UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-K
(MARK ONE)
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
The Fiscal Year Ended December 31, 2008
OR
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¨
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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
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___________________
ARABIAN
AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as
specified in its charter)
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Delaware
(State
or other jurisdiction of incorporation or organization)
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75-1256622
(I.R.S.
Employer
Identification
No.)
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10830
North Central Expressway Suite 175
Dallas,
Texas
(Address
of principal executive offices)
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75231
(Zip
code)
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Registrant’s
telephone number, including area code: (214) 692-7872
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
(Title
of Class)
Common
stock, par value $0.10 per share
___________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes¨ Noý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes¨ No ý
_____________________
Indicate
by check mark whether the registrant (l) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yesý No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ý Non-accelerated
filer ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes¨ No ý
The
aggregate market value on June 30, 2008 of the registrant’s voting securities
held by non-affiliates was $103,469,814.
Number of
shares of registrant’s Common Stock, par value $0.10 per share, outstanding as
of March 6, 2009: 23,421,995.
DOCUMENTS
INCORPORATED BY REFERENCE
No
documents are incorporated by reference into this report.
TABLE
OF CONTENTS`
Item
Number and Description
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PART
I
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ITEM
1. BUSINESS
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General
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1
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International
Operations
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2
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Competition
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5
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Environmental
Matters
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6
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Personnel
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7
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Available
Information
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8
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ITEM
1A. RISK FACTORS
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8
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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11
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ITEM
2. PROPERTIES
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United
States Specialty Products Facility
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11
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Saudi
Arabia Mining Properties
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13
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United
States Mineral Interests
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18
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Offices
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19
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ITEM
3. LEGAL PROCEEDINGS
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21
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
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21
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PART
II
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ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND
RELATED SHAREHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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22
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ITEM
6. SELECTED FINANCIAL DATA
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23
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS
OF OPERATION
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General
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23
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Liquidity
and Capital Resources
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23
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Results
of Operations
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27
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Critical
Accounting Policies
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32
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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35
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
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35
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND
FINANCIAL DISCLOSURE
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36
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ITEM
9A. CONTROLS AND PROCEDURES
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36
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ITEM
9B. OTHER INFORMATION
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37
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PART
III
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ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
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38
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ITEM
11. EXECUTIVE COMPENSATION
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39
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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43
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
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45
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ITEM
14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
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45
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PART
IV
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ITEM
15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
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47
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PART
I
ITEM
1. Business.
General
Arabian
American Development Company (the “Company”) was organized as a Delaware
corporation in 1967. The Company’s principal business activities include
manufacturing various specialty petrochemical products and developing mineral
properties in Saudi Arabia and the United States.
United States Activities. The
Company’s domestic activities are primarily conducted through a wholly owned
subsidiary, American Shield Refining Company (the “Petrochemical Company”),
which owns all of the capital stock of Texas Oil and Chemical Co. II, Inc.
(“TOCCO”). TOCCO owns all of the capital stock of South Hampton Resources Inc.
(“South Hampton”), and South Hampton owns all of the capital stock of Gulf State
Pipe Line Company, Inc. (“Gulf State”). South Hampton owns and operates a
specialty petrochemical facility near Silsbee, Texas which produces high purity
petrochemical solvents and other petroleum based products. Gulf State owns and
operates three pipelines which connect the South Hampton facility to a natural
gas line, to South Hampton’s truck and rail loading terminal and to a major
petroleum products pipeline owned by an unaffiliated third party. The
Company also directly owns approximately 55% of the capital stock of a Nevada
mining company, Pioche-Ely Valley Mines, Inc. (“Pioche”). Pioche does
not conduct any substantial business activities. See Item 2.
Properties.
Saudi Arabia Activities.
Prior to December 2008, the Company held a thirty (30) year mining lease (which
commenced on May 22, 1993) covering an approximate 44 square kilometer area in
the Al Masane area in southwestern Saudi Arabia. The lease carries an option to
renew or extend the term of the lease for additional periods not to exceed
twenty (20) years. The lease was contributed to Al Masane Al Kobra
Mining Company (“AMAK” formerly known as “ALAK”) in December 2008 in return for
a fifty percent ownership interest in AMAK.
In 1999
the Company applied for an exploration license covering an area of approximately
2,850 square kilometers surrounding the mining lease area, where it has
previously explored with the written permission of the Saudi Ministry of
Petroleum and Mineral Resources. In 2005 the Saudi Mining Code was
changed which necessitated the re-submission of these applications and the
re-submission is being prepared in the format required by the new
Code. The information relating to these areas were also transferred
to AMAK, and the new applications will be in the name of the joint
venture.
See Item 2. Properties for
additional discussions regarding all of the Company’s properties and financing
of the Al Masane project.
Note 16 to the Consolidated
Financial Statements contains information regarding the Company’s
industry segments and geographic financial information for the years ended
December 31, 2008, 2007 and 2006. In addition, see Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations for a
discussion of the Company’s liquidity, capital resources and operating
results.
International
Operations
A
substantial portion of the Company’s mineral properties and related interests is
located in Saudi Arabia. Specific and known risks are discussed in detail in
this report; however, the Company’s international operations involve additional
general risks not usually associated with domestic operations, any of which
could have a material and adverse affect on the Company’s business, financial
condition or results of operations, including a heightened risk of the
following:
Economic and Political Instability;
Terrorist Acts; War and Other Political Unrest. The U.S. military action
in Iraq and Afganistan, the terrorist attacks that took place in the United
States on September 11, 2001, the potential for additional future terrorist acts
and other recent events have caused uncertainty in the world’s financial markets
and have significantly increased global political, economic and social
instability, including in Saudi Arabia, a country in which the Company has
substantial interests. It is possible that further acts of terrorism may be
directed against the United States domestically or abroad, and such acts of
terrorism could be directed against the Company’s investment in those locations.
The Company’s interests in Saudi Arabia and elsewhere could be further adversely
affected by post-war conditions in Iraq or Afganistan if armed hostilities, acts
of terrorism or other unrest persist. Recent acts of terrorism and threats of
armed conflicts elsewhere in the Middle East could also limit or disrupt the
Company’s operations.
War and
other political unrest may also cause unforeseen delays in the development of
the Company’s interests located in Saudi Arabia and may pose a direct security
risk to their interests.
Such
economic and political uncertainties may materially and adversely affect the
Company’s business, financial condition or results of operations in ways that
cannot be predicted at this time.
Terrorist
acts, conflicts and wars may seriously harm our business and revenue, costs and
expenses and financial condition and stock price. Terrorist acts, conflicts or
wars (wherever located around the world) may cause damage or disruption to the
Company, its employees, facilities, partners, suppliers, distributors, resellers
or customers. The potential for future attacks, the national and international
responses to attacks or perceived threats to national security, and other actual
or potential conflicts or wars, including the ongoing military operations in
Iraq, have created many economic and political uncertainties. Although it is
impossible to predict the occurrences or consequences of any such events, they
could result in a decrease in demand for our products, make it difficult or
impossible to deliver products to our customers or to receive components from
our suppliers, create delays and inefficiencies in our supply chain and result
in the need to impose employee travel restrictions. The Company is predominantly
uninsured for losses and interruptions caused by terrorist acts, conflicts and
wars. The Company’s future revenue, gross margin, expenses and financial
condition also could suffer due to a variety of international factors,
including:
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ongoing
instability or changes in a country’s or region’s economic or political
conditions, including inflation, recession, interest rate fluctuations and
actual or anticipated military or political
conflicts;
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• longer
accounts receivable cycles and financial instability among
customers;
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trade
regulations and procedures and actions affecting production, pricing and
marketing of products;
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• local
labor conditions and regulations;
• geographically
dispersed workforce;
• changes
in the regulatory or legal environment;
• differing
technology standards or customer requirements;
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import,
export or other business licensing requirements or requirements relating
to making foreign direct investments, which could affect our ability to
obtain favorable terms for labor and raw materials or lead to penalties or
restrictions;
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difficulties
associated with repatriating cash generated or held abroad in a
tax-efficient manner and changes in tax laws;
and
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fluctuations
in freight costs and disruptions in the transportation and shipping
infrastructure at important geographic points of exit and entry for our
products and shipments.
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Currency
variations also contribute to fluctuations in sales of products and services in
impacted jurisdictions. In addition, currency variations can adversely affect
margins on sales of the Company’s products in countries outside of the United
States.
Business
disruptions could harm the Company’s future revenue and financial condition and
increase its costs and expenses. The Company’s operations could be subject to
earthquakes, power shortages, telecommunications failures, water shortages,
tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions,
medical epidemics and other natural or manmade disasters or business
interruptions, for some of which the Company may be self-insured. The occurrence
of any of these business disruptions could harm the Company’s revenue and
financial condition and increase its costs and expenses.
Termination of Mining Lease;
Expropriation or Nationalization of Assets. AMAK’s mining lease for the
Al Masane area in Saudi Arabia, which it received from the Company in December
2008, is subject to the risk of termination if AMAK does not comply with its
contractual obligations. See Item 2. Properties. Further,
the Company’s foreign investments in assets are subject to the risk of
expropriation or nationalization. If a dispute arises, the Company may have to
submit to the jurisdiction of a foreign court or panel or may have to enforce
the judgment of a foreign court or panel in that foreign
jurisdiction.
Compliance with Foreign Laws.
Because of the Company’s substantial international investments, its business is
affected by changes in foreign laws and regulations (or interpretation of
existing laws and regulations) affecting both the mining and petrochemical
industries, and foreign taxation. The Company will be directly affected by the
adoption of rules and regulations (and the interpretations of such rules and
regulations) regarding the exploration and development of mineral properties for
economic, environmental and other policy reasons. The Company may be required to
make significant capital expenditures to comply with non-U.S. governmental laws
and regulations. It is also possible that these laws and regulations
may in the future add significantly to the Company’s
operating
costs or may significantly limit its business activities. Additionally, the
Company’s ability to compete in the international market may be adversely
affected by non-U.S. governmental regulations favoring or requiring the awarding
of leases, concessions and other contracts or exploration licenses to local
contractors or requiring foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction. The Company is not
currently aware of any specific situations of this nature, but there is always
opportunity for this type of difficulty to arise in the international business
environment.
Mining Management
Risks. The Company’s management and Board of Directors have
many years of experience in the exploration for, and development of, mineral
prospects in various parts of the world. The members of the Company’s Board
serving concurrently on the AMAK Board are:
Mr. Hatem El Khalidi,
who holds a MSc. Degree in Geology from Michigan State University, is also a
consultant in oil and mineral exploration. He has served as President
of the Company since 1975 and Chief Executive Officer of the Company since
February 1994. Mr. El Khalidi originally discovered the Al Masane
deposits, and development has been under his direct supervision throughout the
life of the project. Mr. El Khalidi’s current term expires in
2010. Mr. El Khalidi serves on the Board of AMAK.
Mr. Ghazi Sultan, a
Saudi citizen, holds a MSc. Degree in Geology from the University of
Texas. Mr. Sultan served as the Saudi Deputy Minister of Petroleum
and Mineral Resources 1965-1988 and was responsible for the massive expansion of
the mineral resources section of the Ministry. Mr. Sultan is a member of the
Audit, Nominating, and Compensation Committees of the Company. Mr.
Sultan’s current term expires in 2010. Mr. Sultan serves on the
Board of AMAK.
Mr. Nicholas Carter,
the Company’s Executive Vice President and Chief Operating Officer, is a
graduate of Lamar University with a BBA Degree in Accounting, is a CPA, and has
extensive experience in the management of the Company’s petrochemical
segment. His employment in the petrochemical business predates the
acquisition by the Company in 1987. Mr. Carter was appointed to the Board on
April 27, 2006. Mr. Carter’s current term expires in
2011. Mr. Carter also serves as a Director and President of Pioche
Ely Valley Mines, Inc. of which the Company owns 55% of the outstanding
stock. Mr. Carter was appointed to the Board of AMAK in February
2009.
Dr. Ibrahim Al Moneef
was appointed to the Board on April 26, 2007. Dr. Al Moneef holds a
PhD in Business Administration from the University of Indiana. He
currently is owner and chief editor of The Manager Monthly Magazine,
a Saudi business journal. He has held key positions with companies doing
business in the Kingdom, including the Mawarid Group, the Ace Group, and the
Saudi Consolidated Electric Company. Dr. Al Moneef serves on the Compensation
and Nominating Committees, and his current term expires in 2009. Dr.
Al Moneef was a member of the Audit Committee until February 21, 2008, when he
tendered his resignation. Mr. Al Moneef serves on the Board of
AMAK.
Neither
management nor Board members have personally operated a mine on a day to day
basis, nor have they marketed the product of a mining operation. The
Company and AMAK have from time to time employed various respected engineering
and financial advisors to assist in the development and evaluation of the mining
projects. The consultants most currently used to update the
feasibility of the Al Masane project are SNC-Lavalin of Toronto,
Canada. The Company and AMAK also use the services of Adrian Molinari
of Toronto, Canada for ongoing guidance. The Company believes that
with the use of competent consultants and with the hiring of experienced
personnel by AMAK in which the Company holds a fifty percent ownership interest
and four of the eight seats on the AMAK Board, the mining venture is being
established and operated in a professional and successful
manner. The
amount of risk will ultimately depend upon the Company’s and AMAK’s ability to
use consultants and experienced personnel to manage the operation.
Other Difficulties and Risks
Associated with International Operations. The Company also may experience
difficulty in managing and staffing operations across international borders,
particularly in remote locations. Additional risks associated with the Company’s
international operations, any of which could disrupt the Company’s operations,
include changing political conditions, foreign and domestic monetary policies,
international economics, world metal price fluctuations, foreign currency
fluctuations, foreign taxation, foreign exchange restrictions, trade protective
measures and tariffs. The establishment of AMAK with its own
management and staff should assist in mitigating many of these potential
risks.
Competition
The
Company competes in both the petrochemical and mining industries. Accordingly,
the Company is subject to intense competition among a large number of companies,
both larger and smaller than the Company, many of which have financial
capability, facilities, personnel and other resources greater than the Company.
In the specialty products and solvents markets, the Petrochemical Company has
one principal competitor.
All of
the Petrochemical Company’s raw materials are purchased on the open
market. The Company has contracts in place for approximately
two-thirds of its monthly supply and purchases the remainder on the spot market
depending on inventory and operational needs. The contracts are
priced upon monthly averages of posted market prices with the remainder being a
function of spot market oil and gas prices. The price of the
feedstock utilized by the Company historically carries an 88% correlation to
crude oil prices but is not as volatile on a day to day basis. However, the
historic correlation has not held true with the price fluctuations of crude
since mid-2008. Currently, and the feedstock prices appear
to be moving in relation to the price of motor gasoline more so than in prior
years.
Because
of the following factors, as well as other variables affecting operating
results, past financial performance may not be a reliable indicator of future
performance, and historical trends should not be used to anticipate results or
trends in future periods. The Company encounters aggressive
competition from numerous and varied competitors in all areas of its business,
and competitors may target the Company’s key market segments. The Company
competes primarily on the basis of performance, price, quality, reliability,
reputation, distribution, service, and account relationships. If the Company’s
products, services, support and cost structure do not enable it to compete
successfully based on any of those criteria, the Company’s operations, results
and prospects could be harmed. The Company has a portfolio of
businesses and must allocate resources across these businesses while competing
with companies that specialize in one or more of these product lines. As a
result, the Company may invest less in certain areas of its businesses than
competitors do, and these competitors may have greater financial, technical and
marketing resources available to them than the Company’s businesses that compete
against them. Industry consolidation also may affect competition by creating
larger, more homogeneous and potentially stronger competitors in the markets in
which the Company competes, and competitors also may affect the Company’s
business by entering into exclusive arrangements with existing or potential
customers or suppliers. The Company may have to continue to lower the prices of
many of its products and services to stay competitive, while at the same time
trying to maintain or improve revenue and gross margin.
If the
Company cannot continue to develop, manufacture and market products and services
that meet customer requirements, its revenue and gross margin may suffer. The
Company must make long-term investments and commit significant resources before
knowing whether its predictions will accurately reflect customer demand for
products and services. After the Company develops a product, it must be able to
manufacture appropriate volumes quickly and at competitive costs. In the course
of conducting business, the Company must adequately address quality issues
associated with its products and services. In order to address quality issues,
the Company works extensively with its customers and suppliers to determine the
cause of the problem and to determine appropriate solutions. However, the
Company may have limited ability to control quality issues. If the Company is
unable to determine the cause or find an appropriate solution it may delay
shipment to customers, which would delay revenue recognition and could adversely
affect the Company’s revenue and reported results. Finding solutions to quality
issues can be expensive, adversely affecting Company profits. If new or existing
customers have difficulty utilizing the Company’s products, its operating
margins could be adversely affected, and it could face possible claims if the
Company fails to meet its customers’ expectations. In addition, quality issues
can impair the Company’s relationships with new or existing customers and
adversely affect its reputation, which could have a material adverse effect on
operating results.
Economic
uncertainty could affect adversely the Company’s revenue, gross margin and
expenses. The Company’s revenue and gross margin depend significantly on general
economic conditions and the demand for products in the markets in which it
competes. Future continued economic weakness may result in decreased revenue,
gross margin, earnings or growth rates and problems with the Company’s ability
to manage inventory levels and collect customer receivables. The Company could
experience such economic weakness and reduced spending due to the effects of
high fuel costs. In addition, future customer financial difficulties could
result in increases in bad debt write-offs and additions to reserves in the
Company’s receivables portfolio. The Company also has experienced, and may
experience in the future, gross margin declines in certain businesses,
reflecting the effect of items such as competitive pricing pressures, inventory
write-downs, and increases in post-retirement benefit expenses. Economic
downturns, such as the current worldwide economic downturn, may also lead to
restructuring actions and associated expenses. Uncertainty about future economic
conditions makes it difficult for the Company to forecast operating results and
to make decisions about future investments.
Environmental
Matters
In 1993,
during remediation of a small spill area, the Texas Commission on Environmental
Quality (TCEQ) required South Hampton to drill a well to check for groundwater
contamination under the spill area. Two pools of hydrocarbons were discovered to
be floating on the groundwater at a depth of approximately 25 feet. One pool is
under the site of a former gas processing plant owned and operated by Sinclair,
Arco and others before its purchase by South Hampton in 1981. Analysis of the
material indicates it entered the ground prior to South Hampton’s acquisition of
the property. The other pool is under the original South Hampton
facility and analysis indicates the material was deposited decades ago. Tests
conducted have determined that the hydrocarbons are contained on the property
and not migrating in any direction. The recovery process was initiated in June
1998 and approximately $53,000 was spent setting up the system. The recovery is
proceeding as planned and is expected to continue for many years until the pools
are reduced to acceptable levels. Expenses of recovery and periodic migration
testing are being recorded as normal operating expenses. Expenses
for
future recovery are expected to stabilize and be less per annum than the initial
set up cost, although there is no assurance of this effect.
The light
hydrocarbon recovered from the former gas plant site is compatible with the
normal Penhex feedstock and is accumulated and transferred into the Penhex
feedstock tank. The material recovered from under the original South
Hampton site is accumulated and sold as a by-product. Approximately
503 barrels were recovered during 2007 and 405 barrels during
2008. The recovered material had an economic value of approximately
$40,000 during 2007 and $17,050 during 2008. Consulting engineers
estimate that as much as 20,000 barrels of recoverable material may be available
to South Hampton for use in its process or for sale. At current
market values this material, if fully recovered would be worth approximately
$840,000. The final volume present and the ability to recover it are both highly
speculative issues due to the area over which it is spread and the fragmented
nature of the pockets of hydrocarbon.
South
Hampton has drilled additional wells periodically to further delineate the
boundaries of the pools and to ensure that migration has not taken place. These
tests confirmed that no migration of the hydrocarbon pools has
occurred. The TCEQ has deemed the current action plan acceptable and
reviews the plan on a semi-annual basis.
In other
remediation activity, South Hampton investigated a potential chemical dump site
on the facility property relating to ownership by Arco in the 1950’s. The
investigation indicated no further action is required and the site was closed in
November of 2007. The Company also continues to remediate the site of
a pipeline leak which occurred in 2001. The affected site contains less than
one-eighth acre of land and the cost of remediation is being covered by
insurance. The amount of material spilled was minimal and due to the nature of
the soil and location, further remediation will rely on natural
attenuation. The Company has applied to the Texas Railroad Commission
for approval to consider the site closed if two years of annual monitoring
indicate no movement of hydrocarbon. Also, see Item 3. Legal
Proceedings.
The Clean
Air Act Amendments of 1990 have had a positive effect on the Petrochemical
Company’s business as manufacturers search for ways to use more environmentally
acceptable materials in their processes. There is a current trend among
manufacturers toward the use of lighter and more recoverable C5 hydrocarbons
(pentanes) which comprise a large part of the Petrochemical Company’s product
line. Management believes its ability to manufacture high quality solvents in
the C5 hydrocarbon market will provide a basis for growth over the coming
years. Also, as the use of C6 solvents is phased out in parts
of the industry, several manufacturers of such solvents have opted to no longer
market those products. As the number of producers has consolidated,
the Company has increased its market share at higher sales prices from customers
who still require C6 solvents in their business. Also, see Item
2. Properties.
Personnel
Mr. Hatem
El Khalidi, a US citizen and the Company’s President and Chief Executive Officer
splits his time between the US and Saudi Arabia. Mr. El Khalidi
supervised the Company’s 14-15 mining segment employees in Saudi Arabia,
consisting of the office personnel and field crews who were primarily charged
with maintaining and caring for the facilities and equipment located at the mine
site. These employees are being terminated in early 2009 as AMAK has
taken over the operation of the mine site. Mr. El Khalidi also serves
as a Director of AMAK. Mr. El Khalidi has announced plans to retire
from his positions as President and Chief Executive Officer of the
Company
effective June 30, 2009. Mr. Carter will assume these positions upon
Mr. El Khalidi’s retirement.
Mr.
Nicholas Carter, Executive Vice President and Chief Operating Officer of the
Company and President of the Petrochemical Segment, resides in southeast Texas,
and is a US citizen. The Petrochemical Company employs 130 persons.
Ms.
Connie Cook, Secretary/Treasurer of the Company and Controller of the
petrochemical companies resides in southeast Texas, and is a US
citizen.
Available
Information
The
Company will provide paper copies of this Annual Report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to those reports, all as filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, free of charge upon written or oral
request to Arabian American Development Company, P. O. Box 1636, Silsbee,
TX 77656, (409) 385-8300. The Company’s website address is
arabianamericandev.com. The petrochemical subsidiary, South Hampton
Resources, Inc. has a website at southhamptonr.com.
ITEM
1A. Risk
Factors.
The
Company’s use of single source suppliers for certain raw materials could create
supply issues. Replacing a single source supplier could delay production of some
products as replacement suppliers initially may be subject to capacity
constraints or other output limitations. The loss of a single source supplier,
the deterioration of the Company’s relationship with a single source supplier,
or any unilateral modification to the contractual terms under which the Company
is supplied raw materials by a single source supplier could adversely affect the
Company’s revenue and gross margins.
The
revenue and profitability of the Company’s operations have historically varied,
which makes its future financial results less predictable. The Company’s
revenue, gross margin and profit vary among its products, customer groups and
geographic markets and therefore will likely be different in future periods than
currently. Overall gross margins and profitability in any given period are
dependent partially on the product, customer and geographic mix reflected in
that period’s net revenue. In addition, newer geographic markets may be
relatively less profitable due to investments associated with entering those
markets and local pricing pressures. Market trends, competitive pressures,
increased raw material or shipping costs, regulatory impacts and other factors
may result in reductions in revenue or pressure on gross margins of certain
segments in a given period, which may necessitate adjustments to the Company’s
operations.
Unanticipated
changes in the Company’s future tax rate or exposure to additional income tax
liabilities could affect its profitability. The Company is currently subject to
income taxes in the United States.
In order
to be successful, the Company must attract, retain and motivate executives and
other key employees, including those in managerial, technical, sales, and
marketing positions. The Company also must keep employees focused on the
Company’s strategies and goals. The failure to hire or loss of key employees
could have a significant impact on the Company’s operations.
The
Company’s stock price, like that of other companies, can be volatile. Some of
the factors that can affect its stock price are:
|
|
•
|
Speculation
in the press or investment community about, or actual changes in, our
executive team, strategic position, business, organizational structure,
operations, financial condition, financial reporting and results,
effectiveness of cost cutting efforts, prospects or extraordinary
transactions;
|
|
|
•
|
Announcements
of new products, services, technological innovations or acquisitions by
the Company or competitors; and
|
|
|
•
|
Quarterly
increases or decreases in revenue, gross margin or earnings, changes in
estimates by the investment community or guidance provided by the Company,
and variations between actual and estimated financial
results.
|
General
or industry-specific market conditions or stock market performance or domestic
or international macroeconomic and geopolitical factors unrelated to the
Company’s performance also may affect the price of the Company’s common stock.
