UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

FORM 10-K
 
 (MARK ONE)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2011
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 1-33926
ARABIAN AMERICAN DEVELOPMENT COMPANY
 
 (Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
75-1256622
(I.R.S. Employer
Identification No.)
 
1600 Hwy 6 S, Suite 240
Sugar Land, TX
(Address of principal executive offices)
77478
(Zip code)

Registrant’s telephone number, including area code: (409) 385-8300
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
(Title of Class)
Common stock, par value $0.10 per share
___________________

 
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨  Noý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨  No ý
 
_____________________

 
Indicate by check mark whether the registrant (l) 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. Yesý  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer ¨                                                      Accelerated filer ý
 
Non-accelerated filer ¨                                                      Smaller reporting company¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes¨  No ý
 
The aggregate market value on June 30, 2011, of the registrant’s voting securities held by non-affiliates was approximately $77 million.
 
Number of shares of registrant’s Common Stock, par value $0.10 per share, outstanding as of March 8, 2012:  23,735,165.
 

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on or about June 6, 2012.

 
 

 

TABLE OF CONTENTS

Item Number and Description
PART I
 
     
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PART II
 
       
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PART III
 
       
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PART IV
 
       
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PART I

Item 1.   Business.

General

Arabian American Development Company (the “Company”) was incorporated in the State of Delaware in 1967. The Company’s principal business activity is the manufacturing of various specialty petrochemical products.  The Company also owns a 37% interest in Al Masane Al Kobra Mining Company, a Saudi Arabian closed joint stock mining company (“AMAK”) which is just commencing commercial production of copper and zinc concentrate and a 55% interest in Pioche Ely Valley Mines, Inc. (“PEVM”), a Nevada mining corporation which presently does not conduct any substantial business activity but owns undeveloped properties in the United States.  Unless the context requires otherwise, references to “we,” “us,” “our,” and the “Company” are intended to mean consolidated Arabian American Development Company and its subsidiaries.  There have been no significant changes during 2011 in the method of conducting our business.

During 2011 the Company operated in one business segment; the manufacturing of various specialty petrochemical products.

United States

Our domestic activities are primarily conducted through a wholly owned subsidiary, Texas Oil and Chemical Co. II, Inc. (the “Petrochemical Company”), which owns all of the capital stock of South Hampton Resources, Inc. (“South Hampton”).  South Hampton owns and operates a specialty petrochemical facility near Silsbee, Texas which produces high purity petrochemical solvents and other petroleum based products including isopentane, normal pentane, isohexane and hexane which may be used in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, and in the catalyst support industry.   Our petrochemical products are typically transported to customers by rail car, tank truck and iso-container.  South Hampton owns all of the capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”) which owns and operates three pipelines that connect the South Hampton facility to a natural gas line, to South Hampton’s truck and rail loading terminal and to a major petroleum products pipeline owned by an unaffiliated third party.

Europe

In 2009 the Company formed South Hampton Resources International, SL (“SHRI”) located in Madrid, Spain.  The Company owned 100% of the capital stock of SHRI.  SHRI served as a sales office for South Hampton products in Europe and the Middle East.  In May of 2011 the Spanish representative returned to the United States, and SHRI will be dissolved.

United States Specialty Petrochemical Operations

South Hampton’s specialty petrochemical facility is approximately 30 miles north of Beaumont and 90 miles east of Houston. The facility consists of seven operating units which, while interconnected, make distinct products through differing processes: (i) a Penhex Unit; (ii) a Reformer Unit; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics Hydrogenation Unit; (vi) a White Oil Fractionation Unit; and (vii) a Hydrocarbon Processing Demonstration Unit. All of these units are currently in operation.

The Penhex Unit has the capacity to process approximately 6,700 barrels per day of fresh feed with the Reforming Unit, the Aromax® Unit, and the Cyclo-Pentane Unit further processing streams produced by the Penhex Unit.  The Aromatics Hydrogenation Unit has a capacity of approximately 400 barrels per day, and the White Oils Fractionation Unit has a capacity of approximately 3,000 barrels per day.  The Hydrocarbon Processing Demonstration Unit has a capacity of approximately 300 gallons per day.  The facility generally consists of equipment commonly found in most petrochemical facilities such as fractionation towers and hydrogen treaters except the facility is adapted to produce specialized products that are high purity, very consistent, precise specification materials utilized in the petrochemical industry as solvents, additives, blowing agents and cooling agents.  South Hampton produces eight distinct product streams and markets several combinations of blends as needed in various customer applications.  South Hampton does not produce motor fuel products or any other commodity type products commonly sold directly to retail consumers or outlets.

 
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Products from the Penhex Unit, Reformer Unit, Aromax® Unit, and Cyclo-pentane Unit are marketed directly to the customer by South Hampton marketing personnel.  The Penhex Unit had a utilization rate during 2011 of approximately 64%.  This compares to a rate of 54% for 2010.  The Penhex Unit capacity was essentially doubled in 2008 and is now configured in two independent process units.  The two unit configuration also improves reliability by reducing the amount of total down time due to mechanical and other factors.  In October 2010 the Company completed the construction of a small Isomerization unit which provides greater flexibility in the product slate and the ability to convert a product which is less in demand, into one which is a stronger performer.

The Reformer and Aromax® Units are operated as needed to support the Penhex and Cyclo-pentane Units.  Consequently, utilization rates of these units are driven by production from the Penhex Unit.  Operating utilization rates are affected by product demand, mechanical integrity, and unforeseen natural occurrences, such as weather events.  The nature of the petrochemical process demands periodic shut-downs for de-coking and other mechanical repairs.

The Aromatics Hydrogenation Unit, White Oils Fractionation Unit, and Hydrocarbon Processing Demonstration Unit are operated as independent and completely segregated processes.  These units are dedicated to the needs of three different toll processing customers.  The customers supply and maintain title to the feedstock, South Hampton processes the feedstock into products based upon customer specifications, and the customers market the products.  Products may be sold directly from South Hampton’s storage tanks or transported to the customers’ location for storage and marketing.  The units have a combined capacity of approximately 3,400 BPD. Together they realized a utilization rate 59% for 2011 and 53% for 2010.  The units are operated in accordance with customer needs, and the contracts call for take or pay minimums of production.

South Hampton, in support of the petrochemical operation, owns approximately 75 storage tanks with total capacity approaching 225,000 barrels, and 115 acres of land at the plant site, 55 acres of which are developed.  South Hampton also owns a truck and railroad loading terminal consisting of storage tanks, four rail spurs, and truck and tank car loading facilities on approximately 53 acres of which 13 acres are developed.

South Hampton obtains its feedstock requirements from a sole supplier.  A contract was signed on June 1, 2004, between South Hampton and the supplier for the purchase of 65,000 barrels per month of natural gasoline on a secured basis for the period from June 1, 2004 through May 31, 2006, subsequently extended to May 31, 2007 and annually thereafter with thirty days written notice of termination by either party.  In December 2006 the agreement was modified so that all purchases are simply on open account under normal credit terms and amounts owed are classified as current.  The supplier built a tank to receive feedstock from a major pipeline system and provides storage for use by South Hampton.  The arrangement is viewed as a means of solidifying a dependable, long term supply of feedstock for the Company.  Storage fees for this arrangement were offset by the cancellation of tank rental fees in place with another party.  The tank was completed in July 2007 and began full operation in October 2007.

As a result of various expansion programs and the toll processing contracts, essentially all of the standing equipment at South Hampton is operational. South Hampton has various surplus equipment stored on-site which may be used in the future to assemble additional processing units as needs arise.

Gulf State owns and operates three (3) 8-inch diameter pipelines aggregating approximately 50 miles in length connecting South Hampton’s facility to: (1) a natural gas line, (2) South Hampton’s truck and rail loading terminal and (3) a major petroleum products pipeline system owned by an unaffiliated third party.  All pipelines are operated within Texas Railroad Commission and DOT regulations for maintenance and integrity.
 
South Hampton sells its products to predominantly Fortune 500 companies for use in the production of polyethylene, packaging, polypropylene, expandable polystyrene, poly-iso/urethane foams, and in the catalyst support industries.  Products are marketed via personal contact and through continued long term relationships.  Sales personnel visit customer facilities regularly and also attend various petrochemical conferences throughout the world.  We have an internet presence as well.  South Hampton has adopted a strategy of moving its larger volume customers to formula based pricing to reduce the effect of feedstock cost volatility.  Under formula pricing the price charged to the customer is based on a formula which includes as a component the average cost of feedstock over the prior month.  As a result, with this pricing mechanism, product prices move in conjunction with feedstock prices without the necessity of announced price changes.  However, because the formulas use an average feedstock price from the prior month, the movement of prices will trail the movement of costs, and formula prices may or may not reflect our actual feedstock cost for the month during which the product is actually sold.  In addition, while formula pricing can benefit product margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing will follow feed costs down

 
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but will retain higher margins during the period by trailing the movement of costs by approximately 30 days. The Company believes that the use of formula pricing can reduce the volatility and increase the predictability of product margins.  However, the Company continues to investigate alternative product pricing methods.  During 2011 and 2010, sales to two customers exceeded 10 percent or more of the Company’s revenues.  In both cases these sales represented multiple products at multiple facilities.

United States Mineral Interests

The Company’s only mineral interest in the United States is its 55% ownership interest in an inactive corporation, PEVM.  PEVM’s properties include 48 patented and 5 unpatented claims totaling approximately 1,500 acres.  All of the claims are located in Lincoln County, NV.   The recent real estate devaluation nation-wide caused the Company to re-evaluate the holdings and a write down of approximately $496,000 was recorded at the end of 2008.  No additional impairment was recorded in 2011, 2010, or 2009.

In late 2008 PEVM commenced dialogue with the Bureau of Land Management (“BLM”) to determine how best to remedy a potential contamination claim on neighboring property.  Communication with the BLM is ongoing.  PEVM has retained an environmental consultant to assist with the resolution of this matter and as of December 31, 2011, the Company had recorded a liability of $350,000 to cover estimated remediation costs as PEVM would have no other source of funds to manage the situation   The Company has liens on several of the patented claims to secure the funds which have been advanced over time.

At this time, neither the Company nor PEVM have plans to develop the mining assets near Pioche, NV.  Periodically proposals are received from outside parties who are interested in developing or using certain assets. Management does not anticipate making any significant domestic mining capital expenditures.

Environmental

General. The Company’s operations are subject to stringent and complex federal, state, local and foreign laws and regulations relating to release of hazardous substances or wastes into the environment or otherwise relating to protection of the environment. As with the industry generally, compliance with existing and anticipated environmental laws and regulations increases our overall costs of doing business, including costs of planning, constructing, and operating plants, pipelines, and other facilities. Included in our construction and operation costs are capital cost items necessary to maintain or upgrade equipment and facilities. Similar costs are likely upon changes in laws or regulations and upon any future acquisition of operating assets.

Any failure to comply with applicable environmental laws and regulations, including those relating to equipment failures and obtaining required governmental approvals, may result in the assessment of administrative, civil or criminal penalties, imposition of investigatory or remedial activities and, in less common circumstances, issuance of injunctions or construction bans or delays. We believe that we currently hold all material governmental approvals required to operate our major facilities. As part of the regular overall evaluation of our operations, we have implemented procedures to review and update governmental approvals as necessary. We believe that our operations and facilities are in substantial compliance with applicable environmental laws and regulations and that the cost of compliance with such laws and regulations currently in effect will not have a material adverse effect on our operating results or financial condition.

The clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. Moreover, risks of process upsets, accidental releases, or spills are associated with our possible future operations, and we cannot assure you that we will not incur significant costs and liabilities, including those relating to claims for damage to property and persons as a result of any such upsets, releases, or spills. In the event of future increases in environmental costs, we may be unable to pass on those cost increases to customers. A discharge of hazardous substances or wastes into the environment could, to the extent losses related to the event are not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and to pay fines or penalties that may be assessed and the cost related to claims made by neighboring landowners and other third parties for personal injury or damage to natural resources or property. The Company will attempt to anticipate future regulatory requirements that might be imposed and plan accordingly to comply with changing

 
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environmental laws and regulations and to minimize costs with respect to more stringent future laws and regulations of more rigorous enforcement of existing laws and regulations.

Hazardous Substance and Waste. To a large extent, the environmental laws and regulations affecting the Company’s operations relate to the release of hazardous substances or solid wastes into soils, groundwater and surface water, and include measures to prevent and control pollution. These laws and regulations generally regulate the generation, storage, treatment, transportation and disposal of solid and hazardous wastes, and may require investigatory and corrective actions at facilities where such waste may have been released or disposed. For instance, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, and comparable state laws, impose liability without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to a release of “hazardous substance” into the environment. Potentially liable persons include the owner or operator of the site where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the potentially responsible classes of persons the costs they incur. The Company has not received any notification that it may be potentially responsible for cleanup costs under CERCLA or any analogous federal or state laws, except as expressly provided herein.

