UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended September 30,
2009
or
[
] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________ to __________
COMMISSION
FILE NUMBER 0-6247
ARABIAN
AMERICAN DEVELOPMENT COMPANY
(Exact
name of registrant as specified in its charter)
DELAWARE
|
75-1256622
|
(State
or other jurisdiction of
|
(I.R.S.
employer incorporation or
|
organization)
|
identification
no.)
|
P.
O. BOX 1636
|
77656
|
SILSBEE,
TEXAS
|
(Zip
code)
|
(Address
of principal executive offices)
|
|
Registrant’s
telephone number, including area code: (409) 385-8300
Former
name, former address and former fiscal year, if
changed
since last report.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer ____ Accelerated filer _X_ 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 X_
Number of
shares of the Registrant's Common Stock (par value $0.10 per share), outstanding
at November 5, 2009: 23,433,995.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
SEPTEMBER
30,
2009
(unaudited)
|
|
|
DECEMBER
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
2,469,926 |
|
|
$ |
2,759,236 |
|
Trade
Receivables, net of allowance for doubtful accounts of
$126,500 and $500,000, respectively
|
|
|
14,090,220 |
|
|
|
11,904,026 |
|
Current
portion of notes receivable, net of discount of $22,104 and
$53,628,respectively
|
|
|
468,109 |
|
|
|
528,549 |
|
Derivative
instrument deposits
|
|
|
-- |
|
|
|
3,950,000 |
|
Prepaid
expenses and other assets
|
|
|
781,801 |
|
|
|
799,342 |
|
Inventories
|
|
|
3,787,904 |
|
|
|
2,446,200 |
|
Deferred
income taxes
|
|
|
1,903,122 |
|
|
|
8,785,043 |
|
Income
taxes receivable
|
|
|
3,000,000 |
|
|
|
429,626 |
|
Total
current assets
|
|
|
26,501,082 |
|
|
|
31,602,022 |
|
|
|
|
|
|
|
|
|
|
Property,
Pipeline and Equipment
|
|
|
50,303,714 |
|
|
|
47,184,865 |
|
Less:
Accumulated Depreciation
|
|
|
(17,067,622 |
) |
|
|
(14,649,791 |
) |
Net
Property, Pipeline and Equipment
|
|
|
33,236,092 |
|
|
|
32,535,074 |
|
|
|
|
|
|
|
|
|
|
Investment
in AMAK
|
|
|
33,002,407 |
|
|
|
33,002,407 |
|
Mineral
Properties in the United States
|
|
|
605,848 |
|
|
|
588,311 |
|
Notes
Receivable, net of discount of $4,345 and $16,793, respectively,
net of current portion
|
|
|
52,177 |
|
|
|
407,388 |
|
Other
Assets
|
|
|
10,938 |
|
|
|
10,938 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
93,408,544 |
|
|
$ |
98,146,140 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,436,628 |
|
|
$ |
6,069,851 |
|
Accrued
interest
|
|
|
126,342 |
|
|
|
147,461 |
|
Derivative
instruments
|
|
|
1,167,085 |
|
|
|
8,673,311 |
|
Accrued
liabilities
|
|
|
1,556,584 |
|
|
|
1,029,690 |
|
Accrued
liabilities in Saudi Arabia
|
|
|
1,075,749 |
|
|
|
1,429,156 |
|
Notes
payable
|
|
|
12,000 |
|
|
|
12,000 |
|
Current
portion of post retirement benefit
|
|
|
83,202 |
|
|
|
-- |
|
Current
portion of long-term debt
|
|
|
1,724,860 |
|
|
|
4,920,442 |
|
Current
portion of other liabilities
|
|
|
618,505 |
|
|
|
544,340 |
|
Total
current liabilities
|
|
|
8,800,955 |
|
|
|
22,826,251 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt, net of current portion
|
|
|
23,964,627 |
|
|
|
23,557,294 |
|
Post Retirement
Benefit, net of current portion
|
|
|
808,815 |
|
|
|
823,500 |
|
Other Liabilities,
net of current portion
|
|
|
692,719 |
|
|
|
446,035 |
|
Deferred
Income Taxes
|
|
|
4,210,581 |
|
|
|
3,356,968 |
|
Total
liabilities
|
|
|
38,477,697 |
|
|
|
51,010,048 |
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Common
Stock-authorized 40,000,000 shares of $.10 par value; issued
and outstanding, 23,433,995 and 23,421,995 shares in 2009
and 2008, respectively
|
|
|
2,343,399 |
|
|
|
2,342,199 |
|
Additional
Paid-in Capital
|
|
|
41,511,024 |
|
|
|
41,325,207 |
|
Accumulated
Other Comprehensive Loss
|
|
|
(763,014 |
) |
|
|
(1,120,072 |
) |
Retained
Earnings
|
|
|
11,564,508 |
|
|
|
4,299,535 |
|
Total
Arabian American Development Company
Stockholders’ Equity
|
|
|
54,655,917 |
|
|
|
46,846,869 |
|
Noncontrolling
Interest
|
|
|
274,930 |
|
|
|
289,223 |
|
Total
equity
|
|
|
54,930,847 |
|
|
|
47,136,092 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
93,408,544 |
|
|
$ |
98,146,140 |
|
See notes
to consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
SEPTEMBER 30
|
|
|
SEPTEMBER 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Petrochemical
Product Sales
|
|
$ |
29,741,240 |
|
|
$ |
38,784,278 |
|
|
$ |
79,280,937 |
|
|
$ |
102,444,163 |
|
Transloading
Sales
|
|
|
-- |
|
|
|
7,890,773 |
|
|
|
4,624,681 |
|
|
|
15,935,628 |
|
Processing
Fees
|
|
|
906,848 |
|
|
|
1,066,919 |
|
|
|
2,724,801 |
|
|
|
3,207,402 |
|
|
|
|
30,648,088 |
|
|
|
47,741,970 |
|
|
|
86,630,419 |
|
|
|
121,587,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Petrochemical Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and Processing (including
depreciation of $556,281,
$260,543, $1,671,957, and
$746,348, respectively)
|
|
|
26,354,402 |
|
|
|
56,851,844 |
|
|
|
66,948,640 |
|
|
|
118,973,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
(LOSS)
|
|
|
4,293,686 |
|
|
|
(9,109,874 |
) |
|
|
19,681,779 |
|
|
|
2,613,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENERAL
AND ADMINISTRATIVE EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
2,480,340 |
|
|
|
1,655,790 |
|
|
|
6,581,643 |
|
|
|
6,278,770 |
|
Depreciation
|
|
|
107,397 |
|
|
|
82,534 |
|
|
|
328,739 |
|
|
|
237,591 |
|
|
|
|
2,587,737 |
|
|
|
1,738,324 |
|
|
|
6,910,382 |
|
|
|
6,516,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
1,705,949 |
|
|
|
(10,848,198 |
) |
|
|
12,771,397 |
|
|
|
(3,902,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
12,141 |
|
|
|
56,628 |
|
|
|
53,976 |
|
|
|
164,731 |
|
Interest
Expense
|
|
|
(324,449 |
) |
|
|
(109,368 |
) |
|
|
(970,857 |
) |
|
|
(199,675 |
) |
Miscellaneous
Income (Expense)
|
|
|
65,176 |
|
|
|
(2,757 |
) |
|
|
(17,293 |
) |
|
|
42,109 |
|
|
|
|
(247,132 |
) |
|
|
(55,497 |
) |
|
|
(934,174 |
) |
|
|
7,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME
TAXES
|
|
|
1,458,817 |
|
|
|
(10,903,695 |
) |
|
|
11,837,223 |
|
|
|
(3,895,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
934,246 |
|
|
|
(3,969,245 |
) |
|
|
4,586,543 |
|
|
|
(1,534,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
524,571 |
|
|
|
(6,934,450 |
) |
|
|
7,250,680 |
|
|
|
(2,361,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE
TO
NONCONTROLLING
INTEREST
|
|
|
3,557 |
|
|
|
3,388 |
|
|
|
14,293 |
|
|
|
18,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO ARABIAN
AMERICAN
DEVELOPMENT COMPANY
|
|
$ |
528,128 |
|
|
$ |
(6,931,062 |
) |
|
$ |
7,264,973 |
|
|
$ |
(2,343,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian American Development Company
|
|
$ |
0.02 |
|
|
$ |
(0.30 |
) |
|
$ |
0.31 |
|
|
$ |
(0.10 |
) |
Basic
Weighted Average Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Common Shares Outstanding
|
|
|
23,733,995 |
|
|
|
23,471,995 |
|
|
|
23,725,995 |
|
|
|
23,354,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings (Loss) per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian American Development Company
|
|
$ |
0.02 |
|
|
$ |
(0.30 |
) |
|
$ |
0.31 |
|
|
$ |
(0.10 |
) |
Diluted
Weighted Average Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Common Shares Outstanding
|
|
|
23,753,535 |
|
|
|
23,471,995 |
|
|
|
23,822,601 |
|
|
|
23,354,193 |
|
See notes
to consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
|
|
ARABIAN AMERICAN DEVELOPMENT
STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
ADDITIONAL
PAID-IN
|
|
|
OTHER
COMPREHENSIVE
|
|
|
RETAINED
|
|
|
|
|
|
NON-
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 |
) |
|
$ |
4,299,535 |
|
|
$ |
46,846,869 |
|
|
$ |
289,223 |
|
|
$ |
47,136,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
to Directors
|
|
|
-- |
|
|
|
-- |
|
|
|
141,778 |
|
|
|
-- |
|
|
|
-- |
|
|
|
141,778 |
|
|
|
-- |
|
|
|
141,778 |
|
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 $183,939)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
357,058 |
|
|
|
-- |
|
|
|
357,058 |
|
|
|
-- |
|
|
|
357,058 |
|
Net
Income (Loss)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7,264,973 |
|
|
|
7,264,973 |
|
|
|
(14,293 |
) |
|
|
7,250,680 |
|
Comprehensive Income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
7,622,031 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER
30, 2009
|
|
|
23,433,995 |
|
|
$ |
2,343,399 |
|
|
$ |
41,511,024 |
|
|
$ |
(763,014 |
) |
|
$ |
11,564,508 |
|
|
$ |
54,655,917 |
|
|
$ |
274,930 |
|
|
$ |
54,930,847 |
|
See notes
to consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
NINE
MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2009
|
|
|
2008
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
Income (Loss) attributable to Arabian American
Development
Co.
