UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------- FOR QUARTER ENDING JUNE 30, 2000 COMMISSION FILE NUMBER 0-6247 ARABIAN AMERICAN DEVELOPMENT COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-1256622 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231 DALLAS, TEXAS (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 692-7872 Former name, former address and former fiscal year, if changed since last report. ARABIAN SHIELD DEVELOPMENT COMPANY Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at June 30, 2000: 22,788,994. ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 501,416 $ 434,313 Short-Term Investments -- 20,597 Trade Receivables 6,211,338 4,308,085 Inventories 1,439,894 745,396 ------------ ------------ Total Current Assets 8,152,648 5,508,391 REFINERY PLANT, PIPELINE AND EQUIPMENT 16,963,410 9,357,956 Less: Accumulated Depreciation (4,793,321) (4,330,856) ------------ ------------ Net Plant, Pipeline and Equipment 12,170,089 5,027,100 AL MASANE PROJECT 34,849,735 34,621,335 OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248 MINERAL PROPERTIES IN THE UNITED STATES 1,280,009 1,299,008 RESTRICTED CASH 1,276,560 3,500,000 OTHER ASSETS 524,070 461,127 ------------ ------------ TOTAL ASSETS $ 60,684,359 $ 52,848,209 ============ ============ LIABILITIES CURRENT LIABILITIES Accounts Payable-Trade $ 4,452,869 $ 1,129,926 Accrued Liabilities 914,691 1,005,110 Accrued Liabilities in Saudi Arabia 857,823 1,326,823 Notes Payable 11,873,780 11,873,780 Current Portion of Long-Term Debt 1,372,137 677,439 ------------ ------------ Total Current Liabilities 19,471,300 16,013,078 LONG-TERM DEBT 8,117,204 3,572,561 ACCRUED LIABILITIES IN SAUDI ARABIA 759,341 741,218 DEFERRED REVENUE 148,618 165,835 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1,067,381 907,354 STOCKHOLDERS' EQUITY COMMON STOCK-authorized 40,000,000 shares of $.10 par value; issued and outstanding 22,488,994 shares in 2000 and 22,019,994 shares in 1999 2,248,899 2,201,999 ADDITIONAL PAID-IN CAPITAL 36,523,606 36,101,506 ACCUMULATED DEFICIT (7,651,990) (6,855,342) ------------ ------------ Total Stockholders' Equity 31,120,515 31,448,163 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,684,359 $ 52,848,209 ============ ============
See notes to consolidated financial statements. -1- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 -------------- -------------- -------------- -------------- REVENUES Refined Product Sales $ 10,396,641 $ 5,958,736 $ 20,447,446 $ 11,386,733 Processing Fees 503,118 354,445 1,021,063 467,562 -------------- -------------- -------------- -------------- 10,899,759 6,313,181 21,468,509 11,854,295 OPERATING COSTS AND EXPENSES Cost of Refined Product Sales and Processing 9,922,723 4,326,443 19,825,853 7,879,622 General and Administrative 876,397 702,089 1,653,379 1,403,917 Depreciation 242,582 178,627 462,464 292,257 -------------- -------------- -------------- -------------- 11,041,702 5,207,159 21,941,696 9,575,796 -------------- -------------- -------------- -------------- OPERATING INCOME (LOSS) (141,943) 1,106,022 (473,187) 2,278,499 OTHER INCOME (EXPENSE) Interest Income 45,328 14,040 66,320 34,984 Interest Expense (261,830) (39,909) (466,354) (79,430) Minority Interest 42,779 1,321 58,165 2,760 Miscellaneous Income (Expense) (4,374) 70,021 18,408 146,165 -------------- -------------- -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES (320,040) 1,151,495 (796,648) 2,382,978 INCOME TAX EXPENSE -- 152,342 -- 215,753 -------------- -------------- -------------- -------------- NET INCOME (LOSS) $ (320,040) $ 999,153 $ (796,648) $ 2,167,225 ============== ============== ============== ============== NET INCOME (LOSS) PER COMMON SHARE: Basic $ (.01) $ .05 $ (.04) $ .10 ============== ============== ============== ============== Diluted $ (.01) $ .04 $ (.04) $ .10 ============== ============== ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON EQUIVALENT SHARES OUTSTANDING: Basic 22,788,994 22,019,494 22,557,071 22,019,494 ============== ============== ============== ============== Diluted 22,788,994 22,530,774 22,557,071 22,664,467 ============== ============== ============== ==============
See notes to consolidated financial statements. -2- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 - --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ------------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL -------------- -------------- -------------- -------------- -------------- JANUARY 1, 2000 22,019,994 $ 2,201,999 $ 36,101,506 $ (6,855,342) $ 31,448,163 Common Stock Issued in Payment of Liabilities 469,000 46,900 422,100 469,000 Net (Loss) -- -- -- (796,648) (796,648) -------------- -------------- -------------- -------------- -------------- JUNE 30, 2000 22,488,994 $ 2,248,899 $ 36,523,606 $ (7,651,990) $ 31,120,515 ============== ============== ============== ============== ==============