For these reasons, investors should not rely on recent trends to predict future
stock prices, financial condition, results of operations or cash flows. In
addition, following periods of volatility in a company’s securities, securities
class action litigation against a company is sometimes instituted. If instituted
against the Company, this type of litigation, while insured against monetary
awards and defense cost, could result in substantial diversion of management’s
time and resources.
As part
of the Company’s business strategy, it sometimes engages in discussions with
third parties regarding possible investments, acquisitions, strategic alliances,
joint ventures, divestitures and outsourcing transactions (‘‘extraordinary
transactions’’) and enters into agreements relating to such extraordinary
transactions in order to further our business objectives. In order to pursue
this strategy successfully, the Company must identify suitable candidates for
and successfully complete extraordinary transactions, some of which may be large
and complex, and manage post-closing issues such as the integration of acquired
companies or employees. Integration and other risks of extraordinary
transactions can be more pronounced for larger and more complicated
transactions, or if multiple transactions are pursued simultaneously. If the
Company fails to identify and complete successfully extraordinary transactions
that further its strategic objectives, it may be required to expend resources to
develop products and technology internally, it may be at a competitive
disadvantage or it may be adversely affected by negative market perceptions, any
of which may have a material adverse effect on the Company’s revenue, gross
margin and profitability. Integration issues are complex, time-consuming and
expensive and, without proper planning and implementation, could significantly
disrupt the Company’s business. The challenges involved in integration
include:
|
|
•
|
combining
product offerings and entering into new markets in which the Company is
not experienced;
|
|
|
•
|
convincing
customers and distributors that the transaction will not diminish client
service standards or business focus, preventing customers and distributors
from deferring purchasing decisions or switching to other suppliers (which
could result in
our incurring additional obligations in order to address customer
uncertainty), and
coordinating sales, marketing and distribution
efforts;
|
|
|
•
|
minimizing
the diversion of management attention from ongoing business
concerns;
|
|
|
•
|
persuading
employees that business cultures are compatible, maintaining employee
morale and retaining key employees, engaging with employee works councils
representing an acquired company’s non-U.S. employees, integrating
employees into the Company, correctly estimating employee benefit costs
and implementing restructuring
programs;
|
|
|
•
|
coordinating
and combining administrative, manufacturing, and other operations,
subsidiaries, facilities and relationships with third parties in
accordance with local laws and other obligations while maintaining
adequate standards, controls and
procedures;
|
•
achieving savings from supply chain integration; and
|
|
•
|
managing
integration issues shortly after or pending the completion of other
independent transactions.
|
The
Company periodically evaluates and enters into significant extraordinary
transactions on an ongoing basis. The Company may not fully realize all of the
anticipated benefits of any extraordinary transaction, and the timeframe for
achieving benefits of an extraordinary transaction may depend partially upon the
actions of employees, suppliers or other third parties. In addition, the pricing
and other terms of the Company’s contracts for extraordinary transactions
require it to make estimates and assumptions at the time it enters into these
contracts, and, during the course of its due diligence, the Company may not
identify all of the factors necessary to estimate its costs accurately. Any
increased or unexpected costs, unanticipated delays or failure to achieve
contractual obligations could make these agreements less profitable or
unprofitable. Managing extraordinary transactions requires varying levels of
management resources, which may divert the Company’s attention from other
business operations. These extraordinary transactions also have resulted and in
the future may result in significant costs and expenses and charges to earnings.
Moreover, the Company has incurred and will incur additional depreciation and
amortization expense over the useful lives of certain assets acquired in
connection with extraordinary transactions, and, to the extent that the value of
goodwill or intangible assets with indefinite lives acquired in connection with
an extraordinary transaction becomes impaired, the Company may be required to
incur additional material charges relating to the impairment of those assets. In
order to complete an acquisition, the Company may issue common stock,
potentially creating dilution for existing stockholders, or borrow, affecting
the Company’s financial condition and potentially its credit ratings. Any prior
or future downgrades in the Company’s credit rating associated with an
acquisition could adversely affect its ability to borrow and result in more
restrictive borrowing terms. In addition, the Company’s effective tax rate on an
ongoing basis is uncertain, and extraordinary transactions could impact its
effective tax rate. The Company also may experience risks relating to the
challenges and costs of closing an extraordinary transaction and the risk that
an announced extraordinary transaction may not
close. As
a result, any completed, pending or future transactions may contribute to
financial results that differ from the investment community’s expectations in a
given quarter.
ITEM
1B. Unresolved Staff
Comments.
None
ITEM
2. Properties.
United
States Specialty Products Facility
South
Hampton owns and operates a specialty petrochemical facility near Silsbee, Texas
which is approximately 30 miles north of Beaumont, Texas, and 90 miles east of
Houston. The facility presently consists of six operating units which, while
interconnected, make distinct products through differing processes: (i) a Penhex
Unit; (ii) a Reformer; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an
Aromatics Hydrogenation Unit; and (vi) a White Oil Fractionation Unit. All of
these units are currently in operation.
The
Penhex Unit has the capacity to process approximately 6,700 barrels per day of
fresh feed, with the Reforming Unit, the Aromax® Unit, and the Cyclo-Pentane
Unit further processing streams produced by the Penhex Unit. The
Aromatics Hydrogenation Unit has a capacity of approximately 400 barrels per
day, and the White Oils Fractionation Unit has a capacity of approximately 3,000
barrels per day. The facility generally consists of equipment
commonly found in most petroleum facilities such as fractionation towers and
hydrogen treaters except the facility is adapted to produce specialized products
that are high purity, very consistent, precise specification materials utilized
in the petrochemical industry as solvents, additives, blowing agents and cooling
agents. South Hampton produces eight distinct product streams and
markets several combinations of blends as needed in various customers’
applications. South Hampton does not produce motor fuel products or
any other commodity type products commonly sold directly to retail consumers or
outlets.
The
products from the Penhex Unit, Reformer, Aromax® Unit, and Cyclo-pentane Unit
are marketed directly to the customer by South Hampton marketing
personnel. The Penhex Unit had a utilization rate during 2008 of
approximately 90%. This compares to a rate of 91% for
2007. The Reformer and Aromax® units are operated as needed to
support the Penhex and Cyclo-pentane Units. Consequently, utilization
rates of these units are driven by production from the Penhex
Unit. Operating utilization rates are affected by product demand,
mechanical integrity, and unforeseen natural occurrences, such as weather
events. The nature of the refining process demands periodic
shut-downs for de-coking and other mechanical repairs. In 2007 there
were mechanical shut-downs resulting in approximately 12 total days of lost
production and another 6 days due to weather or other uncontrollable issues. The
Penhex Unit capacity was expanded in 2008 and now is configured in two
independent process units. Since the marketing effort may take several years to
utilize the expanded capacity, utilization rates of the unit could be
significantly lower over the next few years. However, the volume of
material available for sale will be much improved as the original PenHex Unit
was operating near capacity for the last several years. The two unit
configuration also improves reliability by reducing the amount of total down
time due to mechanical and other factors.
The other
two operating units at the plant site, an Aromatics Hydrogenation Unit and a
White Oils Fractionation Unit, are operated as two, independent and completely
segregated processes. These units are dedicated to the needs of two
different toll processing customers. The customers
supply
and
maintain title to the feedstock, South Hampton processes the feedstock into
products based upon customer specifications, and the customers market the
products. Products may be sold directly from South Hampton’s storage
tanks or transported to the customers’ location for storage and
marketing. As of October 2005, after the expansion program, the units
have a combined capacity of 3,400 BPD. Together they realized a utilization rate
58% for 2007 and 43% for 2008. The units are operated in accordance
with customer needs, and the contracts call for take or pay minimums of
production.
In the
summer of 2006 the Aromatics Hydrogenation Unit was modified to produce two
products in addition to that of the original design. Rotating the
three separate products through production was found to be inefficient and the
customer has concentrated on switching production between two products as a
standard operating routine. The unit has been kept at capacity using
this scheme.
In March
2007 the Board of Directors approved the expansion of the South Hampton Penhex
unit. The capacity was to be increased from 3,000 barrels per day to
approximately 6,000 barrels per day. The Company immediately began
acquiring equipment and ordering items, such as instrumentation, pumps, and
compressors which require a long lead time for delivery. The project
consists of an additional fractionation train identical to the current design,
and also entailed the expansion of the Aromax, reformer, and Cyclo-pentane units
to support the increased volumes. Construction work began in the fall
of 2007, with the initial focus being the infrastructure required to support the
increased operation, such as pipe racks, electrical capacity increases, fire
water line extensions, water well modifications, etc. The final
permit to construct was received from the TCEQ on February 28, 2008, and
foundation work for the primary equipment started on that date. Final
completion was in September 2008 and the new unit was in total operation in
October 2008. The final cost of the expansion was approximately $18.0
million and trial runs in October of 2008 set the new capacity at 3,700 barrels
per day in addition to the 3,000 barrels per day with existing equipment. For additional
information see Note 7 to the
Consolidated Financial Statements.
South
Hampton, in support of the petrochemical operation, owns approximately 69
storage tanks with total capacity approaching 225,000 barrels, and 106 acres of
land at the plant site, 55 acres of which are developed. South
Hampton also owns a truck and railroad loading terminal consisting of storage
tanks, four rail spurs, and truck and tank car loading facilities on
approximately 53 acres of which 13 acres are developed.
As a
result of various expansion programs and the toll processing contracts,
essentially all of the standing equipment at South Hampton is operational. South
Hampton has various surplus equipment stored on-site which may be used in the
future to assemble additional processing units as needs arise.
Gulf
State owns and operates three (3) 8-inch diameter pipelines aggregating
approximately 50 miles in length connecting South Hampton’s facility to: (1) a
natural gas line, (2) South Hampton’s truck and rail loading terminal and (3) a
major petroleum products pipeline system owned by an unaffiliated third
party. All pipelines are operated within Texas Railroad Commission
and DOT regulations for maintenance and integrity.
Saudi
Arabia Mining Properties
Al
Masane Project
Location, Access and
Transportation. The Company’s Al Masane project, contributed
to AMAK in December 2008, consisted of a mining lease area of approximately 44
square kilometers in southwestern Saudi Arabia approximately 640 km southeast of
Jeddah. Reference is made to the map on page 20 of this Report for
information concerning the location of the Al Masane
project. Presently, the site can be accessed by heavy trucks via the
20 kilometer improved asphalt and gravel road from Sifah. The elevation of the
Al Masane project is approximately 1,620 meters above sea
level. Najran is the major town located in the area and is serviced
by air from Jeddah and Riyadh. Access from the town of Najran to the
project site is 130 km by a paved road which continues to
Sifah. There are scheduled flights from Jeddah to Abha and
Najran. From the west, there is paved road between Abha and Gusap,
and then a dirt road to the site.
Conditions to Retain
Title. The Saudi government granted the Company a mining lease
for the Al Masane area on May 22, 1993. The lease was contributed to
AMAK in December 2008. As holder of the Al Masane mining lease, the
Company has been, until December 2008, solely responsible to the Saudi Arabian
government for rental payments and other obligations required by the mining
lease and repayment of an $11 million loan. The Company’s interpretation of the
mining lease, and verified by the Ministry of Petroleum and Minerals in it’s
Letter of Approval for the transfer, is that repayment of this loan will be made
in accordance with a repayment schedule agreed upon with the Saudi Arabian
government from the Company’s share of the project’s cash flows. The initial
term of the lease is for a period of thirty (30) years beginning May 22, 1993,
with the Company (now AMAK) having the option to renew or extend the term of the
lease for additional periods not to exceed twenty (20) years. Under the lease,
the Company (now AMAK) is obligated to pay advance surface rental in the amount
of 10,000 Saudi riyals (approximately $2,667 at the current exchange rate) per
square kilometer per year (approximately $117,350 annually) during the period of
the lease. The Company paid $234,700 in March 2006, $117,300 in
February 2007, and $117,300 in February 2008 which paid the lease amounts in
full through the end of 2008. AMAK paid the lease fee in January
2009. In addition, the Company (now AMAK) must pay income tax in
accordance with the laws of Saudi Arabia then in force and pay all
infrastructure costs. The Saudi Arabian Mining Code provides that income tax is
to be paid yearly at the rate of 20% commencing immediately upon realization of
profits. The lease gives the Saudi Arabian government priority to purchase any
gold production from the project as well as the right to purchase up to 10% of
the annual production of other minerals on the same terms and conditions then
available to other similar buyers and at current prices then prevailing in the
free market. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.
History of Previous
Operations. The Al Masane project contains extensive ancient
mineral workings and smelters which were discovered by Hatem El Khalidi,
President and CEO of the Company while flying over the area and later mapped by
him on camel back during 1967. From ancient inscriptions in the area, it is
believed that mining activities occurred sporadically from 1000 BC to 700 AD.
The ancients are believed to have extracted mainly gold, silver and
copper. Various regional investigations of the Al Masane area were
carried out by the United States Geological Survey (USGS)
mission. The first systematic mapping was by Brown and Jackson who
published the Geologic Map of the Asir Quadrangle in 1959, and Greenwood carried
out
reconnaissance
mapping in 1974 of the Wadi Malahah quadrangle, which includes Al
Masane. Conway undertook geologic mapping of the area in
1976. Beginning in 1972, the Company undertook various geological,
geophysical, and geochemical surveys which lead to the discovery of the ore
lenses. In 1975, Robertson Research International (“RRI”)
reviewed the exploration program completed by the Company, prepared a
preliminary economic evaluation on the deposit and recommended ongoing
development. In 1977, the Company retained Watts, Griffis and McOuat
Limited of Toronto, Canada (WGM) to study the deposits and an underground
development program was recommended to define the tonnage and grade of the
deposit. By September 1980 a permanent exploration camp including
water supply and power plant was established. In April 1981 WGM
completed a program of 3,700 meters of underground access and development using
trackless mining equipment and 25,000 meters of underground diamond drilling and
20,000 meters of surface drilling (“Phase I”). Bulk underground
metallurgical samples were taken, and pilot plant test work was conducted at the
Colorado School of Mines Research to confirm the laboratory test work completed
previously by Lakefield Research in Canada on the drill core. This
work was financed primarily with the 1984 $11 million interest-free loan from
the Saudi Arabian Ministry of Finance. Continued surface prospecting
in the immediate area by the Company led to the discovery of the Moyeath zone in
late 1980. Although the surface expression of the gossans1 was small, preliminary diamond drilling
indicated a significant massive sulphide deposit at depth. Between
1982 and 1987, infill diamond drilling was conducted on the Al Houra and Moyeath
deposits which expanded the ore reserves. In addition, a number of
studies relating to water supply for the project were
completed. Environmental studies for the project were completed by
independent consultants in 1995 as part of the bankable feasibility
studies.
Description of Current Property
Condition. In 1982 WGM concluded that sufficient ore reserves
were established to justify completion of a fully bankable feasibility study to
determine the economic potential of establishing a commercial mining and ore
treatment operation at Al Masane. WGM determined that the Al Masane deposits
would support commercial production of copper, zinc, gold and silver and
recommended implementation of Phase II of the Al Masane development program,
which included construction of underground mining, ore treatment and support
facilities. WGM’s September 1984 reevaluation of the project resulted in no
substantial changes of its initial conclusions and
recommendations. In 1993, the Company commissioned WGM to prepare a
new fully bankable feasibility study to be used to obtain financing for
commercial development of the project. The study, which was completed in 1994,
contained specific recommendations to insure that project construction was
accomplished expeditiously and economically. The engineering design and costing
portions of the study were performed by Davy International of Toronto, Canada
(“Davy”). WGM and Davy updated this study in 1996. WGM recommended
that the Al Masane reserves be mined by underground methods using trackless
mining equipment. Once the raw ore is mined, it would be subjected to a grinding
and treating process resulting in three products to be delivered to smelters for
further refining. These products are zinc concentrate, copper concentrate and
Dore2 bullion. The copper and zinc concentrates also
contain valuable amounts of gold and silver. These concentrates and the Dore
bullion to be produced from the proposed cyanidization plant are estimated to be
22,000 ounces of gold and 800,000 ounces of silver and will be sold to copper
and zinc custom smelters and refineries worldwide. As recommended by
WGM, the source
|
1
|
“Gossan”
means the rust colored oxidized, capping or staining of a mineral deposit,
generally formed by the oxidation or alteration of iron
sulphide.
|
|
2
|
“Dore”
means unrefined gold and silver bullion bars consisting of approximately
90% precious metals which will be further refined to almost pure
metal.
|
of power
for the Al Masane site will be from diesel powered generators until such time as
the site is connected to the national power grid, which is presently 20 km from
the site.
In the
1994 feasibility study, WGM stated that there is potential to find more reserves
within the lease area, as the ore zones are all open at depth. Further diamond
drilling is required to quantify the additional mineralization associated with
these zones. A significant feature of the Al Masane ore zones is that they tend
to have a much greater vertical plunge than strike length; relatively small
surface exposures such as the Moyeath zone may be developed into sizeable ore
tonnages by thorough and systematic exploration. Similarly, systematic
prospecting of the small gossans in the area could yield significant tonnages of
new ore. The 1996 update showed the estimated capital cost to bring
the project into operation to be $89 million. At a production rate of 700,000
tons per year, the operating cost of the project (excluding concentrate freight,
ship loading, smelter charges, depreciation, interest and taxes) was estimated
to be $38.49 per ton of ore milled. The feasibility study was updated
in August of 2005, by SNC-Lavalin, Engineers and Constructors, Inc. of Toronto,
Canada using the field work and conclusions of the previous
studies. No design work or field work was performed, but the update
was designed to apply current costs and metal prices to the existing
work. The 2005 update indicates the current capital cost to be
approximately $116 million with an additional $7 million needed for the addition
of a Gold Recovery Circuit (GRC). The updated operating costs are
estimated to be $53.37 per ton of ore milled, without the GRC, or $60.01 with
the GRC.
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 3-4 months of
2008, if spot prices as of December 28, 2008, 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 such as offshore petroleum exploration, will vary over
time as market prices rise and fall with worldwide economic
performance.
The
following chart illustrates the change from the previous three year average to
current levels:
|
|
Average
Price
|
Spot
Price as of
|
Percentage
|
|
|
|
For 2006-2008
|
12/31/08
|
Increase (Decrease)
|
|
|
Gold
|
$723.00
per ounce
|
$869.75
per ounce
|
|
20.30 |
% |
|
Silver
|
$
13.30 per ounce
|
$
10.79 per ounce
|
|
(18.87 |
%) |
|
Copper
|
$ 3.16
per pound
|
$ 1.32 per
pound
|
|
(58.23 |
%) |
|
Zinc
|
$ 1.47
per pound
|
$ 0.51 per
pound
|
|
(65.31 |
%) |
Based on
the contractor’s report for December 2008, overall engineering progress on the
project was at 90%, procurement progress was at 37%, and construction progress
was at 14%. Permanent camp leveling works were in progress for
seniors’ quarters and explosives storage area, rock cutting work, crusher
station-retaining wall works, conveyor belt foundation works, and zinc flotation
tailing cyaniding/tailing head leveling were in progress. As noted
above, the estimated total capital cost to bring the Al Masane project into
production is $116 million. See Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations for a further
discussion of these matters.
Pursuant
to the mining lease agreement, when the Al Masane project is profitable the
Company was obligated to form a Saudi public stock company with the Saudi
Arabian Mining Company, a corporation wholly owned by the Saudi Arabian
government (“Ma’aden”), as successor to and
assignee
of the mining interests formerly held by the Petroleum Mineral Organization
(“Petromin”). Ma’aden is the Saudi Arabian government’s official mining company.
In 1994, the Company received instructions from the Saudi Ministry of Petroleum
and Mineral Resources stating that it is possible for the Company to form a
Saudi company without Petromin (now Ma’aden), but the sale of stock to the Saudi
public could not occur until the mine’s commercial operations were profitable
for at least two years. The instructions added that Petromin (now Ma’aden) still
had the right to purchase shares in the Saudi joint stock company any time it
desires. Title to the mining lease and the other obligations specified in the
mining lease would be transferred to the Saudi joint stock company. According to
the terms of the lease agreement the Company would remain responsible for
repaying the $11 million loan to the Saudi Arabian
government. However, as a condition of approval for transferring the
lease to AMAK in late 2008, the Ministry required the note to be transferred to
the books of AMAK.
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. 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. The basic terms of
agreement forming AMAK are as follows: (1) the capitalization is the amount
necessary to develop the project, approximately $120 million, (2) the Company
owns 50% of AMAK with the remainder being held by the Saudi investors,
(3) the Company has contributed the mining assets and mining lease for a
credit of $60 million and the Saudi investors have contributed $60 million cash,
and (4) the remaining capital for the project will be raised by AMAK by other
means which may include application for a loan from the Saudi Industrial
Development Fund, loans from private banks, and/or the inclusion of other
investors. The appraisal of the assets, which is necessary for the Company to
receive full credit toward its capital contribution is underway and is expected
to be completed in April 2009. AMAK will have all powers of
administration over the Al Masane mining project. Subsequent to the above
agreement, the cash contribution was deposited in the accounts for AMAK in
September and October of 2007. 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. The Board meetings are conducted in English for the
benefit of all attendees.
Rock Formations and
Mineralization. Three mineralized zones, the Saadah, Al Houra
and Moyeath, have been outlined by diamond drilling. The Saadah and
Al Houra zones occur in a volcanic sequence that consists of two mafic-felsic
sequences with interbedded exhalative cherts and metasedimentary
rocks. The Moyeath zone was discovered after the completion of
underground development in 1980. It is located along an angular
unconformity with underlying felsic volcanics and shales. The
principle sulphide minerals in all of the zones are pyrite, sphalerite, and
chalcopyrite. The precious metals occur chiefly in tetrahedrite and
as tellurides and electrum. The following table sets forth a summary
of the diluted recoverable, proven and probable mineralized materials at the Al
Masane project, along with the estimated average grades of these mineralized
materials:
|
Zone
|
|
Mineralized
Materials
(Tonnes)
|
|
|
Copper
(%)
|
|
|
Zinc
(%)
|
|
|
Gold
(g/t)
|
|
|
Silver
(g/t)
|
|
|
Saadah
|
|
|
3,872,400 |
|
|
|
1.67 |
|
|
|
4.73 |
|
|
|
1.00 |
|
|
|
28.36 |
|
|
Al
Houra
|
|
|
2,465,230 |
|
|
|
1.22 |
|
|
|
4.95 |
|
|
|
1.46 |
|
|
|
50.06 |
|
|
Moyeath
|
|
|
874,370 |
|
|
|
0.88 |
|
|
|
8.92 |
|
|
|
1.29 |
|
|
|
64.85 |
|
|
Total
|
|
|
7,212,000 |
|
|
|
1.42 |
|
|
|
5.31 |
|
|
|
1.19 |
|
|
|
40.20 |
|
For
purposes of calculating proven and probable mineralized materials, a dilution of
5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra and
Moyeath zones was assumed. A mining recovery of 80% was used for the Saadah zone
and 88% for the Al Houra and Moyeath zones. Mining dilution is the amount of
wallrack adjacent to the ore body that is included in the ore extraction
process.
Proven
mineralized materials are those mineral deposits for which quantity is computed
from dimensions revealed in outcrops, trenches, workings or drill holes, and
grade is computed from results of detailed sampling. For ore deposits to be
proven the sites for inspection, sampling and measurement must be spaced so
closely and the geologic character must be so well defined that the size, shape,
depth and mineral content of reserves are well established. Probable mineralized
materials are those for which quantity and grade are computed from information
similar to that used for proven mineralized materials, but the sites for
inspection, sampling and measurement are farther apart or are otherwise less
adequately spaced. However, the degree of assurance, although lower than that
for proven mineralized materials, must be high enough to assume continuity
between points of observation.
The
metallurgical studies conducted on the ore samples taken from the zones
indicated that 87.7% of the copper and 82.6% of the zinc could be recovered in
copper and zinc concentrates. Overall, gold and silver recovery from the ore was
estimated to be 77.3% and 81.3%, respectively, partly into copper concentrate
and partly as bullion through cyanide processing of zinc concentrates and mine
tailings. Further studies recommended by consultants may improve those
recoveries and thus the potential profitability of the project; however, there
can be no assurances of this effect. WGM was contracted by AMAK to
recalculate the reserves using the latest methods and technology. The
results are not expected to appreciably change the economics of the
project.
Other
Exploration Areas in Saudi Arabia
During
the course of its exploration and development work in the Al Masane area, the
Company has carried on exploration work in other areas in Saudi
Arabia. This work was contributed to AMAK in December
2008.