|
|
$ |
7,264,973 |
|
|
$ |
(2,343,060 |
) |
Adjustments
to Reconcile Net Income (Loss) attributable to Arabian
American Development Co. to Net Cash Provided by (Used
in)
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,002,696 |
|
|
|
983,939 |
|
Accretion
of Notes Receivable Discounts
|
|
|
(43,972 |
) |
|
|
(80,802 |
) |
Unrealized
(Gain) Loss on Derivative Instruments
|
|
|
(6,965,228 |
) |
|
|
10,396,294 |
|
Share-based
Compensation
|
|
|
187,017 |
|
|
|
282,000 |
|
Deferred
Income Taxes
|
|
|
7,551,595 |
|
|
|
(4,600,952 |
) |
Provision
for doubtful accounts
|
|
|
111,154 |
|
|
|
-- |
|
Postretirement
Obligation
|
|
|
68,517 |
|
|
|
202,000 |
|
Loss
attributable to noncontrolling interest
|
|
|
(14,293 |
) |
|
|
(18,042 |
) |
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Increase
in Trade Receivables
|
|
|
(2,297,348 |
) |
|
|
(4,707,152 |
) |
Decrease
in Notes Receivable
|
|
|
459,623 |
|
|
|
533,547 |
|
(Increase)
Decrease in Income Tax Receivable
|
|
|
(2,570,374 |
) |
|
|
1,070,407 |
|
Increase
in Inventories
|
|
|
(1,341,704 |
) |
|
|
(8,342,525 |
) |
(Increase)
Decrease in Derivative Instrument Deposits
|
|
|
3,950,000 |
|
|
|
(6,350,000 |
) |
(Increase)
Decrease in Prepaid Expenses
|
|
|
17,540 |
|
|
|
(120,604 |
) |
Increase
(Decrease)in Accounts Payable and Accrued
Liabilities
|
|
|
(3,106,329 |
) |
|
|
8,713,411 |
|
Increase
(Decrease) in Accrued Interest
|
|
|
(21,119 |
) |
|
|
28,753 |
|
Increase
in Other Liabilities
|
|
|
773,000 |
|
|
|
-- |
|
Decrease
in Accrued Liabilities in Saudi Arabia
|
|
|
(353,407 |
) |
|
|
(549 |
) |
Net
Cash Provided by (Used in) Operating Activities
|
|
|
5,672,341 |
|
|
|
(4,353,335 |
) |
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions
to Al Masane Project
|
|
|
-- |
|
|
|
(342,046 |
) |
Additions
to Property, Pipeline and Equipment
|
|
|
(3,155,865 |
) |
|
|
(14,524,431 |
) |
Additions
to Mineral Properties in the U.S.
|
|
|
(17,537 |
) |
|
|
(473 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(3,173,402 |
) |
|
|
(14,866,950 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions
to Long-Term Debt
|
|
|
2,530,761 |
|
|
|
16,900,000 |
|
Repayment
of Long-Term Debt
|
|
|
(5,319,010 |
) |
|
|
(22,697 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
(2,788,249 |
) |
|
|
16,877,303 |
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(289,310 |
) |
|
|
(2,342,982 |
) |
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
2,759,236 |
|
|
|
4,789,924 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
2,469,926 |
|
|
$ |
2,446,942 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
payments for interest
|
|
$ |
991,976 |
|
|
$ |
546,408 |
|
Cash
payment for taxes, net of refunds
|
|
$ |
(278,622 |
) |
|
$ |
4,814 |
|
Supplemental
disclosure of non-cash items:
|
|
|
|
|
|
|
|
|
Capital
expansion amortized to depreciation expense
|
|
$ |
452,151 |
|
|
$ |
468,522 |
|
Investment
in AMAK
|
|
$ |
-- |
|
|
$ |
3,525,000 |
|
Issuance
of common stock for settlement of accrued directors’ compensation
|
|
$ |
-- |
|
|
$ |
229,501 |
|
Unrealized
gain/loss on interest rate swap, net of tax
|
|
$ |
357,058 |
|
|
$ |
533,515 |
|
See notes
to consolidated financial statements.
ARABIAN AMERICAN DEVELOPMENT COMPANY
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
BASIS OF PRESENTATION
The
accompanying consolidated financial statements and footnotes thereto are
unaudited. In the opinion of the management of Arabian American
Development Company (the Company), these statements include all adjustments,
which are of a normal recurring nature, necessary to present a fair statement of
the Company’s results of operations, financial position and cash
flows.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect the amounts of assets, liabilities,
revenue, costs, expenses, and gains and losses not affecting retained earnings
that are reported in the Consolidated Financial Statements and accompanying
disclosures. Actual results may be different. See the
Company’s 2008 Annual Report for a discussion of the Company’s critical
accounting estimates.
Interim
results are not necessarily indicative of results for a full
year. The information in this Form 10-Q should be read in conjunction
with the Company’s 2008 Annual Report.
These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, American Shield Refining Company (the “Petrochemical
Company” or “ASRC”), which owns all of the capital stock of Texas Oil and
Chemical Company II, Inc. (“TOCCO”). TOCCO owns all of the capital stock of
South Hampton Resources, Inc., (“South Hampton”). South Hampton owns
all of the capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”).
The Company owns 100% of the capital stock of South Hampton Resources
International, SL (SHRI) located in Spain and a 41% interest in Al Masane Al
Kobra Mining Company (“AMAK”), a Saudi Arabian closed joint stock company which
owns and is developing mining assets in Saudi Arabia. The Company
also owns approximately 55% of the capital stock of a Nevada mining company,
Pioche-Ely Valley Mines, Inc. (“Pioche”), which does not conduct any substantial
business activity. The Petrochemical Company, its subsidiaries and SHRI
constitute the Company’s Specialty Petrochemicals Segment. Pioche constitutes
its Mining Segment at September 30, 2009. The Company included the Al
Masane Project (Note 13) along with Pioche in its Mining Segment at September
30, 2008 and for the three and nine months then ended.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In June
2009 FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” —
an amendment of SFAS No. 140” (“SFAS 166”)”, which was primarily codified
into Topic 860 in the Accounting Standards Codification (“ASC”). This
statement removes the concept of a qualifying special-purpose entity which was
primarily codified into Topic 810 in the ASC, Consolidation of Variable Interest
Entities, to qualifying special-purpose entities. This statement must
be applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company is currently
evaluating the impact adoption of this statement may have on the consolidated
financial statements.
In June
2009 the FASB issued SFAS No. 167, “Amendments to FASB interpretation No. 46(R)”
(“SFAS 167”), which has not been codified in the ASC. This statement requires an
analysis of existing investments to determine whether variable interest or
interests gives the Company a controlling financial interest in a variable
interest entity. This analysis identifies the primary beneficiary of a variable
interest entity as the enterprise that has both the power to direct the
activities of significant impact on a variable interest entity and the
obligation to absorb losses or receive benefits from the variable interest
entity that could potentially be significant to the variable interest entity.
This statement requires ongoing reassessments of whether an enterprise is the
primary beneficiary of a variable interest entity. This statement is effective
as of the beginning of each reporting entity’s first annual
reporting
period
that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company is currently
evaluating the impact this statement may have on the consolidated financial
statements.
In June
2009 the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“US GAAP”) -a
replacement of FASB Statement No. 162” (“SFAS 168”) which was primarily codified
into Topic 105 in the ASC. The FASB Accounting Standards Codification is
intended to be the source of authoritative U.S. GAAP and reporting
standards as issued by the Financial Accounting Standards Board. Its primary
purpose is to improve clarity and use of existing standards by grouping
authoritative literature under common topics. This statement is effective
beginning with the quarter ended September 30, 2009. All references
to GAAP in the consolidated financial statements now use the new Codification
numbering system. The Codification does not change or alter existing GAAP;
therefore, it does not have an impact on the Company’s consolidation financial
statements.
In June
2009 the SEC released “Update of codification of Staff Accounting Bulletins”.
This update amends or rescinds existing portions of the interpretive guidance
included in the SEC’s Staff Accounting Bulletin Series to be consistent with the
authoritative accounting guidance of SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”), primarily codified into Topic 805 in the ASC and
SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”
(“SFAS 160”), primarily codified into ASC 810-10-65. This update is effective
for the Company beginning with the first fiscal quarter of 2010 and will be
utilized in conjunction with future business combinations and non-controlling
interests.
In August
2009 the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair
Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair
Value”.
This
statement includes amendments to Subtopic 820-10, “Fair Value Measurements and
Disclosures—Overall”, for the fair value measurement of liabilities and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the techniques provided for in this
update. This statement is effective for the first report period (including
interim periods) beginning after issuance. The application of ASU No. 2009-05
had no impact on the Company’s consolidated financial statements.
3.