See notes to consolidated financial statements. -3- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2000 JUNE 30, 1999 ------------- ------------- OPERATING ACTIVITIES Net Income (Loss) $ (796,648) $ 2,167,225 Adjustments for Non-Cash Transactions Depreciation 462,464 292,257 Increase (Decrease) in Deferred Revenue (17,217) 28,982 Effects of Changes in Operating Assets and Liabilities Decrease (Increase) in Trade Receivables (357,802) (745,708) Decrease (Increase) in Inventories (448,500) (229,888) Decrease (Increase) in Other Assets (54,967) 79,431 (Decrease) Increase in Accounts Payable and Accrued Liabilities 1,406,473 63,016 Other (15,275) 87,654 ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 178,528 1,742,969 ------------- ------------- INVESTING ACTIVITIES Proceeds from Sale of Short-Term Investments 20,597 -- Additions to Short-Term Investments -- (11,760) Purchase of Business (Net of Cash Acquired) (2,279,665) -- Additions to Al Masane Project (228,400) (274,014) Additions to Refinery Plant, Pipeline and Equipment (2,425,052) (2,028,685) (Additions to) Reduction in Mineral Properties in the U.S. 18,999 (2,199) Increase in Accrued Liabilities in Saudi Arabia 18,123 18,162 ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (4,875,398) (2,298,496) ------------- ------------- FINANCING ACTIVITIES Common Stock Sold -- -- Additions to Notes Payable and Long-Term Obligations 2,901,948 -- Reduction of Notes Payable and Long-Term Obligations (361,415) -- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,540,533 -- ------------- ------------- NET INCREASE (DECREASE) IN CASH (2,156,337) (555,527) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,934,313 1,907,242 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,777,976 $ 1,351,715 ============= =============
See notes to consolidated financial statements. -4- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The consolidated financial statements reflect all adjustments (consisting only of normal and recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Arabian American Development Company and Subsidiaries' financial position and operating results for the interim period. Interim period results are not necessarily indicative of the results for the calendar year. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information and the Company's December 31, 1999 Annual Report on Form 10-K. These financial statements include the accounts of Arabian American Development Company (the "Company") and its wholly-owned subsidiaries, American Shield Refining Company (the "Refining Company") and American Shield Coal Company (the "Coal Company"). The Refining Company owns all of the capital stock of Texas Oil and Chemical Company II, Inc. ("TOCCO"). TOCCO owns all of the capital stock of South Hampton Refining Company ("South Hampton") and South Hampton owns all of the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State"). TOCCO also owns 92% of the capital stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a specialty petrochemical products refining company located near Veracruz, Mexico, which was purchased on January 25, 2000 for approximately $2.5 million. The Company also owns approximately 51% of the capital stock of Pioche-Ely Valley Mines, Inc. ("Pioche"), which owns mining properties in Nevada. The Refining Company and its subsidiaries constitute the Company's Specialty Petrochemicals or Refining Segment. The Coal Company, Pioche and the Company's mineral properties in Saudi Arabia constitute its Mining Segment. 2. INVENTORIES Inventories include the following:
JUNE 30, 2000 DEC. 31, 1999 ------------- ------------- Refinery feedstock $ 129,215 $ -- Refined products 1,310,679 745,396 ------------- ------------- Total inventories $ 1,439,894 $ 745,396 ============= =============
Refined products and feedstock are recorded at the lower of cost, determined on the last-in, first-out method (LIFO), or market. At June 30, 2000 and December 31, 1999, current cost exceeded LIFO value by approximately $228,000 and $142,000, respectively. -5- 3. NET INCOME (LOSS) PER COMMON SHARE The following table (in thousands, except per share amounts) sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30, 2000 and 1999.