We also generate, and may in the future generate, both hazardous and nonhazardous solid wastes that are subject to requirements of the federal Resource Conservation and Recovery Act, or RCRA, and/or comparable state statutes. From time to time, the Environmental Protection Agency, or EPA, and state regulatory agencies have considered the adoption of stricter disposal standards for nonhazardous wastes, including crude oil and natural gas wastes. Moreover, it is possible that some wastes generated by us that are currently classified as nonhazardous may in the future be designated as “hazardous wastes,” resulting in the wastes being subject to more rigorous and costly management and disposal requirements.

Air Emissions. The Company’s current and future operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including our facilities, and impose various monitoring and reporting requirements. Pursuant to these laws and regulations, we may be required to obtain environmental agency pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in an increase in existing air emissions, obtain and comply with the terms of air permits, which include various emission and operational limitations, or use specific emission control technologies to limit emissions. The Company will likely be required to incur certain capital expenditures in the future for air pollution control equipment in connection with maintaining or obtaining governmental approvals addressing air-emission related issues. Failure to comply with applicable air statutes or regulations may lead to the assessment of administrative, civil or criminal penalties, and may result in the limitation or cessation of construction or operation of certain air emission sources. We believe such requirements will not have a material adverse effect on our financial condition or operating results, and the requirements are not expected to be more burdensome to us than any similarly situated company.

Climate Change. In response to concerns suggesting that emissions of certain gases, commonly referred to as “greenhouse gases” (including carbon dioxide and methane), may be contributing to warming of the Earth’s atmosphere, the U.S. Congress is actively considering legislation to reduce such emissions. In addition, at least one-third of the states, either individually or through multi-state regional initiatives, have already taken legal measures intended to reduce greenhouse gas emissions, primarily through the planned development of greenhouse gas emission inventories and/or greenhouse gas cap and trade programs. In addition, EPA is taking steps that would result in the regulation of greenhouse gases as pollutants under the federal Clean Air Act. Furthermore, in September 2009 the EPA finalized regulations that require monitoring and reporting of greenhouse gas emissions on an annual basis including extensive greenhouse gas monitoring and reporting requirements beginning in 2010. Although the greenhouse gas reporting rule does not control greenhouse gas emission levels from any facilities, it will still cause us to incur monitoring and reporting costs for emissions that are subject to the rule. Some of our facilities include source categories that are subject to the greenhouse gas reporting requirements included in the final rule. In December 2009 the EPA also issued findings that greenhouse gases in the atmosphere endanger public health and welfare and emissions from mobile sources cause or contribute to greenhouse gases in the atmosphere. The endangerment findings will not immediately affect our operations, but standards eventually promulgated pursuant to these findings could affect our operations and ability to obtain air permits for new or modified facilities.

 
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Legislation and regulations relating to control or reporting of greenhouse gas emissions are also in various stages of discussions or implementation in about one-third of the states. Lawsuits have been filed seeking to force the federal government to regulate greenhouse gases emissions under the Clean Air Act and to require individual companies to reduce greenhouse gas emissions from their operations. These and other lawsuits may result in decisions by state and federal courts and agencies that could impact the Company’s operations and ability to obtain certifications and permits to construct future projects.

Passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict emissions of greenhouse gases in areas in which we conduct business could adversely affect the demand for the products we store, transport, and process, and depending on the particular program adopted, could increase the costs of our operations including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize the Company’s greenhouse gas emissions, pay any taxes related to the Company’s greenhouse gas emissions and/or administer and manage a greenhouse gas emissions program. We may be unable to recover any such lost revenues or increase costs in the rates we charge customers, and any such recovery may depend on events beyond our control. Reductions in our revenues or increases in our expenses as a result of climate control initiatives could have adverse effects on the Company’s business, financial position, results of operations and prospects.

Clean Water Act. The Federal Water Pollution Control Act, also known as the Clean Water Act, and comparable state laws impose restrictions and strict controls regarding the discharge of pollutants, including natural gas liquid related wastes, into state waters or waters of the United States. Regulations promulgated pursuant to these laws require that entities that discharge into federal and state waters obtain National Pollutant Discharge Elimination System, or NPDES, and/or state permits authorizing these discharges. The Clean Water Act and analogous state laws assess administrative, civil and criminal penalties for discharges of unauthorized pollutants into the water and impose substantial liability for the costs of removing spills from such waters. In addition, the Clean Water Act and analogous state laws require that individual permits or coverage under general permits be obtained by covered facilities for discharges of storm water runoff. The Company believes that it is in substantial compliance with Clean Water Act permitting requirements as well as the conditions imposed there under, and that continued compliance with such existing permit conditions will not have a material effect on the Company’s operations.

TCEQ. In 1993 during remediation of a small spill area, the Texas Commission on Environmental Quality (TCEQ) required South Hampton to drill a well to check for groundwater contamination under the spill area. Two pools of hydrocarbons were discovered to be floating on the groundwater at a depth of approximately 25 feet. One pool is under the site of a former gas processing plant owned and operated by Sinclair, Arco and others before its purchase by South Hampton in 1981. Analysis of the material indicates it entered the ground prior to South Hampton’s acquisition of the property.  The other pool is under the original South Hampton facility and analysis indicates the material was deposited decades ago. Tests conducted have determined that the hydrocarbons are contained on the property and not migrating in any direction. The recovery process was initiated in June 1998 and approximately $53,000 was spent setting up the system. The recovery is proceeding as planned and is expected to continue for many years until the pools are reduced to acceptable levels. Expenses of recovery and periodic migration testing are being recorded as normal operating expenses. Expenses for future recovery are expected to stabilize and be less per annum than the initial set up cost, although there is no assurance of this effect.  The light hydrocarbon recovered from the former gas plant site is compatible with our normal Penhex feedstock and is accumulated and transferred into the Penhex feedstock tank.  The material recovered from under the original South Hampton site is accumulated and sold as a by-product.  Approximately 75 barrels were recovered during 2011 and 150 barrels during 2010.  The recovered material had an economic value of approximately $8,000 during 2011 and $13,000 during 2010.  Consulting engineers estimate that as much as 20,000 barrels of recoverable material may be available to South Hampton for use in its process or for sale.  At current market values this material, if fully recovered would be worth approximately $2,000,000. The final volume present and the ability to recover it are both highly speculative issues due to the area over which it is spread and the fragmented nature of the pockets of hydrocarbon.  South Hampton has drilled additional wells periodically to further delineate the boundaries of the pools and to ensure that migration has not taken place. These tests confirmed that no migration of the hydrocarbon pools has occurred.  The TCEQ has deemed the current action plan acceptable and reviews the plan on a semi-annual basis.

The Clean Air Act Amendments of 1990. The Clean Air Act Amendments of 1990 had a positive effect on the Petrochemical Company’s business as manufacturers search for ways to use more environmentally acceptable materials in their processes. There is a current trend among manufacturers toward the use of lighter and more recoverable C5 hydrocarbons (pentanes) which comprise a large part of the Petrochemical Company’s product line. We believe our

 
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ability to manufacture high quality solvents in the C5 hydrocarbon market will provide a basis for growth over the coming years.   Also, as the use of C6 solvents is phased out in parts of the industry, several manufacturers of such solvents have opted to no longer market those products.  As the number of producers has consolidated, we have increased our market share at higher sales prices from customers who still require C6 solvents in their business.

As discussed above under “United States Mineral Interests” in 2008 the Company learned of a claim by the BLM against World Hydrocarbons, Inc. for contamination of real property owned by the BLM north of and immediately adjacent to the processing mill situated on property owned by PEVM. World Hydrocarbons, Inc. responded to the BLM by stating that it does not own the mill and that PEVM is the owner and responsible party.

Personnel

The number of regular employees was approximately 160, 145 and 140 at years ended 2011, 2010 and 2009, respectively.  Regular employees are defined as active executive, management, professional, technical and wage employees who work full time or part time for the Company and are covered by our benefit plans and programs.

During 2010 we either terminated or transferred to AMAK all of our employees working in Saudi Arabia except for 2 who were subsequently terminated early in 2011.  In connection therewith, we paid accrued salaries and termination benefits due these employees with the exception of Mr. Hatem El Khalidi whose termination benefits were accrued pending resolution of lawsuits brought by Mr. El Khalidi against the Company in Saudi Arabia and the United States.  See Item 3. Legal Proceedings.   Mr. Ghazi Sultan, a director of the Company, is acting as the Company’s representative in Saudi Arabia.

Competition

The petrochemical and mining industries are highly competitive.  There is competition within the industries and also with other industries in supplying the chemical and mineral needs of both industrial and individual consumers.  We compete with other firms in the sale or purchase of needed goods and services and employ all methods of competition which are lawful and appropriate for such purposes. See further discussion under “Intense competition” in Item 1a.

Investment in AMAK

We own a 37% interest in AMAK, a Saudi Arabian closed joint stock mining company.  AMAK’s mining activities are expected to produce copper, zinc, gold, silver, and possibly nickel.  The AMAK project, which encompasses the Al Masane mine, processing plant and ancillary facilities is located in Najran province in southwestern Saudi Arabia.  Specifically, it is located 75 km northwest of the city of Najran, the provincial capital and midway between the outpost of Rihab and the district town of Sufah.

In August 2010 the Saudi Arabian Ministry of Commerce approved amendments to AMAK’s Articles of Association and Bylaws which provide that the Company fully and completely paid the subscription price for 18,450,000 shares of AMAK stock (or 41% of the issued and outstanding shares), that neither AMAK nor the other AMAK shareholders may require the Company to make an additional capital contribution without the Company’s written consent, and that the Company will retain seats on the AMAK Board equal in number to that of the Saudi Arabian shareholders for a three year period beginning August 25, 2009.  This was the final step in settling the issue as to whether the Company might be obligated to make an additional capital contribution to AMAK.
 
On October 24, 2010, we executed a limited Guarantee in favor of the Saudi Industrial Development Fund ("SIDF") guarantying up to 41% of the SIDF loan to AMAK in the principal amount of 330,000,000 Saudi Riyals (US$88,000,000) (the "Loan").  As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate Guarantees totaling 162.55% of the overall Loan amount.  The other AMAK shareholders provided personal Guarantees.  We were the only AMAK sharehodler providing a corporate Guarantee.  The Loan was required in order for AMAK to fund construction of the underground and above-ground portions of its mining project in southwest Saudi Arabia and to provide working capital for commencement of operations.

In July 2011 we announced that the Arab Mining Company (ARMICO) invested US $37.3 million, acquiring five million shares or 10% interest in AMAK.  This capital provided AMAK with the financing necessary to start full production.  ARMICO acquired a seat on AMAK's board which is held by Mr. Sultan Al-Shawli, Saudi Deputy Minister for Petroleum and Minerals.  Mr. Al-Shawli's election increases the total number of board members to nine.
 
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ARMICO paid 28 Saudi Riyals per share for their 10% stake in the AMAK joint stock company.  AMAK's Saudi partners now own 53%, and we own 37%.
 
Accounting Treatment of Investment in AMAK.  Initially, we accounted for our investment in AMAK using the equity method of accounting under the presumption that since we owned more than 20% of AMAK, we would have the ability to exercise significant influence over the operating and financial policies of AMAK. AMAK’s bylaws require that audited financial statements for each year ended December 31 be submitted to its stockholders by June 30 of the following year. As a result, we expected to obtain the audited financial statements of AMAK by June 30, 2009, and in addition we expected to be able to secure the cooperation of AMAK and its auditors in converting those financial statements from generally accepted accounting principles in Saudi Arabia (“Saudi GAAP”) to U.S. generally accepted accounting principles (“U.S. GAAP”). However, by August 2009, no financial statements of AMAK were produced. In May 2010 we received a draft of the 2009 financial statements of AMAK prepared under Saudi GAAP. At that time we introduced a resolution at a meeting of the AMAK Board of Directors that would require AMAK to produce annual and quarterly financial statements prepared in accordance with U.S. GAAP which the Company required in order to apply the equity method of accounting for the investment. The resolution was defeated as the result of the casting of the tie breaking vote held by the Saudi Chairman of the Board. Consequently, we concluded that since August 2009 we no longer had significant influence over the operating and financial policies of AMAK and changed to the cost method of accounting for our investment in AMAK. We recorded our cost method investment in AMAK at the carrying amount of its equity method investment at the date the method of accounting was changed. Also see Item 1A – Risk Factors - Inability to significantly influence AMAK activities.”

Going forward, the lack of ability to exert significant influence basically means that we hold a passive ownership interest in AMAK. The AMAK Saudi directors have taken the lead in dealing with: (i) various contractors who are constructing the underground and above ground mining facilities, (ii) personnel issues, (iii) credit facilities from third party lenders, and (iv) consultants assisting in various phases of mine development. The Company believes that it has developed a good working relationship with the other AMAK stockholders and feels comfortable with allowing the AMAK Saudi directors to oversee the operation, especially since the project is located in their region and they are better qualified to deal with cultural issues and other unique aspects of doing business in Saudi Arabia. Periodically we make suggestions as to how the operation could be improved and generally the AMAK Saudi directors have been receptive to those ideas.

