
10(o) - Addendum to Equipment Lease Agreement dated August 1, 2004, between
Silsbee Trading and Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit 10(q) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
(file No. 0-6247)).
10(p) - Letter Agreement dated May 7, 2005 between Sheikh Fahad Al-Athel and
the Company (incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2005 (file No. 0-6247)).
10(q) - Loan Agreement dated June 30, 2005 between Texas Oil & Chemical Co.
II/South Hampton Refining Co. and The Catalyst Fund,
LTD/Soutwest/Catalyst Capital, LTD.
10(r) - Judicial Agreement dated May 19, 2005 between Fabricante Y
Comercializadora Beta, S.A. de C.V. and Productos Coin, S.A.de C.V.
10(s) - Agreement dated June 6, 2005 between Fabricante Y Comercializadora
Beta, S.A. de C.V. and Productos Quimicos Coin, S.A. de C.V.
10(t) - Mercantile Shares Purchase and Sale Agreement dated June 9, 2005
between Texas Oil & Chemical Co. II. Inc. and Ernesto Javier Gonzalez
Castro and Mauricio Ramon Arevalo Mercado.
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
19
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
20
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: August 19, 2005 ARABIAN AMERICAN DEVELOPMENT COMPANY
(Registrant)
By: /s/ NICHOLAS CARTER
------------------------------------
Nicholas Carter Secretary/Treasurer
(Authorized Officer and Principal
Financial Officer)
21