UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER 0-6247
ARABIAN AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
LARGE ACCELERATED FILER ACCELERATED FILER NON-ACCELERATED FILER X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
YES NO X
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Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at June 30, 2006: 22,771,994.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 1,374,512 $ 1,738,558
Trade Receivables, Net 11,064,193 12,972,657
Financial Contracts 646,276 74,752
Inventories 720,630 1,164,674
------------ -----------
Total Current Assets 13,805,611 15,950,641
PLANT, PIPELINE AND EQUIPMENT 19,379,571 17,905,048
Less: Accumulated Depreciation (10,240,934) (9,678,443)
------------ -----------
Net Plant, Pipeline and Equipment 9,138,637 8,226,605
AL MASANE PROJECT 37,029,962 36,804,098
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,058,215 1,058,492
OTHER ASSETS 2,947,533 2,476,865
------------ -----------
TOTAL ASSETS $ 66,411,206 $66,947,949
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 584,774 $ 1,787,353
Accrued Liabilities 2,145,038 1,638,742
Accrued Liabilities in Saudi Arabia 1,914,538 2,407,282
Notes Payable 11,012,500 11,025,833
Current Portion of Long-Term Debt 1,977,192 1,425,932
------------ -----------
Total Current Liabilities 17,634,042 18,285,142
LONG-TERM DEBT 4,623,786 9,838,662
DEFERRED REVENUE 1,656,383 1,732,556
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 804,836 808,443
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,471,994 and 22,431,994 shares in 2006
and 2005, respectively 2,247,199 2,243,199
ADDITIONAL PAID-IN CAPITAL 36,568,206 36,512,206
RETAINED EARNINGS (ACCUMULATED DEFICIT) 2,876,754 (2,472,259)
------------ -----------
Total Stockholders' Equity 41,692,159 36,283,146
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,411,206 $66,947,949
============ ===========
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
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES
Petrochemical Product Sales $22,795,530 $19,735,554 $46,381,899 $36,086,333
Processing Fees 1,286,744 853,501 2,016,748 1,888,215
----------- ----------- ----------- -----------
24,082,274 20,589,055 48,398,647 37,974,548
OPERATING COSTS AND EXPENSES
Cost of Petrochemical Product
Sales and Processing 17,995,788 17,422,591 36,394,991 29,863,725
General and Administrative 1,395,044 1,100,024 2,766,899 2,126,630
Depreciation 287,832 162,598 562,491 311,330
----------- ----------- ----------- -----------
19,678,664 18,685,213 39,724,381 32,301,685
----------- ----------- ----------- -----------
OPERATING INCOME 4,403,610 1,903,842 8,674,266 5,672,863
OTHER INCOME (EXPENSE)
Interest Income 49,638 9,888 99,326 18,499
Interest Expense (393,979) (200,181) (539,831) (428,492)
Minority Interest 1,818 1,535 3,607 3,634
Miscellaneous Income 139,994 28,427 243,063 50,811
----------- ----------- ----------- -----------
(202,529) (160,331) (193,835) (355,548)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 4,201,081 1,743,511 8,480,431 5,317,315
INCOME TAXES 1,553,349 227,500 3,131,418 348,600
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 2,647,732 1,516,011 5,349,013 4,968,715
DISCONTINUED OPERATIONS
Income (Loss) from Operations of Coin -- 502,724 -- 989,856
Gain on Disposal of Coin -- 5,825,668 -- 5,825,668
----------- ----------- ----------- -----------
GAIN FROM DISCONTINUED OPERATIONS -- 6,328,392 -- 6,815,524
----------- ----------- ----------- -----------
NET INCOME $ 2,647,732 $ 7,844,403 $ 5,349,013 $11,784,239
=========== =========== =========== ===========
Basic Earnings per Common Share
Income from Continuing Operations $ 0.116 $ 0.067 $ 0.235 $ 0.218
Discontinued Operations 0.000 0.278 0.000 0.300
----------- ----------- ----------- -----------
Net Income $ 0.116 $ 0.345 $ 0.235 $ 0.518
=========== =========== =========== ===========
Basic Weighted Average Number
of Common Shares Outstanding 22,771,994 22,731,994 22,768,661 22,731,994
=========== =========== =========== ===========
Diluted Earnings per Common Share
Income from Continuing Operations $ 0.116 $ 0.067 $ 0.234 $ 0.218
Discontinued Operations 0.000 0.278 0.000 0.300
----------- ----------- ----------- -----------
Net Income $ 0.116 $ 0.345 $ 0.234 $ 0.518
=========== =========== =========== ===========
Diluted Weighted Average Number
of Common Shares Outstanding 22,898,209 22,731,994 22,907,734 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, 2006
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
----------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- ---------- ----------- ------------ -----------
DECEMBER 31, 2005 22,431,994 $2,243,199 $36,512,206 $(2,472,259) $36,283,146
Common Stock
Issued to Employees 40,000 4,000 56,000 -- 60,000
Net Income -- -- -- 5,349,013 5,349,013
---------- ---------- ----------- ----------- -----------
JUNE 30, 2006 22,471,994 $2,247,199 $36,568,206 $ 2,876,754 $41,692,159
========== ========== =========== =========== ===========
See notes to consolidated financial statements.