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net Income (Loss) $ (320) $ 999 $ (797) $ 2,167 Add interest on convertible debt -- 9 -- 17 -------- -------- -------- -------- Net Income (Loss) - diluted $ (320) $ 1,008 $ (797) $ 2,184 ======== ======== ======== ======== Weighted average shares outstanding - basic 22,789 22,019 22,557 22,019 Dilutive effect of convertible debt -- 511 -- 511 Dilutive effect of stock options -- -- -- 134 -------- -------- -------- -------- Weighted average shares outstanding - diluted 22,789 22,530 22,557 22,664 ======== ======== ======== ======== Net Income (Loss) per share: Basic $ (.01) $ .05 $ (.04) $ .10 ======== ======== ======== ======== Diluted $ (.01) $ .04 $ (.04) $ .10 ======== ======== ======== ========
4. ACQUISITION On January 25, 2000, TOCCO purchased 92% of the issued and outstanding shares of the common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin") from Spechem, S.A. de. C.V. for $2.5 million in cash. Coin is a specialty petrochemical products refining company located in Coatzacoalcos, Mexico near Veracruz. Financing was provided by a loan from Heller Financial Leasing, Inc. The following table (in thousands, except per share amounts) presents pro forma unaudited consolidated results of operations for the three and six months ended June 30, 2000 and 1999, assuming that the acquisition had taken place at the beginning of the periods presented. The pro forma results are not necessarily indicative of the results of operations that would have occurred had the acquisition been made at the beginning of the periods presented, or of future results of operations of the combined companies.
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenue $ 10,950 $ 8,645 $ 22,690 $ 16,624 Net Income (Loss) (369) 1,053 (937) 2,443 Net Income (Loss) per share: Basic $ (.01) $ .05 $ (.04) $ .11 ============ ============ ============ ============ Diluted $ (.01) $ .05 $ (.04) $ .11 ============ ============ ============ ============
-6- 5. SEGMENT INFORMATION As discussed in Note 1, the Company has two business segments. The Company measures segment profit or loss as operating income (loss), which represents income (loss) before interest, miscellaneous income and minority interest. Information on the segments is as follows:
Three Months ended June 30, 2000 Refining Mining Total -------------------------------- ------------ ------------ ------------ Revenue from external customers $ 10,899,759 $ -- $ 10,899,759 Operating income (loss) (104,365) (37,578) (141,943) Total assets $ 20,617,007 $ 40,067,352 $ 60,684,359
Three Months ended June 30, 1999 Refining Mining Total -------------------------------- ------------ ------------ ------------ Revenue from external customers $ 6,313,181 $ -- $ 6,313,181 Operating income (loss) 1,182,282 (76,260) 1,106,022 Total assets $ 10,889,124 $ 38,182,038 $ 49,071,162
Six Months ended June 30, 2000 Refining Mining Total -------------------------------- ------------ ------------ ------------ Revenue from external customers $ 21,468,509 $ -- $ 21,468,509 Operating income (loss) (386,307) (86,880) (473,187) Total assets $ 20,617,007 $ 40,067,352 $ 60,684,359
Six Months ended June 30, 1999 Refining Mining Total -------------------------------- ------------ ------------ ------------ Revenue from external customers $ 11,854,295 $ -- $ 11,854,295 Operating income (loss) 2,496,645 (218,146) 2,278,499 Total assets $ 10,889,124 $ 38,182,038 $ 49,071,162
6. LEGAL PROCEEDINGS South Hampton is a defendant in four lawsuits filed in Jefferson County and Orange County, Texas in the period from December 1997 to December 1999 by former employees of the southeast Texas plants of the Goodyear Tire & Rubber Company, Dupont and South Hampton. The suits claim illness and disease resulting from alleged exposure to chemicals, including benzene, butadiene and/or isoprene, during their employment. The plaintiffs claim that the companies engaged in the business of manufacturing, selling and/or distributing these chemicals in a manner which subjected them to liability for unspecified actual and punitive damages. South Hampton intends to vigorously defend itself against these lawsuits. In August 1997, the Texas Natural Resource Conservation Commission ("TNRCC") notified South Hampton that it had violated various rules and procedures. It proposed administrative penalties totaling $709,408 and recommended that South Hampton undertake certain actions necessary to bring the operations at its refinery into compliance The violations generally relate to various air and water quality issues. Appropriate modifications have been made by South Hampton where it appeared there were legitimate concerns. South Hampton feels the penalty is greatly overstated and intends to vigorously defend itself against it. A preliminary hearing was held in November 1997, but no further action has been taken. -7- On February 2, 2000, the TNRCC amended its pending administrative action against South Hampton to add allegations dating through May 21, 1998 of 35 regulatory violations relating to air quality control and industrial solid waste requirements. The TNRCC proposes that administrative penalties be assessed in the amount of approximately $765,000 and that certain corrective