Cash Flows from AMAK.  Our investment in AMAK will produce cash flows to the Company at such time as AMAK pays dividends. The Company anticipates that AMAK may have the ability to begin paying dividends once it has commenced commercial operations, and cash flows from those operations are sufficient to pay dividends after AMAK first services its $88 million credit facility and AMAK’s Board of Directors sets aside cash for required statutory reserves and any other reserves its Board of Directors believes are necessary and appropriate. Since we have no significant influence over AMAK’s Board of Directors, the amount and timing of dividends we receive from AMAK will be controlled by the other investors in AMAK.

AMAK will nonetheless not begin paying any dividends until it has commenced commercial production and achieved positive operating cash flows.   AMAK successfully completed the construction phase of the mine and turned the facility over to the surface facility operator on November 28, 2011.  Metal concentrates will be trucked to the Port of Jizan and stored until such time as there are quantities sufficient to fill a cargo ship. Once the mine reaches full capacity, several vessels per year will be loaded with copper and zinc concentrates which can then be shipped worldwide.  In an effort to improve cash flow, AMAK is in discussions concerning an advanced payment covenant with its marketing agent, Ocean Partners, and may receive up to 80 percent of the market value for metal concentrates in 1,000 ton increments when stored in a secure area within the mill.

As a result of the foregoing, we do not anticipate receiving any substantial cash flows from our investment in AMAK until 2013 at the earliest, and there can be no assurance as to the amount or timing of any cash flows we will receive from our investment in AMAK.

We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by the production of those reserves, as well as, recent equity transactions within AMAK.

 
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Available Information

The Company will provide paper copies of this Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports, all as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge upon written or oral request to Arabian American Development Company, P. O. Box 1636, Silsbee, TX  77656, (409) 385-8300.  These reports are also available free of charge on our website, www.arabianamericandev.com, as soon as reasonably practicable after they are filed electronically with the SEC.  South Hampton also has a website at www.southhamptonr.com, and AMAK has a website at www.amak.com.sa. These websites and the information contained on or connected to them are not incorporated by reference herein to the SEC filings.

Item 1A.   Risk Factors.

The Company’s financial and operating results are subject to a variety of risks inherent in the global petrochemical and mining businesses (due to our investment in AMAK).  Many of these risk factors are not within our control and could adversely affect our business, our financial and operating results or our financial condition.  We discuss some of those risks in more detail below.

Use of single source suppliers for raw materials could create supply issues

The Company’s use of single source suppliers for certain raw materials could create supply issues. Replacing a single source supplier could delay production of some products as replacement suppliers initially may be subject to capacity constraints or other output limitations. The loss of a single source supplier, the deterioration of our relationship with a single source supplier, or any unilateral modification to the contractual terms under which we are supplied raw materials by a single source supplier could adversely affect our revenue and gross margins.

Dependence on a limited number of customers could adversely impact profitability

During 2011, 2010 and 2009, sales to each of two customers by the Petrochemical Company exceeded 10 percent or more of the Company’s revenues.  In both cases these sales represented multiple products at multiple facilities.  The total loss of either of these two customers could adversely affect the Petrochemical Company’s ability to market its products on a competitive basis and generate a profit.

Varying economic conditions could adversely impact demand for products

The demand for petrochemicals and metals correlates closely with general economic growth rates.  The occurrence of recessions or other periods of low or negative growth will typically have a direct adverse impact on our results.  Other factors that affect general economic conditions in the world or in a major region, such as changes in population growth rates or periods of civil unrest, also impact the demand for petrochemicals and metals.  Economic conditions that impair the functioning of financial markets and institutions also pose risks to the Company, including risks to the safety of our financial assets and to the ability of our partners and customers to fulfill their commitments to the Company.  In addition, the revenue and profitability of our operations have historically varied, which makes future financial results less predictable. The Company’s revenue, gross margin and profit vary among our products, customer groups and geographic markets; and therefore, will likely be different in future periods than currently. Overall gross margins and profitability in any given period are dependent partially on the product, customer and geographic mix reflected in that period’s net revenue. In addition, newer geographic markets may be relatively less profitable due to investments associated with entering those markets and local pricing pressures. Market trends, competitive pressures, increased raw material or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of certain segments in a given period which may necessitate adjustments to our operations.

Environmental regulation

The petrochemical industry is subject to extensive environmental regulation pursuant to a variety of federal and state regulations.  Such environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with storage, transportation, treatment and disposal of hazardous substances and waste.  Legislation also requires us to operate and maintain our facilities to the satisfaction of applicable regulatory authorities.  Costs to comply with these regulations are significant to our business.  Failure to comply with these laws or failure to obtain permits may expose us to fines, penalties or interruptions in operations that could be material to our results of operations.

 
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Safety, business controls and environmental risk management

Our results depend upon management’s ability to minimize the inherent risks of petrochemical operations, to control effectively our business activities and to minimize the potential for human error.  We apply rigorous management systems and continuous focus to workplace safety and to avoid spills or other adverse environmental events.  Substantial liabilities and other adverse impacts could result if our systems and controls do not function as intended.  Business risks also include the risk of cyber security breaches.  If our systems for protecting against cyber security risks prove to be insufficient, we could be adversely affected by having our business systems compromised, our proprietary information altered, lost or stolen, or our business operations disrupted.

Regulatory and litigation

Even in countries with well-developed legal systems where the Company does business, we remain exposed to changes in law that could adversely affect our results, such as increases in taxes, price controls, changes in environmental regulations or other laws that increase our cost of compliance, and government actions to cancel contracts or renegotiate items unilaterally.  We may also be adversely affected by the outcome of litigation or other legal proceedings, especially in countries such as the United States in which very large and unpredictable punitive damage awards may occur.  AMAK’s mining lease for the Al Masane area in Saudi Arabia is subject to the risk of termination if AMAK does not comply with its contractual obligations.  Further, our investment in AMAK is subject to the risk of expropriation or nationalization. If a dispute arises, the Company may have to submit to the jurisdiction of a foreign court or panel or may have to enforce the judgment of a foreign court or panel in that foreign jurisdiction.  Because of our substantial international investment, our business is affected by changes in foreign laws and regulations (or interpretation of existing laws and regulations) affecting both the mining and petrochemical industries, and foreign taxation. The Company will be directly affected by the adoption of rules and regulations (and the interpretations of such rules and regulations) regarding the exploration and development of mineral properties for economic, environmental and other policy reasons. We may be required to make significant capital expenditures to comply with non-U.S. governmental laws and regulations.  It is also possible that these laws and regulations may in the future add significantly to our operating costs or may significantly limit our business activities. Additionally, the Company’s ability to compete in the international market may be adversely affected by non-U.S. governmental regulations favoring or requiring the awarding of leases, concessions and other contracts or exploration licenses to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.  We are not currently aware of any specific situations of this nature, but there are always opportunities for this type of difficulty to arise in the international business environment.

Loss of key personnel and management effectiveness

In order to be successful, we must attract, retain and motivate executives and other key employees including those in managerial, technical, sales, and marketing positions. We must also keep employees focused on our strategies and goals. The failure to hire or loss of key employees could have a significant adverse impact on operations.  An important component of our competitive performance is our ability to operate efficiently including our ability to manage expenses and minimize the production of low margin products on an on-going basis.  This requires continuous management focus including technological improvements, cost control and productivity enhancements.  The extent to which we manage these factors will impact our performance relative to competition.  For projects in which we are not in control (such as the AMAK mining project) we depend on the managerial effectiveness of one or more co-investors whom we do not control.

Market place volatility

The Company’s stock price, like that of other companies, can be volatile. Some of the factors that can affect our stock price are:

Speculation in the press or investment community about, or actual changes in, our executive team, strategic position, business, organizational structure, operations, financial condition, financial reporting and results, effectiveness of cost cutting efforts, prospects or extraordinary transactions;

Announcements of new products, services, technological innovations or acquisitions by the Company or competitors; and

 
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Quarterly increases or decreases in revenue, gross margin or earnings, changes in estimates by the investment community or guidance provided by the Company, and variations between actual and estimated financial results.

General or industry-specific market conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to our performance may also affect the price of our common stock. For these reasons, investors should not rely on recent trends to predict future stock prices, financial condition, results of operations or cash flows. In addition, following periods of volatility in a company’s securities, securities class action litigation against a company is sometimes instituted. If instituted against us, this type of litigation, while insured against monetary awards and defense cost, could result in substantial diversion of management’s time and resources.

Risk associated with extraordinary transactions

As part of the Company’s business strategy, we sometimes engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing transactions (“extraordinary transactions”) and enter into agreements relating to such extraordinary transactions in order to further our business objectives.  In order to pursue this strategy successfully, we must identify suitable candidates for and successfully complete extraordinary transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. Integration and other risks of extraordinary transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If the Company fails to identify and complete successfully extraordinary transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on the Company’s revenue, gross margin and profitability. Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:

Combining product offerings and entering into new markets in which we are not experienced;

Convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers (which could result in our incurring additional obligations in order to address customer uncertainty), and coordinating sales, marketing and distribution efforts;

Minimizing the diversion of management attention from ongoing business concerns;

Persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, engaging with employee works councils representing an acquired company’s non-U.S. employees, integrating employees into the Company, correctly estimating employee benefit costs and implementing restructuring programs;

Coordinating and combining administrative, manufacturing, and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures;

Achieving savings from supply chain integration; and

Managing integration issues shortly after or pending the completion of other independent transactions.

The Company periodically evaluates and enters into significant extraordinary transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of any extraordinary transaction, and the timeframe for achieving benefits of an extraordinary transaction may depend partially upon the actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for extraordinary transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate our costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements less profitable or unprofitable. Managing extraordinary transactions requires varying levels of management resources, which may divert our attention from other business operations. These extraordinary transactions also have resulted and in the future may result in significant costs and expenses and charges to earnings. Moreover, the Company has incurred and will incur additional depreciation and

 
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amortization expense over the useful lives of certain assets acquired in connection with extraordinary transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with an extraordinary transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating dilution for existing stockholders, or borrow, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in the Company’s credit rating associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, the Company’s effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing an extraordinary transaction and the risk that an announced extraordinary transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations in a given quarter.

Guaranteeing Performance by Others including Third Parties and Others

From time to time, the Company may be required or determine it is advisable to guarantee performance of loan agreements by others in which the Company maintains a financial interest. In such instances, if the primary obligor is unable to perform its obligations, the Company might be forced to perform the primary obligor’s obligations which could negatively impact the Company’s financial interests.

Economic and Political Instability; Terrorist Acts; War and Other Political Unrest

The U.S. military action in Iraq and Afghanistan, the terrorist attacks that took place in the United States on September 11, 2001, the potential for additional future terrorist acts and other recent events, including terrorist related activities and civil unrest in Egypt, Yemen, Libya, Bahrain and Syria, the on-going Iranian nuclear confrontation, as well as the European debt crisis, have caused uncertainty in the world’s financial markets and have significantly increased global political, economic and social instability, including in Saudi Arabia, a country in which we have a substantial investment. It is possible that further acts of terrorism may be directed against the United States domestically or abroad, and such acts of terrorism could be directed against our investment in those locations.  Such economic and political uncertainties may materially and adversely affect our business, financial condition or results of operations in ways that cannot be predicted at this time.  Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions. We are predominantly uninsured for losses and interruptions caused by terrorist acts, conflicts and wars. Our future revenue, gross margin, expenses and financial condition also could suffer due to a variety of international factors, including:

Ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts;

Longer accounts receivable cycles and financial instability among customers;

Trade regulations and procedures and actions affecting production, pricing and marketing of products;

Local labor conditions and regulations;

Geographically dispersed workforce;

Changes in the regulatory or legal environment;

Differing technology standards or customer requirements;

Import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could affect our ability to obtain favorable terms for labor and raw materials or lead to penalties or restrictions;

Difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; and

 
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Fluctuations in freight costs and disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments.

Currency fluctuations

Currency variations also contribute to fluctuations in sales of products and services in impacted jurisdictions. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the United States.

Business disruption

Business disruptions could harm the Company’s future revenue and financial condition and increase our costs and expenses. Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for some of which we may be self-insured. The occurrence of any of these business disruptions could harm our revenue and financial condition and increase our costs and expenses.

Dependence on AMAK management and Board

We are relying upon AMAK’s management and Board to employ various respected engineering and financial advisors to assist in the development and evaluation of the mining projects in Saudi Arabia.  During 2011 AMAK utilized the services Behre Dolbear of London for ongoing guidance regarding construction, turn over and eventual operation of the ore-processing and underground facilities, and other items to ensure success of the project.  Additionally, AMAK hired two very experienced persons in 2011 to serve as Chief Executive Officer and Chief Financial Officer.  The amount of risk will ultimately depend upon the AMAK’s ability to use consultants and experienced personnel to manage the operation in Saudi Arabia.