3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2006 2005
----------- -----------
OPERATING ACTIVITIES
Net Income $ 5,349,013 $11,784,239
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
Depreciation 562,491 311,330
Deferred Revenue (76,173) (21,311)
Unrealized Gain on Financial Contracts (571,524) (195,111)
Gain on Disposal of Coin -- (5,825,668)
Common Stock Compensation Expense 60,000 --
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Trade Receivables 1,908,464 (598,448)
(Increase) Decrease in Inventories 444,044 (106,355)
Increase in Other Assets (470,668) (96,171)
Increase in Accounts Payable and Accrued Liabilities (701,174) (25,167)
Increase (Decrease) in Accrued Interest 4,890 (580,967)
Increase in Accrued Liabilities in Saudi Arabia (492,744) (233,482)
Other (3,607) (3,633)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,013,012 4,409,256
----------- -----------
INVESTING ACTIVITIES
Additions to Al Masane Project (225,864) (106,703)
Additions to Plant, Pipeline and Equipment (1,474,523) (1,541,071)
Reduction in Mineral Properties in the United States 277 130
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,700,110) (1,647,644)
----------- -----------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 4,558,726 1,300,000
Reduction of Notes Payable and Long-Term Obligations (9,235,674) (3,032,137)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (4,676,948) (1,732,137)
----------- -----------
NET INCREASE (DECREASE) IN CASH (364,046) 1,029,475
CASH AT BEGINNING OF PERIOD 1,738,558 623,202
----------- -----------
CASH AT END OF PERIOD $ 1,374,512 $ 1,652,677
=========== ===========
See notes to consolidated financial statements.
4
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP
for complete financial statements, but, in our opinion, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of consolidated financial position, consolidated results of operations, and
consolidated cash flows at the dates and for the periods presented have
been included. 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, 2005 Annual Report on
Form 10-K.
These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiary,
American Shield Refining Company (the "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
Resources, Inc., formerly known as South Hampton Refining Co. ("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, 2006 DECEMBER 31, 2005
------------- -----------------
Petrochemical products $720,630 $1,164,674
======== ==========
Inventories are recorded at the lower of cost, determined on the last-in,
first-out method (LIFO), or market. At June 30, 2006, and December 31,
2005, current cost exceeded LIFO value by approximately $811,000 and
$601,000, respectively,
3. NET INCOME PER COMMON SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted net income per share for the three and six
months ended June 30, 2006 and 2005, respectively.
