<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
----------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR QUARTER ENDING SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-6247
ARABIAN AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at September 30, 2000: 22,788,994.
----------
<PAGE> 2
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------------ ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 204,766 $ 434,313
Short-Term Investments -- 20,597
Trade Receivables 6,252,295 4,308,085
Inventories 1,224,378 745,396
--------------- ---------------
Total Current Assets 7,681,439 5,508,391
REFINERY PLANT, PIPELINE AND EQUIPMENT 17,213,314 9,357,956
Less: Accumulated Depreciation (5,085,191) (4,330,856)
--------------- ---------------
Net Plant, Pipeline and Equipment 12,128,123 5,027,100
AL MASANE PROJECT 34,950,990 34,621,335
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,280,112 1,299,008
RESTRICTED CASH -- 3,500,000
OTHER ASSETS 575,591 461,127
--------------- ---------------
TOTAL ASSETS $ 59,047,503 $ 52,848,209
=============== ===============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable-Trade $ 5,429,881 $ 1,129,926
Accrued Liabilities 869,074 1,005,110
Accrued Liabilities in Saudi Arabia 857,823 1,326,823
Notes Payable 11,873,780 11,873,780
Current Portion of Long-Term Debt 4,903,137 677,439
--------------- ---------------
Total Current Liabilities 23,933,695 16,013,078
LONG-TERM DEBT 3,414,792 3,572,561
ACCRUED LIABILITIES IN SAUDI ARABIA 771,628 741,218
DEFERRED REVENUE 140,010 165,835
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1,029,509 907,354
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; issued and
outstanding, 22,488,994 shares in 2000
and 22,019,994 shares in 1999 2,248,899 2,201,999
ADDITIONAL PAID-IN CAPITAL 36,523,606 36,101,506
ACCUMULATED CURRENCY TRANSLATION ADJUSTMENTS (163,650) --
ACCUMULATED DEFICIT (8,850,986) (6,855,342)
--------------- ---------------
Total Stockholders' Equity 29,757,869 31,448,163
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,047,503 $ 52,848,209
=============== ===============
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 3
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEP. 30,2000 SEP. 30,1999 SEP. 30,2000 SEP. 30,1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Refined Product Sales $ 11,095,240 $ 7,614,063 $ 31,542,686 $ 19,000,796
Processing Fees 669,000 484,298 1,690,063 951,860
------------ ------------ ------------ ------------
11,764,240 8,098,361 33,232,749 19,952,656
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 11,496,474 6,483,917 31,322,327 14,363,539
General and Administrative 988,054 697,442 2,641,433 2,101,359
Depreciation 291,871 213,495 754,335 505,752
------------ ------------ ------------ ------------
12,776,399 7,394,854 34,718,095 16,970,650
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (1,012,159) 703,507 (1,485,346) 2,982,006
OTHER INCOME (EXPENSE)
Interest Income 25,736 13,425 92,056 48,409
Interest Expense (291,384) (45,774) (757,738) (125,204)
Minority Interest 37,873 7,200 96,038 9,960
Miscellaneous Income (Expense) 40,938 108,877 59,346 255,042
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,198,996) 787,235 (1,995,644) 3,170,213
INCOME TAX EXPENSE -- 52,782 -- 268,535
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,198,996) $ 734,453 $ (1,995,644) $ 2,901,678
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.05) $ 0.03 $ (0.09) $ 0.13
============ ============ ============ ============
Diluted $ (0.05) $ 0.03 $ (0.09) $ 0.13
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 22,788,994 22,019,494 22,634,379 22,019,494
============ ============ ============ ============
Diluted 22,788,994 22,530,774 22,634,379 22,619,902
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL CURRENCY
--------------------------- PAID-IN TRANSLATION ACCUM.