Inability to significantly influence AMAK activities

We do not have the ability to significantly influence AMAK activities for a number of reasons including disputed terms of organizational documents which diluted our ownership percentage, inability to persuade the remaining board members regarding certain management decisions,  lack of control at the board of director level, cultural differences, differing accounting and management practices, differing governmental laws and regulations, and the fact that the AMAK mining project is halfway around the world from the Company’s main base of operations in the United States.

Inability to recoup investment in AMAK

The Company will only recover its investment in AMAK through either the receipt of dividends from AMAK or the sale of part or all of its interest in AMAK. There is a risk that we will be unable to recover our investment in AMAK if AMAK is not profitable, or if AMAK’s Board of Directors chooses not to declare dividends even if AMAK is profitable.  However, since the Company has no significant influence over AMAK’s Board of Directors, the amount and timing of the dividends we receive from AMAK will be controlled by the other investors in AMAK. With respect to the sale of part or all of our interest in AMAK, under Saudi law, AMAK must sell a portion of its equity to the public once AMAK has been profitable for two years. While the proceeds of such a sale might allow the Company to recover its investment in AMAK, there is no assurance that AMAK will achieve the profitability required for such a public sale, or that the market conditions for any such public sale will be favorable enough to allow us to recover our investment.

AMAK’s inability to obtain sufficient funding

In the event AMAK is unable to continue to borrow funds in an amount sufficient to fund operations, AMAK may be forced to take other less desirable methods to raise necessary capital such as selling additional equity in AMAK at a possible discount, operations could cease and the newly constructed assets could sit unused and deteriorate over time, or worst case the AMAK shareholders could lose their investment or be forced to sell for a significant loss.

AMAK’s inability to obtain additional mining leases

In the event AMAK is unable to obtain additional mining leases, there would be a loss of future opportunities.

 
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Cancellation of the current mining lease held by AMAK

In the event that the Saudi Ministry cancels the current lease, AMAK shareholders including the Company could lose their investment or be forced to sell for a loss.

Intense competition

The Company competes in the petrochemical industry. Accordingly, we are subject to intense competition among a large number of companies, both larger and smaller than us, many of which have financial capability, facilities, personnel and other resources greater than us. In the specialty products and solvents markets, the Petrochemical Company has one principal competitor in North America, ConocoPhillips.  Multiple competitors exist when searching for new business in other parts of the world.  We compete primarily on the basis of performance, price, quality, reliability, reputation, distribution, service, and account relationships. If our products, services, support and cost structure do not enable us to compete successfully based on any of those criteria, our operations, results and prospects could be harmed.  The Company has a portfolio of businesses and must allocate resources across these businesses while competing with companies that specialize in one or more of these product lines. As a result, we may invest less in certain areas of our businesses than competitors do, and these competitors may have greater financial, technical and marketing resources available to them than our businesses that compete against them. Industry consolidation may also affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we compete, and competitors also may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers. We may have to continue to lower the prices of many of our products and services to stay competitive, while at the same time, trying to maintain or improve revenue and gross margin.

Research and Development

If the Company cannot continue to develop, manufacture and market products and services that meet customer requirements, its revenue and gross margin may suffer. We must make long-term investments and commit significant resources before knowing whether our predictions will accurately reflect customer demand for products and services. After we develop a product, we must be able to manufacture appropriate volumes quickly and at competitive costs. In the course of conducting business, the Company must adequately address quality issues associated with our products and services. In order to address quality issues, we work extensively with our customers and suppliers to determine the cause of the problem and to determine appropriate solutions. However, we may have limited ability to control quality issues. If the Company is unable to determine the cause or find an appropriate solution, it may delay shipment to customers, which would delay revenue recognition and could adversely affect our revenue and reported results. Finding solutions to quality issues can be expensive, adversely affecting our profits. If new or existing customers have difficulty utilizing our products, our operating margins could be adversely affected, and we could face possible claims if we fail to meet customers’ expectations. In addition, quality issues can impair the Company’s relationships with new or existing customers and adversely affect its reputation, which could have a material adverse effect on operating results.

Item 1B.   Unresolved Staff Comments.

Not Applicable

Item 2.  Properties.

South Hampton owns and operates a specialty petrochemical facility near Silsbee, Texas which is approximately 30 miles north of Beaumont, Texas, and 90 miles east of Houston. The facility consists of seven operating units which, while interconnected, make distinct products through differing processes: (i) a Penhex Unit; (ii) a Reformer; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics Hydrogenation Unit; (vi) a White Oil Fractionation Unit; and (vii) a Hydrocarbon Processing Demonstration Unit commissioned in 2011 for Gevo. All of these units are currently in operation.

During 2010 we acquired Silsbee Trading and Transportation Company (“STTC”) which owned and operated 14 transport trucks and 23 trailers for delivery of South Hampton’s products. STTC was subsequently merged into South Hampton.  South Hampton currently owns 16 trucks and 23 trailers.

Gulf State owns and operates three (3) 8-inch diameter pipelines aggregating approximately 50 miles in length connecting South Hampton’s facility to: (1) a natural gas line, (2) South Hampton’s truck and rail loading terminal and

 
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(3) a major petroleum products pipeline system owned by an unaffiliated third party.  All pipelines are operated within Texas Railroad Commission and DOT regulations for maintenance and integrity.

The Company’s only mineral interest in the United States is its ownership interest in PEVM.  See Item 1 – Business – United States Mineral Interests.

The Company has a year-to-year lease on space in an office building in Jeddah, Saudi Arabia, used for storage purposes.  The Company plans to terminate this lease in 2012.
South Hampton has a leased corporate and sales office in Sugar Land, Texas.

Item 3.  Legal Proceedings.

On May 9, 2010, after numerous attempts to resolve certain issues with Mr. Hatem El Khalidi, the Board of Directors terminated the retirement agreement, options, retirement bonuses, and all outstanding directors’ fees due to Mr. El Khalidi, former CEO, President and Director of the Company.  In June 2010 Mr. El Khalidi filed suit against the Company in the labor courts of Saudi Arabia alleging additional compensation owed to him for holidays and overtime.  In November 2011 the labor court determined that the Company owed Mr. El Khalidi $255,000 for holiday pay and dismissed the remainder of his claims.  The Company and Mr. El Khalidi have appealed the decision to the next level.  In September 2010 Mr. El Khalidi threatened suit against the Company in the U.S. alleging breach of contract under the above agreements and other claims.  In late 2010 the Company filed suit against Mr. El Khalidi in the United States District Court in the Eastern District of Texas, Beaumont Division, seeking a declaratory judgment that all monies allegedly owed to Mr. El Khalidi are terminated (the “Federal Court Case”).  On March 21, 2011, Mr. El Khalidi filed suit against the Company in the 14th Judicial District Court of Dallas County, Texas for breach of contract and defamation (the “State Court Case”).  On July 1, 2011, the Company and Mr. El Khalidi entered into an agreement to dismiss the Federal Court Case and transfer venue for the State Court Case to Hardin County, Texas.  Pursuant to this agreement, the Federal Court Case was dismissed on July 13, 2011, and the State Court Case was transferred to Hardin County, Texas on July 15, 2011.  There has been no activity in this matter since transfer to Hardin County, Texas.  The Company believes that the claims are unsubstantiated and intends to vigorously defend the case.  The liabilities owed to Mr. El Khalidi will remain recorded on the Company’s books until the lawsuits are resolved.

On September 14, 2010, South Hampton received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas which was subsequently transferred to the 11th Judicial District Court of Harris County, Texas.  The suit alleges that the plaintiff became ill from exposure to asbestos.  There are approximately 44 defendants named in the suit.  South Hampton has placed its insurers on notice of the claim and plans to vigorously defend the case.  No amounts have been accrued for this claim.

On April 14, 2011, and April 27, 2011, South Hampton received notice of three lawsuits filed in Jefferson County, Texas.  The suits allege that the plaintiffs became ill from benzene exposure during the employment with Goodyear Tire and Rubber Company, an alleged customer of South Hampton.  There are numerous defendants named in the suits.  South Hampton has placed its insurers on notice of the claims and plans to vigorously defend the cases.

Item 4. Mine Safety Disclosures.

Not applicable


 
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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

The Company’s common stock traded on the Nasdaq Stock Market LLC (“Nasdaq”) during the last two fiscal years under the symbol: ARSD. The following table sets forth the high and low bid prices for each quarter as reported by Nasdaq. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

   
Nasdaq
 
   
High
   
Low
 
Fiscal Year Ended December 31, 2011
           
Fourth Quarter ended December 31, 2011
  $ 10.09     $ 3.20  
Third Quarter ended September 30, 2011
  $ 4.75     $ 3.16  
Second Quarter ended June 30, 2011
  $ 4.47     $ 3.70  
First Quarter ended March 31, 2011
  $ 5.10     $ 3.65  
                 
Fiscal Year Ended December 31, 2010
     
Fourth Quarter ended December 31, 2010
  $ 4.53     $ 2.20  
Third Quarter ended September 30, 2010
  $ 2.60     $ 1.63  
Second Quarter ended June 30, 2010
  $ 3.30     $ 1.99  
First Quarter ended March 31, 2010
  $ 3.15     $ 2.14  

At March 8, 2012, there were approximately 565 recorded holders (including brokers’ accounts) of the Company’s common stock. The Company has not paid any dividends since its inception and, at this time, does not have any plans to pay dividends in the foreseeable future.  The current lender allows the petrochemical subsidiaries to pay dividends to the parent company of up to 30% of EBITDA.  The Petrochemical Company was in compliance with this restriction as of December 31, 2011.  See Note 10 to the Consolidated Financial Statements.

Total Stockholder Return

The following graph compares the cumulative total stockholder return on our common stock against the Nasdaq Composite Index and a Peer Group, for the five years ending December 31, 2011.  The graph was constructed on the assumption that $100 was invested in our common stock, the Nasdaq Composite Index and the Peer Group on December 31, 2006, and that any dividends were fully reinvested.

 
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Item 6.  Selected Financial Data.

The following is a five-year summary of selected financial data of the Company (in thousands, except per share amounts):

   
2011
   
2010
   
2009
   
2008
   
2007
 
Revenues
  $ 199,517     $ 139,110     $ 117,587     $ 154,630     $ 108,638  
Net Income (Loss)
  $ 8,430     $ 2,686     $ 6,627     $ (10,731 )   $ 7,771  
Net Income (Loss) Per Share-Diluted
  $ 0.35     $ 0.11     $ 0.28     $ (0. 46 )   $ 0.33  
Total Assets (at December 31)
  $ 110,612     $ 92,528     $ 90,487     $ 96,290     $ 84,221  
Notes Payable (at December 31)
  $ 12     $ 12     $ 12     $ 12     $ 11,012  
Current Portion of Long-Term Debt (at December 31)
  $ 1,500     $ 1,865     $ 1,400     $ 4,920     $ 31  
Total Long-Term Debt Obligations
(at December 31)
  $ 22,739     $ 20,836     $ 23,439     $ 23,557     $ 9,078  

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

Statements in Items 7 and 7A, as well as elsewhere in or incorporated by reference in, this Annual Report on Form 10-K 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

 
16


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; lawsuits; 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 Annual Report on Form 10-K, all of which are difficult to predict and many of which are beyond the Company’s control.
 
Overview

The following discussion and analysis of the Company’s financial results, as well as the accompanying consolidated financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of the Company.

Business Environment and Risk Assessment

Petrochemical Operations

Worldwide petrochemical demand improved significantly during 2011.  South Hampton benefitted from continued operational excellence and competitive advantages achieved through its business mix and focus on producing high quality products and outstanding customer service.  South Hampton also benefitted from a major competitor’s hiatus from the market and from relatively stable feedstock prices.

During the first half of 2011 feedstock prices continued to exhibit sudden and persistent increases and spikes; however, in mid-June feedstock prices stabilized somewhat, and while still fluctuating, stayed within a range which allowed South Hampton to better manage margins.  The relative stability continued through the end of the year.  At the end of 2011, South Hampton had approximately 10% and 30% of anticipated feed requirements covered by derivative contracts for the first and second quarters of 2012, respectively.

South Hampton has a strategy of moving larger volume customers to formula based pricing to reduce the effect of feedstock cost volatility.  Under formula pricing the price charged to the customer is based on a formula which includes as a component the average cost of feedstock over the prior month.  Product prices move in conjunction with feedstock prices without the necessity of announced price changes.  Because the formulas use an average feedstock price from the prior month, the movement of prices trails the movement of costs, and formula pricing may or may not reflect South Hampton’s actual feedstock cost for the month during which the product is actually sold.  In addition, while formula pricing can benefit product margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing may actually improve margins as formula prices trail feed costs downward by approximately 30 days. The use of formula pricing has helped reduce volatility and increase the predictability of product margins.  As previously noted, South Hampton continues to investigate alternative product pricing methods.