5
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
------------------------ ------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
CONTINUING OPERATIONS
BASIC NET INCOME PER SHARE:
Income from continuing operations $2,648 22,772 $0.116 $1,516 22,732 $0.067
Dilutive stock options outstanding 126
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Income from continuing operations $2,648 22,898 $0.116 $1,516 22,732 $0.067
====== ====== ====== ====== ====== ======
DISCONTINUED OPERATIONS
BASIC NET INCOME PER SHARE:
Income from discontinued operations $ -- 22,772 $0.000 $6,328 22,732 $0.278
Dilutive stock options outstanding 126
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Income from discontinued operations $ -- 22,898 $0.000 $6,328 22,732 $0.278
====== ====== ====== ====== ====== ======
TOTAL OPERATIONS
BASIC NET INCOME PER SHARE:
Net income $2,648 22,772 $0.116 $7,844 22,732 $0.345
Dilutive stock options outstanding 126
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Net income $2,648 22,898 $0.116 $7,844 22,732 $0.345
====== ====== ====== ====== ====== ======
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2005
------------------------ ------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
CONTINUING OPERATIONS
BASIC NET INCOME PER SHARE:
Income from continuing operations $5,349 22,769 $0.235 $4,969 22,732 $0.218
Dilutive stock options outstanding 139
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Income from continuing operations $5,349 22,908 $0.234 $4,969 22,732 $0.218
====== ====== ====== ====== ====== ======
DISCONTINUED OPERATIONS
BASIC NET INCOME PER SHARE:
Income from discontinued operations $ -- 22,769 $0.000 $6,816 22,732 $0.300
Dilutive stock options outstanding 139
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Income from discontinued operations $ -- 22,908 $0.000 $6,816 22,732 $0.300
====== ====== ====== ====== ====== ======
TOTAL OPERATIONS
BASIC NET INCOME PER SHARE:
Net income $5,349 22,769 $0.235 $11,784 22,732 $0.518
Dilutive stock options outstanding 139
------ ------ ------ ------ ------ ------
DILUTED NET INCOME PER SHARE:
Net income $5,349 22,908 $0.234 $11,784 22,732 $0.518
====== ====== ====== ======= ====== ======
For the three and six months ended June 30, 2005, options for 400,000 shares
were excluded from diluted shares outstanding because their effect was
anti-dilutive.
6
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, 2006 PETROCHEMICAL MINING TOTAL
- -------------------------------- ------------- ------------ -----------
Continuing operations:
Revenue from external customers $24,082,274 $ -- $24,082,274
Depreciation 287,781 51 287,832
Operating income (loss) 4,568,565 (164,955) 4,403,610
----------- ------------ -----------
Total assets $25,771,616 $ 40,639,590 $66,411,206
=========== ============ ===========
THREE MONTHS ENDED JUNE 30, 2005 PETROCHEMICAL MINING TOTAL
- -------------------------------- ------------- ------------ -----------
Continuing operations
Revenue from external customers $20,589,054 $ -- $20,589,054
Depreciation 162,598 -- 162,598
Operating income (loss) 1,938,145 (171,804) 1,766,341
Discontinued operations (Productos Quimicos Coin)
Revenue from external customers $ 710,680 $ -- $ 710,680
Depreciation -- -- --
Operating income 131,154 -- 131,154
----------- ------------ -----------
Total assets $13,848,181 $ 40,170,795 $54,018,976
=========== ============ ===========
SIX MONTHS ENDED JUNE 30, 2006 PETROCHEMICAL MINING TOTAL
- ------------------------------ ------------- ------------ -----------
Continuing operations:
Revenue from external customers $48,398,647 $ -- $48,398,647
Depreciation 562,402 89 562,491
Operating income (loss) 9,129,292 (455,026) 8,674,266
SIX MONTHS ENDED JUNE 30, 2005 PETROCHEMICAL MINING TOTAL
- ------------------------------ ------------- ------------ -----------
Continuing operations
Revenue from external customers $37,974,548 $ -- $37,974,548
Depreciation 311,330 -- 311,330
Operating income (loss) 5,708,704 (294,441) 5,414,263
Discontinued operations (Productos Quimicos Coin)
Revenue from external customers $ 2,042,676 $ -- $ 2,042,676
Depreciation -- -- --
Operating income 497,730 -- 497,730
Information regarding foreign operations for the three and six months ended
June 30, 2006 and 2005 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,
------------------ ------------------
2006 2005 2006 2005
------- ------- ------- --------
REVENUES
United States $24,082 $20,589 $48,399 $37,975
Mexico -- 711 -- 2,042
Saudi Arabia -- -- -- --
------- ------- ------- -------
$24,082 $21,300 $48,399 $40,017
======= ======= ======= =======
LONG-LIVED ASSETS
United States $10,197 $ 7,779
Mexico -- --
Saudi Arabia 39,461 38,959
------- -------
$49,658 $46,738
======= =======
7
5. LEGAL PROCEEDINGS
For the period ending June 30, 2006, South Hampton had no outstanding
lawsuits.