SHARES AMOUNT CAPITAL ADJUSTMENTS DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 2000 22,019,994 $ 2,201,999 $ 36,101,506 $ -- $ (6,855,342) $ 31,448,163
Common Stock Issued in
Payment of Liabilities 469,000 46,900 422,100 -- -- 469,000
Comprehensive Loss
Net Loss -- -- -- -- (1,995,644) (1,995,644)
Currency Translation
Adjustment -- -- -- (163,650) -- (163,650)
Total Comprehensive Loss -- -- -- -- -- (2,159,294)
------------ ------------ ------------ ------------ ------------ ------------
SEPTEMBER 30, 2000 22,488,994 $ 2,248,899 $ 36,523,606 $ (163,650) $ (8,850,986) $ 29,757,869
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEP. 30, 2000 SEP. 30, 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $(1,995,644) $ 2,901,678
Adjustments for Non-Cash Transactions
Income Tax Provision -- 193,121
Depreciation 754,335 505,752
Increase (Decrease) in Deferred Revenue (25,825) 75,767
Effects of Changes in Operating Assets and Liabilities
Decrease (Increase) in Trade Receivables (398,759) (1,501,384)
Decrease (Increase) in Inventories (232,984) (120,943)
Decrease (Increase) in Other Assets (106,488) 112,092
(Decrease) Increase in Accounts Payable and
Accrued Liabilities 2,337,868 289,659
Other (216,798) (36,016)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 115,705 2,419,726
----------- -----------
INVESTING ACTIVITIES
Proceeds from Sale of Short-Term Investments 20,597 9,699
Purchase of Business (Net of Cash Acquired) (2,279,665) --
Additions to Al Masane Project (329,655) (376,255)
Additions to Refinery Plant, Pipeline and Equipment (2,674,956) (2,150,110)
(Additions to) Reduction in Mineral Properties in the U. S 18,896 (24,869)
Increase in Accrued Liabilities in Saudi Arabia 30,410 26,752
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,214,373) (2,514,783)
----------- -----------
FINANCING ACTIVITIES
Additions to Notes Payable and Long-Term Obligations 3,167,350 750,000
Reduction of Notes Payable and Long-Term Obligations (1,798,229) (1,250,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,369,121 (500,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH (3,729,547) (595,057)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,934,313 1,907,242
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 204,766 $ 1,312,185
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 6
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments (consisting
only of normal and recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of Arabian American Development
Company and Subsidiaries" financial position and operating results for the
interim period. Interim period results are not necessarily indicative of the
results for the calendar year. Please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information and the Company's December 31, 1999 Annual Report on Form 10-K.
These financial statements include the accounts of Arabian American
Development Company (the "Company") and its wholly-owned subsidiaries,
American Shield Refining Company (the "Refining Company") and American Shield
Coal Company (the "Coal Company"). The Refining Company owns all of the
capital stock of Texas Oil and Chemical Company II, Inc. ("TOCCO"). TOCCO
owns all of the capital stock of South Hampton Refining Company ("South
Hampton") and South Hampton owns all of the capital stock of Gulf State Pipe
Line Company, Inc. ("Gulf State"). TOCCO also owns 92% of the capital stock
of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a specialty petrochemical
products refining company located near Veracruz, Mexico, which was purchased
on January 25, 2000 for approximately $2.5 million. The Company also owns
approximately 51% of the capital stock of Pioche-Ely Valley Mines, Inc.
("Pioche"), which owns mining properties in Nevada. The Refining Company and
its subsidiaries constitute the Company"s Specialty Petrochemicals or
Refining Segment. The Coal Company, Pioche and the Company"s mineral
properties in Saudi Arabia constitute its Mining Segment.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories include the following:
SEP. 30, 2000 DEC. 31, 1999
------------- -------------
<S> <C> <C>
Refinery feedstock $ 315,064 $ --
Refined products 909,314 745,396
------------ ------------
Total inventories $ 1,224,378 $ 745,396
============ ============
</TABLE>
Refined products and feedstock are recorded at the lower of cost, determined
on the last-in, first-out method (LIFO), or market. At September 30, 2000 and
December 31, 1999, current cost exceeded LIFO value by approximately $155,000
and $142,000, respectively.
3. FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated at the rate of exchange in effect at
the close of the period. Revenues and expenses are translated at the weighted
average of exchange rates in effect during the period. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included as part of the accumulated
currency translation adjustments component of stockholders' equity.