INVENTORIES
Inventories
include the following:
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
Raw
material
|
|
$ |
2,293,154 |
|
|
$ |
1,291,400 |
|
Petrochemical
products
|
|
|
1,494,750 |
|
|
|
1,154,800 |
|
Total
inventory
|
|
$ |
3,787,904 |
|
|
$ |
2,446,200 |
|
Inventories
are recorded at the lower of cost, determined on the last-in, first-out method
(LIFO), or market. At September 30, 2009, current cost exceeded LIFO
value by approximately $467,000. At December 31, 2008, the Company
recorded a charge of approximately $1,786,000 to reduce inventory to net
realizable value.
Inventories
serving as collateral for the Company’s line of credit with a domestic bank were
$2.43 million and $1.35 million at September 30, 2009, and December 31, 2008,
respectively (see Note 7).
4.
PROPERTY, PIPELINE AND EQUIPMENT
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Platinum
catalyst
|
|
$ |
1,497,285 |
|
|
$ |
1,318,068 |
|
Land
|
|
|
689,363 |
|
|
|
552,705 |
|
Property,
pipeline and equipment
|
|
|
48,107,066 |
|
|
|
45,304,092 |
|
Construction
in progress
|
|
|
10,000 |
|
|
|
10,000 |
|
Total
property, pipeline and equipment
|
|
|
50,303,714 |
|
|
|
47,184,865 |
|
Less
accumulated depreciation and
amortization
|
|
|
(17,067,622 |
) |
|
|
(14,649,791 |
) |
Net
property, pipeline and equipment
|
|
$ |
33,236,092 |
|
|
$ |
32,535,074 |
|
Property,
pipeline, and equipment serve as collateral for a $14.0 million term loan with a
domestic bank as of September 30, 2009 and December 31, 2008 (see Note
7).
Interest
capitalized for construction for the three months ended September 30, 2009, and
2008, was $8,129 and $175,721, respectively. Interest capitalized for
construction for the nine months ended September 30, 2009, and 2008, was $8,129
and $375,485, respectively.
Catalyst
amortization relating to the platinum catalyst which is included in cost of
sales was $3,280 and $1,077 for the three months ended September 30, 2009, and
2008, respectively and $9,843 and $7,538 for the nine months ended September 30,
2009, and 2008, respectively.
5.
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO ARABIAN AMERICAN DEVELOPMENT
CO.
The
following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted net income (loss) per share attributable to
Arabian American Development Co. for the three and nine months ended September
30, 2009 and 2008, respectively.
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
Basic
Net Income (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian
American Development Co.
|
|
$ |
528 |
|
|
|
23,734 |
|
|
$ |
0.02 |
|
|
$ |
(6,931 |
) |
|
|
23,472 |
|
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
stock options outstanding
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian
American Development Co.
|
|
$ |
528 |
|
|
|
23,754 |
|
|
$ |
0.02 |
|
|
$ |
(6,931 |
) |
|
|
23,472 |
|
|
$ |
(0.30 |
) |
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
Basic
Net Income (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian
American Development Co.
|
|
$ |
7,265 |
|
|
|
23,726 |
|
|
$ |
0.31 |
|
|
$ |
(2,343 |
) |
|
|
23,354 |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
stock options outstanding
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to
Arabian
American Development Co.
|
|
$ |
7,265 |
|
|
|
23,823 |
|
|
$ |
0.31 |
|
|
$ |
(2,343 |
) |
|
|
23,354 |
|
|
$ |
(0.10 |
) |
At
September 30, 2009, and 2008, 439,000 and 500,000 potential common stock shares
were issuable upon the exercise of options.
Inclusion
of the Company’s options in the diluted loss per share for the three and nine
months ended September 30, 2008, has an anti-dilutive effect because the Company
incurred a loss from operations.
As
discussed in Note 1, the Company has two business segments. The Company measures
segment profit or loss as operating income (loss), which represents income
(loss) before interest, and miscellaneous income. Information on the segments is
as follows:
Three Months ended September 30,
2009
|
|
Petrochemical
|
|
|
Mining
|
|
|
Corporate
And Other**
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
30,648,088 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
30,648,088 |
|
Depreciation*
|
|
|
663,393 |
|
|
|
-- |
|
|
|
285 |
|
|
|
663,678 |
|
Operating
income (loss)
|
|
|
2,195,084 |
|
|
|
(93,993 |
) |
|
|
(395,142 |
) |
|
|
1,705,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
59,800,289 |
|
|
$ |
605,848 |
|
|
$ |
33,002,407 |
|
|
$ |
93,408,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
47,741,970 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
47,741,970 |
|
Depreciation*
|
|
|
342,792 |
|
|
|
-- |
|
|
|
285 |
|
|
|
343,077 |
|
Operating
income (loss)
|
|
|
(10,666,804 |
) |
|
|
(78,342 |
) |
|
|
(103,053 |
) |
|
|
(10,848,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
74,783,759 |
|
|
$ |
45,747,630 |
|
|
$ |
-- |
|
|
$ |
120,531,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
86,630,419 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
86,630,419 |
|
Depreciation*
|
|
|
1,999,840 |
|
|
|
-- |
|
|
|
856 |
|
|
|
2,000,696 |
|
Operating
income (loss)
|
|
|
14,103,304 |
|
|
|
(395,545 |
) |
|
|
(936,362 |
) |
|
|
12,771,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
121,587,193 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
121,587,193 |
|
Depreciation*
|
|
|
983,083 |
|
|
|
-- |
|
|
|
856 |
|
|
|
983,939 |
|
Operating
income (loss)
|
|
|
(2,287,077 |
) |
|
|
(309,270 |
) |
|
|
(1,306,151 |
) |
|
|
(3,902,498 |
) |
|
*Depreciation
includes cost of sales depreciation and is net of amortization of deferred
revenue (other liabilities).
|
|
**
Corporate and Other includes the Company’s $33,002,407 joint venture
interest in AMAK at September 30, 2009 (Note 13) and certain corporate
expenses.
|
Information
regarding foreign operations for the three and nine months ended September 30,
2009 and 2008 follows (in thousands). Revenues are attributed to countries based
upon the origination of the transaction.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
30,648 |
|
|
$ |
47,742 |
|
|
$ |
86,630 |
|
|
$ |
121,587 |
|
Saudi
Arabia
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
$ |
30,648 |
|
|
$ |
47,742 |
|
|
$ |
86,630 |
|
|
$ |
121,587 |
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
33,842 |
|
|
$ |
33,927 |
|
|
|
|
|
|
|
|
|
Saudi
Arabia
|
|
|
-- |
|
|
|
43,766 |
|
|
|
|
|
|
|
|
|
|
|
$ |
33,842 |
|
|
$ |
77,693 |
|
|
|
|
|
|
|
|
|
|
7.
LIABILITIES AND LONG-TERM DEBT
|
In
September 2007 South Hampton entered into a $10.0 million term loan agreement
with a domestic bank to finance the expansion of the petrochemical
facility. An amendment was entered into in November 2008 which
increased the term loan to $14.0 million due to the increased cost of the
expansion. This note is secured by property, pipeline and equipment.
The agreement expires October 31, 2018. At September 30, 2009, there
was a short-term amount of $1,400,000 and a long-term amount of $11,300,000
outstanding. At December 31, 2008, there was a short-term amount of $906,577 and
a long-term amount of $13,093,423 outstanding. The interest
rate on the loan varies
according
to several options. At September 30, 2009, and December 31, 2008, the
rate was 3.0%. Interest is paid monthly.
In May
2006 South Hampton entered into a $12.0 million revolving loan agreement with a
domestic bank secured by accounts receivable and inventory. An
amendment was entered into on July 8, 2009, which extended the termination date
to June 30, 2011. Additional amendments were entered into during 2008
which ultimately increased the availability of the line to $21.0 million based
upon the Company’s accounts receivable and inventory. At September
30, 2009, and December 31, 2008, there was a short-term amount outstanding of
$324,860 and $3,994,855, respectively due to the outstanding amount surpassing
the borrowing base limit allowed and a long-term amount outstanding of
$12,664,627 and $10,463,871, respectively. The credit agreement contains a
sub-limit of $3.0 million available to be used in support of the hedging
program. The interest rate on the loan varies according to several
options. At September 30, 2009, and December 31, 2008, the rate was
3.0%. The amount drawn on the loan exceeded the borrowing base at
September 30, 2009, but was remedied within 15 days after the end of the third
quarter. The amount drawn on the loan also exceeded the borrowing
base at December 31, 2008. The borrowing base is determined by a
formula in the loan agreement. If the amount outstanding exceeds the borrowing
base, a principal payment is due to reduce the amount outstanding to the
calculated borrowing base. Interest is paid monthly. Loan
covenants that must be maintained quarterly include EBITDA, capital
expenditures, dividends payable to parent, and leverage ratio. Interest on the
loan is paid monthly and a commitment fee of 0.25% is due quarterly on the
unused portion of the loan.
The
Company currently has a supplier who is the sole provider of South Hampton’s
feedstock, although other sources are available. The account is on
open status. In 2007 South Hampton and the supplier entered into an
agreement, which expires seven years from the date of initial operation, for
construction of a tank and pipeline connection for the handling of
feedstock. In the event of default, South Hampton is obligated to
reimburse the supplier for the unamortized portion of the cost of the tank. The
tank was placed in service in July 2007. Therefore, at September 30,
2009, 2 years 3 months of the 7 year agreement have elapsed. The tank
lease and pipeline connection agreement replaced a previous lease and pipeline
connection agreement that had been in place since 1985 with a different
vendor.