actions be taken. South Hampton intends to vigorously defend itself against these additional allegations, the proposed penalties and proposed corrective actions. In May 1991, the Company filed a complaint with the U.S. Department of Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"). The Company's complaint alleged various violations of the Foreign Corrupt Practices Act ("FCPA") by Hunt, at the Company's detriment, in obtaining its 1981 Petroleum Production Sharing Agreement ("PSA") in Yemen. The DOJ requested additional documentation regarding the Company's allegations in 1995 that the Company provided in early 1996. In late 1996, the DOJ advised the Company that the documents presented did not provide sufficient evidence of any criminal activity and that the DOJ did not intend to pursue the investigation. In December 1996, after providing the DOJ with additional legal analyses, the Company's representatives were told that the DOJ would take a more aggressive stance if additional legal evidence was presented to the DOJ. In an effort to comply with the DOJ's request, in 1997 the Company requested certain documents from the Central Intelligence Agency ("CIA") under the Freedom of Information Act ("FOIA"). The Company believes the requested documents may contain the evidentiary information that the DOJ needs to properly and sufficiently evaluate the Company's compliant against Hunt. The CIA refused to either confirm or deny the existence of the requested information. After exhausting its administrative appeals, the Company filed suit against the CIA in early 1998 in the U.S. District Court for the Northern District of Texas seeking a judicial determination of the Company's FOIA request. The Company argued the FOIA specifically prohibits any agency from using Executive Order 12958, relating to classification of documents, and the FOIA to conceal criminal activity, in this instance Hunt's violation of the FCPA. Following a February 1999 hearing, the Court rejected the Company's arguments and issued a summary judgment in favor of the CIA. The Company filed an appeal with the U.S. Court of Appeals for the Fifth Circuit, which on January 28, 2000 rejected the Company's appeal. The Company believes that this could be a landmark case. As a consequence, on April 22, 2000, it filed a writ of certiorari with the United States Supreme Court in which the Company argued that the District and Appellate Courts erred in their judgments. The Company has requested the Supreme Court to issue its ruling that the matter be remandered to the trial court with instructions that the CIA review its own documents to determine if any information requested by the Company should not have been classified but handed over the Company for use in the pursuit of its case with the DOJ against Hunt for conspiracy and violation of the FCPA. On July 1, 2000, the United States Supreme Court assigned Cause No. 00-17 to the Company's Petition. The Company has requested and will continue to request additional documents from both the CIA and DOJ under appropriate provisions of the FOIA and may seek judicial review in the event its requests are denied. In the event the Company is able to provide the DOJ with appropriate legal evidence and the DOJ prevails in any FCPA action against Hunt regarding the PSA, the Company would then institute an appropriate action against Hunt in accordance with the provisions of the Victim Restitution Act. Based on the advice of its counsel, the Company believes that it would be entitled to restitution of monies lost as a result of the wrongdoing by Hunt, if Hunt is convicted under the FCPA. The Company further believes, based on such advice, that the amount of restitution could include all of the profits received by Hunt from its Yemen operations and also could include proceeds from the sale of a portion of Hunt's interest in the PSA. However, there can be no assurance that the DOJ will pursue or obtain a conviction of Hunt regarding the PSA under the FCPA and no assurance that the Company would receive or be entitled to receive any restitution as a result of any such conviction. 7. SUBSEQUENT EVENTS At the Company's annual stockholder's meeting on May 15, 2000, a proposal was approved to change the Company's name from "Arabian Shield Development Company", and on July 19, 2000, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the State of Delaware to make the change effective. The Company's operational division in Saudi Arabia will continue to conduct its operations there under the name of Arabian Shield Development Company. -8- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Statements in Part 1, Item 2 as well as elsewhere in, or incorporated by reference in, this Quarterly Report on Form 10-Q regarding the Company's financial position, business strategy and plans and objectives of the Company's management for future operations and other statements that are not historical facts, are "forward-looking statements" as that term is defined under applicable Federal securities laws. In some case, "forward-looking statements" can be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "contemplates," "proposes," believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such statements. Such