-5-
<PAGE> 7
4. NET INCOME (LOSS) PER COMMON SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted net income (loss) per share for the three
and nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income (Loss) - basic $ (1,199) $ 734 $ (1,996) $ 2,902
Add interest on convertible debt -- 9 -- 42
------------ ------------ ------------ ------------
Net Income (Loss) - diluted $ (1,199) $ 743 $ (1,996) $ 2,944
============ ============ ============ ============
Weighted average shares outstanding - basic 22,789 22,019 22,634 22,019
Dilutive effect of convertible debt -- 512 -- 512
Dilutive effect of stock options -- -- -- 89
------------ ------------ ------------ ------------
Weighted average shares outstanding -diluted 22,789 22,531 22,634 22,620
============ ============ ============ ============
Net Income (Loss) per share:
Basic $ (.05) $ .03 $ (.09) $ .13
============ ============ ============ ============
Diluted $ (.05) $ .03 $ (.09) $ .13
============ ============ ============ ============
</TABLE>
5. ACQUISITION
On January 25, 2000, TOCCO purchased 92% of the issued and outstanding
shares of the common stock of Productos Quimicos Coin, S.A. de. C.V.
("Coin") from Spechem, S.A. de. C.V. for $2.5 million in cash. Coin is a
specialty petrochemical products refining company located in Coatzacoalcos,
Mexico near Veracruz. Financing was provided by a loan from Heller
Financial Leasing, Inc.
The following table (in thousands, except per share amounts) presents pro
forma unaudited consolidated results of operations for the three and nine
months ended September 30, 2000 and 1999, assuming that the acquisition had
taken place at the beginning of the periods presented. The pro forma results
are not necessarily indicative of the results of operations that would have
occurred had the acquisition been made at the beginning of the periods
presented, or of future results of operations of the combined companies.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 11,764 $ 11,265 $ 34,177 $ 27,889
Net Income (Loss) (1,199) 608 (2,035) 3,051
Net Income (Loss) per share:
Basic $ (.05) $ .03 $ (.09) $ .14
========== ========== ========== ==========
Diluted $ (.05) $ .03 $ (.09) $ .13
========== ========== ========== ==========
</TABLE>
-6-
<PAGE> 8
6. SEGMENT INFORMATION
As discussed in Note 1, the Company has two business segments. The Company
measures segment profit or loss as operating income (loss), which represents
income (loss) before interest, miscellaneous income and minority interest.
Information on the segments is as follows:
<TABLE>
<CAPTION>
Three Months ended September 30, 2000 Refining Mining Total
------------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
Revenue from external customers $ 11,764,240 $ -- $ 11,764,240
Operating income (loss) (938,019) (74,140) (1,012,159)
Total assets $ 20,310,986 $ 38,736,517 $ 59,047,503
</TABLE>
<TABLE>
<CAPTION>
Three Months ended September 30, 1999 Refining Mining Total
------------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
Revenue from external customers $ 8,098,361 $ -- $ 8,098,361
Operating income (loss) 739,011 (35,504) 703,507
Total assets $ 11,235,790 $ 38,424,550 $ 49,660,340
</TABLE>
<TABLE>
<CAPTION>
Nine Months ended September 30, 2000 Refinery Mining Total
------------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
Revenue from external customers $ 33,232,749 $ -- $ 33,232,749
Operating income (loss) (1,324,326) (161,020) (1,485,346)
</TABLE>
<TABLE>
<CAPTION>
Nine Months ended September 30, 1999 Refinery Mining Total
------------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
Revenue from external customers $ 19,952,656 $ -- $ 19,952,656
Operating income (loss) 3,134,149 (152,143) 2,982,006
</TABLE>
7. LEGAL PROCEEDINGS
South Hampton is a defendant in four lawsuits filed in Jefferson County and
Orange County, Texas in the period from December 1997 to December 1999 by
former employees of the southeast Texas plants of the Goodyear Tire & Rubber
Company, Dupont and South Hampton. The suits claim illness and disease
resulting from alleged exposure to chemicals, including benzene, butadiene
and/or isoprene, during their employment. The plaintiffs claim that the
companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected them to liability
for unspecified actual and punitive damages. South Hampton intends to
vigorously defend itself against these lawsuits.