Liquidity and Capital Resources

Sources and Uses of Cash

Cash and cash equivalents decreased by $0.94 million during the year ended December 31, 2011.  The change in cash and cash equivalents is summarized as follows:

   
2011
   
2010
   
2009
 
Net cash provided by (used in)
 
(in thousands)
 
  Operating activities
  $ 4,056     $ 11,330     $ 6,515  
  Investing activities
    (6,638 )     (3,149 )     (3,184 )
  Financing activities
    1,646       (3,023 )     (3,638 )
Increase (decrease) in cash and equivalents
  $ (936 )   $ 5,158     $ (307 )
Cash and cash equivalents
  $ 6,674     $ 7,610     $ 2,452  

 
17

Operating Activities

Operating activities generated cash of approximately $4,056,000 during fiscal 2011 as compared with cash provided of approximately $11,330,000 during fiscal 2010.  Although the Company’s net income increased by $5,745,000 from 2010 to 2011, the cash provided by operations decreased 64.2% due primarily to the following factors:

Net income for 2010 included a non-cash equity in loss from AMAK charge of $263,000 as compared to $0 in 2011;

Trade receivables for 2011 increased approximately $12,041,000 (due to increased sales volume and selling price) as compared to a decrease of $1,062,000 in 2010;

Notes receivable for 2011 decreased approximately $35,000 (due to the payoff of the note) as compared to a decrease of $389,000 in 2010;

As the result of an increase in volume and cost, the increase in inventory was approximately $3,539,000 in 2011 as compared to an increase of about $852,000 in 2010;

In 2010 the Company received an income tax refund of $4,510,000 which had been recognized as a non-cash credit (increase in tax receivable) in 2009 as compared to income tax receivable in 2011 of $216,000;

These sources of decreased operating cash flow were partially offset by the following increases in the cash provided by operations:

Net income for 2011 included a non-cash depreciation charge of $3,220,000 as compared to 2010 which included a non-cash depreciation charge of $2,613,000, a change of $607,000;

Net income for 2011 included non-cash compensation charges of $872,000 as compared to $808,000 in 2010, a change of $64,000;

Net income for 2011 included non-cash amortization charges of $250,000 as compared to $0 in 2010, a change of $250,000;

Net income for 2011 included a non-cash deferred tax benefit of $860,000 as compared to 2010 which included a non-cash deferred tax benefit of $685,000, a change of $175,000;

Other liabilities increased for 2011 by $1,628,000 (due to the receipt of funds from Gevo for construction of the hydrocarbon processing demonstration unit) as compared to $0 in 2010;

Accounts payable and accrued liabilities increased for 2011 by approximately $4,246,000 (due to an increase in the amount owed for feedstock, freight, taxes, and compensation) while in 2010 there was a decrease of about $504,000 (due to the decrease in the amount owed for federal income tax); and

Accrued liabilities in Saudi Arabia decreased approximately $76,000 (due to the payment of amounts owed for termination benefits to Saudi employees) as compared to a decrease of $207,000 (also due to the payment of amounts owed for termination benefits to Saudi employees).

Operating activities generated cash of approximately $11,330,000 during fiscal 2010 as compared with cash provided of approximately $6,515,000 during fiscal 2009.  Although the Company’s net income decreased by $3,942,000 from 2009 to 2010, the cash provided by operations increased by 73.9% due primarily to the following factors:

Trade receivables decreased approximately $1,062,000 (due to decreased sales volume in the fourth quarter) as compared to an increase of $510,000 in 2009;

In 2010 the Company received an income tax refund of $4,510,000 which had been recognized as a non-cash credit (increase in tax receivable) in 2009;

 
18


•       As the result of changes in demand and production the increase in inventory was approximately $852,000 in 2010 as compared to an increase of about $2,619,000 in 2009;

Accounts payable and accrued liabilities decreased approximately $504,000 (due to a decrease in the amount owed for federal income tax) while in 2009 the same accounts decreased by about $2,146,000 (due to the payment of derivative related items);

Net income for 2010 included non-cash compensation charges of $808,000 as compared to $280,000 in 2009, a change of $528,000

These sources of increased operating cash flow were partially offset by the following increases in the use of cash for operations:

 •
Net income for 2009 included a non-cash deferred tax benefit of $8,977,000 in 2010 as compared to 2010 which included a non-cash deferred tax benefit of $685,000, a change of $8,292,000;

No cash flows were derived from the return of derivative instrument deposits in 2010 while in 2009 cash of $3,950,000 was provided from the return of a previous margin call;

2009 included a non-cash unrealized gain on derivative instruments of $6,976,000 as compared to a non-cash unrealized gain of $177,000 in 2010, a change of $6,699,000;

Accrued liabilities in Saudi Arabia decreased approximately $207,000 (due to the payment of amounts owed for termination benefits to Saudi employees) as compared to a decrease of $935,000 (due to the payment of amounts owed to the previous President of the Company and termination of some of the Saudi employees) in 2009.

Investing Activities

Cash used for investing activities during fiscal 2011 was approximately $6,638,000, representing an increase of approximately $3,489,000 over the corresponding period of 2010.  Capital expenditures increased approximately 124.9% from 2010 to 2011.  During 2011 approximately $1.9 million was expended for the construction of a hydrocarbon processing demonstration unit in connection with the Gevo contract.  In addition expenditures were made for the following:  $695,000 for land surrounding the petrochemical facility, $977,000 for tankage, $310,000 to refurbish the Cyclo Unit, $198,000 for construction equipment, and $168,000 for a maintenance warehouse.

Cash used for investing activities during fiscal 2010 was approximately $3,149,000, representing a decrease of approximately $35,000 over the corresponding period of 2009.  Capital expenditures decreased approximately 9.0% from 2009 to 2010.  During 2010 approximately $1.8 million was expended for the construction of an isomerization and hexane treater unit.  This expenditure provides greater flexibility in our product mix as the isomerization unit allows the conversion of normal pentane into isopentane.

Capital expenditures decreased significantly from 2008 to 2009 due to the completion in 2008 of the expansion project.  The hexane treater unit was the final phase of the 2008 expansion.

Approximately $250,000 in cash was used for the South Hampton/STTC merger in 2010.  See Note 1 to the Consolidated Financial Statements.

Financing Activities

Cash provided in financing activities during fiscal 2011 increased approximately $4,669,000 compared to the corresponding period of 2010.  We made principal payments on long-term debt during 2011 of $2,000,000 on our line of credit and $2,461,000 on term loans.  Additions to long term debt of $6.0 million were from draws on the line of credit.

Cash used in financing activities during fiscal 2010 decreased approximately $615,000 compared to the corresponding period of 2009.  We made principal payments on long-term debt during 2010 of $3,000,000 on our line of credit and $1,420,000 on term loans.  Additions to long term debt of $1.4 million were from a $1.0 million draw on the line of credit and the signing of a note for approximately $397,000 relating to the purchase of additional transportation equipment.

 
19


Credit Agreement

On May 25, 2006, South Hampton entered into a Credit Agreement, as amended, with Bank of America.  We were in compliance with all of our financial covenants as of December 31, 2011, under the Credit Agreement except for the capital expenditure limit which was waived by Bank of America.  All of our obligations under the Credit Agreement are fully and unconditionally secured pursuant to a perfected first priority security interest on all of South Hampton’s assets.  As of December 31, 2011, the Credit Agreement provided for an aggregate principal amount of up to $32 million available through the following facilities: (i) $18 million revolving credit facility which includes a $3 million sublimit for use in the hedging program and a $9 million sublimit for the issuance of standby or commercial letters of credit; and (ii) $14 million term loan (advanced as a $10 million loan and a $4 million loan) obtained in 2007 to finance the expansion of South Hampton’s petrochemical facility.  The revolving credit facility matures on June 30, 2013, and the term loan matures on October 31, 2018.
 
Under the terms of the Credit Agreement, accrued and unpaid interest is due and payable in arrears on the first business day of each month on any outstanding borrowings at the lower of: (i) the higher of the federal funds rate plus 0.50% or the prime rate plus applicable margin, or (ii) the rate equal to the British Bankers Association LIBOR plus the applicable margin. The applicable margin is determined from TOCCO’s most recent compliance certificate and current financials based on the following:

 
 
Level
 
 
Leverage Ratio
Applicable Margin for Base Rate Loans
Applicable Margin for LIBOR Loans
Applicable Margin for Commitment Fee
I
Greater than or equal to 1.5:1.0
(0.50%)
2.00%
0.25%
II
Less than 1.5:1.0 but greater than or equal to 1.0:1.0
(0.75%)
1.75%
0.25%
III
Less than 1.0:1.0
(1.00%)
1.50%
0.25%

In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with respect to the $10.0 million floating rate term loan under the credit facility.  The notional amount of the interest rate swap was $6,750,000 at December 31, 2011.  The Company receives credit for payments of variable rate interest made on the term loan at the loan’s variable rates which are based upon the London InterBank Offered Rate (LIBOR), and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  The swap agreement terminates on December 15, 2017.  We designated the interest rate swap agreement as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  The derivative instrument is reported at fair value with any changes in fair value reported within other comprehensive income (Loss) in our Statement of Stockholders’ Equity.  At December 31, 2011, Accumulated Other Comprehensive Loss net of $385,555 tax was $748,430 related to this transaction.

Our average floating interest rate on debt outstanding under our credit facility at December 31, 2011, was 2.75%.  The Credit Agreement includes customary representations and warranties made by us to Bank of America.

The Credit Agreement contains customary, affirmative and negative covenants requiring us to take certain actions and restricting us from taking others. Such covenants include but are not limited to (i) restrictions on certain payments, including dividends, (ii) the use of the loan proceeds only for certain purposes, and (iii) limitations on the occurrence of liens, certain investments, and/or subsidiary indebtedness (subject to certain exceptions).

In addition the Credit Agreement contains certain financial covenants, which include but are not limited to:

Maintaining a minimum EBITDA of $8.5 million at end of each trailing four fiscal quarter period;
   
Maintaining a maximum leverage ratio of 2.0:1.0 measured at end of each fiscal quarter;
   
Prohibition of unfinanced capital expenditures in excess of $4.0 million for trailing four fiscal quarter period; and
   
Limitations on dividends paid to the parent company of 30% of EDITDA.


 
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The Credit Agreement contains standard default triggers, which include but are not limited to (i) default on certain of our other indebtedness, (ii) the entry of certain judgments against South Hampton and its subsidiaries, and (iii) a change in the control of the Company. Upon the occurrence of any event of default Bank of America may take certain actions including declaring any outstanding amount due and payable.

On November 30, 2010, due to the South Hampton/STTC merger, various notes were assumed.  The agreements were with JPMorgan Chase Bank, NA and were originally created for the purchase of transportation equipment. These notes were paid off during 2011.

On November 30, 2010, as part of the consideration for the acquisition of STTC, South Hampton issued a $300,000 note to Nicholas N. Carter, our President and CEO, with a 3-year term bearing interest at 4.0% per annum.  Principal and interest are payable annually on November 30th of each year.  As of December 31, 2011, the principal amount of the note was $200,000.

On December 7, 2010, STTC entered into a loan agreement with JPMorgan Chase Bank, NA for approximately $397,000 for the purchase of transportation equipment.  This note was paid off during 2011.

Results of Operations

Comparison of Years 2011, 2010, 2009

The discussion of the business uses the tables below for purposes of illustration and discussion. The reader should rely on the Audited Financial Statements attached to this report for financial analysis under United States generally accepted accounting principles.

   
2011
   
2010
   
Change
   
%Change
 
   
(in thousands)
       
Petrochemical Product Sales
  $ 194,620     $ 133,579     $ 61,041       45.7 %
Transloading Sales
    -       854       (854 )     (100.0 %)
 Processing
    4,897       4,677       220       4.7 %
Gross Revenue
  $ 199,517     $ 139,110     $ 60,407       43.4 %
                                 
Volume of sales (thousand gallons)
    54,256       46,721       7,535       16.1 %
                                 
Cost of Materials
  $ 138,287     $ 93,298     $ 44,989       48.2 %
Petrochemical Facility Operating Expense
    35,314       28,597       6,717       23.5 %
Natural Gas Expense*
    5,266       4,991       275       5.5 %
General & Administrative Expense
    11,777       10,930       847       7.7 %
                                 
Capital Expenditures
  $ 6,518     $ 2,899     $ 3,619       124.8 %

   
2010
   
2009
   
Change
   
%Change
 
   
(in thousands)
       
Petrochemical Product Sales
  $ 133,579     $ 109,179     $ 24,400       22.3 %
Transloading Sales
    854       4,625       (3,771 )     (81.5 %)
 Processing
    4,677       3,783       894       23.6 %
Gross Revenue
  $ 139,110     $ 117,587     $ 21,523       18.3 %
                                 
Volume of sales (thousand gallons)
    46,721       49,909       (3,188 )     (6.4 %)
                                 
Cost of Materials
  $ 93,298     $ 69,474     $ 23,824       34.3 %
Petrochemical Facility Operating Expense
    28,597       26,214       2,383       9.1 %
Natural Gas Expense*
    4,991       4,572       419       9.2 %
General & Administrative Expense
    10,930       9,145       1,785       19.5 %
                                 
Capital Expenditures
  $ 2,899     $ 3,184     $ (285 )     (9.0 %)
*Natural gas expense is included in operating expense as shown on the face of the Consolidated Financial Statements


 
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Revenues

2010-2011

Revenues increased from 2010 to 2011 by approximately 43.4% primarily due to an increase in the average selling price of 24.7% and an increase in sales volume of 16.1%.  Average selling price rose due to the increase in raw material costs which influences the calculation of selling prices.  Sales volume increased due to growth in market share and the use of our products in emerging technologies.  Numerous contracts were initiated and/or renewed during 2011.