In August 1997, the Executive Director of the Texas Commission on
Environmental Quality (TCEQ) filed a preliminary report and petition with
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.
No action occurred on this item in the second quarter of 2006. See the 10-K
Report as of December 31, 2005 for more detail on this topic.
6. LIABILITIES AND LONG-TERM DEBT
In May 2006, South Hampton signed a credit agreement with Bank of America
for a $12.0 million working capital line of credit secured by Accounts
Receivable and Inventory. The agreement expires in October 31, 2008. The
proceeds of the credit line were used to pay the outstanding balance of
$1.8 million borrowed from the Catalyst Fund in 2005 for expansion of the
tolling facilities at the petrochemical plant, the credit line with Amegy
Bank, and for feedstock acquisition as necessary. The credit agreement
contains a sub-limit of $3.0 million available to be used in support of the
hedging program.
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 thirty (30) days written notice of termination by
either party. The contract requires South Hampton to reduce its debt to the
supplier by $250,000 per quarter. Therefore, $1.0 million of the balance of
approximately $4.26 million was classified as current at December 31, 2005.
At June 31, 2006, the total balance of $1.95 million is classified as
current. 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.
In the first half of 2006 TOCCO paid dividends to ASRC in amounts
sufficient to repay approximately $40,000 of the liability to its President
and Chief Executive Officer. During the first half of 2006, approximately
$415,000 of this liability was paid and $880,000 remained outstanding.
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 feedstock 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 feedstock volumes of the facility for up to six
8
months forward and up to 100% of the natural gas requirements. Except in
rare cases, the account uses options and financial swaps to meet the
targeted goals. These derivative agreements are not designated as hedges
per SFAS 133, as amended. TOCCO had option and swap contracts outstanding
as of June 30, 2006, covering various natural gas price movement scenarios
through October of 2007 and covering from 50% to 100% of the natural gas
requirements for each month. As of the same date, TOCCO had committed to
financial swap contracts for up to 50% of its required monthly feed stock
volume with settlement dates through September of 2006. For the six months
ended June 30, 2006 and 2005, the net realized gain from the derivative
agreements was approximately $606,000 and $837,000, respectively. There was
an estimated unrealized gain for the six months ended June 30, 2006 and
2005 of approximately $646,000 and $195,000, respectively. The realized and
unrealized gains are recorded in Cost of Petrochemical Product Sales and
Processing for the periods ended June 30, 2006 and 2005.
In March 2006, a margin call was made on the financial swaps for $700,000,
due to a temporary decrease in the price of natural gasoline. As of June
30, 2006, this amount is recorded in Other Assets in the consolidated
balance sheet as a prepayment against potential hedge settlements.
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 having a contract with the Mexican bank
to take over the Coin facility in the event the foreclosure proceedings
were completed. 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
On August 4, 2006, the margin call paid due to the decrease in the price of
natural gasoline in March 2006, was reversed and $700,000 was returned to
South Hampton by the trading partner.
9
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.
On August 25, 2005, South Hampton legally changed its name from South
Hampton Refining Co. to South Hampton Resources, Inc. The former name had
been used by South Hampton since the late 1970's when it was involved in
the processing of crude oil and the production of motor fuels. Since South
Hampton had emphasized the petrochemical and specialty product business for
the past twenty years and no longer produced motor fuels of any nature, it
was felt the name was misleading and needed to be changed.
On July 31, 2006, the Company, which was quoted on the Pink Sheets for the
last four (4) years, began trading on the OTC Bulletin Board. The change
was pursued by the Company in an effort to expand the availability of
information and increase the liquidity of the Company's common stock for
the benefit of its shareholders. Assisting the Company in changing its
trading venue to the OTC Bulletin Board was Westminster Securities Corp., a
full service brokerage firm headquartered in New York.
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. As the
petroleum markets have fluctuated the last twenty years, South Hampton was
able to adapt by raising prices, cutting costs, shifting focus, or
developing new markets as necessary. When oil prices began their dramatic
rise in 2004, TOCCO had financial swaps in place which protected it against
sudden and volatile price swings in feedstock prices and to a lesser
extent, fuel gas costs. Product demand has continued to be strong during
the last several years of fluctuating petroleum markets. These conditions
allowed the Petrochemical segment to report significant earnings and to
meet continued volatility of the markets in the future. The Company also
moved to take advantage of the
10
increased demand by increasing its production capacity by 30% in the first
quarter of 2005.