Wadi
Qatan and Jebel Harr. The Wadi Qatan area is located in southwestern
Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30
kilometers east of the Al Masane area. These areas consist of 40 square
kilometers, plus a northern extension of an additional 13 square kilometers. The
Company’s geological, geophysical and limited core drilling in the past
disclosed the existence of massive sulfides containing an average of 1.2%
nickel. Reserves for these areas have not yet been classified and additional
exploration work is required. When and if AMAK obtains an exploration license
for the Wadi Qatan and Jebel Harr areas, AMAK may continue the exploratory
drilling program initiated by the Company in order to prove whether
sufficient
ore reserves exist to justify a viable mining operation; however there is no
assurance that a viable mining operation can be established.
Greater
Al Masane. On June 22, 1999, the Company submitted a formal application
for a five-year exclusive mineral exploration license for the Greater Al Masane
area of approximately 2,850 square kilometers, which surrounds the Al Masane
mining lease area and includes the Wadi Qatan and Jebel Harr areas. The Company
previously worked in the Greater Al Masane area after obtaining written
authorization from the Saudi Ministry of Petroleum and Mineral Resources, and
has expended over $2 million on exploration work. Geophysical, geochemical and
geological work and diamond core drilling on the Greater Al Masane area reveals
mineralization similar to that discovered at Al Masane. A detailed exploration
program and expenditures budget accompanied the application. The Company
indicated on its application that it would welcome the participation of Ma’aden
in this license. Ma’aden, which expressed an interest in the Greater Al Masane
area, was informed directly by the Company that its participation as a joint
venture partner in the license would be welcomed.
As
previously stated, neither AMAK nor the Company possess current formal
exploration licenses for any of the above areas. The absence of such licenses
creates uncertainty regarding AMAK’s and the Company’s rights and obligations,
if any, in these areas. The Company believes it has satisfied the Saudi Arabian
government’s requirements in these areas and that the government should honor
the Company’s (now AMAK’s) claims.
The new
Mining Code, adopted by the Saudi government in October, 2004, specifies that
the size of an exploration license cannot exceed one hundred (100) square
kilometers. However, there is no restriction on how many exploration
licenses can be held by one party simultaneously. AMAK is in the
process of identifying the best areas of the previously explored Greater Al
Masane Area. AMAK submitted application for exploration licenses for two of the
areas in question in late 2008. The applications were rejected and
will be resubmitted with additional information in early 2009.
Reference
is made to the map on page 20 of this Report for information concerning the
location of the foregoing areas.
United
States Mineral Interests
The
Company’s only mineral interest in the United States is its ownership interest
in Pioche. Pioche has been inactive for many years.
Nevada Mining Properties.
Pioche’s properties include 48 patented and 5 unpatented claims totaling
approximately 1,500 acres. All the claims are located in the Pioche Mining
District, Lincoln County, Nevada. There are prospects and mines on these claims
that previously produced silver, gold, lead, zinc and copper. The ore bodies are
both oxidized and sulfide deposits, classified into three groups: fissure veins
in quartzite, mineralized granite porphyry and replacement deposits in carbonate
rocks (limestone and dolomites). There is a 300-ton-a-day processing mill on
property owned by Pioche. The mill is not currently in use and a significant
expenditure would be required in order to put the mill into continuous
operation, if commercial mining is to be conducted on the
property. Pioche’s properties are located approximately 100 miles
from Las Vegas, Nevada, and with the significant growth which has occurred in
Las Vegas, the Company believes the real estate value of Pioche is potentially
greater than the metal value. However, the recent real estate crisis
has caused the Company to re-evaluate the holdings and a write down of
approximately $496,000 was recorded at the end of 2008. The Board of
Directors of Pioche has determined that the Company should sell parcels of the
real estate if
market
conditions are acceptable. Mr. Carter, appointed as a Director in
2007, was appointed President of Pioche, and Charles Goehringer was appointed
Director and Vice President in January 2008. Title research has been
conducted and the Company is satisfied that most of the claims can be sold for
real estate value. In 2008 the Company learned of a claim by the U.S.
Bureau of Land Management (“BLM”) against World Hydrocarbons, Inc. for
contamination of real property owned by the BLM north of and immediately
adjacent to the processing mill situated on property owned by
Pioche. The BLM’s claim alleged that mine tailings from the
processing mill containing lead and arsenic migrated onto BLM property during
the first half of the twentieth century. World Hydrocarbons, Inc.
responded to the BLM by stating that it does not own the mill and that Pioche is
the owner and responsible party. Pioche subsequently commenced
dialogue with the BLM in late 2008 to determine how best to remedy the
situation. Communication with the BLM is continuing and Pioche
management plans to inspect the properties in March 2009. Pioche has
retained an environmental consultant to assist with the resolution of this
matter.
Offices
The
Company has a year-to-year lease on space in an office building in Jeddah, Saudi
Arabia, used for office occupancy. The Company also leases a house in Jeddah
that is used as a technical office and for staff housing. The Company continues
to lease office space in Dallas, Texas on a month-to-month
basis.
ITEM
3. Legal
Proceedings.
In August
of 1997, the Executive Director of the Texas Commission on Environmental Quality
(TCEQ), filed a preliminary report and petition with the TCEQ alleging that
South Hampton violated various TCEQ rules, TCEQ permits issued to South Hampton,
a TCEQ order issued to South Hampton, the Texas Water Code, Texas Clean Air Act
and Texas Solid Waste Disposal Act. The violations generally relate to the
management of volatile organic compounds in a manner that allegedly violates the
TCEQ air quality rules and the storage, processing and disposal of hazardous
waste in a manner that allegedly violates the TCEQ industrial and hazardous
waste rules. The TCEQ Executive Director recommended that TCEQ enter an order
assessing administrative penalties against South Hampton in the amount of
$709,408 and requiring South Hampton to undertake such actions as are necessary
to bring its operations at its facility and its bulk terminal into compliance
with the Texas Water Code, Texas Health and Safety Code, TCEQ rules, permits and
orders.
On
February 2, 2000, TCEQ amended its pending administrative action against South
Hampton to add allegations dating through May 21, 1998 of 35 regulatory
violations relating to air quality control and industrial solid waste
requirements. TCEQ proposed that administrative penalties be
increased to approximately $765,000 and that certain corrective actions be
taken. On April 11, 2003, TCEQ reduced the penalties to approximately
$690,000. On May 25, 2003, a settlement hearing with TCEQ was held and
additional information was submitted to TCEQ on June 2, October 2 and November
4, 2003. South Hampton believed the original penalty and the additional
allegations were incorrect and the Company defended against these allegations,
the proposed penalties and proposed corrective actions. Management and the TCEQ,
in March 2008, reached a tentative agreement for a settlement of $274,433. The
agreement was approved by the TCEQ governing body of Commissioners in the third
quarter of 2008. South Hampton has a liability of $0 and $275,000 recorded at
December 31, 2008 and 2007, related to these environmental issues. Payments were
initiated immediately upon approval by the Commissioners, and the final payment
was made in December 2008. Approximately one half of the settlement
amount was paid into a state operated fund for local environmental improvement
projects and was applied to connect low income families to sewer facilities in
Hardin County, Texas.
ITEM
4. Submission Of Matters To A
Vote Of Security Holders.
None
PART
II
ITEM
5. Market for
Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of
Equity Securities.
The
Company’s common stock traded on the NASDAQ and the OTC Bulletin Board during
the last two fiscal years under the symbol: ARSD. The following table sets forth
the range of high and low bid prices for each quarter as reported by Nasdaq and
the OTC Bulletin Board. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
|
|
|
NASDAQ/OTC
Bulletin Board
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
First Quarter ended March 31,
2008
|
|
$ |
7.16 |
|
|
$ |
6.88 |
|
|
Second Quarter ended June 30,
2008
|
|
$ |
6.21 |
|
|
$ |
5.89 |
|
|
Third Quarter ended September 30,
2008
|
|
$ |
4.66 |
|
|
$ |
4.35 |
|
|
Fourth Quarter ended December 31,
2008
|
|
$ |
1.76 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2007
|
|
|
|
|
First Quarter ended March 31,
2007
|
|
$ |
3.41 |
|
|
$ |
3.30 |
|
|
Second Quarter ended June 30,
2007
|
|
$ |
6.30 |
|
|
$ |
6.00 |
|
|
Third Quarter ended September 30,
2007
|
|
$ |
6.07 |
|
|
$ |
5.91 |
|
|
Fourth Quarter ended December 31,
2007
|
|
$ |
7.74 |
|
|
$ |
7.55 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008, there were approximately 660 recorded holders of the
Company’s common stock. The Company has not paid any dividends since its
inception and, at this time, does not have any plans to pay dividends in the
foreseeable future. The current lender allows the petrochemical
subsidiaries to pay dividends to the parent company of up to 30% of
EBITDA. The Petrochemical Company was in compliance with this
restriction as of December 31, 2008. See Note 10 to the Consolidated
Financial Statements.
On
January 29, 2008 the Company stock moved from the Over the Counter Bulletin
Board (OCBB) to the NASDAQ exchange. The listing symbol, ARSD,
remained unchanged for the move to the new venue. Management believes the move
to the electronic market model provides the Company with increased visibility
and liquidity for its Common stock, as well as, increased efficiency and
cost-effective trading execution for current and potential
investors.
See Note 14 to the Consolidated
Financial Statements for information about stock options outstanding and
other stock awards at December 31, 2008.
ITEM
6. Selected
Financial Data.
The
following is a five-year summary of selected financial data of the Company (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
154,630 |
|
|
$ |
108,638 |
|
|
$ |
98,502 |
|
|
$ |
82,416 |
|
|
$ |
59,793 |
|
|
Net
Income (Loss)
|
|
$ |
(8,875 |
) |
|
$ |
7,771 |
|
|
$ |
7,875 |
|
|
$ |
16,636 |
|
|
$ |
(2,551 |
) |
|
Net
Income (Loss) Per Share-Diluted
|
|
$ |
(0.38 |
) |
|
$ |
0.33 |
|
|
$ |
0.34 |
|
|
$ |
0.73 |
|
|
$ |
(.11 |
) |
|
Total
Assets (at December 31)
|
|
$ |
98,146 |
|
|
$ |
84,221 |
|
|
$ |
71,590 |
|
|
$ |
66,974 |
|
|
$ |
51,048 |
|
|
Notes
Payable (at December 31)
|
|
$ |
12 |
|
|
$ |
11,012 |
|
|
$ |
11,013 |
|
|
$ |
11,026 |
|
|
$ |
11,744 |
|
|
Current
Portion of Long-Term Debt (at December 31)
|
|
$ |
4,920 |
|
|
$ |
31 |
|
|
$ |
489 |
|
|
$ |
1,426 |
|
|
$ |
3,071 |
|
|
Total
Long-Term Debt Obligations
(at
December 31)
|
|
$ |
23,557 |
|
|
$ |
9,078 |
|
|
$ |
5,108 |
|
|
$ |
9,839 |
|
|
$ |
4,916 |
|
ITEM
7. Management’s
Discussion and Analysis Of Financial Condition and Results Of
Operation.
General
Statements
in Items 7 and 7A, as well as elsewhere in, or incorporated by reference in,
this Annual Report on Form 10-K regarding the Company’s financial position,
business strategy and plans and objectives of the Company’s management for
future operations and other statements that are not historical facts, are
“forward-looking statements” as that term is defined under applicable Federal
securities laws. In some cases, “forward-looking statements” can be identified
by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “contemplates,” “proposes,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; lawsuits; competition; industry cycles; feedstock, specialty
petrochemical product and mineral prices; feedstock availability; technological
developments; regulatory changes; environmental matters; foreign government
instability; foreign legal and political concepts; and foreign currency
fluctuations, as well as other risks detailed in the Company’s filings with the
U.S. Securities and Exchange Commission, including this Annual Report on Form
10-K, all of which are difficult to predict and many of which are beyond the
Company’s control.
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. The
Company’s corporate overhead needs are minimal. A discussion of each segment’s
liquidity and capital resources follows.
SPECIALTY PETROCHEMICALS
SEGMENT. South Hampton obtains its feedstock requirements from a sole
supplier. On May 7, 2004, South Hampton and the supplier signed a
letter of intent whereby the supplier agreed to assist with the capital required
to expand a toll processing unit for a large customer. As security
for the funds used to purchase capital equipment and secure outstanding debts
for feedstock purchased from the supplier, South Hampton executed a mortgage in
June 2004 covering most of the existing facility’s
equipment. South Hampton elected not to take advantage of the
equipment financing portion of the agreement but continues to purchase feedstock
from the supplier. The lien was removed in December 2006, and South
Hampton agreed to purchase feedstock on delivery from the supplier versus the
previous agreement which did not require payment by South Hampton until the
feedstock was used.
In
relation to the above, a contract was signed on June 1, 2004, between South
Hampton and the supplier for the purchase of 65,000 barrels per month of natural
gasoline on a secured basis for the period from June 1, 2004 through May 31,
2006, subsequently extended to May 31, 2007 and annually thereafter with thirty
days written notice of termination by either party. In December 2006,
the agreement was modified so that all purchases are simply on open account
under normal credit terms and amounts owed are classified as
current. The supplier built a tank to receive feedstock from a major
pipeline system and provides storage for use by South Hampton. The
arrangement is viewed as a means of solidifying a dependable, long term supply
of feedstock for the Company. Storage fees for this arrangement are
offset by the cancellation of tank rental fees in place with another
party. The tank was completed in July 2007 and began full operation
in October 2007.
On August
1, 2004, South Hampton entered into a capital lease with Silsbee Trading and
Transportation, which is owned by an officer of the Company, for the purchase of
a diesel powered manlift. The lease is for five years with title
transferring to South Hampton at the end of the term.
On March
20, 2007 the Board approved expansion of the petrochemical facilities with the
project expected to cost approximately $12 million. The project was
completed in September 2008 at a cost of approximately $18
million. The Company originally financed $10 million and paid the
remainder out of cash flow. The project was refinanced to include
additional expenditures in October 2008, and the final amount financed totaled
$14 million.
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 limit exposures to 50% of
the monthly feedstock volumes of the facility for up to six months forward and
up to 100% of the natural gas requirements. The derivative agreements are not
designated as hedges per SFAS 133, as amended. TOCCO had no option
and swap contracts for natural gas outstanding as of December 31,
2008. As of the same date, TOCCO had committed to financial swap
contracts for a portion of its required monthly feedstock volume with settlement
dates through March 2009 and crude option contracts with settlement dates
through December 2009. For the years ended December 31, 2008, 2007,
and 2006, the net realized gain/(loss) from the derivative agreements was
approximately $(1,721,000), $3,367,000, and $(784,048),
respectively. There was an unrealized gain/(loss) from the derivative
agreements for the year ended December 31, 2008, 2007, and 2006 of approximately
$(5,486,000), $973,000, and $(840,000), respectively.
In
addition, due to changes in the fair value of the derivative instruments at
December 31, 2008, approximately $14,104,000 in derivative premiums were written
off and were recorded in cost of petrochemical product sales and
processing. The realized and unrealized gains/(losses) are recorded
in Cost of Petrochemical Product Sales and Processing for the periods ended
December 31, 2008, 2007, and 2006. The fair value of the derivative
asset/(liability) at December 31, 2008, 2007, and 2006 totaled approximately
$(6,976,000), $206,700 and $(766,000).
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 insturment, as well as, other relevant economic
measures (Level 2 of fair value hierarchy).
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 early
October 2008. 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, 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. After making several moves
throughout the ninety day period, all the option positions were finally
neutralized (offsetting puts and calls) in mid-November 2008.
The
obligation on the financial swaps which are due at the end of January through
March of 2009 results in a cash outlay each month of approximately $1.9 million
split between two trading partners. The Company has sufficient cash
on hand and cash from operations to ensure that it is able to make such payments
timely. Additionally, as a safe guard, the Company has received a
temporary extension of its Line of Credit with the bank which will enable the
Company to borrow up to $3.5 million above its borrowing base for working
capital. The Company must return to compliance with its borrowing
base limitation on its credit line by mid-June 2009. After the March
2009 payment, there will be no further liquidity issues with the derivative
positions as they stand.
There are
crude options outstanding through December 2009; however, they are neutralized
and while unrealized gains and losses may be reported, there will be no
significant realized gains and
losses
relating to these options. In addition, the Company’s cash outflow
has been limited to the amount of premiums paid of approximately $14,104,000
which were expensed during the year ended December 31, 2008. As of
December 31, 2008, approximately $3,950,000 was in a margin account with one of
the Company’s trading partners. The balance is being reduced and returned to the
Company as financial swaps outstanding for the first three months of the year
expire and are paid off.
MINING
SEGMENT. The Company’s most significant asset in this segment
is its fifty percent ownership interest in AMAK. As discussed in
Item 2. Properties,
implementation of the project was delayed until open market prices for metals
improved. With prices over the last few years at acceptable levels, the Company
has successfully joined with Saudi investors in establishing
AMAK. The Company's mining lease was transferred to AMAK on December
30, 2008, and AMAK is building the mining and treatment facilities, and will
operate the mine. AMAK will have all powers of administration over the Al
Masane mining project. Saudi investors’ deposited cash contributions
totaling $60.0 million in the accounts for AMAK in September and October of
2007.
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. Discussions are underway between the Company and
the Saudi investors as to the final resolution of the note. The
possibility exists that the note may be paid out of the Company’s share of the
proceeds of the mining operation. No specific payment schedule has
been documented.
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 March 31, 2009.
At this
time, the Company has no definitive plans for the development of its domestic
mining assets near Pioche, Nevada. It 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 real estate crisis prompted the Company
to re-evaluate its holding and record an impairment charge of approximately
$496,000 in 2008.
To
compensate for the loss of Mr. Crichton in December 2007 as President and Board
member of Pioche representing ARSD, Mr. Carter was appointed President of Pioche
and Mr. Goehringer
joined
the Board of Pioche in January 2008. At the same time, the Board of
Pioche agreed to move Pioche toward the sale of assets and to generate whatever
cash might be possible over time.
The table
below summarizes the following contractual obligations of the
Company:
|
|
|
Payments
due by period
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Less
than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
|
Long-Term
Debt Obligations
|
|
$ |
28,458,726 |
|
|
$ |
4,901,432 |
|
|
$ |
13,326,312 |
|
|
$ |
2,707,585 |
|
|
$ |
7,523,397 |
|
|
Capital
Lease Obligations
|
|
|
19,523 |
|
|
|
19,523 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
Operating
Lease Obligations
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
Purchase
Obligations
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
Other
Long-Term Liabilities Reflected on the Company’s Balance Sheet under
GAAP
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
Total
|
|
$ |
28,478,249 |
|
|
$ |
4,920,955 |
|
|
$ |
13,326,312 |
|
|
$ |
2,707,585 |
|
|
$ |
7,523,397 |
|
Results
of Operations
Comparison
of the Years 2008, 2007, 2006
Specialty
Petrochemicals Segment
This
discussion of the petrochemicals segment of the business uses the table below
for purposes of illustration and discussion. The reader should rely on the
Audited Financial Statements attached to this report for financial analysis
under United States generally accepted accounting principles.
South
Hampton sales volumes and gross revenues increased in each of the last three
years. Historically, over the last twenty years, specialty products
markets generally did not experience significant volatility and prices might
only be adjusted once or twice a year. In recent years as the
petroleum markets have demonstrated a great deal of price volatility, a more
aggressive approach to product pricing has been required.
From 2006
to 2007, the Gross Sales figures indicate an increase of 10.0% with a volume
increase of approximately 5.4%. Because of the strong demand
and the Company’s focus on maximizing its operating capacity, the volume
increased again by 15.4% from 2007 to 2008 while Gross Sales increased by
42.3%. The results of the dramatic rise in oil prices over the
periods being reported upon are evident. It is important to note that
the utilization rates described previously in this report and increased sales
volumes for 2006 through 2008 indicate that market demand played a major role in
the increased success of the Petrochemical Company. This strong
demand allowed the Petrochemical Company to raise prices to necessary levels and
still maintain market share.
The
Petrochemical Company remains dedicated to maintaining a certain level of toll
processing business in the facility and will continue to pursue
opportunities. An expansion/modification was completed for a tolling
customer in July 2006, and the results of this work are expected to allow
continued increases. The results of the improvements to these
processes are evidenced by
the
increased revenues for toll processing from 2006 to 2007. From 2007
to 2008 revenues decreased primarily due to a change in ownership of one of the
tolling customers which resulted in delays and adjustments in the customer’s
marketing and logistics handling. Improvement is expected
as capacity remains available and both parties are finding more efficient ways
to manage their business.
Beginning
in 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 the expense
and profit on the activity. The feedstock 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 has a one year contract
expiring in April 2009 to provide this service at a fixed volume and
markup.
|
|
|
|
|
|
|
|
|
|
|
|
TOCCO
|
|
(in
thousands)
|
|
|
Petrochemical
Product Sales
|
|
$ |
130,264 |
|
|
$ |
103,205 |
|
|
$ |
93,855 |
|
|
Transloading
Sales
|
|
|
20,239 |
|
|
|
- |
|
|
|
- |
|
|
Toll
Processing
|
|
|
4,127 |
|
|
|
5,433 |
|
|
|
4,647 |
|
|
Gross
Revenue
|
|
$ |
154,630 |
|
|
$ |
108,638 |
|
|
$ |
98,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
of sales (thousand gallons)
|
|
|
46,311 |
|
|
|
40,144 |
|
|
|
38,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Materials
|
|
$ |
131,665 |
|
|
$ |
66,989 |
|
|
$ |
60,131 |
|
|
Total
Operating Expense
|
|
$ |
27,562 |
|
|
$ |
22,696 |
|
|
$ |
19,758 |
|
|
Natural
Gas Expense
|
|
$ |
7,310 |
|
|
$ |
6,109 |
|
|
$ |
5,707 |
|
|
General
& Administrative Expense
|
|
$ |
6,966 |
|
|
$ |
5,687 |
|
|
$ |
4,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
$ |
15,038 |
|
|
$ |
10,799 |
|
|
$ |
3,734 |
|
Total
Cost of Materials increased dramatically in recent years as mentioned in the
discussion of Gross Sales. The Petrochemical Company uses natural
gasoline as feedstock which is the heavier liquid remaining after butane and
propane are removed from liquids produced by natural gas wells. The
material is a commodity product in the oil/petrochemical markets and generally
is readily available. Alternative uses are in motor gasoline
blending, ethanol denaturing, and as a feedstock in other petrochemical
processes, including ethylene crackers. The price of natural gasoline
historically has an 88% correlation to the price of crude oil although after the
2008 drop in the crude market, the price is more closely aligned with unleaded
gasoline price movements. The price of feedstock generally does not
carry the day to day volatility of crude oil simply because the market is made
by commercial users and there is not the participation of non-commercial
speculators as is true with the commodities traded on the public
exchanges. The Petrochemical Company attempted to maintain, when the
market was suitable, a hedge position on approximately half of its feedstock
needs, buying financial swaps to protect the price for three to nine months in
advance as opportunities arise. The numbers in the table above
reflect the final price of materials, including results of the realized and
unrealized gains and losses of the hedging program. Material purchase costs rose
by 11% from 2006 to 2007 and by 96.5% from 2007 to
2008. However,
when adjusting for the effects of derivative losses, material costs rose by 65%
from 2007 to 2008. After the losses generated by the hedging program
in the later part of 2008, the Company has exited the derivative markets for the
time being and does not intend to re-establish
the program until new policies and balances are put into place. The
volatility experienced during the last half of 2008 in the petroleum markets has
waned to some extent in recent months and hedging against inflation has not been
necessary. See Note 20 in the Consolidated Financial
Statements.
Operating
Expenses for the Petrochemical Company have increased over the past three years,
Natural gas and labor are the largest individual expenses and both exhibited
significant increases but for different reasons. The cost of natural gas
purchases rose 7% from 2006 to 2007, and increased 19.7% from 2007 to
2008. These cost increases are primarily due to price hikes as the
volume of gas used was relatively flat over the period being reported
upon. The labor increase was significant and not unexpected for 2007
and 2008 as the Company began hiring personnel and reorganizing its operations
and maintenance labor force early in the year to allow adequate time to train
and season employees prior to starting up the new expanded portion of the
operation. Additionally, the number of truck drivers increased in
preparation for greater product volumes to be moved. Total labor
costs for operations personnel, maintenance, and truck drivers increased from
$5.6 million in 2006, to $7.3 million in 2007, and to $8.3 million in
2008. In addition to the impact of the increased workforce being
melded into the system, the Company gave a 7% cost of living increase to the
total workforce in June of 2007 and 10% in 2008. The southeast Texas
economy is robust and many of the local refineries and petrochemical plants have
large expansion projects underway. The Company must stay competitive
on salaries and benefits in order to retain valuable trained and skilled
employees. Over time the Company’s pay scales had fallen
significantly behind those with whom it must compete for employees and there has
been an attempt to alleviate some of the difference over the last several
years. The cost of living increases were determined by sampling local
industry and arriving at an average increase. As of December 31,
2008, the Company had reduced its workforce to 130 employees which is a level it
feels is sustainable under the current economic conditions.