In August 1997, the Texas Natural Resource Conservation Commission ("TNRCC")
notified South Hampton that it had violated various rules and procedures. It
proposed administrative penalties totaling $709,408 and recommended that
South Hampton undertake certain actions necessary to bring the operations at
its refinery into compliance The violations generally relate to various air
and water quality issues. Appropriate modifications have been made by South
Hampton where it appeared there were legitimate concerns. South Hampton
feels the penalty is greatly overstated and intends to vigorously defend
itself against it. A preliminary hearing was held in November 1997, but no
further action has been taken.
-7-
<PAGE> 9
On February 2, 2000, the TNRCC amended its pending administrative action
against South Hampton to add allegations dating through May 21, 1998 of 35
regulatory violations relating to air quality control and industrial solid
waste requirements. The TNRCC proposes that administrative penalties be
assessed in the amount of approximately $765,000 and that certain corrective
actions be taken. South Hampton intends to vigorously defend itself against
these additional allegations, the proposed penalties and proposed corrective
actions.
In May 1991, the Company filed a complaint with the U.S. Department of
Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"). The
Company's complaint alleged various violations of the Foreign Corrupt
Practices Act ("FCPA") by Hunt, at the Company's detriment, in obtaining its
1981 Petroleum Production Sharing Agreement ("PSA") in Yemen. The DOJ
requested additional documentation regarding the Company's allegations in
1995 that the Company provided in early 1996. In late 1996, the DOJ advised
the Company that the documents presented did not provide sufficient evidence
of any criminal activity and that the DOJ did not intend to pursue the
investigation. In December 1996, after providing the DOJ with additional
legal analyses, the Company's representatives were told that the DOJ would
take a more aggressive stance if additional legal evidence was presented to
the DOJ. In an effort to comply with the DOJ's request, in 1997 the Company
requested certain documents from the Central Intelligence Agency ("CIA")
under the Freedom of Information Act ("FOIA"). The Company believes the
requested documents may contain the evidentiary information that the DOJ
needs to properly and sufficiently evaluate the Company's compliant against
Hunt. The CIA refused to either confirm or deny the existence of the
requested information. After exhausting its administrative appeals, the
Company filed suit against the CIA in early 1998 in the U.S. District Court
for the Northern District of Texas seeking a judicial determination of the
Company's FOIA request. The Company argued the FOIA specifically prohibits
any agency from using Executive Order 12958, relating to classification of
documents, and the FOIA to conceal criminal activity, in this instance
Hunt's violation of the FCPA. Following a February 1999 hearing, the Court
rejected the Company's arguments and issued a summary judgment in favor of
the CIA. The Company filed an appeal with the U.S. Court of Appeals for the
Fifth Circuit, which on January 28, 2000 rejected the Company's appeal. The
Company believes that this could be a landmark case. As a consequence, on
April 22, 2000, it filed a writ of certiorari with the United States Supreme
Court in which the Company argued that the District and Appellate Courts
erred in their judgments. The Company has requested the Supreme Court to
issue its ruling that the matter be remandered to the trial court with
instructions that the CIA review its own documents to determine if any
information requested by the Company should not have been classified but
handed over the Company for use in the pursuit of its case with the DOJ
against Hunt for conspiracy and violation of the FCPA. On July 1, 2000, the
Supreme Court assigned Cause No. 00-17 to the Company's Petition. On October
2, 2000, the Supreme Court denied the Company's Petition without giving any
opinion. The Company has requested and will continue to request additional
documents from both the CIA and DOJ under appropriate provisions of the FOIA
and may seek judicial review in the event its requests are denied. In the
event the Company is able to provide the DOJ with appropriate legal evidence
and the DOJ prevails in any FCPA action against Hunt regarding the PSA, the
Company would then institute an appropriate action against Hunt in
accordance with the provisions of the Victim Restitution Act. Based on the
advice of its counsel, the Company believes that it would be entitled to
restitution of monies lost as a result of the wrongdoing by Hunt, if Hunt is
convicted under the FCPA. The Company further believes, based on such
advice, that the amount of restitution could include all of the profits
received by Hunt from its Yemen operations and also could include proceeds
from the sale of a portion of Hunt's interest in the PSA. However, there can
be no assurance that the DOJ will pursue or obtain a conviction of Hunt
regarding the PSA under the FCPA and no assurance that the Company would
receive or be entitled to receive any restitution as a result of any such
conviction. The cost to the Company of these pursuits is minimal.