A contract is in place between South Hampton and the supplier for the
purchase of 65,000 barrels per month of natural gasoline on open account
through May 31, 2007, and year to year thereafter, with thirty days written
notice of termination by either party. A provision of the contract states
that South Hampton will reduce the debt to the supplier by $250,000 per
quarter. South Hampton has paid the account ahead of the scheduled balance
reductions, and the account is now operating as an open account, secured by
inventory and fixed assets. The supplier is currently the sole provider of
feedstock, although other sources are available in the open market. At June
30, 2006, South Hampton owed the supplier approximately $1.95 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 man lift. The lease is for five years
with title transferring to South Hampton at the end of the term.
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, through a negotiated settlement, the facility
was transferred to the acquirer and on June 9, 2005, the stock in Coin was
sold (see Note 8). There are no material continuing liabilities associated
with the Company's prior ownership of the Coin operation.
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 was delayed over the last five years because
open market prices for metals were insufficient to attract additional
investment required to achieve production. As world economy and metal
prices have improved over the last two years, investment viability has
improved and steps are being taken to take advantage of the improved
investment climate.
On May 15, 2004, the Company agreed to abide by a resolution from the
Council of Ministries requiring implementation of the work program to build
the mine, treatment plant and infrastructure within two years from the date
of the signed agreement The Company also agreed to pay past due surface
rentals, totaling 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 surface rentals as specified in the Mining Lease Agreement.
The Company paid $266,000 of the back lease payments on January 3, 2005,
and the remaining $320,000 on December 27, 2005. The lease payments were
brought current in the first quarter of 2006 with the payment of $234,000
for the years 2005 and 2006. The 2007 lease payment of $117,000 will be due
on January 1, 2007. On May 29, 2006, the Company's President notified the
Ministry by letter of the progress made in the formation of a joint venture
which will directly implement the work plan.
The Company is presently engaged in negotiations with three companies
organized and existing under the laws of the Kingdom of Saudi Arabia,
concerning the formation of a joint stock company under the name Al Masane
Al Kobra Mining Company ("ALAK"). ALAK's primary activity will be the
mining of base metals ore and concomitant metals, and refining the ore
into condensed copper, zinc, gold and silver alloys, at the Al Masane
mining project location. On June 10, 2006, the Company developed a
preliminary Memorandum of Understanding ("MOU") with Thamarat Najran
Company, a company organized and existing under the laws of the Kingdom of
Saudi Arabia ("TNC"). The basis of the MOU was preliminarily approved by
the Boards of the Company and TNC on July 7 and July 3, 2006, respectively.
A Partnership Agreement including two additional Saudi investment
companies, Qasr Al-Ma'adin Corporation and Durrat Al-Masani' Corporation,
was negotiated and approved by the Saudi partners on August 9, 2006 and is
under consideration by the Board of the Company. While final detailed
arrangements may change as the project develops, the basic terms of
agreement are as
11
follows: (1) The capitalization of the joint stock company will be the
amount necessary to develop the project, approximately $120 million, (2)the
Company will own 50% of ALAK and the remainder will be held by the Saudi
investors; (3) the Company will contribute the mining lease for a credit of
$30 million and the Saudi investors will contribute $30 million, and (4)
the remaining capital will be raised by ALAK by other means including
application for a loan from the Saudi Industrial Development Fund. ALAK
will have all powers of administration over the Al Masane mining project.
The Company will have three directors representing its interests on a
six-member board of directors with the Chairman of ALAK chosen from the
three directors representing the Saudi investors. The original documents
are in Arabic, and English translations have been provided to the parties.
ALAK is in the process of being established under the rules of the Saudi
Ministry of Commerce and Industry.
After initialization, the work plan will take approximately twenty-two (22)
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 ("SNC-Lavalin"), to
update the feasibility study. The prices of zinc, copper, gold and silver
have increased significantly over the last two years. The updated study was
completed in August of 2005. The study by SNC-Lavalin updated the estimated
capital cost and operating expenses of the project. The firm concluded that
capital expenditure of approximately $115 million is needed to bring the
mine into production with an additional $6.7 million for a cyanide leach
process for gold recovery. The study was then turned over to a separate and
independent consultant for further analysis and to allow the economic
feasibility to be reviewed. The consultant, Molinari and Associates, Inc.
of Toronto, Canada, ("Molinari") concluded that the study by SNC-Lavalin
was conservative and there were many opportunities for cost savings and
improvements in the projections as presented.
