UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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___
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 5,950,641
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
<FN>
<F1>
See notes to consolidated financial statements.
</FN>
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
<FN>
<F1>
See notes to consolidated financial statements.
</FN>
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK 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
<FN>
<F1>
See notes to consolidated financial statements.
</FN>
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
<FN>
<F1>
See notes to consolidated financial statements.
</FN>
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.
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
Per Share Per 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 Share Per 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
<FN>
<F1>
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.
</FN>
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
<FN>
<F1>
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.
</FN>
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
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 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.
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 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 follows: (1) 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) 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 Increase
For 2003-2005 06/30/2006
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 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.
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.
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
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
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.
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:
(a) (b) (c) (d)
Total Number of Average Price Total Number of Maximum Number
Shares Purchased Paid Per Share Shares Purchased of Shares that
as Part of Publicly May Yet Be
Period Announced Plans or Purchased Under
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.
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)).
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.
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 14, 2006 ARABIAN AMERICAN DEVELOPMENT COMPANY
(Registrant)
By: /s/ NICHOLAS CARTER
Nicholas Carter Secretary/Treasurer
Authorized Officer and Principal
Financial Officer)
EXHIBIT 31.1
CERTIFICATION
I, Hatem El-Khalidi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arabian American
Development Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant?s
internal control over financial reporting that occurred during the
registrant?s most recent fiscal quarter (the registrant?s fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonable likely to materially affect, the registrant?s internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information, and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 14, 2006 /s/ HATEM EL-KHALIDI
Hatem El-Khalidi
President and Chief Executive
Officer
EXHIBIT 31.2
CERTIFICATION
I, Nicholas Carter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arabian American
Development Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant?s
internal control over financial reporting that occurred during the
registrant?s most recent fiscal quarter (the registrant?s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonable likely to materially affect, the registrant?s internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information, and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: August 14, 2006 /s/ NICHOLAS CARTER
Nicholas Carter
Treasurer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Arabian American Development
Company (the ?Company?) on Form 10-Q for the quarter ended June 30, 2006, as
filed with the Securities and Exchange Commission on the date hereof (the
?Report?), I Hatem El-Khalidi, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ HATEM EL-KHALIDI
Hatem El-Khalidi
President and Chief Executive Officer
August 14, 2006
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Arabian American Development
Company (the ?Company?) on Form 10-Q for the quarter ended June 30, 2006, as
filed with the Securities and Exchange Commission on the date hereof (the
?Report?), I Nicholas Carter, Treasurer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ NICHOLAS CARTER
Nicholas Carter
Treasurer
August 14, 2006
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