Processing revenues increased from 2010 to 2011 primarily due to one of our toll customers running above take or pay minimum during 2011.  The Petrochemical Company remains dedicated to maintaining a certain level of toll processing business in the facility and continues to pursue opportunities.

2009-2010

Revenues increased from 2009 to 2010 by approximately 18.3% primarily due to increases in selling prices of approximately 22.3% offset by the expiration of the transloading contract in April 2009.  Total sales volume decreased approximately 6.4% due to expiration of the transloading contract; however, petrochemical product sales volume remained steady.

Processing revenues increased from 2009 to 2010 primarily due to one of our toll customers running above take or pay minimum during 2010.

Cost of Materials

2010-2011

Cost of Materials increased from 2010 to 2011 due to higher feedstock prices which increased an average of 30.7% and an increase in volume purchased of 17.7%.  The Petrochemical Company uses natural gasoline as feedstock which is the heavier liquid remaining after butane and propane are removed from liquids produced by natural gas wells.  The material is a commodity product in the oil/petrochemical markets. Alternative uses are in motor gasoline blending, ethanol denaturing, and as a feedstock in other petrochemical processes, including ethylene crackers.  The price of natural gasoline historically has an 88% correlation to the price of crude oil although after the 2008 drop in the crude market, the price is more closely aligned with unleaded gasoline price movements.  The price of feedstock generally does not carry the day to day volatility of crude oil simply because the market is made by commercial users and there is not the participation of non-commercial speculators as is true with commodities trading on public exchanges. Cost of Materials in 2011 was reduced by $403,000 for the net recognized and unrecognized gains the Company recorded on feedstock and natural gas contracts purchased to hedge against changes in commodity prices. Cost of Materials in 2010 was reduced by $205,000 of net recognized and unrecognized gains the Company recorded on feedstock and natural gas contracts purchased to hedge against changes in commodity prices.  See Note 19 of Notes to the Consolidated Financial Statements.

2009-2010

Cost of Materials increased from 2009 to 2010 due to higher feedstock prices which increased an average of 38.9%.  Cost of Materials in 2010 was reduced by $205,000 for the net recognized and unrecognized gains the Company recorded on feedstock and natural gas contracts purchased to hedge against changes in commodity prices. Cost of Materials in 2009 was reduced by $1,120,000 of net recognized and unrecognized gains the Company recorded on feedstock and natural gas contracts purchased to hedge against changes in commodity prices.  See Note 19 of Notes to the Consolidated Financial Statements.

Petrochemical Operating and Natural Gas Expense

2010-2011

Total Operating Expense for the Petrochemical Company increased from 2010 to 2011.  Natural gas, labor and transportation costs are the largest individual expenses in this category. The cost of natural gas purchased increased 5.5% from 2010 to 2011 due to an increase in the volume used of 13.6% offset by lower average per-unit costs of 8.6%.  The

 
22


average price per MMBTU for 2011 was $4.32; whereas, for 2010 the per-unit cost was $4.73.  Volume purchased increased from 1,077,000 MMBTU to 1,224,000 MMBTU.  Labor increased approximately 13.5% due to a 15.8% increase in personnel and a 34.2% increase in profit sharing.  Transportation costs increased 43.8% due to additional costs involved in shipping products overseas and an increase in the number of overall shipments.  Transportation costs are recovered through our selling price.

2009-2010

Total Operating Expense for the Petrochemical Company increased from 2009 to 2010.  Natural gas, labor and transportation costs are the largest individual expenses in this category. The cost of natural gas purchased increased 11.4% from 2009 to 2010 due to higher per-unit costs.  The average price per MMBTU for 2009 was $4.07; whereas, for 2010 the per-unit cost was $4.73.  Volume purchased actually decreased from 1,124,000 MMBTU to 1,077,000 MMBTU.  Labor increased slightly by approximately 2.2%.  Transportation costs increased 22% due to additional costs involved in shipping products overseas.

General and Administrative Expense

2010-2011

General and Administrative costs from 2010 to 2011 increased 7.7% due to expenses recorded for administrative payroll costs, officers’ compensation, insurance premiums, travel costs, investor relations’ expenses, and expenses in Saudi Arabia.  Payroll costs increased approximately $575,000 due to a cost of living adjustment being implemented and an increase in management and officer compensation.  Officer compensation increased due to the award of bonus compensation upon meeting target performance as outlined in the executive compensation policy.  Group health insurance premiums increased 20.1% due to the health insurance environment.   Travel and investor relations’ expenses increased due to an increase in the number of trips to Saudi Arabia and investor conferences.  Expenses in Saudi Arabia increased due to the addition of a branch manager for the Jeddah office and the hiring of a consultant to assist with oversight of our AMAK investment.   These increases were offset by decreases in consulting fees, directors’ fees, accounting fees, post-retirement benefits and legal fees.   Consulting fees decreased approximately $493,000 in a return to normal operations.  Legal fees also declined approximately $240,000 for the year due to decreased assistance provided by outside parties.

2009-2010

General and Administrative costs from 2009 to 2010 increased 19.5% due to expenses recorded for PEVM environmental issues, administrative payroll costs, insurance premiums, consulting fees, property taxes, directors’ fees, post-retirement benefits, and legal fees.  Payroll costs increased approximately $392,000 due to the addition of personnel and the 2009 cost of living adjustment being in effect for all of 2010 versus one-half of the 2009 fiscal year.  Insurance premiums increased approximately $313,000 largely due to additional property coverage, an increase in health insurance premiums, and addition of a credit policy.  Consulting fees increased about $271,000 due to the employ of a compensation consultant and an energy consultant for hedging purposes.  Directors’ fees increased approximately $265,000 due to the newly approved directors’ fees policy.  Legal fees also rose approximately $307,000 for the year due to additional assistance provided by outside parties in response to issues with SEC comment letters, affairs in Saudi Arabia, merger and acquisition opportunities and litigation.  On the positive side, the adjustment to the allowance for doubtful accounts decreased based upon historical bad debt calculation.  Administrative costs in Saudi Arabia also decreased significantly.

Our general and administrative expenses have two principle components; general and administrative expenses for our petrochemical operation and general corporate expenses.

General & Administrative Expenses for our Specialty Petrochemicals Operations

   
2011
   
2010
   
Change
   
%Change
 
Petrochemical Company
 
(in thousands)
       
General & Administrative Expense
  $ 8,593     $ 7,963     $ 630       7.9 %

General and Administrative costs increased from 2010 to 2011 7.9% due to increases in administrative payroll and health insurance premiums.  Payroll costs increased approximately $575,000 due to a cost of living adjustment and an increase

 
23


in management salaries.  Health insurance premiums increased about $253,000 mainly due to the health insurance environment and several large claims being made within the group.  On the positive side, consulting fees decreased about $505,000 due to a reduction in the amount of time that consultants were used for purposes outside the norm and general and auto insurance policy premiums decreased about $111,000 upon renewal.

   
2010
   
2009
   
Change
   
%Change
 
Petrochemical Company
 
(in thousands)
       
General & Administrative Expense
  $ 7,963     $ 7,200     $ 763       10.6 %

General and Administrative costs from 2009 to 2010 increased 10.6% due to increases in administrative payroll, insurance premiums, consulting fees and property taxes.  Payroll costs increased approximately $392,000 due to the addition of personnel and the 2009 cost of living adjustment being in effect for all of 2010 versus one-half of the 2009 fiscal year.  Insurance premiums increased about $313,000 largely due to additional property coverage, an increase in health insurance premiums, and the addition of a credit policy.  Consulting fees increased about $189,000 due to employ of an energy consultant for hedging purposes.   Property taxes increased approximately $103,000 due to a higher taxable base plus a decrease in the amount of the abatement allowed for the plant expansion.

General Corporate Expenses

(in thousands)
 
2011
   
2010
   
Change
   
% Change
 
General corporate expenses
  $ 3,184     $ 2,967     $ 217       7.3 %

General corporate expenses increased from 2010 to 2011 primarily due to increases in officer compensation of $418,000 (due to the target operating income level being attained), travel of $91,000, investor related charges of $45,000, and administrative expenses in Saudi of $399,000 offset by decreases in post-retirement benefits of $275,000, directors’ fees of $129,000, accounting fees of $183,000, and legal fees of $304,000.

(in thousands)
 
2010
   
2009
   
Change
   
% Change
 
General corporate expenses
  $ 2,967     $ 1,945     $ 1,022       52.5 %

General corporate expenses increased from 2009 to 2010 primarily due to increases in officer compensation of $90,000 post-retirement benefits of $133,000, directors’ fees of $265,000, travel of $122,000, accounting fees of $149,000, consulting fees of $83,000, legal fees of $381,000 $350,000 due to accrued environmental liability on PEVM and equity in loss of AMAK of $263,000 offset by decreases in Saudi corporate expenses of $489,000.

Capital Resources and Requirements

2010-2011

Capital expenditures increased approximately 124.8% from 2010 to 2011.  During 2011 approximately $1.9 million was expended for the construction of a hydrocarbon processing demonstration unit for use in connection with the Gevo processing agreement.  Gevo provided 100% of the capital for this project.  In addition expenditures were made for the following:  $695,000 for land surrounding the petrochemical facility, $977,000 for tankage, $310,000 to refurbish the Cyclopentane Unit, $198,000 for construction equipment, and $168,000 for a maintenance warehouse.

2009-2010

Capital expenditures decreased approximately 9.0% from 2009 to 2010.  During 2010 approximately $1.8 million was expended for the construction of an isomerization and hexane treater unit.  This expenditure provides greater flexibility in our product mix as the isomerization unit allows the conversion of normal pentane into isopentane.  The hexane treater unit was the final phase of the 2008 expansion.

Capital expenditures typically average $4.0 million per year for facility improvements.  At December 31, 2011, there was $3.5 million available on the Company’s line of credit.  The Company believes that operating cash flows along with credit availability will be sufficient to finance its 2012 operations and capital expenditures.

 
24


The table below summarizes the following contractual obligations of the Company:

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Long-Term Debt Obligations
  $ 24,239,488     $ 1,500,000     $ 17,389,488     $ 2,800,000     $ 2,550,000  

The anticipated source of funds for payments due within three years that relate to contractual obligations is from a combination of continuing operations and long-term debt refinancing.

Investment in AMAK

See Note 8 of Notes to Consolidated Financial Statements.

New Accounting Standards

In January 2010 the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10.   ASU 2010-06 amends Codification Subtopic 820-10 to now require a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances and settlements.  In addition, ASU 2010-06 clarifies the disclosures for reporting fair value measurement for each class of assets and liabilities and the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted.  The disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements did not have a material impact on the consolidated financial statements. The adoption of the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements had no impact on the Company’s consolidated financial statements.

In December 2010 the FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The update had no impact on the Company’s consolidated financial statements.

In December 2010 the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The update had no impact on the Company’s consolidated financial statements.

 
25


In May 2011 the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This amendment provides additional guidance expanding the disclosures for Fair Value Measurements, particularly Level 3 inputs. For fair value measurements categorized in Level 3 of the fair value hierarchy, required disclosures include: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes in place, and (3) a narrative description of the sensitivity of the fair value changes in unobservable inputs and interrelationships between those inputs. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact adoption of this ASU may have on the consolidated financial statements.

In June 2011 FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The objective of this Update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company is currently evaluating the impact adoption of this ASU may have on the consolidated financial statements.

In September 2011 the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The Company is currently evaluating the impact adoption of this ASU may have on the consolidated financial statements.

In December 2011 the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective beginning on or after January 1, 2013, and interim periods within those annual periods and is to be applied retrospectively. This guidance does not amend the existing guidance on when it is appropriate to offset; as a result, we do not expect this guidance to affect our financial condition, results of operation or cash flows.

In December 2011 FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The objective of this Update is to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. For public entities, the requirements are effective for fiscal years, and interim periods

 
26


within those years, beginning after December 15, 2011. The Company is currently evaluating the impact adoption of this ASU may have on the consolidated financial statements.

Critical Accounting Policies

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  An impairment loss is recognized when the carrying amount of the asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition.  The Company’s long-lived assets include its petrochemical facility, its contract based intangible asset resulting from its acquisition of STTC, and its investments in AMAK and PEVM.

The Company’s petrochemical facility is currently its only revenue generating asset.  The facility was in full operation at December 31, 2011.  Plant, pipeline and equipment costs are reviewed annually to determine if adjustments should be made.

The Company assesses the carrying values of its assets on an ongoing basis. Factors which may affect carrying values include, but are not limited to, mineral prices, capital cost estimates, equity transactions, 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 any of its mineral properties.