Another
cost component that has increased over the past several years is the cost of
transportation which is largely passed through to the customer.
Operating
Expenses in general increased over the three year period -- 15% from 2006 to
2007; and another 21% from 2007 to 2008.
General
and Administrative costs from 2006 to 2007 increased 23% due to higher
administrative payroll costs and insurance premiums. General and
Administrative costs from 2007 to 2008 increased an additional 22% due to higher
administrative payroll costs, insurance premiums, and adjustments to allowance
for doubtful accounts. An adjustment was made to the Company’s
allowance for doubtful accounts mainly due to the bankruptcy of a
customer. The insurance premium increase was largely due to expanded
coverage for liability, casualty, and D&O insurance. Auditing,
accounting, and consulting fees also rose for the year due to additional
regulatory requirements. On the bright side, the Petrochemical
Company successfully emphasized its safety program in an effort to keep
insurance costs under control as evidenced by a $41,000 reduction in its
Worker’s Compensation insurance premium during 2007 as compared to
2006. From 2007 to 2008 the Worker’s Compensation insurance premium
rose slightly by about $12,000 due to additional employees during construction
of the unit expansion.
In 2006
modifications to a toll processing unit were completed and operation began in
July. Capital costs for expanding the toll processing units are
reimbursed by the customers over five years and recorded as a reduction to
depreciation expense. No further changes were made in 2007 or
2008 and increased throughput fees are expected as a result of the previous
expansion work.
Mining
Segment and General Corporate Expenses.
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
General
corporate expenses
|
|
$ |
2,399 |
|
|
$ |
2,178 |
|
|
$ |
1,242 |
|
General
corporate expenses increased from 2006 to 2007 primarily due to increases in
bonus compensation of $139,000, D&O insurance premiums of $128,000, investor
related items of $101,000, post retirement obligations of $622,000, legal and
auditing fees of $91,000 offset by a reduction in directors’ fees of
$241,000. The increase from 2007 to 2008 was primarily due to
increases in investor related expenses of $146,000, audit fees of $177,000, the
impairment loss that the Company took on its investment in Pioche of $496,000
offset by reductions in post retirement expenses of $270,000 and directors’ fees
of $288,000.
None of
the Company’s mining operations or investments generate operating or other
revenues. The minority interest amount represents Pioche minority stockholders’
share of the losses from Pioche operations for prior years.
New
Accounting Standards
Effective
January 1, 2008, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS
157”), which did not have a material impact on the Company’s consolidated
financial statements except for disclosures found in Note 4. SFAS 157
establishes a common definition for fair value, a framework for measuring fair
value under generally accepted accounting principles in the United States, and
enhances disclosures about fair value measurements. In February 2008 the
Financial Accounting Standards Board (“FASB”) issued Staff Position
No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring
fair value measurements of non-financial assets and non-financial liabilities
until fiscal years beginning after November 15, 2008. The Company is
evaluating the expected impact of SFAS 157 for non-financial assets and
non-financial liabilities on its consolidated financial position and results of
operations.
In
October 2008 the FASB issued FSP FAS 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active.” FSP FAS 157-3
clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 is effective upon issuance, including prior periods for
which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as
a change in accounting estimate following the guidance in FASB Statement
No. 154, “Accounting Changes and Error Corrections.” FSP FAS 157-3 is
effective for the financial statements included in the Company’s annual report
for the year ended December 31, 2008, and application of FSP FAS 157-3 had no
impact on the Company’s consolidated financial statements.
In
December 2007 FASB issued Statement No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(Consolidated Financial Statements)(“SFAS
160”). SFAS 160 establishes accounting and reporting standards for a
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. In addition, SFAS 160 requires certain consolidation procedures for
consistency with the requirements of SFAS 141(R), “Business Combinations.” SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008, with earlier adoption
prohibited. The Company is currently evaluating the impact adoption of SFAS 160
may have on the consolidated financial statements.
In
December 2007 FASB issued Statement No. 141(R), “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions
and events that qualify as business combinations; requires that the acquired
assets and liabilities, including contingencies, be recorded at the fair value
determined on the acquisition date and changes thereafter reflected in revenue,
not goodwill; changes the recognition timing for restructuring costs; and
requires acquisition costs to be expensed as incurred. Adoption of SFAS
141(R) is required for combinations after December 15, 2008. Early
adoption and retroactive application of SFAS 141(R) to fiscal years
preceding the effective date are not permitted. The Company is
currently evaluating the impact adoption of SFAS 141(R) may have on the
consolidated financial statements.
In March
2008 FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS
161”). SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. Entities will be required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedge items are accounted for under SFAS
133 and its related interpretations; and (c) how derivative instruments and
related hedge items affect an entity’s financial position, financial performance
and cash flows. The Company is required to adopt SFAS 161 beginning in fiscal
year 2009. The Company is currently evaluating the impact adoption of SFAS 161
may have on the consolidated financial statements.
In May
2008 the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). The new standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS
162, GAAP hierarchy was defined in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS
69 has been criticized because it is directed to the auditor rather than the
entity. SFAS 162 addresses these issues by establishing that the GAAP hierarchy
should be directed to entities because it is the entity (not its auditor) that
is responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008
and is only effective for nongovernmental entities; therefore, the GAAP
hierarchy will remain in SAS No. 69 for state and local governmental
entities and federal governmental entities. SFAS 162 did not have a material
impact on the Company’s consolidated financial statements upon
adoption.
In
June 2008 the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years.
Upon adoption, a company is required to retrospectively adjust its earnings per
share data (including any amounts related to interim periods, summaries of
earnings and selected financial data) to conform to the provisions of FSP EITF
03-6-1. The Company is currently evaluating the impact adoption of FSP EITF
03-6-1 may have on the consolidated financial statements.
In
November 2008 the FASB ratified the consensus reached in EITF 08-06, “Equity
Method Investment Accounting Considerations” (“EITF 08-06”). EITF 08-06 was
issued to address questions that arose regarding the application of the equity
method subsequent to the issuance of SFAS 141(R). EITF 08-06 concluded that
equity method investments should continue to be recognized using a cost
accumulation model, thus continuing to include transaction costs in the carrying
amount of the equity method investment. In addition, EITF 08-06 clarifies that
an impairment assessment should be applied to the equity method investment as a
whole, rather than to the individual assets underlying the investment. EITF
08-06 is effective for fiscal years beginning on or after December 15, 2008.
EITF 08-06 will not have a material impact on the Company’s consolidated
financial statements upon adoption.
Critical
Accounting Policies
Long-lived
Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, in accordance with the
Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for
the Impairment or Disposal of Long-lived Assets.” An impairment loss
is recognized when the carrying amount of the asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition. The Company’s long-lived assets primarily
include its mineral exploration and development projects. The Company’s most
significant long-lived asset was the Al Masane mining project in Saudi Arabia
which was transferred to AMAK in December 2008. In March 2007 (for
purposes of estimating future cash flows), price assumptions contained in the
1996 update to the Al Masane project’s feasibility study and prepared by WGM,
were updated by an independent consultant. See Item 2. Properties. These
price assumptions are averages over the projected ten-year life of the Al Masane
mine and are $1.98 per pound for copper, $0.85 per pound for zinc, $492 per
ounce for gold and $9.03 per ounce for silver. Copper and zinc comprise in
excess of 80% of the expected value of production.
The
Greater Al-Masane area is known to include massive sulphide deposits similar to
those found in the Al-Masane area, which has been more thoroughly classified and
explored. In consideration of the comparable amount of deposit area
included, and the amount expended to date in the exploration efforts, and using
current metal prices to evaluate the potential of the area explored, no
impairment of this asset existed at December 31, 2007. This asset was
transferred to Investment in AMAK in December 2008.
Pioche’s
properties include 48 patented and 5 unpatented claims totaling approximately
1,500 acres. There is a 300 ton/day processing mill on property owned by Pioche.
The mill is not currently in use and a significant expenditure would be required
in order to put the mill into continuous operation, if commercial mining were to
be conducted. At December 31, 2008 the Company
took a charge for impairment of the Pioche property due to the condition of the
real estate market in Nevada and elsewhere, and also because of some questions
about environmental impairments on the site of the ore processing
mill.
The
Company assesses the carrying values of its assets on an ongoing basis. Factors
which may affect carrying values include, but are not limited to, mineral
prices, capital cost estimates, the estimated operating costs of any mines and
related processing, ore grade and related metallurgical characteristics, the
design of any mines and the timing of any mineral production. There are no
assurances that, particularly in the event of a prolonged period of depressed
mineral prices, the Company will not be required to take a material write-down
of any of its mineral properties.
Environmental
Liabilities
The
Petrochemical Company is subject to the rules and regulations of the TCEQ, which
inspects the operations at various times for possible violations relating to
air, water and industrial solid waste requirements. As noted in Item 1. Business and Item 3. Legal Proceedings,
evidence of groundwater contamination was discovered in 1993. The recovery
process, initiated in 1998, is proceeding as planned and is expected to continue
for many years.
Also in
1997, the TCEQ notified South Hampton of several alleged violations relating to
air quality rules and the storage, processing and disposal of hazardous waste.
Some claims have been dropped, some have been settled and others continue to be
negotiated. It is the Company’s policy to accrue remediation costs based on
estimates of known environmental remediation exposure. During 2007 an additional
$75,000 was accrued for potential settlement of these violations. At
December 31, 2007, a total liability of $275,000 was accrued to cover the final
negotiated settlement costs of these environmental issues. The
settlement was paid beginning in September 2008 with the last payment being made
in December 2008. Approximately one half of the total amount was paid
into a fund operated by the State which pays for local environmental enhancement
projects. In this case the money was designated to a project
connecting low income families to a municipal sewer system in the County in
which the Company operates.
Share-Based
Compensation
The
Company uses the fair value recognition provisions of Financial Accounting
Standards No. 123R, "Share Based Payment", which requires the Company to expense
the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of such instruments. The Company
uses the Black-Sholes model to calculate the fair value of the equity instrument
on the grant date.
Income
Taxes
In
assessing the realization of deferred tax assets, the Company considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As a result of
uncertainty
of achieving sufficient taxable income in the future a valuation allowance
against a portion of its deferred tax asset has been recorded. If these
estimates and assumptions change in the future, the Company may reverse the
valuation allowance against deferred tax assets.
In June
2006, the Financial Accounting Standards Board issued FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, — an Interpretation of FASB Statement
No. 109, Accounting for Income Taxes, or FASB 109. FIN 48
clarifies the accounting for uncertainty in income taxes in an enterprise’s
financial statements in accordance with FASB 109 and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on the classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006 and we
adopted the provisions of FIN 48 effective January 1, 2007. At the
adoption date of January 1, 2007, and at December 31, 2008, there were no
unrecognized tax benefits.
Derivative
Instruments
The
Company uses financial commodity swaps to hedge the cost of natural gasoline,
the primary source of feedstock, and natural gas used as fuel to operate our
plant to manage risks generally associated with price volatility. The
contracts are accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, or SFAS 133. SFAS 133
requires every derivative instrument to be recorded in our consolidated balance
sheets as either an asset or liability measured at its fair value. Our
derivative agreement are not designated as hedges therefore all changes in
estimated fair value are recognized in cost of petrochemical product sales and
processing in the consolidated statements of operations.
On March
21, 2008, South Hampton entered into 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 pay interest based upon the
London InterBank Offered Rate (LIBOR) or a base rate plus a markup and will
receive from Bank of America an interest rate of 5.83%. South Hampton
has designated the transaction as a cash flow hedge according to Statement of
Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and
149. 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 December 31, 2008
totaled $1,697,079. The cumulative loss of $1,697,079 from the
changes in the swaps contract’s fair value that is included in other
comprehensive loss will be reclassified into income when interest is
paid.
South Hampton assesses the fair value of the interest rate swap
using a present value model model that includes quoted LIBOR rates and the
nonperformance risk of the Company and Bank of America based on the Credit
Default Swap Market (Level 2 of fair value hierarchy).
ITEM
7A. Quantitative and
Qualitative Disclosures about Market Risk.
The
market risk inherent in the Company’s financial instruments represents the
potential loss resulting from adverse changes in interest rates, foreign
currency rates and commodity prices. The Company’s exposure to interest rate
changes results from its variable rate debt instruments which are vulnerable to
changes in short term United States prime interest rates. At December 31, 2008,
2007 and 2006, the Company had approximately $28,459,000, $9,059,000 and
$9,100,000, respectively, in variable rate debt outstanding. A hypothetical 10%
change in interest rates underlying these borrowings would result in annual
changes in the Company’s earnings and cash flows of approximately $2,846,000,
$911,000 and $275,000 at December 31, 2008,
2007 and 2006, respectively. However, the interest rate swap will
limit this exposure in future periods on the $10.0 million outstanding of term
debt.
The
Company does not view exchange rates exposure as significant and has not
acquired or issued any foreign currency derivative financial
instruments.
The
Petrochemical Company purchases all of its raw materials, consisting of
feedstock and natural gas, on the open market. The cost of these materials is a
function of spot market oil and gas prices. As a result, the Petrochemical
Company’s revenues and gross margins could be affected by changes in the price
and availability of feedstock and natural gas. As market conditions dictate, the
Petrochemical Company from time to time will engage in various hedging
techniques including financial swap and option agreements. The Petrochemical
Company does not use such financial instruments for trading purposes and is not
a party to any leveraged derivatives. The Petrochemical Company’s policy on such
hedges is to buy positions as opportunities present themselves in the market and
to hold such positions until maturity, thereby offsetting the physical purchase
and price of the materials.
At the
end of 2007, market risk for 2008 was estimated as a hypothetical 10% increase
in the cost of natural gas and feedstock over the market price prevailing on
December 31, 2007. To mitigate this risk, at December 31, 2007, the
Petrochemical Company had natural gas option agreements in effect expiring in
March 2008, which covered from 50% to 100% of the fuel gas requirement. The
Petrochemical Company also entered into financial swap agreements covering
approximately 50% of the feedstock requirements through the third quarter of
2008.
At the
end of 2008, market risk for 2009 was estimated as a hypothetical 10% increase
in the cost of natural gas and feedstock over the market price prevailing on
December 31, 2008. Because of the conditions in the petroleum markets
today, with low demand and reasonably low volatility, the Company is not hedging
its feedstock costs as it has periodically in the past. Assuming 2009
total petrochemical product sales volumes at the same rate as 2008 and that feed
prices stay in the range they were at the end of the year, the 10% market risk
increase will result in an increase in the cost of natural gas and feedstock of
approximately $5,400,000 in fiscal 2009.
ITEM
8. Financial Statements and
Supplementary Data.
The
consolidated financial statements of the Company and the consolidated financial
statement schedules, including the report of the independent registered public
accounting firm thereon, are set forth beginning on Page F-1.
ITEM
9. Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure.
None
ITEM
9A. Controls and
Procedures.
Disclosure Controls and
Procedures
Management
of the Company has evaluated, under the supervision and with the participation
of the Company’s principal executive officer and principal financial officer,
the effectiveness of the design and operation of the Company’s “disclosure
controls and procedures” (as defined in the Securities Exchange Act of 1934
Rules 13a-15(c) and 15d-15(c)) as of the end of the period covered by this
report. Based on this evaluation, the principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures
were effective at December 31, 2008, and designed to provide reasonable
assurance that material information relating to us and our consolidated
subsidiaries is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and is accumulated and communicated to management, including the Company’s
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management’s Report on
Internal Control Over Financial Reporting.
Management
of Arabian American Development Company (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. All internal
control systems, no matter how well designed, have inherent limitations and may
not prevent or detect misstatements. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Company management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, The Company used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control—Integrated Framework. Our management concluded that based on its
assessment, our internal control over financial reporting was effective as of
December 31, 2008. The effectiveness of our internal control over financial
reporting as of December 31, 2008 was audited by Travis, Wolff &
Company, L.L.P. (also know as Moore Stephens TravisWolff, L.L.P.), an
independent registered public accounting firm, as stated in their report, which
appears under Item 8 –Financial Statements and Supplementary
Data.
Internal Control Over
Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2008, that have materially affected,
or are reasonably likely to affect materially, the Company’s internal control
over financial reporting.
ITEM
9B. Other
Information.
None
PART
III
ITEM
10. Directors and Executive
Officers of the Registrant.
The
following sets forth the name and age of each director of the Company, the date
of his election as a director and all other positions and offices with the
Company presently held by him.
|
Name;
Current Positions Held
|
|
Age
|
|
Date
of Election
|
|
Hatem
El
Khalidi
President
of the Company since 1975; prior to 1975 Vice President of the Company;
Chief Executive Officer of the Company since February 1994
|
|
84
|
|
April
1968
|
|
Nicholas
N. Carter ……………………………………………….
Executive
Vice President, Chief Executive Officer of the Company since January 2008,
President of the Petrochemical Company since 1987
|
|
62
|
|
August
2004
|
|
Robert
E. Kennedy ……………………………………………….
Chairman
of the Audit and Compensation Committees; Member of Nominating
Committee
|
|
65
|
|
January
2007
|
|
Ghazi
Sultan
Chairman
of the Nominating Committee; Member of Compensation and Audit
Committees
|
|
71
|
|
September
1993
|
|
Ibrahim
Al
Moneef
Member
of the Compensation and Nominating Committees
|
|
68
|
|
April
2007
|
|
Mohammed
Al
Omair
Member
of Audit, Compensation and Nominating
Committees
|
|
65
|
|
October
2007
|
|
Charles
Goehringer,
Jr.
Member
of Compensation and Nominating Committees
|
|
50
|
|
October
2007
|
Each
director of the Company is elected on staggering three year terms to serve until
his successor is elected and qualified. Each person listed in the foregoing
table has served as a director since the date of election
indicated.
The Board
of Directors of the Company has an Audit Committee which is currently composed
of Messrs. Ghazi Sultan, Mohammed Al Omair, and Robert E. Kennedy. The Board has
determined that each of the members of the Audit Committee meets the Securities
and Exchange Commission and National Association of Securities Dealers standards
for independence. The Board has also determined that Ghazi Sultan
meets the Securities and Exchange Commission criteria of an “audit committee
financial expert.”
The
following table sets forth the name of each executive officer of the Company,
their age and all the positions and offices with the Company held:
|
Name
|
|
Positions
|
|
Age
|
|
Hatem
El Khalidi
|
|
President,
Chief Executive Officer and Director
|
|
84
|
|
Nicholas
N. Carter
|
|
Executive
Vice President, Chief Operating Officer and Director/President -
TOCCO
|
|
62
|
|
Connie
Cook
|
|
Secretary
and Treasurer/Secretary - TOCCO
|
|
46
|
Each
executive officer of the Company serves for a term extending until his successor
is elected and qualified.
The
Company has adopted a Code of Ethics that applies to the Company’s principal
executive officer, principal financial officer, principal accounting officer and
controller, and to persons performing similar functions. A copy of
the Code of Ethics has been filed as an exhibit to this Annual Report on Form
10-K.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act 1934 requires the Company’s officers and
directors, and persons who own more than 10% of a registered class of the
Company’s equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. To the best of the Company’s knowledge, during the fiscal
year ended December 31, 2008, all Section 16(a) filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with.
ITEM
11. Executive
Compensation.
Compensation
Committee Report
This
Committee was formed by the Board during March 2007. The individuals
serving on the Compensation Committee are Robert E. Kennedy, Ghazi Sultan,
Mohammed Al Omair, Ibrahim Al Moneef, and Charles Goehringer, Jr. as of December
2008.
It is the
intent of the Board that the salaries and other compensation of the Executives
of the Company will be recommended to the Board for action at least once
annually and will be based upon competitive salaries and financial performance
of the Company.
Compensation
Discussion and Analysis
General
The
compensation programs of the Company are designed to attract and retain
qualified individuals upon whom the sustained progress, growth, profitability,
and value of the Company depend. It is the plan of the Board that
through the Compensation Committee, the Company will develop and implement
compensation policies, plans and programs to further these goals by rewarding
executives for positive financial performance. Management provides
recommendations regarding executive compensation to the Compensation Committee.
The Company does not currently engage any consultant related to executive and/or
director compensation matters.
Compensation
Components
During
fiscal 2008, executive compensation included base salary, annual cash and stock
incentives, and benefits generally available to all employees.
Base
Salary
The base
salary of Mr. Carter has been subject to a standard cost of living increase
annually over the past several years at the same rate as other Petrochemical
segment employees. No other adjustments were made. Mr. El
Khalidi’s remuneration has remained fixed at the current level for many
years. It is the task of the Compensation Committee to review
executive salaries annually and make recommendations as to whether adjustments
should be made.
Incentive
Compensation
The Full
Board has reviewed and acted upon the executive performance awards based upon
the financial results for the years ended 2008 and 2007. The
performance awards have been in the form of cash and stock and have been awarded
in the first quarter of each year dependent on the results of the previous
year. The Compensation Committee has taken over making these
recommendations and is developing a formal program per the Policies which are
currently under consideration. The total award is calculated based
upon performance of the Company compared with the 2005 performance which is
considered the base year. The award is paid in the first quarter
after the financial results of the year ended are reasonably known.
Stock
Option Plan
The
Company adopted a Stock Option plan during 2008.
Other
Compensation
There is
no other compensation paid to the executive officers.
Termination
of Employment Payments
There
were no termination payments made to executive officers during
2008.
Tax
Considerations
There are
no tax considerations which affect the compensation of executives for
2008.
Summary
of Executive Compensation
The
following Summary Compensation Table sets forth certain information with respect
to all compensation paid or earned for services rendered to the Company for the
year ending December 31, 2008 for those persons who served as our
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and
Vice President of Marketing for the Petrochemical Company during the year and
who are our four most highly compensated executive officers:
SUMMARY
COMPENSATION TABLE
|
Name
and
Principal Position
|
Year
|
|
Salary
($) (1)
|
|
|
Bonus
($)
|
|
|
Restricted
Stock
Award(s)
($)
|
|
|
Stock
Award(s)
|
|
|
Non-Equity
Incentive
Plan
Compensation($)
|
|
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings($)
|
|
|
All
Other
Compensation
($) (2)(3)
|
|
|
Total
($)
|
|
|
Hatem
El Khalidi,
President
and Chief
Executive
Officer, Director
|
2008
|
|
$ |
72,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
8,000 |
|
|
$ |
80,000 |
|
|
2007
|
|
$ |
72,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
8,000 |
|
|
$ |
80,000 |
|
|
2006
|
|
$ |
72,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
8,000 |
|
|
$ |
80,000 |
|
|
Nicholas
N. Carter,
Executive
Vice President and Chief Operating Officer
President,
Petrochemical Company
|
2008
|
|
$ |
209,918 |
|
|
$ |
78,665 |
|
|
$ |
99,800 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
12,595 |
|
|
$ |
400,978 |
|
|
2007
|
|
$ |
172,059 |
|
|
$ |
96,506 |
|
|
$ |
66,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
10,324 |
|
|
$ |
344,889 |
|
|
2006
|
|
$ |
163,044 |
|
|
$ |
97,994 |
|
|
$ |
30,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
9,783 |
|
|
$ |
300,821 |
|
|
Connie
J. Cook,
Secretary
and Treasurer
|
2008
|
|
$ |
133,009 |
|
|
$ |
51,143 |
|
|
$ |
49,900 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
7,981 |
|
|
$ |
242,033 |
|
|
2007
|
|
$ |
108,500 |
|
|
$ |
70,085 |
|
|
$ |
33,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
6,510 |
|
|
$ |
218,095 |
|
|
2006
|
|
$ |
102,816 |
|
|
$ |
73,057 |
|
|
$ |
15,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
6,169 |
|
|
$ |
197,042 |
|
|
Mark
D. Williamson,
Vice
President of Marketing, Petrochemical Company
|
2008
|
|
$ |
240,705 |
|
|
$ |
51,143 |
|
|
|
49,900 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
14,442 |
|
|
$ |
356,190 |
|
|
2007
|
|
$ |
190,393 |
|
|
$ |
70,023 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
11,424 |
|
|
$ |
271,840 |
|
|
2006
|
|
$ |
193,830 |
|
|
$ |
80,124 |
|
|
$ |
15,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
11,630 |
|
|
$ |
300,584 |
|
|
(1)
|
Includes
$0, $0 and $0 in compensation for the fiscal years ended December 31,
2008, 2007, and 2006, respectively, that was deferred at the election of
Mr. El Khalidi. All present deferred compensation owing to Mr.