Metal prices were at record lows worldwide during 2003, and therefore,
mining projects were not economically feasible. As the prices have
recovered for the 2004-2006 time period, the project becomes near breakeven
over the three year period, 2003 through 2005. If spot prices as of June
30, 2006, are used in the analysis, or even the ten year average of prices
is used, the project becomes economically very attractive. Mining
economics, as with other capital intensive extractive industries such as
offshore petroleum exploration, will vary over time as market prices rise
and fall with worldwide economic performance.
The following chart illustrates the change from the prices of 2003 and 2004
to current levels:
AVERAGE PRICE SPOT PRICE AS OF
FOR 2003-2005 06/30/2006 INCREASE
----------------- ----------------- -----------------
GOLD $406.00 per ounce $600.00 per ounce $194.00 per ounce
SILVER $ 6.29 per ounce $ 10.70 per ounce $ 4.41 per ounce
COPPER $ 1.26 per pound $ 3.35 per pound $ 2.09 per pound
ZINC $ 0.49 per pound $ 1.51 per pound $ 1.02 per pound
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 surrounding the Al Masane
mining lease area and including 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 areas revealed mineralization similar to that
discovered at Al Masane. In August of 2006, the Ministry notified the
Company that its application for a mineral exploration license did not
comply with requirements of the Mining Code adopted in 2004. The Ministry
invited the Company to re-apply, taking into consideration the new
requirement that each application be limited to 100 square
12
kilometers in area. There is no limit on the number of applications, so the
Company intends to re-apply for multiple areas, choosing the areas
previously identified as the highest grade locations.
Management is also 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 $1,007,000 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 was owed
approximately $1,255,000 at December 31, 2005 and $880,000 as of June 30,
2006).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has neither made any repayments
nor 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 demands 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 depending upon the needs of the mining operation. Management
believes it has sufficient resources to manage this severance liability as
necessary. The President has been paid approximately $415,000 in 2006, and
plans are to further reduce the balance on a periodic basis.
As noted previously, 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 forty-eight (48) patented and five (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/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%. The recent high metal prices and positive outlook on the
metals markets have generated a renewed interest in the properties.
Inquiries are evaluated as they appear and the Company is investigating the
best use of the properties.
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 can be obtained. It is also possible that
the terms of any additional financing the Company is able to obtain would
be unfavorable to the Company and its existing shareholders.
13
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. Mr. John Crichton, Chairman of the Board, has
world wide experience as a renowned oil and mineral consultant to major
companies. He is the holder of a MSc. Degree in Petroleum Engineering from
MIT. Mr. Hatem El-Khalidi, who holds an MSc. Degree in Geology from
Michigan State University, is also a consultant in oil and mineral
exploration. Mr. El-Khalidi is the person who discovered the Al Masane
deposits, which under his direct supervision were subsequently developed by
the Company. The third board member, Mr. Ghazi Sultan, a Saudi citizen,
holds a MSc. Degree in Geology from the University of Texas. Mr. Sultan
served as the Saudi Deputy Minister of Petroleum and Mineral Resources
1965-1988 and was responsible for the massive expansion of the mineral
resources section of the Ministry. In that position, a $200 million annual
budget was under his direct control and supervision. Mr. Sultan supervised
the work of the USGS (United States Geological Survey) Mission in Saudi
Arabia, the BRGM (French Government Mineral Survey), and the British
Riofenix Mission (owned by Rio Tinto Mining Company). All of these studies
explored and evaluated many mineral deposits for the Ministry in Saudi
Arabia with some becoming mines. Mr. Sultan is the member responsible for
the Audit Committee of the Company. Mr. Nicholas Carter, the Company's
Secretary and Treasurer, is a graduate of Lamar University with a BBA
Degree in Accounting, is a CPA, and has extensive experience in the
management of the Company's petrochemical plant. His employment in the
petrochemical business predates the acquisition by the Company in 1987. Mr.