8. SUBSEQUENT EVENT
NASDAQ notified the Company in May that its common stock would be delisted
in August if the Company was unable to demonstrate compliance with its
minimum bid price requirements. The Company appealed this proposed action in
August and a hearing on the appeal was held in October. As a result of the
hearing, the Company's stock was delisted on October 12, 2000. The Company
then submitted an appeal request to a higher NASDAQ authority and a decision
is expected in January. Meanwhile, the Company's stock is being traded on
the OTC Bulletin Board.
-8-
<PAGE> 10
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Statements in Part 1, Item 2 as well as elsewhere in, or incorporated by
reference in, this Quarterly Report on Form 10-Q regarding the Company's
financial position, business strategy and plans and objectives of the Company's
management for future operations and other statements that are not historical
facts, are "forward-looking statements" as that term is defined under applicable
Federal securities laws. In some case, "forward-looking statements" can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Quarterly Report on Form 10-Q, all of which
are difficult to predict and many of which are beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in two business segments, specialty petrochemicals
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.
SPECIALTY PETROCHEMICALS SEGMENT. This segment contributes substantially all
of the Company's internally generated cash flows from operating activities and
its primary sources of revenue are the specialty products refineries owned and
operated by South Hampton near Silsbee, Texas and by Coin in Mexico. In order to
supplement its cash flows from operating activities, this business segment has a
$3.25 million credit agreement with the Southwest Bank. In connection with the
acquisition of the common stock of Coin, South Hampton and Gulf State entered
into the $3.5 million note with Heller Financial. This segment's cash flows from
operating activities, along with its available present credit facility and
possible refinancing options, are expected to be adequate to finance its
operations and debt service requirements. In the event this segment were to
undertake a major capital expenditure, such as construction of a new facility,
financing for this activity would most likely come from some combination of
internal resources, a debt placement with a financial institution or a joint
venture partner. Any major capital expenditure requires the Southwest Bank's
advance review and approval.
MINING SEGMENT. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. In order to
commercially develop the Al Masane project, the Company entered into a joint
venture arrangement with Al Mashreq Company for Mining Investments ("Al
Mashreq"), a Saudi limited liability company owned by Saudi Arabian investors
(including certain of the Company's shareholders). The partners formed The
Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability
company ("Arabian Mining"), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and
process minerals from the Al Masane lease area. Arabian Mining received
conditional approval for a $38.1 million interest-free loan from the Saudi
Industrial Development Fund ("SIDF").
Due to the severe decline in the open market prices for the minerals to be
produced by the Al Masane project and the financial crisis affecting Eastern
Asia in 1998, SIDF and other potential lenders required additional guarantees
and other financing conditions, which were unacceptable to the Company and Al
Mashreq. As a consequence, Al Mashreq withdrew from the joint venture. By letter
dated May 11, 1999, the Company informed the Ministry of Petroleum and Mineral
Resources that the joint venture was dissolved and that implementation of the
project would be delayed until open market prices for the minerals to be
produced by the Al Masane project improve to the average price levels
experienced during the period from 1988 through 1997. At that time, the Company
will attempt to locate a joint venture partner, form a joint venture and,
together with the joint venture
-9-
<PAGE> 11
partner, attempt to obtain acceptable financing to commercially develop the
project. There can be no assurances that the Company will be able to locate a
joint venture partner, form a joint venture or obtain financing from SIDF or any
other sources. Financing plans for the above are currently being studied. In the
meantime, the Company intends to maintain the Al Masane mining lease through the
payment of the annual advance surface rental, the implementation of a drilling
program to attempt to increase proven and probable reserves and to attempt to
improve the metallurgical recovery rates beyond those stated in the feasibility
study, which may improve the commercial viability of the project at lower metal
prices than those assumed in the feasibility study.