Environmental Liabilities

The Petrochemical Company is subject to the rules and regulations of the TCEQ, which inspects the operations at various times for possible violations relating to air, water and industrial solid waste requirements. As noted in Item 1. Business, evidence of groundwater contamination was discovered in 1993. The recovery process, initiated in 1998, is proceeding as planned and is expected to continue for many years.

In 2008 the Company learned of a claim by the U.S. Bureau of Land Management (“BLM”) against World Hydrocarbons, Inc. for contamination of real property owned by the BLM north of and immediately adjacent to the processing mill situated on property owned by PEVM.  The BLM’s claim alleged that mine tailings from the processing mill containing lead and arsenic migrated onto BLM property during the first half of the twentieth century.  World Hydrocarbons, Inc. responded to the BLM by stating that it does not own the mill and that PEVM is the owner and responsible party.  PEVM subsequently commenced dialogue with the BLM in late 2008 to determine how best to remedy the situation.  Communication with the BLM is continuing.  PEVM has retained an environmental consultant to assist with the resolution of this matter and as of December 31, 2011, had recorded a liability of $350,000 to cover estimated remediation costs.

 Share-Based Compensation

The Company expenses the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Sholes model to calculate the fair value of the equity instrument on the grant date.

Off Balance Sheet Arrangements

Off balance sheet arrangements as defined by the SEC means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has (i) obligations under certain guarantees or contracts, (ii) retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangements, (iii) obligations under certain derivative arrangements, and (iv) obligations arising out of a material variable interest in an unconsolidated entity.  The Company’s guarantee for AMAK’s debt is considered an off balance sheet arrangement.  Please see further discussion under “Investment in AMAK” in Item 1. Business.

 
27


Income Taxes

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of uncertainty of achieving sufficient taxable income in the future a valuation allowance against a portion of its deferred tax asset has been recorded. If these estimates and assumptions change in the future, the Company may reverse the valuation allowance against deferred tax assets. The Company assesses its tax positions taken or expected to be taken in a tax return to record any unrecognized tax benefits.  At January 1, 2007 (adoption date), and at December 31, 2011, there were no unrecognized tax benefits.

Derivative Instruments

The Company uses financial commodity agreements to hedge the cost of natural gasoline, the primary source of feedstock, and natural gas used as fuel to operate our plant to manage risks generally associated with price volatility.  The commodity agreements are recorded in our consolidated balance sheets as either an asset or liability measured at fair value. Our commodity agreements are not designated as hedges; therefore, all changes in estimated fair value are recognized in cost of petrochemical product sales and processing in the consolidated statements of operations.

On March 21, 2008, South Hampton entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to the $10.0 million term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017.  The notional amount of the interest rate swap was $6,750,000 at December 31, 2011.  South Hampton receives credit for payments of variable rate interest made on the term loan at the loan’s variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  South Hampton designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company’s Consolidated Statement of Stockholders’ Equity.  The Company entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.

The fair value of the derivative liability associated with the interest rate swap at December 31, 2011, and 2010 totaled $1,133,985 and $1,116,220, respectively.  The cumulative loss from the changes in the swap contract’s fair value that is included in other comprehensive loss is reclassified into income when interest is paid.

South Hampton assesses the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy).

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

The market risk inherent in the Company’s financial instruments represents the potential loss resulting from adverse changes in interest rates, foreign currency rates and commodity prices. The Company’s exposure to interest rate changes results from its variable rate debt instruments which are vulnerable to changes in short term United States prime interest rates. At December 31, 2011, 2010 and 2009, the Company had approximately $24,039,000, $21,439,000 and $28,839,000, respectively, in variable rate debt outstanding. A hypothetical 10% change in interest rates underlying these borrowings would result in annual changes in the Company’s earnings and cash flows of approximately $2,039,000, $2,144,000 and $2,484,000 at December 31, 2011, 2010 and 2009, respectively.  However, the interest rate swap will limit this exposure in future periods on $10.0 million of the outstanding term debt.

The Company does not view exchange rates exposure as significant and has not acquired or issued any foreign currency derivative financial instruments.

The Petrochemical Company purchases all of its raw materials, consisting of feedstock and natural gas, on the open market. The cost of these materials is a function of spot market oil and gas prices. As a result, the Petrochemical Company’s revenues and gross margins could be affected by changes in the price and availability of feedstock and natural gas. As market conditions dictate, the Petrochemical Company from time to time will engage in various hedging techniques including financial swap and option agreements. The Petrochemical Company does not use such financial instruments for trading purposes and is not a party to any leveraged derivatives. The Petrochemical Company’s policy on such hedges is to buy positions as opportunities present themselves in the market and to hold such positions until maturity, thereby offsetting the physical purchase and price of the materials.

 
28


At the end of 2011, market risk for 2012 was estimated as a hypothetical 10% increase in the cost of natural gas and feedstock over the market price prevailing on December 31, 2011.   The Company had economic hedges in effect at December 31, 2011, through June 2012.  Assuming that 2012 total petrochemical product sales volumes stay at the same rate as 2011 and that feed prices stay in the range that they were at the end of the year, the 10% market risk increase will result in an increase in the cost of natural gas and feedstock of approximately $14,000,000 in fiscal 2012.

At the end of 2010, market risk for 2011 was estimated as a hypothetical 10% increase in the cost of natural gas and feedstock over the market price prevailing on December 31, 2010.   The Company had economic hedges in effect at December 31, 2010, through March 2011.  Assuming that 2011 total petrochemical product sales volumes stay at the same rate as 2010 and that feed prices stay in the range that they were at the end of the year, the 10% market risk increase will result in an increase in the cost of natural gas and feedstock of approximately $11,000,000 in fiscal 2011.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements of the Company and the consolidated financial statement schedules, including the report of our independent registered public accounting firm thereon, are set forth beginning on Page F-1.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None

Item 9A.  Controls and Procedures.

Disclosure Controls and Procedures

Management of the Company has evaluated, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(c)) as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at December 31, 2011, and designed to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Company management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, The Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Our management concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2011.

 
29

Our internal control over financial reporting as of December 31, 2011, has been audited by BKM Sowan Horan, LLP, an independent registered public accounting firm, as stated in their report which follows.

 
30



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Arabian American Development Company

We have audited Arabian American Development Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Arabian American Development Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

In our opinion, Arabian American Development Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arabian American Development Company as of December 31, 2011, and 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2011, and our report dated March 9, 2012 expressed an unqualified opinion.
 

 

 
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 9, 2012
 

 

 
31


Item 9B.  Other Information.
 

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Incorporated by reference from our Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2011.

We have adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer and controller, and to persons performing similar functions.  A copy of the Code of Ethics has been filed as an exhibit to this Annual Report on Form 10-K and is available on our website.

Item 11.  Executive Compensation.

Incorporated by reference from our Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2011.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference from our Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2011.

Item 13. Certain Relationships, Related Transactions, and Director Independence.

Incorporated by reference from our Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2011.

Item 14.  Principal Accounting Fees and Services.

Incorporated by reference from our Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2011.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules.
 
(a)1.    The following financial statements are filed with this Report:

 
Reports of Independent Registered Public Accounting Firms
 
Consolidated Balance Sheets dated December 31, 2011 and 2010
 
Consolidated Statements of Income for the three years ended December 31, 2011
 
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2011
 
Consolidated Statements of Cash Flows for the three years ended December 31, 2011
 
Notes to Consolidated Financial Statements

   2.     The following financial statement schedules are filed with this Report:
 
Schedule II -- Valuation and Qualifying Accounts for the three years ended December 31, 2011.
 
   3.  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.

 
32

 


Exhibit
Number
Description
3(a)
- Certificate of Incorporation of the Company as amended through the Certificate of Amendment filed with the Delaware Secretary of State on July 19, 2000 (incorporated by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 0-6247))
 
3(b)
- Restated Bylaws of the Company dated April 26, 2007 (incorporated by reference to Item 5.03 to the Company’s Form 8-K dated April 26, 2007 (File No. 0-6247))
 
10(a)
- Partnership Agreement dated August 6, 2006 between Arabian American Development Company, Thamarat Najran Company, Qasr Al-Ma’adin Corporation, and Durrat Al-Masani’ Corporation (incorporated by reference to Exhibit 10(i) to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2006 (file No. 0-6247))
 
10(b)*
- Retirement Awards Program dated January 15, 2008 between Arabian American Development Company and Hatem El Khalidi (incorporated by reference to Exhibit 10(h) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (file No. 001-33926))
 
10(c)*
- Stock Option Plan of Arabian American Development Company for Key Employees adopted April 7, 2008 (incorporated by reference to Exhibit A to the Company’s Form DEF 14A filed April 30, 2008 (file No. 001-33926))
 
10(d)*
- Arabian American Development Company Non-Employee Director Stock Option Plan adopted April 7, 2008 (incorporated by reference to Exhibit B to the Company’s Form DEF 14A filed April 30, 2008 (file No. 001-33926))
 
10(e)
- Master Lease Agreement dated February 3, 2009, between Silsbee Trading and Transportation Corp. and South Hampton Resources, Inc. (incorporated by reference to Exhibit 10(j) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (file No. 001-33926))
 
10(f)
- Memorandum of Understanding relating to formation of AMAK, dated May 21, 2006 (incorporated by reference to Exhibit 10(k) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
 
10(g)
- Memorandum of Understanding relating to formation of AMAK, dated May 21, 2006 (incorporated by reference to Exhibit 10(k) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
 
10(h)
- Memorandum of Understanding relating to formation of AMAK, dated June 10, 2006 (incorporated by reference to Exhibit 10(l) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
 
10(i)
- Articles of Association of Al Masane Al Kobra Mining Company, dated July 10, 2006 (incorporated by reference to Exhibit 10(m) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
 
 
 
33

 
 
Exhibit
Number
 
 
Description
10(j)
- Bylaws of Al Masane Al Kobra Mining Company (incorporated by reference to Exhibit 10(n) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
 
10(k)
- Letter Agreement dated August 5, 2009, between Arabian American Development Company and the other Al Masane Al Kobra Company shareholders named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 27, 2009 (file No. 001-33926))
 
10(l)
- Letter of Intent dated November 30, 2010, between South Hampton Transportation, Inc. and Silsbee Trading and Transportation Corp (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 2, 2010 (file No. 001-33926))
 
10(m)
- Limited Guarantee dated October 24, 2010, between Arabian American Development Company and the Saudi Industrial Development Fund (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 27, 2010 (file No. 001-33926))
 
10(n)
- Agreement and Plan of Reorganization dated November 30, 2010, between Arabian American Development Company, South Hampton Transportation, Inc. and Silsbee Trading and Transportation Corp (incorporated by reference to Exhibit 2.01 to the Company’s Form 8-K filed on December 2, 2010 (file No. 001-33926))
 
14
- Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 0-6247))
 
16
- Letter re change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K dated June 21, 2010 (File No. 001-33926))
 
21
- Subsidiaries
 
23.1
- Consents of Independent Registered Public Accounting Firms
 
24
- Power of Attorney (set forth on the signature page hereto).
 
31.1
- Certification of Chief Executive Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
 
31.2
- Certification of Chief Financial Officer pursuant to Rule 13A-14(A) of the  Securities Exchange Act of 1934
 
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
 
(b)  
Exhibits required by Regulation 601 S-K
See (a) 3 of this Item 15
(c)  
Financial Statement Schedules
See (a) 2 of this Item 15

 
34

 

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of Arabian American Development Company, a Delaware corporation, and the undersigned directors and officers of Arabian American Development Company, hereby constitutes and appoints Nicholas Carter its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

ARABIAN AMERICAN DEVELOPMENT COMPANY


Dated: March 9, 2012                                           By:/s/ Nicholas Carter
                                                                                Nicholas Carter
                                                                                President and Chief Executive Officer


 
35

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 9, 2012.