Carter replaced Mr. Mohammed Al-Omair on the Board effective April 27,
2006.
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended June 30, 2006, total
petrochemical product sales and processing fees from continuing operations
increased approximately $3,493,000 or 17%, while the cost of petrochemical
sales and processing (excluding depreciation) increased approximately
$573,000 or 3% from the same period in 2005. Consequently, the total gross
profit margin on revenue in the second quarter of 2006 increased
approximately $2,920,000 or 92% compared to the same period in 2005.
Sales from discontinued operations (the Productos Quimicos Coin subsidiary)
for the quarter decreased approximately $710,000 or 100%, while its cost of
sales (excluding depreciation) decreased approximately $409,000 or 100%.
Discontinued operations had no effect on gross profit margin on product
sales in this quarter, compared to a positive gross profit margin of
approximately $302,000 in the same quarter in 2005.
In the six months ended June 30, 2006, total petrochemical product sales
and processing fees from continuing operations increased approximately
$10,424,000 or 28%, while the cost of petrochemical sales and processing
(excluding depreciation) increased approximately $6,531,000 or 22% from the
same period in 2005. Consequently, the total gross profit margin on
petrochemical product sales and processing in the first six months of 2006
increased approximately $3,893,000 compared to the same period in 2005. The
cost of petrochemical product sales and processing and gross profit margin
for the six months ended June 30, 2006 include an estimated unrealized gain
of approximately $646,000 on the derivative agreements.
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. Total capacity of the unit was increased by
approximately 30% and was functional by March 31, 2005. Consistent
operation at full capacity of the expanded equipment was attained in the
early part of the third quarter 2005. The project cost approximately $1.5
million and was accomplished using current maintenance department
employees. The expanded capacity will allow the Company to increase sales
to meet demand growth and to increase market share.
14
Sales from discontinued operations decreased approximately $2,043,000 or
100%, while its cost of sales (excluding depreciation) decreased
approximately $1,545,000 or 100%. Therefore, discontinued operations had a
gross profit margin on product sales for the six months of approximately
$0, compared to a gross profit margin of approximately $498,000 for the
same period in 2005.
Sales demand has remained high during the last twenty-four (24) months
despite constant price increases to customers. Management attributes the
strong sales demand to improved general economic activity during the past
year and to growth in the industries served by the petrochemical product
lines. Growth of markets served has generally been 2% to 3% annually over
the last ten (10) years. The Company's growth in volume has generally
matched that trend over the same time period, although with the recently
expanded capacity, the growth rate in sales has increased above the
industry wide growth rate.
By January of 2006 most of the feedstock price fluctuation related to
hurricanes Rita and Katrina had worked out of the markets. Sales prices
generated acceptable margins, and only one price increase was instituted.
Demand has remained strong on most products through the first half of 2006,
and the process ran at 92% of capacity for the first quarter, and 88% in
the second quarter. Small operational equipment modifications were made as
the Company continues to fine tune the equipment which was added in the
previous year.
Since 2003, the Company has entered into derivative agreements to dampen
sudden price spikes and 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. Approximately 50% of the Company's monthly feedstock requirements
for three to six months ahead are covered at any one time. This ratio
cushions price increases and allows the Company to experience partial
benefit when the price drops. In the second quarter of 2006, the natural
gasoline derivative agreements had a realized gain of approximately
$705,000 and an estimated unrealized gain of approximately $854,000 for a
total positive effect of approximately $1,559,000. The program is designed
to be insurance against unforeseen dramatic price swings rather than as a
speculative profit center. It operates mostly as a "buy and hold" program.
The price of natural gas (fuel gas), which is the petrochemical operation's
largest single operating expense, continued to be high during the second
quarter of 2006 as compared to historical levels. Of course what is
historically considered a "high" price has changed within the industry as
the Company's natural gas price, including the effect of the hedge program,
has fluctuated within the $6.00 to $8.00 per mmbtu range for the last
twenty-four (24) months. The Company has option contracts in place for fuel
gas through the first quarter of 2007 in order to minimize the impact of
price fluctuations in the market (see Note 9). The Company was also able to
pass through price increases as they have occurred. In the second quarter
of 2006, the natural gas derivative agreements had a realized loss of
approximately $99,000 and an estimated unrealized loss of approximately
$207,000
Toll processing fee revenue for the second quarter of 2006 of approximately
$1,287,000 represents an increase of approximately $433,000 or 51% above
the fees for the same period in 2005. Toll processing fee revenue for the
first six months of 2006 of approximately $2,017,000 represents an increase
of approximately $129,000 or 7% above the fees for the same period in 2005.