During
the first nine months of 2008, $61,000 of the liability to the Company’s
previous President and Chief Executive Officer, Mr. El Khalidi, was
paid. In the first nine months of 2009, approximately $360,000 of the
liability to Mr. El Khalidi was paid, resulting in a balance of approximately
$83,000 which remains outstanding as of September 30,
2009. Approximately $34,000 of that amount relates to termination
benefits due according to Saudi law upon Mr. El Khalidi’s retirement from the
Company.
|
8. DERIVATIVE
INSTRUMENTS
|
Feedstock,
Crude and Natural Gas Contracts
Hydrocarbon
based manufacturers such as TOCCO are significantly impacted by changes in
feedstock and natural gas prices. Not considering derivative
transactions, feedstock and natural gas used for the three months ended
September 30, 2009, and 2008, represented approximately 79.5% and 87.8% of
TOCCO’s operating expenses, respectively. During the first half of 2009 the
Company saw a decrease in the cost of feedstock and natural gas due to lower per
unit costs as the petroleum market worldwide experienced falling
prices. Prior to the decline in the market during the fourth quarter
of 2008, feedstock and natural gas expense had become an increasingly larger
portion of TOCCO’s operating expenses due to the dramatic increases in all
hydrocarbon prices in 2007 and early 2008
On
January 30, 1992, the Board of Directors of TOCCO adopted a resolution
authorizing the establishment of a commodities trading account to take advantage
of opportunities to lower the cost of feedstock and natural gas for its
subsidiary, South Hampton, through the use of short term commodity swap and
option contracts. The policy adopted by the Board specifically
prohibits the use of the account for speculative
transactions. The
operating guidelines adopted by Management generally limited exposures to 50% of
the monthly feedstock volumes of the facility for up to six months forward and
up to 100% of the natural gas requirements.
On
February 26, 2009, the Board of Directors rescinded the 1992 resolution and
replaced it with a new resolution. The 2009 resolution allows the
Company to establish a commodity futures account for the purpose of maximizing
Company resources and reducing the Company’s risk as pertaining to its purchases
of natural gas and feedstock for operational purposes by employing a four step
process. This process, in summary, includes, (1) education of Company employees
who are responsible for carrying out the policy, (2) adoption of a derivatives
policy by the Board explaining the objectives for use of derivatives including
accepted risk limits, (3) implementation of a comprehensive derivative strategy
designed to clarify the specific circumstances under which the Company will use
derivatives, and (4) establishment and maintenance of a set of internal controls
to ensure that all of the derivatives transactions taking place are authorized
and in accord with the policies and strategies that have been
enacted. On August 31, 2009, the Company adopted a formal risk
management policy.
South
Hampton endeavors to acquire feedstock and natural gas at the lowest possible
cost. The primary feedstock (natural gasoline) is traded over the
counter and not on organized futures exchanges. Financially settled
instruments (fixed price swaps) are the principal vehicle used to give some
predictability to feed prices. South Hampton does not purchase or hold any
derivative financial instruments for trading purposes.
In July
2008 as petroleum prices were nearing record highs and there was discussion in
the market of further dramatic increases, the Company, after several months of
study, determined that crude oil options would provide better and longer term
price protection for feedstock versus shorter term financial swaps normally
used. The Company acquired crude oil options in the form of collars
covering the period of August 2008 to December 2009. Collars
generally limit the upside of price movements by utilizing a call with a strike
at the desired level, and the premium for the call is paid by selling a put at a
strike price which is deemed an acceptable floor price.
The
initial floor of $120 was determined to be an appropriate point as current crude
prices were about $133 per barrel for the period in question. A cap
of $140 was established as the ceiling. The volume of crude options
covered from 15% to 20% of the total expected volume of feedstock for the
Company over the time period in question. Beginning in early and
mid-August 2008, as it became apparent that the price declines might be more
dramatic than normal, the Company began moving the strike price of the floor
puts down to levels which seemed more reasonable and would appear to be out of
the money in normal circumstances. Moving the floor puts required
payment of a premium to buy back the established position and sale of another
put to defer the cost of the buyback, with the new floor of the put at a
reasonable level under the circumstances. In some cases puts were
repurchased with no re-establishment of a new floor. As of
mid-November 2008 neutralized positions for all crude options by having the same
number of puts and calls in place for a particular strike price thereby allowing
the options to expire with no further cash effect. In August,
September, and October 2008 margin calls were made on the financial derivatives
for $10,250,000 due to the decrease in the price of natural gasoline and
crude. As of September 30, 2009, and December 31, 2008, collateral in
the amount of $0 and $3,950,000 remained on deposit. The financial swaps for
natural gasoline (covering approximately 30% of the feed requirements for the
4th quarter of 2008 and the 1st quarter of 2009) were ultimately bought out in
several stages as prices continued to fall and the final loss was fixed. The
Company exited that market entirely as of mid-November 2008.
The
derivative agreements currently in place are not designated as hedges per ASC
Topic 815, Derivatives and Hedging. As of September 30, 2009, South
Hampton had committed to crude option contracts with settlement dates through
December 2009.
The
following tables detail (in thousands) the impact the agreements had on the
financial statements:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss)
|
|
$ |
3,622 |
|
|
$ |
(17,737 |
) |
|
$ |
17,447 |
|
|
$ |
(10,121 |
) |
Realized
gain (loss)
|
|
|
( 3,622 |
) |
|
|
2,378 |
|
|
|
(16,338 |
) |
|
|
5,465 |
|
Net
gain (loss)
|
|
$ |
-- |
|
|
$ |
(15,359 |
) |
|
$ |
1,109 |
|
|
$ |
( 4,656 |
) |
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Fair
value of derivative liability
|
|
$ |
11 |
|
|
$ |
6,976 |
|
The
realized and unrealized gains/(losses) are recorded in Cost of Petrochemical
Product Sales and Processing for the periods ended September 30, 2009, and
2008.
Interest
Rate Swap
On March
21, 2008, South Hampton entered into an interest rate swap agreement with Bank
of America related to the $10.0 million term loan secured by property, pipeline
and equipment. The effective date of the interest rate swap agreement is August
15, 2008, and terminates on December 15, 2017. As part of the
interest rate swap agreement South Hampton will receive credit for payments of
interest made on the term loan based upon the London InterBank Offered Rate
(LIBOR) and will pay Bank of America an interest rate of 5.83% less the credit
on the interest rate swap. South Hampton has 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 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 September 30,
2009, and December 31, 2008 totaled $1,156,082 and $1,697,079,
respectively. The cumulative loss of $763,014 (shown net of deferred
tax benefit of $393,068) from the changes in the swap contract’s fair value that
is included in other comprehensive loss will be reclassified into income when
interest is paid. The unrealized gain on the interest rate swap for
the nine months ended September 30, 2009, included in other comprehensive loss
is $357,058 (net of $183,939 of income tax expense).
For the
three and nine months ended September 30, 2009, $129,758 and $384,080,
respectively, were reclassified from other comprehensive income (loss) into
interest expense. For the three and nine months ended September 30,
2008, $28,960 was reclassified from other comprehensive income (loss) into
interest expense. The net amount of pre-tax loss in other
comprehensive income (loss) as of September 30, 2009, predicted to be
reclassified into earnings within the next 12 months is approximately
$454,000.
9.
FAIR VALUE MEASUREMENTS
The fair
value of financial instruments at September 30, 2009 is summarized as
follows:
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,469,926 |
|
|
$ |
2,469,926 |
|
Notes
receivable
|
|
|
520,286 |
|
|
|
520,286 |
|
Accrued
interest
|
|
|
126,342 |
|
|
|
126,342 |
|
Derivative
instruments
|
|
|
1,167,085 |
|
|
|
1,167,085 |
|
Accrued
liabilities
|
|
|
1,556,584 |
|
|
|
1,556,584 |
|
Accrued
liabilities in Saudi Arabia
|
|
|
1,075,749 |
|
|
|
1,075,749 |
|
Notes
payable
|
|
|
12,000 |
|
|
|
12,000 |
|
Long
Term Debt
|
|
|
25,689,487 |
|
|
|
25,689,487 |
|
Other
liabilities
|
|
|
1,311,224 |
|
|
|
1,311,224 |
|
The
carrying value of cash and cash equivalents, accrued interest, accrued
liabilities, accrued liabilities in Saudi Arabia and other liabilities
approximate the fair value due to the immediate or short-term maturity of these
financial instruments. The carrying value of notes receivable approximates the
fair value due to its short-term nature and historical collectability. The fair
value of variable rate long term debt and notes payable reflect recent market
transactions and approximate carrying value. The fair value of the
derivative instruments are described below.
The
Company adopted Statement of Financial Accounting Standards No. 157 (“SFAS
157”), Fair Value Measurements effective January 1, 2008, which is codified
into Topic 820 in the ASC.
ASC Topic
820 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. ASC Topic 820
applies to reported balances that are required or permitted to be measured at
fair value under existing accounting pronouncements; accordingly, the standard
amends numerous accounting pronouncements but does not require any new fair
value measurements of reported balances. ASC Topic 820 emphasizes that fair
value, among other things, is based on exit price versus entry price, should
include assumptions about risk such as nonperformance risk in liability fair
values, and is a market-based measurement, not an entity-specific measurement.
When considering the assumptions that market participants would use in pricing
the asset or liability, ASC Topic 820 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy). The fair value hierarchy
prioritizes inputs used to measure fair value into three broad
levels.
Level
1 inputs
|
Level
1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to
access.
|
Level
2 inputs
|
Level
2 inputs are inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for
similar assets and liabilities in active markets, as well as inputs that
are observable for the asset or liability (other than quoted prices), such
as interest rates, foreign exchange rates, and yield curves that are
observable at commonly quoted intervals.
|
Level
3 inputs
|
Level
3 inputs are unobservable inputs for the asset or liability, which is
typically based on an entity’s own assumptions, as there is little, if
any, related market activity.
|
In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.