El Khalidi aggregating $37,409 is considered, and future deferred
compensation owing to Mr. El Khalidi, if any, will be considered payable
to Mr. El Khalidi on demand.
|
|
(2)
|
Includes
$8,000 in termination benefits for each of the fiscal years ended December
31, 2008, 2007, and 2006, respectively, that was accrued for Mr. El
Khalidi in accordance with Saudi Arabian employment laws. The total amount
of accrued termination benefits due to Mr. El Khalidi as of December 31,
2008 was $316,000.
|
|
(3)
|
Includes
amounts as shown for Mr. Carter, Ms. Cook, and Mr. Williamson that were
contributed on the employee’s behalf into the Company’s 401(k)
plan.
|
Employment
Agreements
The
Company does not have any Employment Agreements outstanding at this
time.
Director
Compensation
The
Company did not pay any Directors’ fees during 2007; however, fees adopted by
the Board and owed for 2007 were accrued in 2007 and paid in the first quarter
of 2008. Directors’ fees for 2008 were in the form of stock
options. These options were not issued until January
2009. No other form of compensation was paid to Directors for
services rendered during 2008.
Compensation
Committee Interlocks and Insider Participation
The
members of the Compensation Committee as of December 31, 2008 are
Messrs. Robert E. Kennedy, Ghazi Sultan, Charles Goehringer, Jr., Ibrahim
Al Moneef, and Mohammed O. Al Omair. None of these gentlemen serve on
the Compensation Committees of any other entities. The members of the
Compensation Committee are non-employee directors.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards:
Number
of Securities Underlying Unexercised Unearned Options
(#)
|
|
|
Option
Exercise
Price
|
|
Option
Expiration Date
|
|
Hatem
El Khalidi
|
|
|
400,000 |
|
|
|
- |
|
|
|
- |
|
|
$ |
1.00 |
|
Undetermined
|
|
Ghazi
Sultan
|
|
|
100,000 |
|
|
|
- |
|
|
|
- |
|
|
$ |
2.00 |
|
08/28/09
|
OPTION
EXERCISES AND STOCK VESTED
|
Name
|
|
Number
of Shares Acquired on Vesting
(#)
|
|
|
Value
Realized on Vesting
($)
|
|
|
Nicholas
N. Carter
|
|
|
20,000 |
|
|
$ |
99,800 |
|
|
Connie
Cook
|
|
|
10,000 |
|
|
$ |
49,900 |
|
|
Mark
Williamson
|
|
|
10,000 |
|
|
$ |
49,900 |
|
GRANTS
OF PLAN-BASED AWARDS
|
Name
|
Grant Date
|
|
All
Other Stock Awards: Number of Shares of Stock or
Units (#)
|
|
|
Grant
Date Fair Value of Stock Awards
|
|
|
Nicholas
N. Carter
|
January
15, 2008
|
|
|
20,000 |
|
|
$ |
141,000 |
|
|
Connie
Cook
|
January
15, 2008
|
|
|
10,000 |
|
|
$ |
70,500 |
|
|
Mark
Willaimson
|
January
15, 2008
|
|
|
10,000 |
|
|
$ |
70,500 |
|
ITEM
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The
following table sets forth, as of December 31, 2008, information as to the
beneficial ownership of the Company’s Common Stock by each person known by the
Company to beneficially own more than 5% of the Company’s outstanding Common
Stock, by each of the Company’s executive officers named in the Summary
Compensation Table, by each of the Company’s directors and by all directors and
executive officers of the Company as a group.
|
Name
and Address
Of
Beneficial Owner
|
|
Shares
Beneficially
Owned
(1)
|
|
Percent
of
Class
|
|
Fahad
Mohammed Saleh Al
Athel
c/o
Saudi Fal
P.
O. Box 4900
Riyadh,
Saudi Arabia 11412
|
|
3,632,953
|
|
15.3%
|
|
Mohammad
Salem ben
Mahfouz
c/o
National Commercial Bank
Jeddah,
Saudi Arabia
|
|
1,500,000
|
|
6.3%
|
|
Harb
S. Al
Zuhair
P.O.
Box 3750
Riyadh,
Saudi Arabia
|
|
1,423,750
|
|
6.0%
|
|
Prince
Talal Bin Abdul
Aziz
P.
O. Box 930
Riyadh,
Saudi Arabia
|
|
1,272,680
|
|
5.4%
|
|
Hatem
El
Khalidi
10830
North Central Expressway, Suite 175
Dallas,
Texas 75231
|
|
460,000(2)
|
|
1.9%
|
|
Ghazi
Sultan
P.O.
Box 5360
Jeddah,
Saudi Arabia 21422
|
|
190,000
(3)
|
|
0.8%
|
|
Nicholas
N.
Carter
P.O.
Box 1636
Silsbee,
Texas 77656
|
|
207,918
|
|
0.9%
|
|
Charles
W. Goehringer,
Jr.
P.O.
Box 4915
Beaumont,
Texas 77704
|
|
32,967
|
|
0.1%
|
|
Robert
E.
Kennedy.
450
Gears Rd., Suite 290
Houston,
Texas 77067
|
|
10,000
|
|
*
|
|
Mohammed
O. Al
Omair.
P.
O. Box 4900
Riyadh,
Saudi Arabia
|
|
1,667
|
|
*
|
|
Name
and Address
Of
Beneficial Owner
|
|
Shares
Beneficially
Owned
(1)
|
|
Percent
of
Class
|
|
Ibrahim
Al
Moneef.
P.
O. Box 10850
Riyadh,
Saudi Arabia
|
|
600,000
|
|
2.5%
|
|
Connie
J.
Cook.
P.
O. Box 1636
Silsbee,
Texas 77656
|
|
32,500
|
|
0.1%
|
|
Mark
Williamson.
P.
O. Box 1636
Silsbee,
Texas 77656
|
|
20,000
|
|
0.1%
|
|
All
directors and executive officers as a group (8 persons)
|
|
1,555,052(4)
|
|
6.6%
|
|
(1)
|
Unless
otherwise indicated, to the knowledge of the Company, all shares are owned
directly and the owner has sole voting and investment
power.
|
|
(2)
|
Includes
400,000 shares which Mr. El Khalidi has the right to acquire through the
exercise of presently exercisable stock options. Excludes 385,000 shares
owned by Ingrid El Khalidi, Mr. El Khalidi’s wife, and 443,000 shares
owned by relatives of Hatem El
Khalidi.
|
|
(3)
|
Includes
100,000 shares which Mr. Sultan has the right to acquire through the
exercise of presently exercisable stock
options.
|
|
(4)
|
Includes
500,000 shares which certain directors and executive officers have the
right to acquire through the exercise of stock options or other rights
exercisable presently or within 60 days. Excludes 385,000 shares owned by
Ingrid El Khalidi, the wife of Hatem El Khalidi, the President, Chief
Executive Officer and a director of the Company, and 443,000 shares owned
by relatives of Hatem El Khalidi.
|
Based on
its stock ownership records, the Company believes that, as of December 31, 2008,
Saudi Arabian stockholders currently hold approximately 57% of the Company’s
outstanding Common Stock, without giving effect to the exercise of presently
exercisable stock options held by certain of such stockholders. Accordingly, if
all or any substantial part of the Saudi Arabian stockholders were considered as
a group, they could be deemed to “control” the Company as that term is defined
in regulations promulgated by the SEC. Although they have orally waived their
rights, certain of the Company’s Saudi Arabian stockholders are parties to
written agreements providing them with the right to purchase their proportionate
share of additional shares sold by the Company.
The
management of the Company has welcomed the substantial stock investment by its
Saudi stockholders. Saudi investors have contributed vitally needed capital to
the Company since 1974. Whether the Company’s Saudi stockholders will be a
continuing source of future capital is unknown at this time. In confronting the
need for additional funds, management of the Company will follow the policy of
considering all potential sources consistent with prudent business practice and
the best interests of all its stockholders. In the course of considering methods
of future financing and other matters relating to the operations of the Company,
management of the Company anticipates that in the ordinary course of business it
will receive recommendations and suggestions from its principal
stockholders.
ITEM
13. Certain Relationships and Related Transactions.
The
Company directly owns approximately 55% of the outstanding capital stock of
Pioche. Mr. Carter is currently a director and President of Pioche, and Mr.
Charles Goehringer, Jr. is currently a director and Vice President of
Pioche. The Company is providing funds necessary to cover the Pioche
operations. During 2008 and 2007, the Company made payments of approximately
$65,168 and $49,700, respectively, for such purposes. As of December
31, 2008, Pioche owed the Company $267,609 as a result of advances made by the
Company. The indebtedness bears no interest.
During
2008 South Hampton incurred product transportation and equipment costs of
approximately $757,000 with Silsbee Trading and Transportation Corp. (STTC), a
private trucking and transportation carrier in which Mr. Carter, President of
TOCCO, had a 100% equity interest. Pursuant to a lease agreement, South Hampton
leases transportation equipment from STTC. Lease payments at the
beginning of 2008 were approximately $69,070 per month and were raised to
approximately $70,320 per month as new and additional tractors and trailers were
added to the fleet throughout the year. With the increase in volume
of the products produced with the new expansion of the facility which is
currently underway, additional transportation equipment is expected to be
required. Under the lease arrangement, STTC provides transportation
equipment and all normal maintenance on such equipment and South Hampton
provides drivers, fuel, management of transportation operations and insurance on
the transportation equipment. Approximately 95% of STTC’s income will be derived
from such lease arrangement. The lease agreement operated on a
month-to-month basis until January 1, 2004, when a new five year agreement was
signed. STTC also entered into a capital lease with South Hampton for
acquisition of a motorized man lift. At the end of the five year
lease period, title to the manlift will be transferred to South Hampton for a
final payment of one dollar.
ITEM
14. Principal
Accounting Fees and Services.
The table
below sets forth the fees that Travis, Wolff & Company, L.L.P. (also known
as Moore Stephens TravisWolff, L.L.P.) billed the Company for the audit of its
financial statements for the fiscal years ended December 31, 2008 and 2007 and
the review of its financial statements for the quarterly periods in the year
ended December 31, 2008, and all other fees Moore Stephens TravisWolff, LLP
billed the Company for services rendered during the fiscal years ended December
31, 2008 and December 31, 2007, respectively:
|
|
|
2008
|
|
|
2007
|
|
|
Audit
Fees
|
|
$ |
335,173 |
|
|
$ |
209,325 |
|
|
Audit-Related
Fees
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Tax
Fees
|
|
$ |
33,545 |
|
|
$ |
23,200 |
|
|
All
Other Fees
|
|
$ |
0 |
|
|
$ |
0 |
|
Under its
charter, the Audit Committee must pre-approve all auditing services and
permitted non-audit services (including the fees and terms thereof) to be
performed for the Company by its independent auditor, subject to the de minimis
exceptions for non-audit services under the Securities Exchange Act of 1934, as
amended, which are approved by the Audit Committee prior to the completion of
the audit. The Audit Committee may delegate authority to grant
pre-approvals of audit and permitted non-audit services to subcommittees,
provided that decisions of the subcommittee to grant pre-approvals must be
presented to the full Audit Committee at its
next
scheduled meeting. During 2008 each new engagement of Travis, Wolff
& Company, L.L.P. (also known as Moore Stephens TravisWolff, L.L.P.) was
approved in advance by the Audit Committee.
PART
IV
ITEM
15. Exhibits, Financial
Statement Schedules.
(a)1. The
following financial statements are filed with this Report:
|
|
Reports
of Independent Registered Public Accounting
Firm.
|
|
|
Consolidated
Balance Sheets dated December 31, 2008 and
2007.
|
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2008.
|
|
|
Consolidated
Statement of Stockholders’ Equity for the three years ended December 31,
2008.
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2008.
|
|
|
Notes
to Consolidated Financial
Statements.
|
2. The
following financial statement schedules are filed with this Report:
|
|
Schedule
II -- Valuation and Qualifying Accounts for the three years ended December
31, 2008.
|
3. The following documents
are filed or incorporated by reference as exhibits to this
Report. Exhibits
marked with an asterisk (*) are management contracts or a compensatory
plan, contract or
arrangement.
|
Exhibit
Number
|
Description
|
|
3(a)
|
- Certificate
of Incorporation of the Company as amended through the Certificate of
Amendment filed with the Delaware Secretary of State on July 19, 2000
(incorporated by reference to Exhibit 3(a) to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2000 (File No.
0-6247)).
|
|
3(b)
|
- Restated
Bylaws of the Company dated April 26, 2007 (incorporated by reference to
Item 5.03 to the Company’s Form 8-K dated April 26, 2007 (File No.
0-6247)).
|
|
10(a)
|
- 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)).
|
|
Exhibit
Number
|
Description
|
|
10(b)
|
- Mining
Lease Agreement effective May 22, 1993 by and between the Ministry of
Petroleum and Mineral Resources and the Company (incorporated
by reference to Exhibit 10(c) to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1999 (File No. 0-6247)).
|
|
10(c)
|
- Equipment
Lease Agreement dated November 14, 2003, between Silsbee Trading and
Transportation Corp. and South Hampton Refining Company (incorporated by
reference to Exhibit 10(o) to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2003 (File No. 0-6247)).
|
|
10(d)
|
- Addendum
to Equipment Lease Agreement dated August 1, 2004, between Silsbee Trading
and Transportation Corp. and south Hampton Refining Company (incorporated
by reference to Exhibit 10(q) to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2004 (File No.
0-6247)).
|
|
10(e)
|
- 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
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 for the quarter ended September
30, 2006 (file No. 0-6247)).
|
|
10(g)*
|
- Retirement
Awards Program dated January 17, 2007 between Arabian American Development
Company and Jack Crichton (incorporated by reference to Exhibit 10(h) to
the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2007 (file No. 0-6247)).
|
|
10(h)*
|
- Retirement
Awards Program dated February 16, 2007 between Arabian American
Development Company and Hatem El Khalidi (incorporated by reference to
Exhibit 10(i) to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007 (file No. 0-6247)).
|
|
Exhibit
Number
|
Description
|
|
10(i)*
|
- 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(j)*
|
- 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)).
|
|
14
|
- Code
of Ethics for Senior Financial Officers (incorporated by reference to
Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 0-6247)).
|
|
16
|
- Letter
re change in certifying accountant (incorporated by reference to Exhibit
16 to the Company’s Current Report on Form 8-K/A dated January 31, 2003
(File No. 0-6247)).
|
|
21
|
- Subsidiaries
(incorporated by reference to Exhibit 21 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001 (File No.
0-6247)).
|
|
23.1
|
- Consent
of Independent Registered Public Accounting Firm
|
|
24
|
- Power
of Attorney (set forth on the signature page hereto).
|
|
31.1
|
- Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
- Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
- Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
- Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
(b)
|
The
following reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
|
|
8.01
|
- Conditional
approval by Saudi Arabian Ministry of Petroleum & Mineral Resources
for transfer of Al Masane lease to AMAK dated September 28,
2008.
|
|
8.01
|
- Approval
of transfer of Al Masane Lease to Al Masane Al Kobra Company completion
dated November 23, 2008.
|
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS that each of Arabian American Development Company, a
Delaware corporation, and the undersigned directors and officers of Arabian
American Development Company, hereby constitutes and appoints Nicholas Carter
its or his true and lawful attorney-in-fact and agent, for it or him and in its
or his name, place and stead, in any and all capacities, with full power to act
alone, to sign any and all amendments to this Report, and to file each such
amendment to the Report, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorney-in-fact and agent full power and authority to
do and perform any and all acts and things requisite and necessary to be done in
and about the premises as fully to all intents and purposes as it or he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue
hereof.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARABIAN
AMERICAN DEVELOPMENT
COMPANY
|
Dated:
March 13, 2009
|
By:
|
/s/ Hatem El
Khalidi
|
Hatem El
Khalidi
President and Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Company in the capacities
indicated on March 13, 2009.
|
Signature
|
Title
|
|
/s/ Hatem El Khalidi
Hatem
El Khalidi
|
President,
Chief Executive Officer and Director (principal executive
officer)
|
|
/s/ Nicholas Carter
Nicholas
Carter
|
Executive
Vice President, Chief Operating Officer and Director
|
|
/s/ Connie Cook
Connie
Cook
|
Secretary
and Treasurer
(principal
financial and accounting officer)
|
|
/s/ Charles Goehringer, Jr.
Charles
Goehringer, Jr.
|
|
|
/s/ Robert Kennedy
Robert
Kennedy
|
|
|
/s/ Ghazi Sultan
Ghazi
Sultan
|
Director
|
|
/s/ Ibrahim Al Moneef
Dr.
Ibrahim Al Moneef
|
Director
|
|
/s/ Mohammed Al Omair
Mohammed
Al Omair
|
Director
|
|
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Internal
Control
Over Financial Reporting
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-4
|
|
|
|
|
Consolidated
Statements of Operations For the Years Ended
December
31, 2008, 2007 and 2006
|
F-6
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity For the Years Ended
December
31, 2008, 2007 and 2006
|
F-7
|
|
|
|
|
Consolidated
Statements of Cash Flows For the Years Ended
December
31, 2008, 2007 and 2006
|
F-8
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
|
|
|
|
INDEX
TO FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on
Schedules
|
F-36
|
|
|
|
|
Schedule
II – Valuation and Qualifying Accounts For the Three Years
Ended
December
31, 2008
|
F-37
|
|
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Arabian
American Development Company and Subsidiaries
Dallas,
Texas
We have
audited the accompanying consolidated balance sheets of Arabian American
Development Company and Subsidiaries (the Company) as of December 31, 2008 and
2007, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arabian
American Development Company and Subsidiaries as of December 31, 2008 and 2007,
and the consolidated results of its operations and its cash flows for each for
the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Arabian American Development Company and
Subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control – Integrate Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our reports dated March 13, 2009 expressed an unqualified
opinion.
As
discussed in Notes 1 and 4 to the consolidated financial statements, effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157 “Fair Value Measurements”.
/s/
Travis, Wolff & Company, L.L.P. (also known as Moore Stephens TravisWolff,
L.L.P.)
Dallas,
Texas
March 13,
2009
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Arabian
American Development Company and Subsidiaries
Dallas,
Texas
We have
audited Arabian American Development Company and Subsidiaries’ internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Arabian American
Development Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Arabian American Development Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income, stockholders’ equity and cash flows of
Arabian American Development Company, and our report dated March 13, 2009
expressed an unqualified opinion.
/s/
Travis, Wolff & Company, L.L.P. (also known as Moore Stephens TravisWolff,
L.L.P.)