On June 22, 1999, the Company submitted a formal application for a five-year
exclusive mineral exploration license for the Greater Al Masane Area of
approximately 2,850 square kilometers, which surrounds the Al Masane mining
lease area and includes the Wadi Qatan and Jebel Harr. The Company previously
worked the Greater Al Masane Area after obtaining written authorization from the
Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3
million in exploration work. Geophysical and geochemical work and diamond core
drilling on the Greater Al Masane area has revealed mineralization similar to
that discovered at Al Masane.
The Company"s mineral interests in the United States include its ownership
interests in the Coal Company and Pioche. The Coal Company"s sole remaining
asset is its net operating loss carryforward of approximately $5.9 million at
December 31, 1999 and its future, if any, is uncertain. Pioche has been inactive
for many years. Its properties include 48 patented and 80 unpatented claims
totaling approximately 3,500 acres in Lincoln County, Nevada. There are
prospects and mines on these claims that previously produced silver, gold, lead,
zinc and copper.
Management also is addressing two other significant financing issues within
this segment. These issues are the $11.0 million note payable due the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $900,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed approximately $772,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. The Company remains active in
Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to
date, management believes that as long as the Company diligently attempts to
explore and develop the Al Masane project no repayment demand will be made. The
Company recently communicated to the Saudi government that its delay in repaying
the note is a direct result of the government's lengthy delay in granting the Al
Masane lease. Based on its interpretation of the Al Masane mining lease and
other documents, management believes the government is likely to agree to link
repayment of this note to the Company's share of the operating cash flows
generated by the commercial development of the Al Masane project and to a
long-term installment repayment schedule. In the event the Saudi government were
to demand immediate repayment of this obligation, which management considers
unlikely, the Company would be unable to pay the entire amount due. If a
satisfactory rescheduling agreement could not reached, and there are no
assurances that one could be, the Company believes it could obtain the necessary
resources to meet the rescheduled installment payments from the cash flows
generated by its two specialty petrochemical refineries while maintaining the
mining lease.
With respect to the accrued salaries and termination benefits due employees
working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligations as they are released from
the Company's employment. The salary and social security benefits for these
employees currently total approximately $108,000 per year.
At this time, the Company has no definitive plans for the development of its
domestic mining assets. It periodically receives proposals from outside parties
who are interested in possibly developing or using certain assets. Management
will continue to review these proposals as they are received, but at this time
does not anticipate making any significant domestic mining capital expenditures
or receiving any significant proceeds from the sale or use of these assets.
If the Company seeks additional outside financing, there is no assurance
that sufficient funds could be obtained. It is also possible that the terms of
the financing could be unfavorable to the Company.
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<PAGE> 12
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. A 92% interest in the Coin refinery in
Mexico was purchased on January 25, 2000, therefore, its revenues and expenses
for February through September are included in the financial statements for the
first nine months of 2000. While there have been some additional expenses
involved in the acquisition, the primary factor affecting the nine month results
was the dramatic rise in the cost of feedstock in late 1999 and early 2000. In
the quarter ended September 30, 2000, total revenue increased approximately
$3,666,000 ($693,000 attributable to Coin) or 45%, while the cost of sales
(excluding depreciation) increased approximately $5,013,000 ($686,000
attributable to Coin) or 77% from the same period in 1999. In the nine months
ended September 30, 2000, total revenue increased approximately $13,280,000
($4,763,000 attributable to Coin) or 67%, while the cost of sales (excluding
depreciation) increased approximately $16,959,000 ($4,741,000 attributable to
Coin) or 118% from 1999. Consequently, the gross profit margin in the first nine
months of 2000 decreased approximately $3,679,000 or 66% compared to the same
period in 1999. Some of the revenue increase came from sales of the acquired
company but product prices and toll processing fees were also higher than in the
previous year. Product prices have increased approximately 15% as the Company
has worked to catch up with the feedstock market and regain its gross margin.