Commodity
Financial Instruments
South
Hampton periodically enters into financial instruments to hedge the cost of
natural gasoline (the primary feedstock) and natural gas (used as fuel to
operate the plant). South Hampton has used financial swaps on
feedstock and options on natural gas to limit the effect of significant
fluctuations in price on operating results. As discussed above, during the third
quarter of 2008 the Company also began using crude oil options as a method of
hedging feedstock prices over longer periods of time. At September
30, 2009, outstanding instruments were crude oil options with settlements dates
through December 31, 2009. South Hampton has not designated these
financial instruments as hedging transactions under ASC Topic
815.
South
Hampton assesses the fair value of the financial swaps on feedstock using quoted
prices in active markets for identical assets or liabilities (Level 1 of fair
value hierarchy). South Hampton assesses the fair value of the
options held to purchase crude oil using a pricing valuation
model. This valuation model considers various assumptions, including
publicly available forward prices for crude, time value, volatility factors and
current market and contractual prices for the underlying instrument, as well as
other relevant economic measures (Level 2 of fair value hierarchy).
Interest
Rate Swap
In March
2008 South Hampton entered into an interest rate swap agreement with Bank of
America related to the $10.0 million term loan secured by property, pipeline and
equipment. The interest rate swap was designed to minimize the effect
of changes in the LIBOR rate. South Hampton has designated the
interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and
Hedging.
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).
The
following items are measured at fair value on a recurring basis subject to
disclosure requirements of ASC Topic 820 at September 30, 2009.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
Fair Value Measurements
Using
|
|
|
|
September 30, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
on Crude
|
|
$ |
11,003 |
|
|
$ |
- |
|
|
$ |
11,003 |
|
|
$ |
- |
|
Interest
Rate Swap
|
|
|
1,156,082 |
|
|
|
- |
|
|
|
1,156,082 |
|
|
|
- |
|
Total
|
|
$ |
1,167,085 |
|
|
$ |
- |
|
|
$ |
1,167,085 |
|
|
$ |
- |
|
The
Company has consistently applied valuation techniques in all periods presented
and believes it has obtained the most accurate information available for the
types of derivative contracts it holds.
10.
SHARE-BASED COMPENSATION
Common Stock
In March
2008 the Company issued 40,000 restricted shares of its common stock to certain
employees and executives of the Company for services
rendered. Compensation expense recognized in connection with this
issuance was $282,000.
In
September 2009 the Company issued 12,000 shares of common stock to non-employee
Board members for services rendered. Compensation expense recognized
in connection with this issuance was $40,800.
Stock
Options
On
January 2, 2009, the Company awarded fully vested options to its non-employee
directors in the amount of 7,000 shares each for a total of 35,000 shares for
their service during 2008. The exercise price of the options is $1.39
per share based upon the closing price on January 2,
2009. Compensation expense recognized in connection with this award
was approximately $49,000.
On
January 26, 2009, the Company awarded fully vested options to two of its key
employees in the amount of 2,000 shares each for a total of 4,000 shares for
their continuing service. The exercise price of the options is $1.11 per share
based upon
the
closing price on January 26, 2009. Compensation expense recognized in
connection with this award was approximately $4,000.
A summary
of the status of the Company’s stock option awards is presented
below:
|
|
Number
of Stock Options
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2009
|
|
|
500,000 |
|
|
$ |
1.20 |
|
Granted
|
|
|
439,000 |
|
|
$ |
3.22 |
|
Exercised
|
|
|
-- |
|
|
|
-- |
|
Expired
|
|
|
(100,000 |
) |
|
|
2.00 |
|
Cancelled
|
|
|
(400,000 |
) |
|
|
1.00 |
|
Forfeited
|
|
|
-- |
|
|
|
-- |
|
Outstanding
at September 30, 2009
|
|
|
439,000 |
|
|
$ |
3.22 |
|
Exercisable
at September 30, 2009
|
|
|
439,000 |
|
|
$ |
3.22 |
|
On July
2, 2009, the Company’s Board considered Mr. El Khalidi’s option to purchase
400,000 shares of Company common stock with an exercise price of $1.00 per share
(the “Option”) as authorized by that certain Board Resolution, dated October 10,
1995 (the “1995 Resolution”) and resolved that the Option granted by the Company
to Hatem El Khalidi pursuant to the 1995 Resolution is hereby officially
terminated in all respects and same shall be removed from the Company’s books
and records. The Board next considered Mr. El Khalidi’s efforts
related to the Al Masane mining project in southwestern Saudi Arabia in
conjunction with his retirement as Chief Executive Officer of the Company on
June 30, 2009, and after discussion, the Board documented its sincere
appreciation of Mr. El Khalidi’s efforts related to the mining project and
issued two stock options to Mr. El Khalidi and wife, Ingrid El Khalidi, tied to
the performance of AMAK: (1) an option to purchase 200,000 shares of the
Company’s common stock with an exercise price equal to the closing sale price of
such a share as reported on the Nasdaq National Market System on July 2, 2009,
provided that said option may not be exercised until such time as the first
shipment of ore from the Al Masane mining project is transported for commercial
sale by AMAK, and further that said option shall terminate and be immediately
forfeited if not exercised on or before June 30, 2012; and (2) an option to
purchase 200,000 shares of the Company’s common stock with an exercise price
equal to the closing sale price of such a share as reported on the Nasdaq Stock
Market on July 2, 2009, provided that said option may not be exercised until
such time as the Company receives its first cash dividend distribution from
AMAK, and further that said option shall terminate and be immediately forfeited
if not exercised on or before June 30, 2019. The fair value of the
options granted to Mr. El Khalidi and wife, Ingrid El Khalidi was calculated
using the Black-Scholes option valuation model with the following
assumptions:
Expected
volatility
|
|
|
139-402 |
% |
Expected
dividends
|
|
None
|
|
Expected
term (in years)
|
|
|
1.5-7 |
|
Risk
free interest rate
|
|
|
0.98%-3.14 |
% |
The
Company recognized approximately $93,000 in share based compensation related to
this transaction.
On August
27, 2009, outstanding options of 100,000 shares awarded to Mr. Ghazi Sultan
expired.
For the
other outstanding 39,000 options, 35,000 have a remaining life of 9 years, three
months, and 4,000 have a remaining life of 9 years, four months as of September
30, 2009.
11.
INCOME TAXES
The
Company files an income tax return in the U.S. federal jurisdiction and Texas.
Income tax expense for the three and nine months ended September 30, 2009
differs from the amount computed by applying the applicable U. S. Corporate tax
rate due primarily to an increase in a valuation allowance of approximately
$365,000. Tax returns for the years 2006 through 2008 remain open for
examination in various tax jurisdictions in which it operates. In
early 2009 the Internal Revenue Service (IRS) commenced an examination of the
Company’s 2007 tax return that is anticipated to be completed by the end of
2009. The Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109, Accounting for Income Taxes” (“FIN 48”), on January
1, 2007. As a result of the implementation of FIN 48, the Company recognized no
material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, and at September 30, 2009, there were no
unrecognized tax benefits. Interest and penalties related to
uncertain tax positions will be recognized in income tax expense. As of
September 30, 2009, no interest or penalties related to uncertain tax positions
had been accrued.
12.
POST RETIREMENT OBLIGATIONS
In
January 2008 an amended retirement agreement replacing the February 2007
agreement was entered into with Mr. El Khalidi. The amended agreement provides
$6,000 per month in benefits to Mr. El Khalidi upon his retirement for the
remainder of his life. Additionally, upon his death $4,000 per month will be
paid to his surviving spouse for the remainder of her life. A health insurance
benefit will also be provided. An additional $382,000 was accrued in
January 2008 for the increase in benefits. A liability of approximately $861,000
based upon an annuity single premium value contract was outstanding at September
30, 2009, and was included in post retirement benefits. Mr. El
Khalidi retired effective June 30, 2009. As of September 30, 2009, no
payments have been made pursuant to this agreement.
In June
2009 the Company’s Board of Directors awarded Mr. El Khalidi a retirement bonus
in the amount of $31,500 for 42 years of faithful service. This
amount was outstanding at September 30, 2009, and was included in post
retirement benefits.
13.
INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”)
In late
2007 the Company and eight Saudi investors formed a Saudi joint stock company
under the name Al Masane Al Kobra Mining Company (AMAK) and received a
commercial license from the Ministry of Commerce in January 2008. The
basic terms of agreement forming AMAK as initially recognized by the Company are
as follows: (1) the total capitalization is $120 million, (2) the Company
subscribed to purchase 50% of AMAK’s stock and the Saudi investors subscribed to
purchase the remainder, (3) the Company contributed its mining assets and
mining lease for 25% of AMAK’s stock and the Saudi investors contributed
$60 million cash for 50% of AMAK’s stock, and (4) the Company would be obligated
to contribute an additional $30 million of capital for the remaining 25% of
AMAK’s stock should the Board of AMAK make a call for capital. Item 4
is a change from the previous position of the Company and was concluded after
detailed legal research by a well respected Saudi law firm. This
issue is addressed in greater detail below.