Dallas,
Texas
March 13,
2009
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,759,236 |
|
|
$ |
4,789,924 |
|
|
Trade
Receivables, net of allowance for doubtful accounts of
$500,000 and $35,000, respectively
|
|
|
11,904,026 |
|
|
|
12,310,561 |
|
|
Current
portion of notes receivable, net of discount of $53,628 and
$101,620, respectively
|
|
|
528,549 |
|
|
|
609,777 |
|
|
Derivative
instruments
|
|
|
-- |
|
|
|
206,832 |
|
|
Derivative
instrument deposits
|
|
|
3,950,000 |
|
|
|
-- |
|
|
Prepaid
expenses and other assets
|
|
|
799,342 |
|
|
|
648,313 |
|
|
Inventories
|
|
|
2,446,200 |
|
|
|
2,887,636 |
|
|
Deferred
income taxes
|
|
|
8,785,043 |
|
|
|
-- |
|
|
Taxes
receivable
|
|
|
429,626 |
|
|
|
1,070,407 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
31,602,022 |
|
|
|
22,523,450 |
|
|
|
|
|
|
|
|
|
|
|
|
PLANT,
PIPELINE, AND EQUIPMENT – AT COST
|
|
|
47,184,865 |
|
|
|
32,229,709 |
|
|
LESS
ACCUMULATED DEPRECIATION
|
|
|
(14,649,791 |
) |
|
|
(12,463,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
PLANT,
PIPELINE, AND EQUIPMENT, NET
|
|
|
32,535,074 |
|
|
|
19,766,495 |
|
|
|
|
|
|
|
|
|
|
|
|
AL
MASANE PROJECT
|
|
|
-- |
|
|
|
37,468,080 |
|
|
INVESTMENT
IN AMAK
|
|
|
33,002,407 |
|
|
|
-- |
|
|
OTHER
INTERESTS IN SAUDI ARABIA
|
|
|
-- |
|
|
|
2,431,248 |
|
|
MINERAL
PROPERTIES IN THE UNITED STATES
|
|
|
588,311 |
|
|
|
1,084,617 |
|
|
NOTES
RECEIVABLE, net of discount of $16,793 and $70,421,
respectively, net of current portion
|
|
|
407,388 |
|
|
|
935,937 |
|
|
OTHER
ASSETS
|
|
|
10,938 |
|
|
|
10,938 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
98,146,140 |
|
|
$ |
84,220,765 |
|
See notes
to the consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS - Continued
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
6,069,851 |
|
|
$ |
4,524,042 |
|
|
Accrued
interest
|
|
|
147,461 |
|
|
|
85,552 |
|
|
Derivative
instruments
|
|
|
8,673,311 |
|
|
|
-- |
|
|
Accrued
liabilities
|
|
|
1,029,690 |
|
|
|
1,931,822 |
|
|
Accrued
liabilities in Saudi Arabia
|
|
|
1,429,156 |
|
|
|
1,406,801 |
|
|
Notes
payable
|
|
|
12,000 |
|
|
|
11,012,000 |
|
|
Current
portion of long-term debt
|
|
|
4,920,442 |
|
|
|
30,573 |
|
|
Current
portion of other liabilities
|
|
|
544,340 |
|
|
|
630,731 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
22,826,251 |
|
|
|
19,621,521 |
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, net of current portion
|
|
|
23,557,294 |
|
|
|
9,077,737 |
|
|
POST
RETIREMENT BENEFIT
|
|
|
823,500 |
|
|
|
441,500 |
|
|
OTHER
LIABILITIES, net
of current portion
|
|
|
446,035 |
|
|
|
990,375 |
|
|
DEFERRED
INCOME TAXES
|
|
|
3,356,968 |
|
|
|
677,131 |
|
|
MINORITY
INTEREST IN CONSOLIDATED SUBSIDIARIES
|
|
|
289,223 |
|
|
|
794,646 |
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Common Stock
- authorized 40,000,000 shares of $.10 par value; issued
and outstanding, 23,421,995 and 22,601,994 shares in
2008 and 2007, respectively
|
|
|
2,342,199 |
|
|
|
2,260,199 |
|
|
Additional
Paid-in Capital
|
|
|
41,325,207 |
|
|
|
37,183,206 |
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(1,120,072 |
) |
|
|
-- |
|
|
Retained
Earnings
|
|
|
4,299,535 |
|
|
|
13,174,450 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
46,846,869 |
|
|
|
52,617,855 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
98,146,140 |
|
|
$ |
84,220,765 |
|
See notes
to the consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31,
|
|
|
2008
|
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
Petrochemical
product sales
|
|
$ |
130,264,329 |
|
|
$ |
103,204,565 |
|
$ |
93,854,726 |
|
|
Transloading
sales
|
|
|
20,238,841 |
|
|
|
-- |
|
|
-- |
|
|
Processing
fees
|
|
|
4,127,064 |
|
|
|
5,433,550 |
|
|
4,647,431 |
|
|
|
|
|
154,630,234 |
|
|
|
108,638,115 |
|
|
98,502,157 |
|
|
Operating
costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of petrochemical product sales and Processing
(including depreciation of $1,299,580,
$793,220, and $672,280, respectively)
|
|
|
159,226,896 |
|
|
|
89,654,585 |
|
|
80,561,052 |
|
|
Gross
Profit (Loss)
|
|
|
(4,596,662 |
) |
|
|
18,983,530 |
|
|
17,941,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
9,034,366 |
|
|
|
7,619,280 |
|
|
5,842,564 |
|
|
Depreciation
|
|
|
331,703 |
|
|
|
281,542 |
|
|
186,779 |
|
|
|
|
|
9,366,069 |
|
|
|
7,900,822 |
|
|
6,029,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(13,962,731 |
) |
|
|
11,082,708 |
|
|
11,911,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
204,635 |
|
|
|
297,494 |
|
|
276,184 |
|
|
Interest
expense
|
|
|
(605,254 |
) |
|
|
(142,696 |
) |
|
(704,282 |
) |
|
Minority
interest
|
|
|
505,424 |
|
|
|
22,912 |
|
|
17,535 |
|
|
Miscellaneous
income (expense)
|
|
|
4,165 |
|
|
|
(62,794 |
) |
|
383,545 |
|
|
|
|
|
108,970 |
|
|
|
114,916 |
|
|
(27,018 |
) |
|
Income
(loss) before income tax expense (benefit)
|
|
|
(13,853,761 |
) |
|
|
11,197,624 |
|
|
11,884,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(4,978,846 |
) |
|
|
3,426,243 |
|
|
4,009,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(8,874,915 |
) |
|
$ |
7,771,381 |
|
$ |
7,875,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
(0.38 |
) |
|
$ |
0.34 |
|
$ |
0.35 |
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
(0.38 |
) |
|
$ |
0.33 |
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,409,458 |
|
|
|
22,895,394 |
|
|
22,804,567 |
|
|
|
Diluted
|
|
|
23,409,458 |
|
|
|
23,291,669 |
|
|
23,030,573 |
|
|
See notes
to the consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
For
the years ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Retained
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Loss
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2005
|
|
|
22,431,994 |
|
|
$ |
2,243,199 |
|
|
$ |
36,512,206 |
|
|
$ |
- |
|
|
$ |
(2,472,259 |
) |
|
$ |
36,283,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
to Employees
|
|
|
40,000 |
|
|
|
4,000 |
|
|
|
56,000 |
|
|
|
- |
|
|
|
- |
|
|
|
60,000 |
|
|
Issued
to Directors
|
|
|
100,000 |
|
|
|
10,000 |
|
|
|
290,000 |
|
|
|
- |
|
|
|
- |
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to directors
|
|
|
- |
|
|
|
- |
|
|
|
229,000 |
|
|
|
- |
|
|
|
- |
|
|
|
229,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,875,328 |
|
|
|
7,875,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2006
|
|
|
22,571,994 |
|
|
$ |
2,257,199 |
|
|
$ |
37,087,206 |
|
|
$ |
- |
|
|
$ |
5,403,069 |
|
|
$ |
44,747,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
to Employees
|
|
|
30,000 |
|
|
|
3,000 |
|
|
|
96,000 |
|
|
|
- |
|
|
|
- |
|
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,771,381 |
|
|
|
7,771,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2007
|
|
|
22,601,994 |
|
|
$ |
2,260,199 |
|
|
$ |
37,183,206 |
|
|
$ |
- |
|
|
$ |
13,174,450 |
|
|
$ |
52,617,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued
for Services
|
|
|
750,000 |
|
|
|
75,000 |
|
|
|
3,637,500 |
|
|
|
- |
|
|
|
- |
|
|
|
3,712,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued to Directors
|
|
|
30,001 |
|
|
|
3,000 |
|
|
|
226,501 |
|
|
|
- |
|
|
|
- |
|
|
|
229,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued to Employees
|
|
|
40,000 |
|
|
|
4,000 |
|
|
|
278,000 |
|
|
|
- |
|
|
|
- |
|
|
|
282,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Loss on Interest Rate Swap (net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
of $ 577,007)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,120,072 |
) |
|
|
- |
|
|
|
(1,120,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,874,915 |
) |
|
|
(8,874,915 |
) |
|
Comprehensive
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,994,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2008
|
|
|
23,421,995 |
|
|
$ |
2,342,199 |
|
|
$ |
41,325,207 |
|
|
$ |
(1,120,072 |
) |
|
$ |
4,299,535 |
|
|
$ |
46,846,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to the consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(
8,874,915 |
) |
|
$ |
7,771,381 |
|
|
$ |
7,875,328 |
|
|
Adjustments
to reconcile net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,631,283 |
|
|
|
1,074,762 |
|
|
|
859,059 |
|
|
Accretion
of notes receivable discounts
|
|
|
(101,619 |
) |
|
|
(148,355 |
) |
|
|
(166,959 |
) |
|
Accretion
of unrealized gross profit
|
|
|
- |
|
|
|
(52,137 |
) |
|
|
(44,534 |
) |
|
Unrealized
(gain) loss on derivative instruments
|
|
|
5,485,914 |
|
|
|
(972,504 |
) |
|
|
840,424 |
|
|
Share-based
compensation
|
|
|
282,000 |
|
|
|
99,000 |
|
|
|
589,000 |
|
|
Bad
debt expense
|
|
|
465,000 |
|
|
|
- |
|
|
|
- |
|
|
Deferred
income taxes
|
|
|
(5,528,129 |
) |
|
|
137,131 |
|
|
|
243,000 |
|
|
Postretirement
obligation
|
|
|
202,000 |
|
|
|
621,500 |
|
|
|
- |
|
|
Impairment
loss
|
|
|
496,306 |
|
|
|
- |
|
|
|
- |
|
|
Minority
interest
|
|
|
(505,423 |
) |
|
|
(22,912 |
) |
|
|
(17,104 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in trade receivables
|
|
|
(58,465 |
) |
|
|
(3,417,379 |
) |
|
|
4,079,475 |
|
|
Decrease
in notes receivable
|
|
|
711,396 |
|
|
|
806,447 |
|
|
|
689,386 |
|
|
(Increase)
decrease in income tax receivable
|
|
|
640,781 |
|
|
|
(450,809 |
) |
|
|
(619,598 |
) |
|
(Increase)
decrease in inventories
|
|
|
441,436 |
|
|
|
688,681 |
|
|
|
(2,411,643 |
) |
|
(Increase)
decrease in other assets
|
|
|
(151,029 |
) |
|
|
215,831 |
|
|
|
207,877 |
|
|
(Increase)
decrease in derivative instruments
deposits
|
|
|
(3,950,000 |
) |
|
|
1,500,000 |
|
|
|
(1,500,000 |
) |
|
Increase
in prepaid expenses
|
|
|
- |
|
|
|
(244,085 |
) |
|
|
(38,671 |
) |
|
Increase
in accounts payable and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
liabilities
|
|
|
2,750,258 |
|
|
|
2,076,607 |
|
|
|
1,128,911 |
|
|
Increase
in accrued interest
|
|
|
61,909 |
|
|
|
25,695 |
|
|
|
1,108 |
|
|
Increase
(decrease) in accrued liabilities in Saudi
Arabia
|
|
|
22,355 |
|
|
|
(238,456 |
) |
|
|
(762,025 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
(5,978,942 |
) |
|
|
9,470,398 |
|
|
|
10,953,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to Al Masane Project
|
|
|
(390,579 |
) |
|
|
(331,058 |
) |
|
|
(332,924 |
) |
|
Additions
to plant, pipeline and equipment
|
|
|
(15,030,593 |
) |
|
|
(10,799,205 |
) |
|
|
(3,738,856 |
) |
|
Additions
to mineral properties in the United States
|
|
|
- |
|
|
|
94 |
|
|
|
- |
|
|
Net
cash used in investing activities
|
|
|
(15,421,172 |
) |
|
|
(11,130,169 |
) |
|
|
(4,071,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to long-term debt
|
|
|
25,900,000 |
|
|
|
6,000,000 |
|
|
|
5,058,726 |
|
|
Repayment
of long-term debt
|
|
|
(6,530,574 |
) |
|
|
(2,488,827 |
) |
|
|
(10,726,183 |
) |
|
Repayment
of note to stockholders
|
|
|
- |
|
|
|
(500 |
) |
|
|
(13,333 |
) |
|
Net
cash provided (used) in financing activities
|
|
|
19,369,426 |
|
|
|
3,510,673 |
|
|
|
(5,680,790 |
) |
See notes
to the consolidated financial statements.
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - continued
For
the years ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(2,030,688 |
) |
|
|
1,850,902 |
|
|
|
1,200,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
4,789,924 |
|
|
|
2,939,022 |
|
|
|
1,738,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
2,759,236 |
|
|
$ |
4,789,924 |
|
|
$ |
2,939,022 |
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest
|
|
$ |
918,845 |
|
|
$ |
294,206 |
|
|
$ |
720,752 |
|
|
Cash
payments (net of refunds) for taxes
|
|
$ |
4,814 |
|
|
$ |
3,585,000 |
|
|
$ |
3,908,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable issued for capital expansion
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
952,900 |
|
|
Capital
expansion amortized to depreciation expense
|
|
$ |
(630,731 |
) |
|
$ |
(584,348 |
) |
|
$ |
(480,002 |
) |
|
Investment
in AMAK
|
|
$ |
33,002,407 |
|
|
|
-- |
|
|
|
-- |
|
|
Issuance
of common stock for settlement of accrued Directors’
compensation
|
|
$ |
229,501 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
Unrealized
loss on interest rate swap, net of tax benefit
|
|
$ |
1,120,072 |
|
|
$ |
-- |
|
|
$ |
-- |
|
See notes
to the consolidated financial statements.
|
|
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
|
Business
and Operations of the Company
|
Arabian
American Development Company (the “Company”) was organized as a Delaware
corporation in 1967. The Company’s principal business activities
include manufacturing various specialty petrochemical products (also referred to
as the “Petrochemical Segment”) and developing mineral properties in Saudi
Arabia and the United States (also referred to as the “Mining
Segment”). All of its mineral properties are presently undeveloped
and require significant capital expenditures before beginning any commercial
operations (see Notes 2, 8 and 9). In December 2008 mining assets
located in Saudi Arabia were transferred into a joint stock company “Al Masane
Al Kobra” (AMAK) of which the Company owns fifty percent.
The
Company’s Petrochemical Segment activities are primarily conducted through a
wholly-owned subsidiary, American Shield Refining Company (the “Petrochemical
Company”), which owns all of the capital stock of Texas Oil and Chemical Co. II,
Inc. (“TOCCO”). TOCCO owns all of the capital stock of South Hampton
Resources Inc. (“South Hampton”), and South Hampton owns all of the capital
stock of Gulf State Pipe Line Company, Inc. (“Gulf State”). South
Hampton owns and operates a specialty petrochemical product facility near
Silsbee, Texas which manufactures high purity solvents used primarily in the
plastics and foam industries. Gulf State owns and operates three
pipelines that connect the South Hampton facility to a natural gas line, to
South Hampton’s truck and rail loading terminal and to a major petroleum
pipeline owned by an unaffiliated third party. 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. Pioche and the Company’s mineral properties in Saudi Arabia constitute
its Mining Segment.
Summary
of Significant Accounting Policies
Principles of Consolidation –
The Company evaluates its equity and other contractual relationships in order to
determine whether the guidelines of FASB Interpretation (“FIN”) No. 46,
“Consolidation of Variable Interest Entities,” as revised under FIN 46R, should
be applied in the consolidated financial statements. FIN 46R
addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. A variable interest entity is
defined as an entity in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support. The primary beneficiary is required to consolidate the
financial position and results of the variable interest entity. The
Company consolidates its wholly owned interests and all inter-company accounts
are eliminated in consolidation.
Cash, Cash Equivalents and Short-Term
Investments - The Company’s principal banking and short-term investing
activities are with local and national financial
institutions. Short-term investments with an original maturity of
three months or less are classified as cash equivalents. At December
31, 2008 and 2007, there were cash equivalents or short-term investments of
$2.76 million and $4.79 million, respectively.
Inventories - Finished
products and feedstock are recorded at the lower of cost, determined on the
last-in, first-out method (LIFO); or market.
Accounts Receivable and Allowance for
Doubtful Accounts – The Company evaluates the collectibility of its
accounts receivable and adequacy of the allowance for doubtful accounts based
upon historical experience and any specific customer financial difficulties of
which the Company
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
becomes
aware. For the years ended December 31, 2008 and 2007, the allowance
balance was increased by $465,000 and $0, respectively. The Company
tracks customer balances and past due amounts to determine any customers that
may be having financial difficulties. This, along with historical
experience and a working knowledge of each customer, helps determine accounts
that should be written off. No amounts were written off in 2008 or
2007.
Notes Receivable – The Company
periodically makes changes in or expands its toll processing units at the
request of the customer. The cost to make these changes is shared by
the customer. Upon completion of the project a non-interest note
receivable is recorded with an imputed interest rate. Interest rates
used on outstanding notes at December 31, 2008, and 2007, were between 8% and
9%. The unearned interest is reflected as a discount against the note
balance. The Company evaluates the collectibility of notes based upon
a working knowledge of the customer. The notes are receivable from
toll processing customers with whom the Company maintains a close
relationship. Thus, all amounts due under the notes receivable are
considered collectible, and no allowance has been recorded at December 31, 2008
and 2007.
Mineral Exploration and Development
Costs - All costs related to the acquisition, exploration, and
development of mineral deposits are capitalized until such time as (1) the
Company commences commercial exploitation of the related mineral deposits at
which time the costs will be amortized, (2) the related project is abandoned and
the capitalized costs are charged to operations, or (3) when any or all deferred
costs are permanently impaired. In December 2008 all Saudi mining
costs were transferred to the Company’s investment in AMAK. At
December 31, 2008, the Company’s remaining mining assets held by Pioche had not
reached the commercial exploitation stage. No indirect overhead or
general and administrative costs have been allocated to any of the
projects.
Plant, Pipeline and Equipment
- - Plant, pipeline and equipment are stated at cost. Depreciation is
provided over the estimated service lives using the straight-line
method. Gains and losses from disposition are included in operations
in the period incurred. Maintenance and repairs are expensed as
incurred. Major renewals and improvements are
capitalized.
Interest
costs incurred to finance expenditures during construction phase are capitalized
as part of the historical cost of constructing the
assets. Construction commences with the development of the design and
ends when the assets are ready for use. Capitalized interest costs
are included in property, pipeline and equipment and are depreciated over the
service life of the related assets.
Platinum
catalyst is included in property, pipeline and equipment at
cost. Amortization of the catalyst is based upon cost less estimated
salvage value of the catalyst using the straight line method over the estimated
useful life (see Note 7).
Other Assets - Other assets
include a license used in petrochemical operations and certain petrochemical
assets.
Long-Lived Assets Impairment -
Long-lived assets
are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable, in accordance with the Statement of Financial Accounting
Standards No.
144 (SFAS 144), “Accounting for the Impairment
or Disposal of Long-Lived Assets.” An impairment loss
would be recognized
when the carrying amount of an asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition.
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
The
amount of the impairment loss to be recorded is calculated by the excess of the
asset's carrying value over its fair value. Fair value is generally determined
using a discounted cash flow analysis although other factors including the state
of the economy are considered.
Revenue recognition - Sales of
petrochemicals are recorded when title passes to the customer. Revenue
associated with processing fees is recognized in the period the service is
performed. Sales are presented net of discounts and allowances. Freight costs
billed to customers are recorded as a component of revenue.
Shipping and handling costs -
Shipping and handling cost are classified as cost of petrochemical
product sales and processing and are expensed as incurred.
Retirement plan – The Company
offers employees the benefit of participating in a 401(K) plan. The
Company matches 100% up to 6% of pay with vesting occurring over 7
years. As of December 31, 2008, 2007, and 2006, matching
contributions of $385,501, $305,058, and $200,440 had been made on behalf of
employees.
Environmental Liabilities -
Remediation costs are accrued based on estimates of known environmental
remediation exposure. Ongoing environmental compliance costs,
including maintenance and monitoring costs, are expensed as
incurred.
Other Liabilities – The
Company periodically makes changes in or expands its toll processing units at
the request of the customer. The cost to make these changes is shared
by the customer. Upon completion of the project a note receivable and
a deferred liability are recorded to recover the project costs which were
capitalized (see Note 6). The amortization of the deferred liability
is recorded as a reduction to depreciation expense. As of December 31
of each year, depreciation expense had been reduced by $630,731 for 2008,
$584,348 for 2007, and $480,002 for 2006.
Net Income Per Share - The
Company computes basic income per common share based on the weighted-average
number of common shares outstanding. Diluted income per common share
is computed based on the weighted-average number of common shares outstanding
plus the number of additional common shares that would have been outstanding if
potential dilutive common shares, consisting of stock options and shares which
could be issued upon conversion of debt, had been issued (see Note
17).
Foreign Currency and
Operations - The functional currency for each of the Company’s
subsidiaries is the US dollar. Transaction gains or losses as a
result of conversion from the subsidiaries local currency to the US dollar are
reflected in the statements of income as a foreign exchange transaction gain or
loss. The Company does not employ any practices to minimize foreign
currency risks. As of December 31, 2008, and 2007, foreign currency
translation adjustments were not significant.
The
Company’s foreign operations have been, and will continue to be, affected by
periodic changes or developments in the foreign countries’ political and
economic conditions, as well as, changes in their laws and
regulations. Any such changes could have a material adverse effect on
the Company’s financial condition, operating results, or cash
flows.
Saudi
Arabian investors, including certain members of the Company’s Board of
Directors, own approximately 57% of the Company’s outstanding common stock at
both December 31, 2008 and 2007.
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
Equity Method – Investee
companies that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to an Investee depends on an evaluation of several
factors including, among others, representation on the Investee company’s board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the Investee company. Under the equity
method of accounting, an Investee company’s accounts are not reflected within
the Company’s Consolidated Balance Sheets and Statements of Operations; however,
the Company’s share of the earnings or losses of the Investee company is
reflected in the Consolidated Statements of Operations. The Company’s
carrying value in an equity method Investee company is reflected in the caption
“Investment in AMAK” in the Company’s Consolidated Balance Sheets.
When the
Company’s carrying value in an equity method Investee company is reduced to
zero, no further losses are recorded in the Company’s consolidated financial
statements unless the Company guaranteed obligations of the Investee company or
has committed additional funding. When the Investee company
subsequently reports income, the Company will not record its share of such
income until it equals the amount of its share of losses not previously
recognized.
Management Estimates - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant
estimates include allowance for doubtful accounts receivable; assessment of
impairment of the Company’s long-lived assets and investments, financial
contracts, litigation liabilities, post retirement benefit obligations, and
deferred tax valuation allowance. Actual results could differ from
those estimates.
Share-Based Compensation – On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, “Share-Based Payments” on a prospective basis. Prior to
January 1, 2006, the Company had applied the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25 and has adopted the disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123, as
amended by Statement of Financial Accounting Standards No.
148. Accordingly, the compensation expense of any employee stock
options granted is the excess, if any, of the quoted market price of the
Company’s common stock at the grant date over the amount the employee must pay
to acquire the stock. See Note 14 for additional information relating
to stock options.
Share-based
compensation expense recognized during the period is based on the fair value of
the portion of share-based payments awards that is ultimately expected to
vest. Share-based compensation expense recognized in the consolidated
statement of operations for the years ended December 31, 2008, and 2007 includes
compensation expense based on the grant date fair value estimated in accordance
with SFAS 123R. As share-based compensation expense recognized in the
consolidated statement of operations is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
Derivatives - Statement of
Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS Nos. 138 and 149,
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative instrument’s fair value be recognized
currently in earnings unless specific
|
|
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
|
hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative instrument’s gains and losses to offset related results on the hedged
item in the income statement, to the extent effective, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Income Taxes – Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. A valuation allowance is recorded if there is uncertainty as to
the realization of deferred tax assets.
Fair Value of Financial
Instruments – The Company’s consolidated financial instruments include
cash, cash equivalents, notes payable and long-term debt. The
carrying amount of cash, cash equivalents and variable rate long-term debt
approximates fair value at December 31, 2008 and 2007. The fair value of the
note payable to the Saudi Arabian Ministry of Finance and National Economy was
not practical to estimate at December 31, 2007 because quoted market prices did
not exist for similar type debt instruments, and there are no available
comparative instruments that can be used as a basis to value this.
New
Accounting Pronouncements
Effective
January 1, 2008, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS
157”), which did not have a material impact on the Company’s consolidated
financial statements except for disclosures found in Note 4. SFAS 157
establishes a common definition for fair value, a framework for measuring fair
value under generally accepted accounting principles in the United States, and
enhances disclosures about fair value measurements. In February 2008 the
Financial Accounting Standards Board (“FASB”) issued Staff Position
No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring
fair value measurements of non-financial assets and non-financial liabilities
until fiscal years beginning after November 15, 2008. The Company is
evaluating the expected impact of SFAS 157 for non-financial assets and
non-financial liabilities on its consolidated financial position and results of
operations.
In
October 2008 the FASB issued FSP FAS 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active.” FSP FAS 157-3
clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 is effective upon issuance, including prior periods for
which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as
a change in accounting estimate following the guidance in FASB Statement
No. 154, “Accounting Changes and Error Corrections.” FSP FAS 157-3 is
effective for the financial statements included in the Company’s annual report
for the year ended December 31, 2008, and application of FSP FAS 157-3 had no
impact on the Company’s consolidated financial statements.
In
December 2007 FASB issued Statement No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(Consolidated Financial Statements)” (“SFAS 160”). SFAS 160
establishes accounting and reporting standards for a non-controlling interest in
a subsidiary and for the deconsolidation of a subsidiary. In addition, SFAS 160
requires certain consolidation procedures for consistency with the requirements
of SFAS 141(R), “Business
|
|
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
|
Combinations.”
SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008, with earlier adoption
prohibited. The Company is currently evaluating the impact adoption of SFAS 160
may have on the consolidated financial statements.
In
December 2007 FASB issued Statement No. 141(R), “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions
and events that qualify as business combinations; requires that the acquired
assets and liabilities, including contingencies, be recorded at the fair value
determined on the acquisition date and changes thereafter reflected in revenue,
not goodwill; changes the recognition timing for restructuring costs; and
requires acquisition costs to be expensed as incurred. Adoption of SFAS
141(R) is required for combinations after December 15, 2008. Early
adoption and retroactive application of SFAS 141(R) to fiscal years
preceding the effective date are not permitted.
The
Company is currently evaluating the impact adoption of SFAS 141(R) may have on
the consolidated financial statements.
In March
2008 FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS
161”). SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. Entities will be required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedge items are accounted for under SFAS
133 and its related interpretations; and (c) how derivative instruments and
related hedge items affect an entity’s financial position, financial performance
and cash flows. The Company is required to adopt SFAS 161 beginning in fiscal
year 2009. The Company is currently evaluating the impact adoption of SFAS 161
may have on the consolidated financial statements.
In May
2008 the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). The new standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS
162, GAAP hierarchy was defined in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS
69 has been criticized because it is directed to the auditor rather than the
entity. SFAS 162 addresses these issues by establishing that GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. SFAS 162 is effective
November 15, 2008 and is only effective for nongovernmental entities; therefore,
the GAAP hierarchy will remain in SAS No. 69 for state and local
governmental entities and federal governmental entities. SFAS 162 did not have a
material impact on the Company’s consolidated financial statements upon
adoption.
In
June 2008 the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008,
|
|
NOTE
1 - BUSINESS AND OPERATIONS OF THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
|
and
interim periods within those years. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts
related to interim periods, summaries of earnings and selected financial data)
to conform to the provisions of FSP EITF 03-6-1. The Company is currently
evaluating the impact adoption of FSP EITF 03-6-1 may have on the consolidated
financial statements.
In
November 2008 the FASB ratified the consensus reached in EITF 08-06, “Equity
Method Investment Accounting Considerations” (“EITF 08-06”). EITF
08-06 was issued to address questions that arose regarding the application of
the equity method subsequent to the issuance of SFAS 141(R). EITF 08-06
concluded that equity method investments should continue to be recognized using
a cost accumulation model, thus continuing to include transaction costs in the
carrying amount of the equity method investment. In addition, EITF
08-06 clarifies that an impairment assessment should be applied to the equity
method investment as a whole, rather than to the individual assets underlying
the investment. EITF 08-06 is effective for fiscal years beginning on
or after December 15, 2008. EITF 08-06 will not have a material
impact on the Company’s consolidated financial statements upon
adoption.
NOTE
2 - LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
which contemplate the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the financial
statements, the Company had an excess of current assets over current liabilities
of $8,775,771 at December 31, 2008.
|
|
|
Saudi Arabia
|
|
|
United States
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
151,796 |
|
|
$ |
31,450,226 |
|
|
$ |
31,602,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
1,448,092 |
|
|
|
21,378,159 |
|
|
|
22,826,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
(shortage) of current assets
over
current liabilities
|
|
$ |
(1,296,296 |
) |
|
$ |
10,072,067 |
|
|
$ |
8,775,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over the
last eight years, except for brief periods when earnings were down, the
petrochemical segment has been able to provide sufficient working capital to pay
the operating and administrative needs of the Company and still have capital
needed for major maintenance and planned capital items within the
segment. During the periods when earnings were not sufficient to
provide the support needed by the mining segment, the Company has relied upon
shareholder loans and advances to cover its ongoing costs. In late
2007 the Company and eight Saudi investors formed a Saudi joint stock company,
Al Masane Al Kobra Mining Company (AMAK). AMAK will manage and
finance future development of the mining project. The mining lease, mining
assets, and the related note payable to the Saudi government were transferred to
AMAK on December 30, 2008. The Company will still have expenses
relating to its continued presence in the Kingdom and in overseeing its
investment in AMAK that will continue to be funded by the petrochemical segment
until the mine is operational, and AMAK begins distributions to the stockholders
(see Note 8).