Signature
Title
/s/ Nicholas Carter
Nicholas Carter
 
 
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Connie Cook
Connie Cook
Chief Financial Officer
(principal financial and accounting officer)
/s/ John R. Townsend
John R. Townsend
Director
/s/ Allen P. McKee
Allen P. McKee
Director
/s/ Joseph P. Palm
Joseph P. Palm
Director
/s/ Ghazi Sultan
Ghazi Sultan
Director



 
36

 

INDEX TO FINANCIAL STATEMENTS
 
Page
 
Report of Independent Registered Public Accounting Firm – BKM Sowan Horan, LLP
F-2
   
Report of Independent Registered Public Accounting Firm – Travis Wolff, LLP
F-3
   
Consolidated Balance Sheets at December 31, 2011 and 2010
F-4
   
Consolidated Statements of Income For the Years Ended December 31, 2011, 2010 and 2009
F-6
   
Consolidated Statement of Stockholders’ Equity For the Years Ended December 31, 2011, 2010 and 2009
F-7
   
Consolidated Statements of Cash Flows For the Years Ended December 31, 2011, 2010 and 2009
F-8
   
Notes to Consolidated Financial Statements
F-10
   
INDEX TO FINANCIAL STATEMENT SCHEDULES
 
   
Schedule II – Valuation and Qualifying Accounts For the Three Years Ended December 31, 2011
F-34


 
F-1

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Arabian American Development Company

We have audited the accompanying consolidated balance sheets of Arabian American Development Company and Subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2011. Our audit also includes the financial statement schedule listed in the index at Schedule II. Arabian American Development Company’s management is responsible for these financial statements and schedule. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arabian American Development Company as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arabian American Development Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 

 

 
/s/ BKM Sowan Horan, LLP
Addison, Texas

March 9, 2012
 


 
F-2

 



 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
Arabian American Development Company
Dallas, Texas
 
We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2009 of Arabian American Development Company and Subsidiaries (the Company).  Our audit also included the financial statement schedule listed in the index at Item 15(a) for the year ended December 31, 2009. These consolidated financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated changes in stockholders’ equity, results of operations and cash flows of Arabian American Development Company and Subsidiaries for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related financial statement schedule for the year ended December 31, 2009, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
/s/Travis Wolff, LLP
 
Dallas, Texas
March 15, 2010






 
F-3

 


ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 

   
December 31,
 
   
2011
   
2010
 
ASSETS
           
CURRENT ASSETS
           
  Cash and cash equivalents
  $ 6,673,987     $ 7,609,943  
  Financial contracts
    392,864       177,446  
   Trade receivables, net of allowance for doubtful accounts of $210,000 and $155,000, respectively
    23,198,132       11,212,290  
   Current portion of notes receivable, net of discount of $0 and $684,  respectively (Note 6)
    -       34,427  
   Prepaid expenses and other assets
    681,168       669,367  
   Contractual based intangible assets (Note 1)
    250,422       250,422  
   Inventories (Note 5)
    9,456,365       5,917,283  
   Deferred income taxes (Note 15)
    1,169,124       487,513  
   Taxes receivable (Note 15)
    -       216,461  
                 
          Total current assets
    41,822,062       26,575,152  
                 
  PLANT, PIPELINE, AND EQUIPMENT – AT COST
    60,624,093       54,703,710  
    LESS ACCUMULATED DEPRECIATION
    (23,671,722 )     (20,839,442 )
                 
  PLANT, PIPELINE, AND EQUIPMENT, NET (Note 7)
    36,952,371       33,864,268  
                 
  INVESTMENT IN AMAK (Note 8)
    30,883,657       30,883,657  
  MINERAL PROPERTIES IN THE UNITED STATES (Note 9)
    588,311       588,311  
  CONTRACTUAL BASED INTANGIBLE ASSETS, net of current portion (Note 1)
    354,764       605,185  
  OTHER ASSETS
    10,938       10,938  
                 
TOTAL ASSETS
  $ 110,612,103     $ 92,527,511  











 
See notes to the consolidated financial statements.
 
F-4

 


ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - Continued
 

   
December 31,
 
   
2011
   
2010
 
 
LIABILITIES
           
  CURRENT LIABILITIES
           
    Accounts payable
  $ 5,857,498     $ 2,778,161  
    Accrued interest
    115,865       120,533  
    Current portion of derivative instruments (Notes 4 and 19)
    344,531       396,527  
    Accrued liabilities (Note 11)
    2,944,470       1,777,642  
    Accrued liabilities in Saudi Arabia (Note 12)
    139,731       184,593  
    Notes payable
    12,000       12,000  
    Current portion of post-retirement benefit (Note 20)
    258,055       246,605  
    Current portion of long-term debt (Note 10)
    1,500,000       1,864,770  
    Current portion of other liabilities
    936,891       199,939  
                 
          Total current liabilities
    12,109,041       7,580,770  
                 
  LONG-TERM DEBT, net of current portion (Note 10)
    22,739,488       20,836,098  
  POST- RETIREMENT BENEFIT, net of current portion (Note 20)
    648,696       680,196  
  DERIVATIVE INSTRUMENTS, net of current portion (Notes 4 and 19)
    789,453       719,693  
  OTHER LIABILITIES, net of current portion
    1,071,115       390,232  
  DEFERRED INCOME TAXES (Note 15)
    7,015,898       5,480,683  
                 
          Total liabilities
    44,373,691       35,687,672  
                 
COMMITMENTS AND CONTINGENCIES (Note 13)
               
                 
EQUITY
               
  Common Stock - authorized 40,000,000 shares of $.10 par value; issued and outstanding, 23,731,415 and 23,682,915 shares in 2011 and 2010, respectively
    2,373,142       2,368,291  
  Additional Paid-in Capital
    44,137,773       43,162,641  
  Accumulated Other Comprehensive Loss
    (748,430 )     (736,706 )
  Retained Earnings
    20,186,704       11,756,390  
 Total Arabian American Development Company Stockholders’ Equity
    65,949,189       56,550,616  
 Noncontrolling interest
    289,223       289,223  
       Total equity
    66,238,412       56,839,839  
 
               
     TOTAL LIABILITIES AND EQUITY
  $ 110,612,103     $ 92,527,511  


See notes to the consolidated financial statements.
 
F-5

 

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
 
For the years ended December 31,

   
2011
   
2010
   
2009
 
Revenues
                 
  Petrochemical product sales
  $ 194,619,696     $ 133,579,088     $ 109,178,541  
  Processing
    4,896,828       4,677,470       3,783,457  
  Transloading sales
    --       853,636       4,624,681  
      199,516,524       139,110,194       117,586,679  
Operating costs and expenses
                       
  Cost of petrochemical product sales and processing (including depreciation of $2,744,256, $2,271,408, and $2,246,309,  respectively)
    173,600,205       121,894,912       95,688,819  
   Gross Profit
    25,916,319       17,215,282       21,897,860  
                         
General and Administrative Expenses
                       
  General and administrative
    11,777,058       10,930,141       9,144,710  
  Depreciation
    475,526       433,372       443,538  
      12,252,584       11,363,513       9,588,248  
                         
Operating income
    13,663,735       5,851,769       12,309,612  
                         
Other income (expense)
                       
  Interest income
    3,576       16,184       63,669  
  Interest expense
    (1,113,292 )     (1,132,968 )     (1,327,530 )
  Equity in loss from AMAK (Note 8)
    --       (262,500 )     --  
  Miscellaneous income (expense)
    3,203       (84,015 )     (74,332 )
      (1,106,513 )     (1,463,299 )     (1,338,193 )
 Income before income tax expense
    12,557,222       4,388,470       10,971,419  
                         
Income tax expense
    4,126,908       1,702,816       4,343,968  
 
                       
   Net income
    8,430,314       2,685,654       6,627,451  
                         
Net loss attributable to Noncontrolling Interest
    --       --       --  
                         
Net income attributable to Arabian American Development Company
  $ 8,430,314     $ 2,685,654     $ 6,627,451  
                         
Net income per common share
                       
    Basic earnings per share
  $ 0.35     $ 0.11     $ 0.28  
    Diluted earnings per share
  $ 0.35     $ 0.11     $ 0.28  
                         
Weighted average number of common shares outstanding
                       
     Basic
    23,992,538       23,769,047       23,733,955  
     Diluted
    24,267,289       23,780,303       23,800,499  


See notes to the consolidated financial statements.
 
F-6

 

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the years ended December 31, 2011, 2010, and 2009

   
ARABIAN AMERICAN DEVELOPMENT STOCKHOLDERS
                 
               
Accumulated
                     
           
Additional
 
Other
           
Non-
       
   
Common Stock
 
Paid-In
 
Comprehensive
 
Retained
       
Controlling
   
Total
 
   
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Earnings
 
Total
   
Interest
   
Equity
 
                                       
DECEMBER 31, 2008
    23,421,995   $ 2,342,199   $ 41,325,207   $ (1,120,072 ) $ 2,443,285   $ 44,990,619     $ 289,223     $ 45,279,842  
                                                       
Stock options
                                                     
  Issued to Directors
    -     -     234,922     -     -     234,922       -       234,922  
  Issued to Employees
    -     -     4,439     -     -     4,439       -       4,439  
Stock issued to Directors
    12,000     1,200     39,600     -     -     40,800       -       40,800  
Unrealized Gain on Interest Rate Swap (net
  of income tax expense of $143,612)
    -     -     -     278,775     -     278,775       -       278,775  
Net Income
    -     -     -     -     6,627,451     6,627,451       -       6,627,451  
  Comprehensive Income
    -     -     -     -     -     6,906,226       -       -  
                                                       
DECEMBER 31, 2009
    23,433,995   $ 2,343,399   $ 41,604,168   $ (841,297 ) $ 9,070,736   $ 52,177,006     $ 289,223     $ 52,466,229  
                                                       
Stock options
                                                     
  Issued to Directors
    -     -     293,060     -     -     293,060       -       293,060  
  Issued to Employees
    -     -     102,403     -     -     102,403       -       102,403  
  Issued to Former Director
    -     -     372,576     -     -     372,576       -       372,576  
Common Stock
                                                     
  Issued to Directors
    14,000     1,400     29,540     -     -     30,940       -       30,940  
  Issued to Employees
    2,750     275     8,663     -     -     8,938       -       8,938  
  Issued for STTC purchase
    232,170     23,217     752,231     -     -     775,448       -       775,448  
Unrealized Gain on Interest Rate Swap (net
  of income tax expense of $53,880)
    -     -     -     104,591     -     104,591       -       104,591  
Net Income
                            2,685,654     2,685,654               2,685,654  
  Comprehensive Income
    -     -     -     -     -     2,790,245       -       -  
                                                       
DECEMBER 31, 2010
    23,682,915   $ 2,368,291   $ 43,162,641   $ (736,706 ) $ 11,756,390   $ 56,550,616     $ 289,223     $ 56,839,839  
                                                       
Stock options
                                                     
  Issued to Directors
    -     -     190,144     -     -     190,144       -       190,144  
  Issued to Employees
    -     -     584,793     -     -     584,793       -       584,793  
  Issued to Former Director
    -     -     97,140     -     -     97,140       -       97,140  
Common Stock
                                                     
  Issued to Directors
    41,000     4,101     87,230     -     -     91,331       -       91,331  
  Issued to Employees
    7,500     750     15,825     -     -     16,575       -       16,575  
Unrealized Loss on  Interest Rate Swap (net
  of income tax benefit of $6,040)
    -     -     -     (11,724 )   -     (11,724 )     -       (11,724 )
Net Income
    -     -     -     -     8,430,314     8,430,314       -       8,430,314  
  Comprehensive Income
                                  8,418,590                  
                                                       
DECEMBER 31, 2011
    23,731,415   $ 2,373,142   $ 44,137,773   $ (748,430 ) $ 20,186,704   $ 65,949,189     $ 289,223     $ 66,238,412  



See notes to the consolidated financial statements.
 
F-7

 

ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the years ended December 31,
   
2011
   
2010
   
2009
 
Operating activities
                 
  Net income attributable to Arabian American Development Co.
  $ 8,430,314     $ 2,685,654     $ 6,627,451  
  Adjustments to reconcile net income
                       
    to Arabian American Development Co. to Net cash provided by operating activities:
                       
    Depreciation
    3,219,782       2,613,164       2,689,847  
    Accretion of notes receivable discounts
    (684 )     (16,109 )     (53,628 )
    Unrealized gain on derivative instruments
    (215,418 )     (177,448 )     (6,976,232 )
    Share-based compensation
    872,077       807,917       280,161  
    Provision for doubtful accounts
    55,000       28,500       111,154  
    Amortization of contractual based intangible asset
    250,421       -       -  
    Deferred income taxes
    859,644       684,582       8,977,317  
    Postretirement obligation
    11,451       -       23,378  
    Equity in loss from AMAK
    -       262,500       -  
  Changes in operating assets and liabilities:
                       
    (Increase) decrease in trade receivables
    (12,040,842 )     1,062,165       (510,083 )
    Decrease in notes receivable
    35,111       389,070       582,177  
    (Increase) decrease in income tax receivable
    216,461       4,510,247       (4,297,082 )
    Increase in inventories
    (3,539,082 )     (852,114 )     (2,618,969 )
    Decrease in prepaid expenses and other assets
    108,222       70,622       59,353  
    Decrease in derivative instruments deposits
    -       -       3,950,000  
    Increase in other liabilities
    1,628,002       -       773,000  
     Increase (decrease) in accounts payable and accrued liabilities
    4,246,165       (504,088 )     (2,146,279 )
    Increase (decrease) in accrued interest
    (4,668 )     (28,005 )     1,077  
    Decrease in accrued liabilities in Saudi Arabia
    (76,363 )     (206,764 )     (957,876 )
    Net cash provided by operating activities
    4,055,593       11,329,893       6,514,766  
                         
Investing activities
                       
  Additions to plant, pipeline and equipment
    (6,518,052 )     (2,898,752 )     (3,184,140 )
  Net advances to AMAK
    (120,023 )     -       -  
  Purchase of STTC transportation company
    -       (250,000 )     -  
    Net cash used in investing activities
    (6,638,075 )