AMAK
applied to the Saudi Industrial Development Fund in February 2009 for a loan
sufficient to complete the project and a response is expected in late 2009 or
early 2010. Loans from private banks and/or inclusion of other investors are
other possibilities under investigation. AMAK has all powers of administration
over the Al Masane mining project. The Company's mining lease and note payable
to the Saudi government are in the process of being formally transferred to AMAK
once certain administrative matters are completed with the incorporation
documents to allow the transfer of the license in lieu of a cash
contribution. An appraisal of the assets was completed in April 2009
with a total valuation of approximately $88 million. The appraisal was done in
order that current values might be used in filings with the Ministry to
demonstrate that the capital of the Company is fully paid. AMAK is
constructing the mining and treatment facilities, and upon projected completion
in
early
2010, will operate the mine. The Company has four directors representing
its interests on an eight person board of directors with the Chairman of AMAK
chosen from the directors representing the Saudi investors. The original
documents are in Arabic, and English translations have been provided to the
parties.
During an
April 2009 AMAK Board meeting, a Saudi director, who is also an AMAK
shareholder, questioned the validity of the Partnership Agreement between the
Company and several of the Saudi investors which has been relied upon by the
Company as the operating document since it was signed. The issues raised
include: discrepancies between the terms of the original Memorandum of
Understanding and the Partnership Agreement; an allegation that various
signatures for one or more of the Saudi investors on the Partnership Agreement
were not authorized; the Saudi attorney that
prepared
the Partnership Agreement exceeded his authority; and whether the Company’s
capital contribution for 50% of AMAK’s stock is fully paid. The Company
has relied upon the Partnership Agreement for the past year.
After
extensive research, investigation and deliberation, the Board of Directors of
the Company determined that while the documents relating to the formation of
AMAK were poorly drafted and ambiguous in certain areas, a business decision
should be made to settle the dispute and move the project forward rather than
spend time and legal fees resolving the issues in the judicial arena of Saudi
Arabia, with the outcome uncertain and potentially damaging to the progress of
the venture. The Company and Saudi investors reached a definitive
written agreement effective August 25, 2009, with the following terms and
conditions: (1) The Company will convey nine percent or 4,050,000 shares of AMAK
stock to the other AMAK shareholders pro rata; (2) The Articles of Association
and By-Laws of AMAK will be amended to reflect that: (a) the Company has fully
and completely paid the subscription price for 18,450,000 shares of AMAK stock
(or 41% of the issued and outstanding shares), (b) neither AMAK nor the other
AMAK shareholders may require the Company to make an additional capital
contribution without the Company’s written consent, and (c) the Company shall
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; (3) AMAK will
assume an $11 million Promissory Note from the Saudi Arabian Ministry of Finance
& National Economy Loan to the Company, dated January 24, 1979, and will
indemnify and defend the Company against any and all claims related to said
Promissory Note; (4) For a three year period commencing August 25, 2009, the
Company has the option to repurchase from the Saudi Arabian shareholders
4,050,000 shares of AMAK stock at a price equal to the then fair market value of
said shares less ten percent; and (5) The two Memorandums of Understanding dated
May 21, 2006 and June 10, 2006 respectively, as well as the Partnership
Agreement dated August 6, 2006, are terminated for all purposes. The
Company is in the process of preparing amendments to various AMAK corporate
documents to reflect the above and upon completion will submit to the AMAK Saudi
Arabian shareholders for consideration.
On August
5, 2006, the Company signed a one year Financial and Legal Services and Advice
Agreement with a Saudi legal firm and a Saudi management consultant to
facilitate the: (1) formation of AMAK, (2) transfer of the mining assets and
lease to AMAK, and (3) raising of additional capital. The attorney
and consultant were to be paid in stock issued by the Company and up to one
million shares were to be issued in increments as each step was
completed. The agreement was extended on a month to month
basis. As of September 30, 2009, 750,000 shares were issued in
payment due to the formation of AMAK and transfer of assets and lease into
AMAK. Stock issued had a value of $3,712,500 using the Company’s
closing stock price on the date of the issuance of the commercial license and
approval of the transfer. The agreement was cancelled in April 2009 with no
further liability to the Company.
14.
RELATED PARTY TRANSACTIONS
South
Hampton incurred transportation and equipment costs of approximately $169,000
and $211,000 for the 3 months ended September 30, 2009, and 2008 and $657,000
and $625,000 for the nine months ended September 30, 2009 and 2008,
respectively, with Silsbee Trading and Transportation Company (“STTC”), which is
currently owned by Nicholas Carter, President and CEO of the
Company.
On August
1, 2004, South Hampton entered into a $136,876 capital lease with STTC for the
purchase of a diesel powered manlift. The lease bears interest at
6.9% for a 5 year term with monthly payments in the amount of
$3,250. Title transferred to South Hampton at the end of the term
which was July 2009. Gross payments of $3,250 and $9,750 were made
for the three months ended September 30, 2009, and 2008, and $22,750 and $29,250
for the nine months ended September 30, 2009, and 2008,
respectively.
Legal
fees of approximately $35,000 and $17,000 were paid during the three months
ended September 30, 2009, and 2008, and approximately $81,000 and $71,000 were
paid during the first nine months of 2009 and 2008 respectively, to the law firm
of Germer Gertz, LLP of which Charles W. Goehringer, Jr. is a minority
partner. Mr. Goehringer acts as corporate counsel for the Company and
in November 2007 was appointed to the Board of Directors.
Directors’
fees of $9,000 and $6,000 were paid during the three months ended September 30,
2009, and 2008, and $30,000 were paid during the first nine months 2009 and
$3,000 of consulting fees and $21,000 of directors’ fees were paid during the
first nine months of 2008 to Robert Kennedy, Board member. The
consulting fee arrangement was terminated in January 2008. Directors’
fees relate to Mr. Kennedy’s service on the Board of TOCCO and its
subsidiaries.
15.
SUBSEQUENT EVENTS
Effective
October 21, 2009, the Company’s Board of Directors authorized issuance of 2,750
shares of common stock to 3 employees in recognition of their valued service for
over 30 years with the Company.
Management
has evaluated subsequent events through November 6, 2009, the date the financial
statements were issued.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009.
FORWARD
LOOKING AND CAUTIONARY STATEMENTS
Except
for the historical information and discussion contained herein, statements
contained in this release may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and
other factors that could cause actual results to differ materially, including
the following: a downturn in the economic environment; the Company’s failure to
meet growth and productivity objectives; fluctuations in revenues and purchases,
impact of local legal, economic, political and health conditions; adverse
effects from environmental matters, tax matters and the Company’s pension plans;
ineffective internal controls; the Company’s use of accounting estimates;
competitive conditions; the Company’s ability to attract and retain key
personnel and its reliance on critical skills; impact of relationships with
critical suppliers; currency fluctuations; impact of changes in market liquidity
conditions and customer credit risk on receivables; the Company’s ability to
successfully manage acquisitions and alliances; general economic conditions
domestically and internationally; insufficient cash flows from operating
activities; difficulties in obtaining financing; outstanding debt and other
financial and legal obligations; industry cycles; specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; 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 release, all of which are difficult to predict and many of which
are beyond the Company's control.
LIQUIDITY AND CAPITAL
RESOURCES
The
Company operates in two business segments, specialty petrochemicals (which is
composed of the entities owned by the Petrochemical Company) and mining. A
discussion of each segment's liquidity and capital resources
follows.
SPECIALTY PETROCHEMICALS
SEGMENT. Since the acquisition of TOCCO and subsidiaries in 1987, this
segment has contributed all of the Company’s internally generated cash flows. As
petroleum markets have fluctuated over the last twenty plus years, the primary
operating subsidiary, South Hampton, has been able to remain competitive by
raising prices, cutting costs, shifting focus, and/or developing new markets as
necessary. As a smaller niche player in a capital intensive industry
dominated by larger companies, continuing adjustments to the business plan have
been necessary to achieve steady profitability and growth. South
Hampton has developed a strong presence in the specialty C5 and C6 solvent
markets and has a reputation in the industry for quality, consistency, and
service to its customers. Product demand has continued to be strong
during the last several years and these conditions have allowed the
Petrochemical Segment to report significant earnings and adapt to continuing
volatility of the markets.
MINING SEGMENT.
Currently, the Company’s only asset in this segment is its ownership interest in
Pioche. In previous reports this segment included the Company’s
ownership interest in AMAK or its investment in the mining assets in Saudi
Arabia. Prior to 2009, costs that were incurred in Saudi Arabia in
relation to the mining venture were capitalized. These were transferred to AMAK
in December of 2008.
At this
time, the Company has no definitive plans for the development of its domestic
mining assets held by Pioche near Pioche, Nevada. The Company
periodically receives proposals from outside parties who are interested in
possibly developing or using certain assets. Management does not anticipate
making any significant domestic mining capital expenditures. Recent
investigation by the Company suggests the highest and best use of the property
may be for residential and commercial real estate development versus
accessibility of the minerals. However, the recent collapse in real
estate values prompted the Company to re-evaluate its holding and record an
impairment charge of approximately $496,000 in 2008. No further
charge was deemed necessary as of September 30, 2009.
INVESTMENT IN AMAK.
Implementation of the Saudi mining project had been delayed over the years until
the mining investment environment in Saudi Arabia was right. With prices over
the last few years at acceptable levels, and investment funds available, the
Company has successfully joined with Saudi investors in establishing
AMAK.
In
December 2008 the Company's mining lease was transferred to AMAK and AMAK is
constructing the mining and treatment facilities, and will operate the
mine. AMAK has all powers of administration over the Al Masane mining
project. The Company’s mining lease and note payable to the Saudi government are
in the process of being formally transferred once certain administrative matters
are completed with the incorporation documents to allow the transfer of the
license in lieu of a cash contribution. AMAK is building the mining
and treatment facilities and upon completion of construction in early 2010 will
operate the mine. The Company has four directors representing its
interests on an eight person board of directors with the Chairman of AMAK chosen
from the directors representing the Saudi investors. The original documents are
in Arabic, and English translations have been provided to the
parties. Board meetings are conducted in English for the benefit of
all attendees. See Note 13 above.