The toll processing customers are very active and remain on long-term
contracts. While there are some fluctuations in 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 during the remainder of 2006 and
beyond as expanded facilities for a major customer were completed in
October 2005. The revised contract with this customer will generate
additional processing fees and contains a capital repayment feature. The
project began operations on schedule (considering the hurricane caused
delay) and is producing high quality products in the volumes
15
requested by the customer. There are shortages in the markets served by
this process, and it is expected the expanded unit will run at capacity for
the remainder of 2006. A project expanding the capacity of a tolling unit
for a different customer was operational by August 3, 2006, and is expected
to further enhance tolling revenues.
Interest expense for the second quarter of 2006 of approximately $394,000
represents an increase of approximately $208,000 or 111% above the fees for
the same period in 2005. Interest expense for the first six months of 2006
of approximately $540,000 represents an increase of approximately $137,000
or 34% above the fees for the same period in 2005. Interest expense
increased in the second quarter of 2006 primarily due to the buyout of the
Catalyst note.
While the volume of feedstock 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 has absorbed
most of the increased working capital needs through cash flow, and the line
of credit is only partially used. Insurance expenses will remain flat
throughout 2006 with the exception of property coverage. The hurricanes
caused the premiums for that line of coverage to increase by 250% upon
renewal in June of 2006. The increase is not material to the results of the
operation.
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 minority stockholders' shares of the
losses from the Pioche 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,
estimated operating costs of any mines and related processing, ore grade
and related metallurgical characteristics, 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 2006 are $3.35 per pound
for copper and $1.51 per pound for zinc for the projected life of the mine.
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, 2006. There are no assurances that, particularly in the event
of a prolonged period of depressed mineral prices, the Company will not be
required to take a material write-down of its mineral properties in the
future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Other than as disclosed, there have been no material changes in the
Company's exposure to market risk from the disclosure included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
ITEM 4. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with the
participation of Company 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
16
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.
17
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, 2006:
(c) (d)
Total Number of Shares Maximum Number of
(a) (b) Purchased as Part of Shares that May Yet be
Total Number of Average Price Publicly Announced Purchased Under the
Period Shares Purchased Paid Per Share Plans or Programs Plans or Programs
- ------ ---------------- -------------- ---------------------- ----------------------
April 1, 2006 through
April 30, 2006 -- $-- -- --
May 1, 2006 through
May 31, 2006 -- $-- -- --
June 1, 2006 through
June 30, 2006 -- $-- -- --
--- --- --- ---
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
REFERENCE IS MADE TO PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR A DISCUSSION of
negotiations with several Saudi Arabian companies concerning the formation
of a joint venture company under the name Al Masane Al Kobra Mining Company
to mine base metals ore at the Al Masane mining project and the Memorandum
of Understanding which was preliminarily approved by the Board of the
Company on July 7, 2006.
18
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(i) - 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(ii) - 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) - 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(b) - 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(c) - 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(d) - 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(e) - 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(f) - Judicial Agreement dated May 19, 2005 between Fabricante Y
Comercializadora Beta, S.A. de C.V. and Productos Coin, S.A.de
C.V. (incorporated by reference to Exhibit 10(r) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
(file No. 0-6247)).
19
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(g) - Agreement dated June 6, 2005 between Fabricante Y
Comercializadora Beta, S.A. de C.V. and Productos Quimicos Coin,
S.A. de C.V. (incorporated by reference to Exhibit 10(s) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005 (file No. 0-6247)).
10(h) - 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. (incorporated
by reference to Exhibit 10(t) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005 (file No.
0-6247)).
31.1 - Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 15, 2006 ARABIAN AMERICAN DEVELOPMENT COMPANY
(Registrant)
By: /s/ NICHOLAS CARTER
------------------------------------
Nicholas Carter Secretary/Treasurer
Authorized Officer and Principal
Financial Officer)
21