NOTE
2 - LIQUIDITY MATTERS, REALIZATION OF ASSETS AND BUSINESS RISKS – continued
Other
issues being addressed by management are the accrued salaries and termination
benefits for the Saudi employees working in the mining segment. These
amounts include accrued salaries and termination benefits of approximately
$1,076,000 due employees and approximately $353,000 due the Company’s President
in accrued salary and termination benefits. Since the mining assets
were transferred to AMAK, the Board voted to terminate the existing Saudi
employees as of March 31, 2009 so that they might have an opportunity to be
employed by AMAK. Funds were deposited in Saudi Arabia in January
2009 to cover the accrued salaries and termination benefits.
The
obligation on the financial swaps which are due at the end of January through
March of 2009 results in a cash outlay each month of approximately $1.9 million
split between two trading partners. The Company has sufficient cash
on hand and cash from operations to ensure that it is able to make such payments
timely. Additionally, as a safe guard, the Company has received a
temporary extension of its line of credit with the bank which will enable it to
borrow up to $3.5 million above its borrowing base for working capital if
needed. The Company must return to compliance with its borrowing base
limitation on its credit line by mid-June 2009. After the March 2009
payment, there will be no further liquidity issues with the derivative positions
as they stand. There are crude options which are outstanding through
December 2009 (see Note 20).
The
earnings of the Petrochemical Segment have been sufficient to provide working
capital for the operation of the business and for the addition of needed capital
improvements. Certain former lenders had
restrictions on the amount of dividends the Petrochemical Segment was allowed to
pass to the Company. The restriction on the payment of dividends to
the Company is limited to 30% of EBITDA in the agreement with the current
lender.
NOTE
3 - CONCENTRATIONS OF REVENUES AND CREDIT RISK
The
Petrochemical Segment sells its products and services to companies in the
chemical and plastics industries. It performs periodic credit
evaluations of its customers and generally does not require collateral from its
customers. For the year ended December 31, 2008, two customers
accounted for 13.2% and 10.6% of total product sales. For the year
ended December 31, 2007, two customers accounted for 13.9% and 12.2% of total
product sales. For the year ended December 31, 2006, two customers accounted for
10.5% and 10.2% of total product sales. The associated
accounts receivable balances for those customers were approximately $1.4 million
and $0.5 million and $0.5 million and $1.2 million as of December 31, 2008 and
2007, respectively. The carrying amount of accounts receivable
approximates fair value at December 31, 2008.
South
Hampton utilizes one major supplier for its feedstock supply. The feedstock is a
commodity product commonly available from other suppliers if
needed. The percentage of feedstock purchased from the supplier
during 2008, 2007, and 2006 was 100%. At December 31, 2008, and 2007,
South Hampton owed the supplier approximately $1,132,000 and $2,134,000,
respectively for feedstock purchases.
The
Company holds its cash with various financial institutions that are insured by
the Federal Deposit Insurance Corporation up to $250,000. At times
during the year, cash balances may exceed this limit. The Company has
not experienced any losses in such accounts and does not believe it is exposed
to any significant risk of loss related to cash.
NOTE
4 – FAIR VALUE MEASUREMENTS
As
discussed in Note 1, “New Accounting Pronouncements,” the Company adopted SFAS
157 effective January 1, 2008, with the exception of the application to
non-financial assets and liabilities measured at fair value on a nonrecurring
basis (such as other real estate owned and goodwill and other intangible assets
for impairment testing) in accordance with FSP 157-2.
SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 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. SFAS 157 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, SFAS 157 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 uses financial swaps on feedstock
and options on natural gas to limit the effect of significant fluctuations in
price on operating results. In 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. South Hampton has not designated these financial
instruments as hedging transactions under FAS 133.
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,
NOTE
4 – FAIR VALUE MEASUREMENTS - continued
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 Swaps
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 FAS 133 (Note 20).
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 SFAS 157 at December 31, 2008.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
December
31, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Swaps on Feedstock
|
|
$ |
5,855,850 |
|
|
$ |
5,855,850 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Options
on Crude
|
|
|
1,120,382 |
|
|
|
- |
|
|
|
1,120,382 |
|
|
|
- |
|
|
Interest
Rate Swap
|
|
|
1,697,079 |
|
|
|
- |
|
|
|
1,697,079 |
|
|
|
- |
|
|
Total
|
|
$ |
8,673,311 |
|
|
$ |
5,855,850 |
|
|
$ |
2,817,461 |
|
|
$ |
- |
|
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.
NOTE
5 - INVENTORIES
Inventories
include the following at December 31:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Raw
material
|
|
$ |
1,291,400 |
|
|
$ |
1,377,878 |
|
|
Finished
products
|
|
|
1,154,800 |
|
|
|
1,509,758 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$ |
2,446,200 |
|
|
$ |
2,887,636 |
|
Inventory
serving as collateral for the Company’s line of credit with a domestic bank was
$1.35 million and $2.56 million at December 31, 2008 and 2007, respectively (see
Note 10).
At
December 31, 2008, the Company recorded a charge of approximately $1,786,000 to
reduce inventory to net realizable value. At December 31, 2007,
current cost exceeded the LIFO value by approximately
$1,873,000.
NOTE
6 – NOTES RECEIVABLE
Notes
receivable balances at December 31 were:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Note
with processing customer (A)
|
|
$ |
914,394 |
|
|
$ |
1,404,608 |
|
|
Less
discount
|
|
|
(68,612 |
) |
|
|
(154,030 |
) |
|
|
|
|
845,782 |
|
|
|
1,250,578 |
|
|
|
|
|
|
|
|
|
|
|
|
Note
with processing customer (B)
|
|
|
91,964 |
|
|
|
313,147 |
|
|
Less
discount
|
|
|
(1,809 |
) |
|
|
(18,011 |
) |
|
|
|
|
90,155 |
|
|
|
295,136 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term notes receivable
|
|
|
935,937 |
|
|
|
1,545,714 |
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
528,549 |
|
|
|
609,777 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term notes receivable, less current portion
|
|
$ |
407,388 |
|
|
$ |
935,937 |
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
The
Company has notes receivable from a long term processing customer for
capital costs incurred in making adjustments to the processing unit at
their request. The payment term is 5 years with interest
imputed at a rate of 8%. Payments of $40,851 are due
monthly.
|
|
(B)
|
The
Company has notes receivable from a long term processing customer for
capital costs incurred in making adjustments to the processing unit at
their request. The payment term is 3 years with interest
imputed at a rate of 8%. Payments of $18,432 are due
monthly.
|
|
|
Payments
from long-term notes for the next five years ending December 31 are as
follows:
|
|
Year
Ending December 31,
|
|
Long-Term
Notes Receivable
|
|
|
2009
|
|
$ |
582,373 |
|
|
2010
|
|
|
423,985 |
|
|
Total
|
|
|
1,006,358 |
|
|
Less:
discount
|
|
|
70,421 |
|
|
|
|
$ |
935,937 |
|
NOTE
7 – PROPERTY, PIPELINE AND EQUIPMENT
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Platinum
catalyst
|
|
$ |
1,318,068 |
|
|
$ |
1,318,068 |
|
|
Land
|
|
|
552,705 |
|
|
|
552,705 |
|
|
Property,
pipeline and equipment
|
|
|
45,304,092 |
|
|
|
23,721,786 |
|
|
Construction
in progress
|
|
|
10,000 |
|
|
|
6,637,150 |
|
|
Total
property, pipeline and equipment
|
|
|
47,184,865 |
|
|
|
32,229,709 |
|
|
Less
accumulated depreciation
|
|
|
(14,649,791 |
) |
|
|
(12,463,214 |
) |
|
Net
property, pipeline and equipment
|
|
$ |
32,535,074 |
|
|
$ |
19,766,495 |
|
Property,
pipeline, and equipment serve as collateral for a $14.0 million term loan with a
domestic bank (see Note 10).
NOTE
7 – PROPERTY, PIPELINE AND EQUIPMENT - continued
Interest
capitalized for construction for 2008 and 2007 was approximately $375,500 and
$193,500 respectively.
In August
2007 a contract was entered into for the construction of additional office space
at the South Hampton facility. The total amount of the contract was
approximately $1.0 million. Construction was completed in October
2008 for a total of about $1.3 million which is included in property, pipeline
and equipment.
The
Company completed its expansion of the petrochemical facility in October 2008
for a total cost of approximately $18.0 million which is included in property,
pipeline and equipment.
NOTE
8 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI
ARABIA/INVESTMENT
IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”)
In the
accompanying consolidated financial statements, the deferred exploration and
development costs have been presented based on the related projects’ geographic
location within Saudi Arabia. This includes the “Al Masane Project”
(the “Project”) and “Other Interests in Saudi Arabia” which primarily pertains
to the costs of rentals, field offices and camps, core drilling and labor
incurred at the Wadi Qatan and Jebel Harr properties. All of these
costs were transferred to the Company’s Investment in AMAK (called
ALAK in prior years) in December 2008. The following is some
background of the Saudi mining assets.
Al Masane
Project
The
Project, consisting of a mining lease area of approximately 44 square
kilometers, contains extensive ancient mineral workings and
smelters. From ancient inscriptions in the area, it is believed that
mining activities went on sporadically from 1000 BC to 700 AD. The
ancients are believed to have extracted mainly gold, silver and
copper. The Project includes various quantities of proved zinc,
copper, gold and silver reserves.
Prior to
the transfer to AMAK in December 2008, as the holder of the Al Masane mining
lease, the Company was solely responsible to the Saudi Arabian government for
the rental payments and other obligations provided for by the mining lease and
repayment of the $11 million loan to the Saudi Arabia Ministry of Finance
and Natural Economy. The Company’s interpretation of the mining lease
is that repayment of this loan will be made in accordance with a repayment
schedule to be agreed upon with the Saudi Arabian government from AMAK’s cash
flows. The initial term of the lease is for a period of thirty (30)
years from May 22, 1993, with the Company having the option to renew or extend
the term of the lease for additional periods not to exceed twenty (20)
years. Under the lease, the Company is obligated to pay advance
surface rental in the amount of 10,000 Saudi Riyals (approximately $2,667) per
square kilometer per year (approximately $117,300 annually) during the period of
the lease. The Company paid $234,700 in March 2006, $117,300 in
February 2007, and $117,300 in February 2008 which paid the lease amounts in
full through the end of 2008. In addition, the Company must pay
income tax in accordance with the income tax laws of Saudi Arabia then in force
and pay all infrastructure costs. The Saudi Arabian Mining Code
provides that income tax is to be paid yearly at the rate of 20% commencing
immediately upon realization of profits. The lease gives the Saudi
Arabian government priority to purchase any gold production from the project as
well as the right to purchase up to 10% of the annual production of other
minerals on the same terms and conditions then available to other similar buyers
and at current prices then prevailing in the free
market. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.
NOTE
8 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA/INVESTMENT
IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”) – continued
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 are as follows: (1) the capitalization will be the amount necessary to
develop the project, approximately $120 million, (2) the Company will own 50% of
AMAK with the remainder being held by the Saudi investors, (3) the
Company will contribute the mining assets and mining lease for a credit of
$60 million and the Saudi investors have contributed $60 million cash, and (4)
the remaining capital for the project will be raised by AMAK by other means
which may include application for a loan from the Saudi Industrial Development
Fund, loans from private banks, and/or the inclusion of other
investors. AMAK will have all powers of administration over the Al
Masane mining project. Subsequent to the above agreement, the cash contribution
was deposited in the accounts for AMAK in September and October of
2007. The Company's mining lease and note payable to the Saudi
government was transferred to AMAK and AMAK is building the mining and treatment
facilities. Upon completion of construction, AMAK 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.
Deferred
exploration and development costs of the Al Masane Project at December 31, 2008,
2007 and 2006, and the changes in these amounts for each of the three years then
ended are detailed below:
|
|
|
Balance
at
December
31, 2008
|
|
|
Investment
in AMAK
|
|
|
Activity
for 2008
|
|
|
Balance
at
December
31, 2007
|
|
|
Activity
for 2007
|
|
|
Balance
at
December
31, 2006
|
|
|
Activity
for 2006
|
|
|
Property
and
equipment:
Mining
equipment
|
|
$ |
- |
|
|
$ |
(2,160,206 |
) |
|
|
- |
|
|
$ |
2,160,206 |
|
|
|
- |
|
|
$ |
2,160,206 |
|
|
|
- |
|
|
Construction
costs
|
|
|
- |
|
|
|
(3,140,493 |
) |
|
|
- |
|
|
|
3,140,493 |
|
|
|
- |
|
|
|
3,140,493 |
|
|
|
- |
|
|
Total
|
|
|
- |
|
|
|
(5,300,699 |
) |
|
|
- |
|
|
|
5,300,699 |
|
|
|
- |
|
|
|
5,300,699 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor,
consulting
Services
and
Project
administration
costs
|
|
|
- |
|
|
|
(23,422,271 |
) |
|
|
390,579 |
|
|
|
23,031,692 |
|
|
|
331,058 |
|
|
|
22,700,634 |
|
|
|
329,904 |
|
|
Materials
and
maintenance
|
|
|
- |
|
|
|
(6,175,232 |
) |
|
|
- |
|
|
|
6,175,232 |
|
|
|
- |
|
|
|
6,175,232 |
|
|
|
- |
|
|
Feasibility
study
|
|
|
- |
|
|
|
(2,960,457 |
) |
|
|
- |
|
|
|
2,960,457 |
|
|
|
- |
|
|
|
2,960,457 |
|
|
|
3,020 |
|
|
Total
|
|
|
- |
|
|
|
(32,557,960 |
) |
|
|
390,579 |
|
|
|
32,167,381 |
|
|
|
331,058 |
|
|
|
31,836,323 |
|
|
|
332,924 |
|
|
|
|
$ |
- |
|
|
$ |
(37,858,659 |
) |
|
$ |
390,579 |
|
|
$ |
37,468,080 |
|
|
$ |
331,058 |
|
|
$ |
37,137,022 |
|
|
$ |
332,924 |
|
Other Interests in Saudi
Arabia
In 1971
the Saudi Arabian government awarded the Company exclusive mineral exploration
licenses to explore and develop the Wadi Qatan area in southwestern Saudi
Arabia. The Company was subsequently awarded an additional license in
1977 for an area north of Wadi Qatan at Jebel Harr. These licenses
have expired. On June 22, 1999, the Company submitted a formal
application for a five-year exclusive exploration license for the Greater Al
Masane area of approximately 2,850 square
NOTE
8 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA/INVESTMENT
IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”) – continued
kilometers
that surrounds the Al Masane mining lease area and includes the Wadi Qatan and
Jebel Harr areas. Although a license has not been formally granted
for the Greater Al Masane area, the Company has been authorized in writing by
the Saudi Arabian government to carry out exploration work on the
area. The Company previously worked the Greater Al Masane area after
obtaining written
authorization
from the Saudi Ministry of Petroleum and Mineral Resources, and has expended
over $2 million in exploration work. Geophysical, geochemical and
geologic work and diamond core drilling on the Greater Al Masane area has
revealed mineralization similar to that discovered at Al Masane. The
license to develop the areas identified by the exploration work will be applied
for by AMAK and the Company will be credited as part of their capital
contribution for the value of the information provided.
In prior
years the deferred exploration and development costs of the “Other Interests in
Saudi Arabia,” in the amount of approximately $2.4 million, consisted of
approximately $1.5 million associated with the Greater Al Masane area and the
balance of approximately $0.9 million was associated primarily with the Wadi
Qatan and Jebel Harr areas. These amounts were transferred to
Investment in AMAK in December 2008. AMAK initially applied for
licenses in two of these areas in December 2008 and, the applications were
rejected. AMAK intends to correct the information to comply with the
Ministry’s comments and to re-apply.
Until
December 2008 the Company assessed the carrying values of its mining assets on
an ongoing basis for impairment. Factors which may result in
impairment include, but are not limited to, mineral prices, capital cost
estimates, the estimated operating costs of any mines and related processing,
ore grade and related metallurgical characteristics, the design of any mines and
the timing of any mineral production. Prices currently used to assess
recoverability are $1.32 per pound for copper and $0.513 per pound for
zinc. Copper and zinc comprise in excess of 80% of the expected value
of production. The Company has recorded no impairment losses through
December 31, 2008.
The
Company on August 5, 2006, signed a one year Financial and Legal Services and
Advice Agreement with a Saudi legal firm and a Saudi management consultant in
Saudi Arabia to facilitate the: (1) formation of AMAK, (2) transfer
of the mining assets and lease into AMAK, and (3) raising of additional
capital. The attorney and consultant are to be paid in stock issued
by the Company and up to one million shares will be issued in increments as each
step is completed. The agreement has been extended on a month to
month basis and remains in effect. As of December 31, 2008, 750,000
shares have been 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
Company accounts for its investment in AMAK using the equity method of
accounting. Accordingly, the investment in AMAK is carried at the
cost of the net transferred assets and will be adjusted for the Company’s
proportionate share of income or loss and reduced for any distributions
received. The audited financial statements are not yet available for
AMAK; however, management believes their proportionate share of income or loss
is not significant for the year ended December 31, 2008.
NOTE
9 - MINERAL PROPERTIES IN THE UNITED STATES
The
principal assets of Pioche are an undivided interest in 48 patented and 5
unpatented mining claims totaling approximately 1,500 acres, and a 300
ton-per-day mill located on the aforementioned properties in the Pioche Mining
District in southeast Nevada. In August 2001, 75 unpatented claims
were abandoned since they were deemed to have no future value to
Pioche. Due to the lack of capital, the properties held by Pioche
have not been commercially operated for approximately 35
years. The
NOTE
9 - MINERAL PROPERTIES IN THE UNITED STATES – continued
Company
has recorded an impairment loss through December 31, 2008 of $496,000 due to the
decline in real estate values of the asset.
NOTE 10 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM
OBLIGATIONS
Notes
payable, long-term debt and long-term obligations at December 31 are summarized
as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
Secured
note to Saudi Arabian government (A)
|
|
$ |
-- |
|
|
$ |
11,000,000 |
|
|
Other
|
|
|
12,000 |
|
|
|
12,000 |
|
|
Total
|
|
$ |
12,000 |
|
|
$ |
11,012,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Capital
lease with affiliated party (B)
|
|
|
19,010 |
|
|
|
49,584 |
|
|
Revolving
note to domestic bank (C)
|
|
|
14,458,726 |
|
|
|
6,058,726 |
|
|
Term
note to domestic bank (D)
|
|
|
14,000,000 |
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
28,477,736 |
|
|
|
9,108,310 |
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
4,920,442 |
|
|
|
30,573 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt, less current portion
|
|
$ |
23,557,294 |
|
|
$ |
9,077,737 |
|
|
(A)
|
The
Company had an interest-free loan of $11,000,000 from the Saudi Arabian
Ministry of Finance and National Economy, the proceeds of which were used
to finance the development phase of the Al Masane Project. The
loan was repayable in ten equal annual installments of $1,100,000, with
the initial installment payable on December 31, 1984. None of
the ten scheduled payments have been made. Pursuant to the
mining lease transfer agreement, the loan was transferred to AMAK in
December 2008 along with the mining
assets.
|
|
(B)
|
On
August 1, 2004, South Hampton entered into a $136,876 capital lease with a
transportation company owned by a Company officer for the purchase of a
diesel powered manlift. The lease bears interest of 6.9% over a
5 year term with a monthly payment of $3,250. Title transfers
to South Hampton at the end of the term. The original cost of
the diesel powered manlift was $136,876 with accumulated depreciation of
$60,454 and $46,766 at December 31, 2008, and 2007,
respectively.
|
|
(C)
|
On
May 25, 2006 South Hampton entered into a $12.0 million revolving loan
agreement with a domestic bank secured by accounts receivable and
inventory. The original agreement was due to expire October 31,
2008. An amendment was entered into on January 28, 2008 which
extended the termination date to June 30, 2010. 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 December 31, 2008, there
was a short-term amount outstanding of $3,994,855 due to the outstanding
amount surpassing the borrowing base limit allowed and a long-term amount
outstanding of $10,463,871. 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 and the amount outstanding. At December 31,
2008 the rate was 3.0%, and the amount drawn on the loan exceeded the
borrowing base; therefore, no additional amount was available to be
drawn. A commitment fee of 0.25% is due quarterly on the unused
portion of the loan. If the amount outstanding surpasses the
amount calculated by the borrowing base, a principal payment would be due
to reduce the amount outstanding to the calculated base. The
bank waived this requirement at December 31, 2008
and
|
|
|
NOTE
10 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS –
Continued
|
is allowing the Company until mid-June 2009 to repay the
overage. Subsequent to year end the Company paid approximately $2.5
million of this amount with approximately $1.5 million
outstanding. Interest is
paid monthly. Covenants that must be maintained include EBITDA,
capital expenditures, dividends payable to parent, and leverage
ratio.
|
(D)
|
On
September 19, 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 on
November 26, 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 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 December 31, 2008 the rate was
3.0%. Interest is paid
monthly.
|
|
|
Principal
payments of long-term debt for the next five years and thereafter ending
December 31 are as follows:
|
|
Year
Ending December 31,
|
|
Long-Term
Debt
|
|
|
Capital
Lease Obligations
|
|
|
2009
|
|
$ |
4,901,432 |
|
|
$ |
19,523 |
|
|
2010
|
|
|
12,032,147 |
|
|
|
-- |
|
|
2011
|
|
|
1,294,165 |
|
|
|
-- |
|
|
2012
|
|
|
1,333,528 |
|
|
|
-- |
|
|
2013
|
|
|
1,374,057 |
|
|
|
-- |
|
|
Thereafter
|
|
|
7,523,397 |
|
|
|
-- |
|
|
Total
|
|
$ |
28,458,726 |
|
|
|
19,523 |
|
|
Less:
Amount representing interest
|
|
|
|
|
|
|
(513 |
) |
|
Present
value of future minimum lease payments
|
|
|
|
|
|
$ |
19,010 |
|
|
|
NOTE 11 – ACCRUED
LIABILITIES
|
Accrued
liabilities at December 31 are summarized as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Accrued
state taxes
|
|
$ |
147,221 |
|
|
$ |
258,407 |
|
|
Accrued
operating costs
|
|
|
-- |
|
|
|
275,000 |
|
|
Accrued
payroll
|
|
|
514,218 |
|
|
|
539,947 |
|
|
Accrued
directors’ fees
|
|
|
-- |
|
|
|
288,250 |
|
|
Post
retirement obligation
|
|
|
-- |
|
|
|
180,000 |
|
|
Accrued
officers’ compensation
|
|
|
-- |
|
|
|
100,000 |
|
|
Other
liabilities
|
|
|
368,251 |
|
|
|
290,218 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,029,690 |
|
|
$ |
1,931,822 |
|
NOTE
12 – ACCRUED LIABILITIES IN SAUDI ARABIA
Accrued
liabilities in Saudi Arabia at December 31 are summarized as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
Salaries
|
|
$ |
602,503 |
|
|
$ |
603,147 |
|
|
Termination
benefits
|
|
|
807,944 |
|
|
|
783,170 |
|
|
Other
liabilities
|
|
|
18,709 |
|
|
|
20,484 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,429,156 |
|
|
$ |
1,406,801 |
|
NOTE
13 - COMMITMENTS AND CONTINGENCIES
South
Hampton has leased, on a month to month basis, various vehicles and equipment
from Silsbee Trading and Transportation Corp. (“STTC”), a trucking and
transportation company currently owned by the President of TOCCO, at a monthly
cost which varies according to the amount of equipment in
service. Effective January 1, 2004, South Hampton and STTC entered
into a five year lease agreement requiring a monthly rental of $32,835 which was
raised to approximately $70,320 per month at December, 2008, as new tractors and
trailers were added to the fleet throughout the years. Total rental
costs were approximately $757,000 in 2008, $653,000 in 2007, and $606,000
in 2006 (see Note 19).
South
Hampton, in 1977, guaranteed a $160,000 note payable of a limited partnership in
which it has a 19% interest. Included in Accrued Liabilities at December 31,
2008 and 2007 is $66,570 related to this guaranty.
In May
2006 a $25,000 irrevocable standby letter of credit was issued by a bank in
favor of the Railroad Commission of Texas for Gulf State Pipeline
operations. The letter of credit was renewed and will expire on July
31, 2009.
Litigation
- -
A lawsuit
was filed in Jefferson County, Texas in September of 2007 alleging the plaintiff
was exposed to benzene due to the negligence of the Company. A
preliminary review indicates the Company had no connection to the plaintiff and
the Company intends to vigorously defend itself. Insurance policies
have provided the defense on the Company’s behalf. The plaintiff
filed a notice of “No Suit” which was finalized in August of 2008.