Metal
prices were at record lows worldwide during 2003, and therefore, numerous mining
projects were not economically feasible. As prices recovered during
the 2006-2008 time period, the project became economically
viable. Despite the drop in metal prices over the last half of 2008,
if spot prices as of September 30, 2009, are used in the analysis, or even the
ten year average of prices is used, the project remains economically
attractive. Mining economics, as with other capital intensive
extractive industries will vary over time as market prices rise and fall with
worldwide economic performance.
The
following chart illustrates the change from the average prices of 2006 through
2008 to current levels:
|
Average
Price
|
Spot
Price as of
|
|
Percentage
|
|
|
For 2006-2008
|
09/30/09
|
|
Increase/(Decrease)
|
|
Gold
|
$723.00
per ounce
|
$990.00
per ounce
|
|
|
36.93 |
% |
Silver
|
$
13.30 per ounce
|
$
16.11 per ounce
|
|
|
21.13 |
% |
Copper
|
$ 3.16
per pound
|
$ 2.70
per pound
|
|
|
(14.56 |
%) |
Zinc
|
$ 1.47
per pound
|
$ 0.84
per pound
|
|
|
(42.86 |
%) |
On June
22, 1999, the Company submitted a formal application for a five year exclusive
mineral exploration license for the Greater Al Masane Area of approximately
2,850 square kilometers surrounding the Al Masane mining lease area and
including the Wadi Qatan and Jebel Harr areas. The Company previously worked in
the Greater Al Masane Area after obtaining written authorization from the Saudi
Ministry of Petroleum and Mineral Resources, and expended over $2 million in
exploration work. Geophysical, geochemical and geological work and diamond core
drilling in the Greater Al Masane areas revealed mineralization similar to that
discovered at Al Masane. In August 2006 the Ministry notified the
Company that its application for a mineral exploration license did not comply
with requirements of the new Mining Code adopted in 2004. The
Ministry invited the Company to re-apply, taking into consideration the new
requirement that each application be limited to 100 square kilometers in
area. AMAK intends to re-apply for multiple areas, choosing the areas
previously identified as the highest grade locations. Exploration
license applications are being submitted in the name of
AMAK. Applications were submitted for two of the areas during the
second quarter, and further applications are expected to be filed in the near
future. The applications filed concerned one area deemed to be the
strongest potential for gold production and the other for nickel.
Management
has addressed two other significant financing issues within this segment. These
issues were the $11 million note (the “Note”) due the Saudi Arabian government
and accrued salaries and termination benefits of approximately $1,076,000 due
employees working in Saudi Arabia.
The Note
was originally due in ten annual installments beginning in 1984. The Company has
not made any repayments nor has it received any payment demands. The
final resolution of the Note was documented when the Ministry approved the
transfer of the
Al Masane
lease and assets to AMAK, and conditioned the transfer upon the Note being
transferred to AMAK, to be paid out of proceeds of the Mining
operation. As discussed in Note 13 - INVESTMENT IN AL MASANE AL KOBRA
MINING CO. to the consolidated financial statements above, all parties have
agreed that the Note will be assumed by AMAK, and AMAK will indemnify and defend
the company against any and all claims arising from the Note.
With
respect to accrued salaries and termination benefits due employees working in
Saudi Arabia, the Company has continued employing these individuals to meet the
needs of the mining operation. Upon finalization of the transfer of
the lease and the assets to AMAK, the Board voted to terminate the employees and
give them an opportunity to apply for work with AMAK if they
chose. Funds to pay severance and any back pay were transferred to
the Company’s bank account in Saudi Arabia in January 2009, and the termination
process is scheduled to be completed by the end of the year.
Operating
Activities
Cash
provided by Operating Activities was approximately $5,672,000 in the first nine
months of 2009 as compared with cash used of approximately $4,353,000 in the
same period of 2008. Primary factors leading to the 230.3% increase
in cash provided by operating activities during the first nine months of 2009 as
compared to the same period in 2008 are as follows:
(1)In
2009 trade receivables only increased $2,297,000, as compared to an increase of
$4,707,000 in 2008;
(2)In
2009 income tax receivable increased by about $2,570,000 as compared to a
decrease of $1,070,000 in 2008;
(3)In
2009 inventory increased approximately $1,342,000 (due to increased prices) as
compared to an increase of about $8,343,000 (also due to price and volume
increases) in 2008;
(4)In
2009 accounts payable and accrued liabilities decreased approximately $3,106,000
while in 2008 the same accounts increased by about $8,713,000;
(5)In
2009 derivative instrument deposits decreased $3,950,000 (due to return of
previous margin call deposits), as compared to an increase of $6,350,000 in
2008;
(6) In
2009 other liabilities increased $773,000 due to funds received from outside
parties for capital projects, as compared to no change in 2008;
(7)In
2009 accrued interest decreased approximately $21,000 as compared to an increase
of about $29,000 in 2008; and
(8)In
2009 accrued liabilities in Saudi Arabia decreased approximately $353,000 (due
to the payment of amounts owed to the then President of the Company), while in
2008 there was a decrease of about $1,000.
The
Company’s net income during the first nine months of 2009 increased by
approximately $9,608,000 or 410.1% in 2009 as compared to the corresponding
period of 2008. Major non-cash items affecting income included an increase in
depreciation of approximately $1,019,000, an decrease in the unrealized loss on
derivative instruments of approximately $17,362,000, a decrease in share-based
compensation of about $95,000, an increase in deferred income taxes of roughly
$12,153,000, and an increase in the provision for doubtful accounts of
approximately $111,000, a write off of accounts receivable of approximately
$485,000 and a decrease in post retirement obligations of about
$133,000.
Investing
Activities
Cash used
for investing activities during the first nine months of 2009 was approximately
$3,148,000, representing a decrease of approximately $11,694,000 over the
corresponding period of 2008. The Company made a conscious decision
in the first
three
quarters of 2009 to limit cash used for capital purchases. During the
first nine months of 2008 approximately $12.0 million was spent for additions to
Property, Pipeline and Equipment related to the Penhex Expansion project with
another $0.9 million being expended for the construction of additional office
space.
Financing
Activities
Cash used
in financing activities during the first nine months of 2009 was approximately
$2,788,000 versus cash provided by financing activities of approximately
$16,877,000 during the corresponding period of 2008. The Company made
principal payments on long-term debt during the first nine months of 2009 of
$4,000,000 on the Company’s line of credit and $1,300,000 on the term loan. In
2008 additions to long term debt of $16.9 million were from a $9.9 million draw
on the line of credit and a $7.0 million draw on the term loan.
On March
21, 2008, South Hampton entered into an 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 is
August 15, 2008 and terminates on December 15, 2017. As part of the
interest rate swap agreement South Hampton will pay an interest rate of 5.83%
and receive interest based upon LIBOR or a base rate plus a markup from Bank of
America. South Hampton has 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
Statement of Stockholders’ Equity. At September 30, 2009, Accumulated
Other Comprehensive Loss net of $393,068 tax was $763,014 related to this
transaction.
At
December 31, 2008, margin deposits made on the financial swaps of $3,950,000 due
to the decrease in the price of natural gasoline and crude were recorded on the
Company’s Balance Sheet as financial contract deposits. In the first
nine months of 2009 all of the collateral in the amount of $3,950,000 was
returned to the Company.
RESULTS OF
OPERATIONS
SPECIALTY PETROCHEMICALS
SEGMENT. In the quarter ended September 30, 2009, total petrochemical
product sales decreased by about $9,043,000, transloading sales decreased by
$7,891,000, and toll processing fees decreased by $160,000 for a net decrease in
revenue of $17,094,000 or 35.8% over the same quarter of 2008. Sales
volume of petrochemical products for the third quarter of 2009 versus 2008
increased approximately 24.3%; however, sales volume from the transloading
venture decreased by 100.0% due to the expiration of the contract earlier in
2009. During the third quarter of 2009, the cost of petrochemical
sales and processing (including depreciation) decreased approximately $30.5
million or 53.6% as compared to the same period in 2008. Consequently, total
gross profit margin on revenue for the third quarter of 2009 increased
approximately $13.4 million or 147.1% as compared to the same period in 2008.
The increase in gross profit margin for the period was due to decreased price of
feedstock during the quarter.
The
Company had no transloading sales for the third quarter of 2009 due to the
expiration of the contract. This represents a decrease of
approximately $7,891,000 or 100% below fees for the same period in
2008. Starting in April 2008, increasing in May 2008, and finally at
full contracted volume in June 2008, the Company began loading railcars with
natural gasoline for shipment to Canada to be used in oil sands processing. The
Company purchases natural gasoline as part of its normal feedstock acquisition,
loads the railcars and charges the customer the cost of the material plus a
markup to cover expense and profit on the activity. Natural gasoline
for this operation is purchased, loaded and invoiced to the customer within the
same month based upon monthly average prices for that month, thereby mitigating
risk of price excursions which might harm the economics of the venture. The
Company had a one year contract that expired in April 2009 to provide this
service at a fixed volume and markup. The market for diluents used in the oil
sands crude production dried up as the price of crude oil fell to comparatively
low levels in the later part of 2008. It is not expected that the business will
pick up until crude shows strengthening over the longer
term. However, certain customers have approached the Company about a
possible
contract
for the 2010 calendar year. Negotiations are underway to secure
another contract.
Toll
processing fee revenue for the third quarter of 2009 of approximately $907,000
represents a decrease of approximately $160,000 or 15.0% below fees for the same
period in 2008. Toll processing customers are active and remain on
long-term contracts. While there are some fluctuations in tolling
volumes handled, toll processing has developed into a stable business and the
Company continues to search for opportunities which fit its location and process
capabilities. Toll processing fees are expected to remain flat for the remainder
of 2009.