Toll processing fee income in the first nine months of 2000 rose by 78%, which
partially offsets the feedstock price increases. The increase in these fees is
primarily due to the addition of a new unit added in May 1999. An additional
unit has recently been constructed and began operations in July 2000. The new
unit is expected to add approximately $70,000 per month in processing fee
income, if operated at minimum levels and up to $110,000 per month at capacity.
The Company currently has toll processing contracts with five different
entities.
In late 1999 and the first nine months of 2000, feedstock costs rose in
conjunction with the large increase in crude oil prices worldwide. Costs of
feedstock increased from $.33 per gallon in the first quarter of 1999 to over
$.80 per gallon in the third quarter of 2000, an increase of 142%. In the second
quarter of 2000, feedstock costs fell during the latter part of April and
through May, but rose again and have remained high. During periods of rapid
feedstock price increases, it is not possible to raise product prices quickly
enough to cover the increased costs; therefore any changes in costs will not
affect the profitability on a one to one basis in the near term. The cost of
natural gas, which is the single largest expense other than feedstock costs,
rose by 265% in 2000 due to the increases in worldwide prices. In the second
quarter of 1999, the Company was paying $1.70 per MMBTU for fuel gas, which
increased to $5.40 per MMBTU by the end of the third quarter of 2000.
Administrative expenses in the first nine months of 2000 were higher by
approximately $540,000, with about 40% of the increase attributable to the
acquired refinery. Sales of the Company's products remain stable and expanded
marketing efforts have kept the Silsbee refinery at near capacity since the
second quarter of 1997.
At the Mexico refinery, process modifications are being designed which
should produce an additional 60,000 gallons per month of premium product for
sale in the U.S. The proposed work has been postponed until market conditions
improve. Capital costs are estimated at approximately $225,000 and should pay
back in less than one year under normal conditions. Their marketing capability
has been upgraded with the addition of experienced petrochemical sales
personnel, which is expected to result in moving more products to Central and
South America. Management expects that the reorganization of the refinery in
Mexico and the blending of its similar operations with the Silsbee refinery will
continue to improve in the fourth quarter of 2000. Margins are steady, even as
costs increase, and, if the U.S. economy continues its growth pattern, sales
volumes should remain high.
MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's other
operations generate significant operating or other revenues. Minority interest
amounts represent the Pioche minority stockholders' share of Pioche losses that
are primarily attributable to the costs of maintaining the Nevada mining
properties.
The Company periodically reviews and evaluates its mineral exploration and
development projects as well as its other mineral properties and related assets.
The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 2000, for purposes of estimating future cash
flows, the price assumptions used by its mining consultant were taken from the
projections of a major international metal's company. These latest price
assumptions are averages over the projected life of the Al Masane mine and are
$1.08 per pound for copper, $.55 per pound for zinc, $350 per ounce for gold,
and $6.00 per ounce for silver. For its other mineral properties and related
assets, carrying values were compared to estimated net realizable values on
market comparables. Using these price assumptions, no asset impairments were
evident.
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<PAGE> 13
The Company intends to assess the carrying values of its assets on an
ongoing basis. Factors which may affect carrying values include, but are not
limited to, mineral prices, capital cost estimates, the estimated operating
costs of any mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that, 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.
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<PAGE> 14
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDERS' PROPOSALS
Any proposal by a shareholder of the Company intended to be presented at the
2001 annual meeting of shareholders, which is tentatively scheduled sometime in
May 2001, must be received by the Company at its principal executive office no
later than December 4, 2000 for inclusion in the Company"s Proxy Statement and
form of proxy. Any such proposal must also comply with the other requirements of
the proxy solicitation rules of the Securities and Exchange Commission. The
Company intends to exercise discretionary voting authority granted under any
proxy which is executed and returned to the Company on any matter that may
properly come before the 2001 annual meeting of shareholders, unless written
notice of the matter is delivered to the Company at its principal executive
office no later than February 15, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
2000.
----------
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 10, 2000 ARABIAN AMERICAN DEVELOPMENT COMPANY
--------------------- ------------------------------------
(Registrant)
/s/ J. A. CRICHTON
-------------------------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON, JR.
-------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 Financial Data Schedule
</TABLE>