In
September 2008 the Bankruptcy Trustee for a former customer filed suit in the U.
S. Bankruptcy Court in Delaware to recover approximately $1,388,000 of
preference payments. The Company contends the payments were made in
the ordinary course of business and feels it has adequate defense to prevent any
material refunds of amounts collected during the time period in
question. Negotiations are underway to settle the suit for an
immaterial amount.
There
were no defense or settlement costs recorded in 2008, 2007 or 2006.
Environmental
remediation - In 1993, at the request of the Texas Commission on
Environmental Quality (“TCEQ”), South Hampton drilled a well to check for
groundwater contamination under a spill area. Based on the results,
two pools of hydrocarbons were discovered. The recovery process was
initiated in June 1998, and is expected to continue for many years until the
pools are reduced to an acceptable level.
NOTE
13 - COMMITMENTS AND CONTINGENCIES - continued
In August
1997 the Executive Director of the Texas Commission on Environmental Quality
(TCEQ) filed a preliminary report and petition with TCEQ alleging that South
Hampton violated various TCEQ rules, TCEQ permits issued to South Hampton, a
TCEQ order issued to South Hampton, the Texas Water Code, the Texas Clean Air
Act and the Texas Solid Waste Disposal Act. The Company has
periodically negotiated with TCEQ to resolve the proposed
penalty. The Company had previously revised and/or corrected the
administrative and mechanical items in question. In March 2008 South
Hampton and TCEQ reached a tentative agreement for a settlement of $274,433.
Final approval by the TCEQ governing body of Commissioners was given on October
8, 2008. Under the terms of the agreement, 50% of the penalty will be
applied to a local community environmental improvement project which the Company
and TCEQ staff identified as acceptable. Payment was made prior to
December 31, 2008; therefore, no liability remained at December 31,
2008. A liability of $275,000 was recorded at December 31,
2007.
Amounts
charged to expense for various activities related to environmental monitoring,
compliance, and improvements were approximately $518,000 in 2008, $439,000 in
2007 and $372,200 in 2006.
NOTE
14 - SHARE-BASED COMPENSATION
Common Stock – In January 2008
the Company issued 30,001 shares of its common stock to non-employee directors
as settlement for accrued compensation at December 31, 2007 for services
rendered in their capacity as directors. During the same time period,
the Company issued 40,000 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. The Company
also issued 750,000 shares of its common stock during 2008 for payment in
connection with the “Financial and Legal Services and Advice Agreement” between
the Company and consultants working to secure the commercial license and
transfer of assets to AMAK. The Company recorded $3,712,500 in its
Investment in AMAK in relation to this transaction.
In
January 2007 the Company issued 30,000 shares of its common stock to certain
employees and executives of the Company for services
rendered. Compensation expense recognized in connection with these
issuances of common stock was $99,000.
In
January 2006 the Company issued 40,000 shares of its common stock to certain
employees and executives of the Company for services rendered. In August 2006
the Company issued 100,000 shares of its common stock to an independent director
of the Company as recognition for many years of service. Compensation expense
recognized in 2006 in connection with these issuances of common stock was
$360,000.
Stock Options - In October
1995 the Company granted the President 400,000 options to secure his accrued
salary. Upon payment of the accrued salary, the options will be
forfeited.
In August
2006 the Company granted 100,000 stock options to a director of the Company for
his many years of service and his assistance with locating the investors who are
participating in the Joint Stock Company (AMAK). The options have a
three year exercise period at an exercise price of $2. Stock option
compensation expense recognized for the year ended December 31, 2006 was
$229,000. The fair value of these options was estimated on the date
of grant using the fair value option pricing model
with the
following assumptions: (1) risk-free interest rate of 4.8%, (2) an
expected life of 3 years, (3) 115% volatility and (4) no
dividends. The weighted average grant date fair value of the options
granted in 2006 was $2.29.
NOTE
14 - SHARE-BASED COMPENSATION – continued
Additional
information with respect to all options outstanding at December 31, 2008, and
changes for the three years then ended are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Outstanding
at beginning of year
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
400,000 |
|
|
$ |
1.00 |
|
|
Granted
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
100,000 |
|
|
$ |
2.00 |
|
|
Forfeited
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
Options
exercisable at end of year
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
500,000 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
information about stock options outstanding at December 31, 2008 is summarized
as follows:
|
Options outstanding and
exercisable
|
|
|
Number
|
|
Remaining
contractual life
|
|
Exercise
price
|
|
| |
400,000 |
|
Undetermined
|
|
$ |
1.00 |
|
| |
100,000 |
|
0.7
years
|
|
$ |
2.00 |
|
The
Company awarded options to its non-employee directors in the amount of 7,000
shares each for a total of 35,000 shares to be issued January 2, 2009 for their
service during 2008. No compensation expense was recorded during 2008
for this award. The exercise price of the options is $1.39 per share
based upon the closing price on January 2, 2009.
On April
7, 2008, the Board of Directors of the Company adopted the Stock Option Plan for
Key Employees, as well as, the Non-Employee Director Stock Option Plan
(hereinafter collectively referred to as the “Stock Option Plans”), subject to
the approval of Company’s shareholders. Shareholders approved the
Stock Option Plans at the 2008 Annual Meeting of Shareholders on July 10,
2008. The Company filed Form S-8 to register the 1,000,000 shares
allocated to the Stock Option Plans on October 23, 2008.
The
Company expects to issue shares upon exercise of the options from its authorized
but unissued common stock.
The
provision for (benefit from) income taxes consisted of the
following:
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
federal provision
|
|
$ |
376,030 |
|
|
$ |
3,357,184 |
|
|
$ |
3,196,005 |
|
|
Current
state provision (benefit)
|
|
|
173,323 |
|
|
|
(68,103 |
) |
|
|
569,903 |
|
|
Deferred
federal provision (benefit)
|
|
|
(5,388,895 |
) |
|
|
141,443 |
|
|
|
222,721 |
|
|
Deferred
state provision (benefit)
|
|
|
(139,304 |
) |
|
|
(4,281 |
) |
|
|
20,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$ |
(4,978,846 |
) |
|
$ |
3,426,243 |
|
|
$ |
4,009,416 |
|
NOTE
15 – INCOME TAXES - continued
Income
tax expense for the years ended December 31, 2008, 2007, and 2006 differs from
the amount computed by applying the applicable U.S. corporate income tax rate of
34.0 in 2008, 34.0 in 2007 and 34.1% in 2006, respectively to net income before
income taxes. The reasons for this difference are as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income
taxes at U.S. statutory rate
|
|
$ |
(4,882,123 |
) |
|
$ |
3,807,192 |
|
|
$ |
4,048,863 |
|
|
State
taxes, net of federal benefit
|
|
|
(42,141 |
) |
|
|
166,685 |
|
|
|
385,756 |
|
|
Prior
year overpayments
|
|
|
(49,872 |
) |
|
|
(145,250 |
) |
|
|
(358,054 |
) |
|
Refund
from amended state return
|
|
|
- |
|
|
|
(158,000 |
) |
|
|
- |
|
|
Permanent
and other items
|
|
|
(4,710 |
) |
|
|
(244,384 |
) |
|
|
( 67,149 |
) |
|
Total
tax expense (benefit)
|
|
$ |
(4,978,846 |
) |
|
$ |
3,426,243 |
|
|
$ |
4,009,416 |
|
The tax
effects of temporary differences that give rise to significant portions of
Federal and state deferred tax assets and deferred tax liabilities were as
follows:
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Plant,
pipeline and equipment
|
|
$ |
(4,122,410 |
) |
|
$ |
(1,368,531 |
) |
|
Unrealized
gains on swap agreements
|
|
|
-- |
|
|
|
(63,370 |
) |
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
265,901 |
|
|
|
82,250 |
|
|
Inventory
|
|
|
635,865 |
|
|
|
33,001 |
|
|
Mineral
interests
|
|
|
365,293 |
|
|
|
217,051 |
|
|
Accrued
liabilities
|
|
|
-- |
|
|
|
211,158 |
|
|
Net
operating loss and contribution carry-forwards
|
|
|
-- |
|
|
|
-- |
|
|
Capital
loss carry-forward
|
|
|
1,228,090 |
|
|
|
1,228,090 |
|
|
Deferred
gain on sale of property
|
|
|
-- |
|
|
|
-- |
|
|
Unrealized
losses on swap agreements
|
|
|
7,306,270 |
|
|
|
-- |
|
|
Unrealized
loss on interest rate swap
|
|
|
577,007 |
|
|
|
-- |
|
|
Post
retirement benefits
|
|
|
400,149 |
|
|
|
211,310 |
|
|
Gross
deferred tax assets
|
|
|
10,778,575 |
|
|
|
1,982,860 |
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(1,228,090 |
) |
|
|
(1,228,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets (liabilities)
|
|
$ |
5,428,075 |
|
|
$ |
(677,131 |
) |
The
current and non-current classifications of the deferred tax balances are as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
Current
deferred tax asset
|
|
$ |
8,785,043 |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
1,993,532 |
|
|
|
1,982,860 |
|
|
Deferred
tax liability
|
|
|
(4,122,410 |
) |
|
|
(1,431,901 |
) |
|
Valuation
allowance
|
|
|
(1,228,090 |
) |
|
|
(1,228,090 |
) |
|
Non-current
deferred tax liability, net
|
|
|
(3,356,968 |
) |
|
|
(677,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets (liabilities), net
|
|
$ |
5,428,075 |
|
|
$ |
(677,131 |
) |
NOTE
15 – INCOME TAXES - continued
The
Company has provided a valuation allowance in 2008, 2007 and 2006 against
certain deferred tax assets because of uncertainties regarding their
realization. At
December 31, 2008, the Company had no net operating loss
carry-forwards.
The
Company has no Saudi Arabian tax liability.
The
Company files an income tax return in the U.S. federal jurisdiction and Texas.
The Federal and Texas tax returns for the years 2005 through 2007 remain open
for examination. Subsequent to year end, the Internal Revenue Service
(IRS) commenced an examination of the Company's 2007 tax returns that is
anticpated to be completed by August 31, 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 December 31, 2008, there were no unrecognized tax
benefits. Interest and penalties related to uncertain tax positions
will be recognized in income tax expense. As of December 31, 2008, no interest
related to uncertain tax positions had been accrued.
NOTE
16 - SEGMENT INFORMATION
As
discussed in Note 1, the Company has two business segments. The
Company measures segment profit or loss as operating income (loss), which
represents income (loss) before interest, foreign exchange transaction gain and
(loss), miscellaneous income and minority interest. Information on
segments is as follows:
|
|
|
December
31, 2008
|
|
|
|
|
Petrochemical
|
|
|
Mining
|
|
|
Total
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
154,630,234 |
|
|
$ |
- |
|
|
$ |
154,630,234 |
|
|
Depreciation
|
|
|
1,630,428 |
|
|
|
856 |
|
|
|
1,631,284 |
|
|
Operating
income (loss)
|
|
|
(11,563,597 |
) |
|
|
(2,399,134 |
) |
|
|
(13,962,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
63,917,729 |
|
|
$ |
34,228,411 |
|
|
$ |
98,146,140 |
|
|
|
|
December
31, 2007
|
|
|
|
|
Petrochemical
|
|
|
Mining
|
|
|
Total
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
108,638,115 |
|
|
$ |
- |
|
|
$ |
108,638,115 |
|
|
Depreciation
|
|
|
1,073,620 |
|
|
|
1,142 |
|
|
|
1,074,762 |
|
|
Operating
income (loss)
|
|
|
13,261,809 |
|
|
|
(2,179,101 |
) |
|
|
11,082,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
42,077,819 |
|
|
$ |
42,142,946 |
|
|
$ |
84,220,765 |
|
|
|
|
December
31, 2006
|
|
|
|
|
Petrochemical
|
|
|
Mining
|
|
|
Total
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
98,502,157 |
|
|
$ |
- |
|
|
$ |
98,502,157 |
|
|
Depreciation
|
|
|
858,813 |
|
|
|
246 |
|
|
|
859,059 |
|
|
Operating
income (loss)
|
|
|
13,130,693 |
|
|
|
(1,218,931 |
) |
|
|
11,911,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
29,638,657 |
|
|
$ |
41,951,509 |
|
|
$ |
71,590,166 |
|
NOTE
16 - SEGMENT INFORMATION –continued
Information
regarding foreign operations for the years ended December 31, 2008, 2007, and
2006 is as follows (in thousands). Revenues are attributed to
countries based upon the origination of the transaction.
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
154,630 |
|
|
$ |
108,638 |
|
|
$ |
98,502 |
|
|
Saudi
Arabia
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
$ |
154,630 |
|
|
$ |
108,638 |
|
|
$ |
98,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
33,123 |
|
|
$ |
20,851 |
|
|
$ |
11,711 |
|
|
Saudi
Arabia(A)
|
|
|
33,002 |
|
|
|
39,899 |
|
|
|
39,568 |
|
|
|
|
$ |
66,125 |
|
|
$ |
60,750 |
|
|
$ |
51,279 |
|
(A)
Represents the Company’s 50% interest in AMAK at December 30, 2008
NOTE
17 - NET INCOME (LOSS) PER COMMON SHARE
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(8,874,915 |
) |
|
$ |
7,711,381 |
|
|
$ |
7,875,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
23,409,458 |
|
|
|
22,895,394 |
|
|
|
22,804,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amount
|
|
$ |
(0.38 |
) |
|
$ |
0.34 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
23,409,458 |
|
|
|
23,291,669 |
|
|
|
23,030,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amount
|
|
$ |
(0.38 |
) |
|
$ |
0.33 |
|
|
$ |
0.34 |
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted
average shares-denominator
basic
computation
|
|
|
23,409,458 |
|
|
|
22,895,394 |
|
|
|
22,804,567 |
|
|
Effect
of dilutive stock options
|
|
|
- |
|
|
|
396,275 |
|
|
|
225,716 |
|
|
Weighted
average shares, as adjusted
denominator
diluted computation
|
|
|
23,409,458 |
|
|
|
23,291,669 |
|
|
|
23,030,283 |
|
Inclusion
of the Company’s options in diluted loss per share for the year ended December
31, 2008, has an anti-dilutive effect because the Company incurred a loss from
operations.
NOTE
18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The
quarterly results of operations shown below are derived from unaudited financial
statements for the eight quarters ended December 31, 2008 (in thousands, except
per share data):
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
31,234 |
|
|
$ |
42,611 |
|
|
$ |
47,742 |
|
|
$ |
33,043 |
|
|
$ |
154,630 |
|
|
Gross
profit (loss)
|
|
|
4,878 |
|
|
|
6,846 |
|
|
|
(9,110 |
) |
|
|
(7,211 |
) |
|
|
(4,597 |
) |
|
Net
income (loss)
|
|
|
1,416 |
|
|
|
3,172 |
|
|
|
(6,931 |
) |
|
|
(6,532 |
) |
|
|
(8,875 |
) |
|
Basic
EPS
|
|
$ |
0.06 |
|
|
$ |
0.14 |
|
|
$ |
(0.30 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.38 |
) |
|
Diluted
EPS
|
|
$ |
0.06 |
|
|
$ |
0.13 |
|
|
$ |
(0.30 |
) |
|
$ |
(
0.28 |
) |
|
$ |
(0.38 |
) |
|
|
Year
Ended December 31, 2007
|
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|
|
|
|
|
|
|
|
Revenues
|
$23,663
|
$
27,141
|
$
28,038
|
$
29,796
|
$108,638
|
|
Gross
profit
|
9,065
|
4,970
|
2,243
|
2,706
|
18,984
|
|
Net
income
|
4,641
|
2,172
|
382
|
576
|
7,771
|
|
Basic
EPS
|
$ 0.20
|
$ 0.10
|
$ 0.02
|
$ 0.02
|
$ 0.34
|
|
Diluted
EPS
|
$ 0.20
|
$ 0.09
|
$ 0.02
|
$ 0.02
|
$ 0.33
|
NOTE
19 - RELATED PARTY TRANSACTIONS
At
December 31, 2008, the Company has a liability to its President and Chief
Executive Officer of approximately $353,000 in accrued salary and termination
benefits.
South
Hampton incurred product transportation and equipment costs of approximately
$757,000, $653,000 and $606,000 in 2008, 2007 and 2006, respectively, with STTC,
which is currently owned by the President of TOCCO.
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 transfers to South Hampton at the end of the
term. In 2008 gross payments of $39,000 were made. Capital
lease payable to STTC at December 31, 2008, totaled $19,010.
Legal
fees in the amount of $81,705 and $99,667 were paid during 2008 and 2007,
respectively to the law firm of Germer Gertz, LLP of which Charles Goehringer is
a minority partner. Mr. Goehringer acts as corporate counsel for the
Company and in November 2007 was appointed to the Board of
Directors.
Robert E.
Kennedy was paid consulting fees of $24,000 plus minor expense reimbursement
during 2007 to assist in locating and evaluating potential merger or acquisition
candidates for the petrochemical segment and $3,000 in consulting fees in
2008. Mr. Kennedy was appointed to the Board of Directors in January
2007. The consulting arrangement ended in January
2008.
NOTE
19 - RELATED PARTY TRANSACTIONS - continued
Ibrahim
Al Moneef was issued 375,000 shares of the Company’s common stock for payment
relating to the “Financial Services Agreement” between himself and the
Company. The Company recorded approximately $1,856,000 in its
Investment in AMAK in connection with this transaction. Mr. Al Moneef
was appointed to the Board of Directors in April 2007.
|
|
NOTE
20 – DERIVATIVE INSTRUMENTS
|
Feedstock,
Crude and Natural Gas Contracts
Hydrocarbon
based solvent 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 years ended December 31,
2008, 2007, and 2006, represented approximately 85.4%, 82.0%, and 81.3% of
TOCCO’s operating expenses, respectively. Over the past several years, feedstock
and natural gas expense have become an increasingly larger portion of TOCCO’s
operating expenses due to the dramatic increase in all hydrocarbon prices during
this period. TOCCO endeavors to acquire feedstock and natural gas at
the lowest possible cost. Because TOCCO’s primary feedstock (natural
gasoline) is not generally traded on an organized futures exchange, there are
limited opportunities to hedge directly in natural gasoline.
However,
TOCCO has found that financial derivative instruments in other commodities such
as crude oil can be useful in decreasing its exposure to natural gasoline price
volatility. TOCCO does not purchase or hold any derivative financial
instruments for trading purposes.
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 limit exposures to 50% of
the monthly feedstock volumes of the facility for up to six months forward and
up to 100% of the natural gas requirements. The derivative agreements are not
designated as hedges per SFAS 133, as amended. As of the December 31,
2008, TOCCO had committed to financial swap contracts for a portion of its
required monthly feedstock volume with settlement dates through March 2009 and
crude option contracts with settlement dates through December
2009. For the years ended December 31, 2008, 2007 and 2006 the net
realized gain (loss) from the derivative agreements was $1,721,064, $3,366,507
and ($784,048), respectively. The asset (liability) as of December
31, 2008, 2007, and 2006 was ($6,976,231), $206,832, and ($765,672),
respectively. The unrealized gain (loss) of ($5,485,914), $972,504, and
($840,424) and the realized gain (loss) for the years ended December 31, 2008,
2007 and 2006, respectively, are recorded in cost of petrochemical product sales
and processing in the Consolidated Statements of Operations. In
addition, due to changes in the fair value of the derivative instruments at
December 31, 2008, $14,103,600 in derivative premiums were written
off and were recorded in cost of petrochemical product sales and
processing.
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. 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
|
|
NOTE
20 – DERIVATIVE INSTRUMENTS -
continued
|
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 timeperiod in
question. Beginning in early and mid-August, 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. The Company, by mid-November 2008
had neutralized the 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. Prior to December 31, 2008, collateral in the amount of
$6,300,000 was returned to the Company leaving a deposit of $3,950,000, the
majority of which was returned in January 2009.
Interest
Rate Swaps
On March
21, 2008, South Hampton entered into an interest rate swap agreement with a
domestic financial institution 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 pay interest based
upon the London InterBank Offered Rate (LIBOR) or a base rate plus a markup and
will receive from Bank of America an interest rate of 5.83%. South
Hampton has designated the transaction as a cash flow hedge according to
Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and
149. 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 December 31, 2008
totaled $1,697,079. The cumulative loss of $1,120,072 (shown net of
deferred tax benefit of $577,007) from the changes in the swaps contract’s fair
value that is included in other comprehensive loss will be reclassified into
income when interest is paid.
NOTE
21- POST RETIREMENT OBLIGATIONS
In January 2007 a retirement
agreement was entered into with Jack Crichton, Chairman of the
Board. The agreement provides $3,000 per month in benefits to
Mr. Crichton for five years after his retirement in addition to a lump sum
of $30,000 that was paid upon the signing of the agreement. A
liability of approximately $148,000 was recorded at March 31, 2007 based upon
the present value of the $3,000 payment per month using the Company’s borrowing
rate of approximately 8%. Mr. Crichton passed away in December 2007,
and per the agreement, all amounts owing were due at that
time. Therefore, an additional $32,000 was recorded in December as a
liability. A current liability of
NOTE
21- POST RETIREMENT OBLIGATIONS - continued
$180,000
remained outstanding at December 31, 2007 and was included in accrued
liabilities. This amount was paid to his estate in 2008.
In February 2007 a retirement
agreement was entered into with Hatem El Khalidi, President of the Company. The
agreement provided $3,000 per month in benefits to Mr. El Khalidi upon his
retirement for the remainder of his life. Additionally, upon his death $2,000
per month would be paid to his surviving spouse for the remainder of her life. A
health insurance benefit will also be provided. A long term liability
of approximately $441,500 based upon an annuity single premium contract value
was outstanding at December 31, 2007 and is included in post retirement
benefits.
In January 2008 the retirement
agreement entered into in February 2007 with Hatem El Khalidi, President of the
Company, was modified. The new 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 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 long term liability of approximately
$823,500 based upon an annuity single premium value contract was outstanding at
December 31, 2008 and is included in post retirement benefits.
NOTE
22 – SUBSEQUENT EVENTS
On
January 26, 2009 the Board appointed Nicholas Carter to represent Company
interest on the Board of AMAK as a replacement for Mohammed Al Omair who
resigned for personal reasons.
On
February 3, 2009, South Hampton entered into a “Master Lease Agreement” with
Silsbee Trading and Transportation. The agreement replaces the Lease
Agreement dated August 1, 2004 and contains the same terms and conditions but
aligns the lease terms on the individual pieces of equipment with the underlying
financing arrangements.
On
February 26, 2009, the Board passed a resolution to develop a comprehensive risk
management and procedure policy. In accordance, South Hampton entered
into a consulting agreement with GSC Energy to assist in developing a policy and
procedure manual.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES
Arabian
American Development Company and Subsidiaries
Dallas,
Texas
We have
audited the consolidated financial statements of Arabian American Development
Company and Subsidiaries (the Company) as of December 31, 2008 and 2007 and for
each of the three years in the period ended December 31, 2008, and have issued
our report thereon dated March 13, 2009. Our audits also include
Schedule II for this Form 10-K. This schedule is the responsibility
of the Company’s management. Our responsibility is to express an
opinion based on our audits.
In our
opinion, the Schedule II at December 31, 2008, 2007, and 2006 and for the years
then ended, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be set forth therein.
/s/
Travis, Wolff & Company LLP (also known as Moore Stephens Travis Wolff,
LLP)
Dallas,
Texas
March 13,
2009
ARABIAN
AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
Three
years ended December 31, 2008
|
Description
|
|
Beginning
balance
|
|
|
Charged
(credited)
to earnings
|
|
|
Deductions(a)
|
|
|
Ending
balance
|
|
|
ALLOWANCE FOR DEFERRED
TAX ASSET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
1,336,451 |
|
|
|
- |
|
|
|
- |
|
|
|
1,336,451 |
|
|
December
31, 2007
|
|
|
1,336,451 |
|
|
|
(108,361 |
) |
|
|
- |
|
|
|
1,228,090 |
|
|
December
31, 2008
|
|
|
1,228,090 |
|
|
|
- |
|
|
|
- |
|
|
|
1,228,090 |
|
(a) Utilization
of carryforwards
|
Description
|
|
Beginning
balance
|
|
|
Charged
to earnings
|
|
|
Deductions
|
|
|
Ending
balance
|
|
|
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
- |
|
|
|
190,829 |
|
|
|
(155,829 |
) |
|
|
35,000 |
|
|
December
31, 2007
|
|
|
35,000 |
|
|
|
- |
|
|
|
- |
|
|
|
35,000 |
|
|
December
31, 2008
|
|
|
35,000 |
|
|
|
465,000 |
|
|
|
- |
|
|
|
500,000 |
|