The cost
of petrochemical product sales and processing and gross profit for the three
months ended September 30, 2009 was not impacted by the derivative
transactions. The cost of petrochemical product sales and processing
and gross profit for the three months ended September 30, 2008 includes an
unrealized loss of approximately $17,737,000 and a realized gain of
approximately $2,378,000 for a net loss effect of about
$15,359,000.
For the
nine month period ending September 30, 2009, total petrochemical product sales,
transloading sales and processing fees decreased approximately $35.0 million or
28.7%, and the cost of petrochemical sales and processing, including
depreciation, decreased approximately $52.0 million or 43.7% for the same period
in 2008. Consequently, the total gross profit margin on petrochemical product
sales, transloading sales and processing during the first nine months of 2009
increased approximately $17.1 million as compared to the same period in 2008.
The cost of petrochemical product sales and processing and gross profit margin
for the nine month period ended September 30, 2009, includes an estimated
unrealized gain of approximately $17,447,000 a realized loss of $16,338,000 for
a net gain effect of approximately $1,109,000. The cost of
petrochemical product sales and processing and gross profit margin for the nine
month period ended September 30, 2008, includes an estimated unrealized loss of
approximately $10,121,000 a realized gain of $5,465,000 for a net loss effect of
approximately $4,656,000.
Growth of
the North American markets served by the Company has generally been 2% to 3%
annually over the past ten (10) years. The Company’s growth in
production has generally matched that trend over the same time period, although
after the March 2005 expansion, the Company’s growth rate in production and
sales exceeded the industry wide growth rate. The Company bases its
marketing philosophy on high quality, consistent products and service to
customers, and believes this is essential to being successful in the specialty
product marketplace. In addition to growth in the North American
market, the Company is actively pursuing export opportunities with current sales
in Australia, Brazil, Europe and the Middle East among other areas. A
marketing office in Madrid, Spain was recently opened to better serve potential
customers in Europe and the Eastern Hemisphere.
Demand
remained strong for most products through the first nine months of 2009, and the
process ran at 55.4% of the new expanded capacity per calendar
day. For the third quarter of 2009, the process ran at 58.8% of the
new Penhex capacity. With the addition of the new facilities in October 2008,
the percent of utilization, while flat in terms of real volume, is lower on a
percentage basis due to the increased baseline capacity. The Company
expects it to take three to five years to market the full volume of product
available under the new capacity. With the previous capacity
limitations, the utilization rate was generally in the low 90%
range.
Since
2003 the Company has entered into derivative agreements to dampen sudden price
spikes and provide feedstock price protection. Management believes
that if the derivative agreements can moderate the rate of change in the overall
cost of feedstock, product prices can be adjusted sufficiently as needed to
maintain margins. Generally, a maximum of 50% of the Company’s monthly feedstock
requirements for three to nine months ahead may be covered at any one time
although 20% to 30% has been the typical range. This ratio cushions
price increases and allows the Company to experience partial benefit when the
price drops. The program is designed to insure against unforeseen
dramatic price swings rather than a speculative profit
center. The
Company
primarily employs a “buy and hold” strategy. After the hedging losses
incurred by the precipitant drop in petroleum prices in the second half of 2008,
the Board of Directors determined that an updated policy, risk review procedure,
and oversight process was needed prior to resuming the hedging
program. On August 31, 2009, the Company adopted a formal risk
management policy (see Note 8). Management believes the need for
hedging protection is diminished in the current petroleum markets with weak
demand and plentiful supply. The price of natural gas (fuel gas),
which is the petrochemical operation’s largest single operating expense,
decreased during the first nine months of 2009 as compared to 2008.
MINING SEGMENT, GENERAL
CORPORATE EXPENSES AND BALANCE SHEET DISCUSSION. None of the
Company's operations in its Mining Segment generate operating or other revenues.
Noncontrolling Interest reflected on the Statements of Income represents Pioche
minority stockholders’ share of the losses from Pioche operations. Pioche losses
are primarily attributable to the costs of maintaining the Nevada mining
properties.
The Al
Masane mining project, prior to being transferred to AMAK in December 2008,
required approximately $60,000 per month of cash outlay to maintain facilities
and advance development of the project in addition to the lease payment of
$117,300 per year. During the first nine months of 2009 the Company
recorded approximately $339,000 as expense. These expenses were
normal expenses relating to salaries and administration in Saudi Arabia, but due
to the asset transfer to AMAK were no longer capitalized. The Saudi
Arabian office of the Company is in the process of being closed. Once
accomplished, these expenses should be minimal.
General
and Administrative costs for the third quarter of 2009 increased
approximately $825,000 as compared to the same period in 2008 due primarily
to the expensing of expenditures in Saudi Arabia versus their capitalization in
the prior year. General and Administrative costs for the first nine
months of 2009 increased approximately $303,000 as compared to the same
period in 2008. This increase is primarily attributable to
approximately $135,000 additional expense related to the consulting fees for
marketing studies, an increase in property taxes of about $112,000, and an
increase of $55,000 related to travel expenses.
Interest
expense for the third quarter of 2009 of approximately $324,000 represents
an increase of approximately $215,000 over the same period in
2008. Interest expense increased in 2009 due to the increase in notes
payable balances related to the expansion of the facilities in Silsbee,
Texas. Interest expense for the first nine months of 2009 of
approximately $971,000 represents an increase of approximately $771,000 for
the same period in 2008. Interest expense increased in 2009 due to
the increase in notes payable balances related to the expansion of the
facilities.
The
Balance Sheet of the Company includes several noteworthy changes for September
30, 2009 as compared to that published in the Company’s Annual Report for
December 31, 2008, primarily attributable to the Petrochemical Segment. Trade
receivables increased during the first nine months of 2009 by $2.2 million to
$14.1 million due to increased credit terms being allowed to foreign
customers. The average collection period remains normal for the
business. Inventories increased from December 31, 2008 due to an
increase in the volume and price of inventory the Company had on hand at the end
of the period. As discussed previously, derivative instruments decreased from a
current liability of approximately $8.7 million to $1.2 million due to
settlements of instruments during the first nine months of 2009 and changes in
fair value of contracts on hand at September 30, 2009.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Derivative
Instrument Risk
Refer to
Note 8 on pages 10 through 12 of this Form 10-Q.
Interest
Rate Risk
Refer to
Note 8 on pages 10 through 12 of this Form 10-Q.
Except as
noted above, there have been no material changes in the Company’s exposure to
market risk from the disclosure included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008.
ITEM
4. CONTROLS AND PROCEDURES.
The
Company’s management evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer, the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were effective as of the end of the period covered by this
report. There has been no change in the Company’s internal control
over financial reporting that occurred during the quarter covered by this report
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
There
have been no reportable legal proceedings or activity for the
quarter.
ITEM
1A. RISK FACTORS
There
have been no material changes from the risk factors previously disclosed in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008
except as noted below.
The
Company is facing heightened risks due to the current business environment.
Challenges in the current business environment due to disruptions in the capital
markets present heightened risks to the Company. The deterioration in
the macroeconomic environment, including disruptions in the credit markets, is
also impacting the Company’s customers. Depending upon the severity and duration
of these factors, the Company’s profitability and liquidity position could be
negatively impacted.
ITEM
6. EXHIBITS.
The
following documents are filed or incorporated by reference as exhibits to this
Report. Exhibits marked with an asterisk (*) are management contracts or a
compensatory plan, contract or arrangement.
Exhibit
Number
|
Description
|
3(i)
|
- Certificate
of Incorporation of the Company as amended through the Certificate of
Amendment filed with the Delaware Secretary of State on July 19, 2000
(incorporated by reference to Exhibit 3(a) to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2000 (File No.
0-6247)).
|
3(ii)
|
- 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)
|
- Loan
Agreement dated January 24, 1979 between the Company, National Mining
Company and the Government of Saudi Arabia (incorporated
by reference to Exhibit 10(b) to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1999 (File No.
0-6247)).
|
10(b)
|
- Mining
Lease Agreement effective May 22, 1993 by and between the Ministry of
Petroleum and Mineral Resources and the Company (incorporated
by reference to Exhibit 10(c) to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1999 (File No.
0-6247)).
|
10(c)
|
- Equipment
Lease Agreement dated November 14, 2003, between Silsbee Trading and
Transportation Corp. and South Hampton Refining Company (incorporated by
reference to Exhibit 10(o) to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2003 (File No.
0-6247)).
|
Exhibit
Number
|
Description
|
10(d)
|
- Addendum
to Equipment Lease Agreement dated August 1, 2004, between Silsbee Trading
and Transportation Corp. and South Hampton Refining Company (incorporated
by reference to Exhibit 10(q) to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 (file No.
0-6247)).
|
10(e)
|
- 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(f)
|
- Financial
and Legal Service and Advice Agreement dated August 5, 2006 between
Arabian American Development Company, Nassir Ali Kadasa, and Dr. Ibrahim
Al-Mounif (incorporated by reference to Exhibit 10(j) to the Company’s
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2006
(file No. 0-6247)).
|
10(g)*
|
- 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(filed No. 0-6247)).
|
10(h)*
|
- 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(i)*
|
- 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(j)
|
- 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.
0-6247)).
|
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)).
|
31.1
|
- Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
- Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
Exhibit
Number
|
Description
|
32.1
|
- Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
- Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DATE: November
6,
2009 ARABIAN AMERICAN DEVELOPMENT
COMPANY
(Registrant)
By: /s/Connie
Cook
Connie Cook
Treasurer