risks, uncertainties and factors include, but are not limited to, general economic conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt and other financial and legal obligations; competition; industry cycles; feedstock, specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company's filings with the U.S. Securities and Exchange Commission, including this Quarterly Report on Form 10-Q, all of which are difficult to predict and many of which are beyond the Company's control. LIQUIDITY AND CAPITAL RESOURCES The Company operates in two business segments, specialty petrochemicals (which is composed of the entities owned by the Refining Company) and mining. Its corporate overhead needs are minimal. A discussion of each segment's liquidity and capital resources follows. SPECIALTY PETROCHEMICALS SEGMENT. This segment contributes substantially all of the Company's internally generated cash flows from operating activities and its primary sources of revenue are the specialty products refineries owned and operated by South Hampton near Silsbee, Texas and by Coin in Mexico. In order to supplement its cash flows from operating activities, this business segment now has a $3.25 million credit agreement with the Southwest Bank. In connection with the acquisition of the common stock of Coin, South Hampton and Gulf State entered into the $3.5 million note with Heller Financial. This segment's cash flows from operating activities, along with its available credit facility, are expected to be adequate to finance its planned capital expenditures and debt service requirements. In the event this segment were to undertake a major capital expenditure, such as construction of a new facility, financing for this activity would most likely come from some combination of internal resources, a debt placement with a financial institution or a joint venture partner. Any major capital expenditure requires the Southwest Bank's advance review and approval. MINING SEGMENT. This segment is in the development stage. Its most significant asset is the Al Masane mining project in Saudi Arabia, which is a net user of the Company's available cash and capital resources. In order to commercially develop the Al Masane project, the Company entered into a joint venture arrangement with Al Mashreq Company for Mining Investments ("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian investors (including certain of the Company's shareholders). The partners formed The Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability company ("Arabian Mining"), which was officially registered and licensed in August 1998 to conduct business in Saudi Arabia and authorized to mine and process minerals from the Al Masane lease area. Arabian Mining received conditional approval for a $38.1 interest-free loan from the Saudi Industrial Development Fund ("SIDF"). Due to the severe decline in the open market prices for the minerals to be produced by the Al Masane project and the financial crisis affecting Eastern Asia in 1998, SIDF and other potential lenders required additional guarantees and other financing conditions, which were unacceptable to the Company and Al Mashreq. As a consequence, Al Mashreq withdrew from the joint venture. By letter dated May 11, 1999, the Company informed the Ministry of Petroleum and Mineral Resources that the joint venture was dissolved and that implementation of the project would be delayed until open market prices for the minerals to be produced by the Al Masane project improve to the average price levels experienced during the period from 1988 through 1997. At -9- that time, the Company will attempt to locate a joint venture partner, form a joint venture and, together with the joint venture partner, attempt to obtain acceptable financing to commercially develop the project. There can be no assurances that the Company will be able to locate a joint venture partner, form a joint venture or obtain financing from SIDF or any other sources. Financing plans for the above are currently being studied. In the meantime, the Company intends to maintain the Al Masane mining lease through the payment of the annual advance surface rental, the implementation of a drilling program to attempt to increase proven and probable reserves and to attempt to improve the metallurgical recovery rates beyond those stated in the feasibility study, which may improve the commercial viability of the project at lower metal prices than those assumed in the feasibility study. On June 22, 1999, the Company submitted a formal application for a five-year exclusive mineral exploration license for the Greater Al Masane Area of approximately 2,850 square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr. The Company previously worked the Greater Al Masane Area after obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3 million in exploration work. Geophysical and geochemical work and diamond core drilling on the Greater Al Masane area has revealed mineralization similar to that discovered at Al Masane. The Company's mineral interests in the United States include its ownership interests in the Coal Company and Pioche. The Coal Company's sole remaining asset is its net operating loss carryforward of approximately $5.9 million at December 31, 1999 and its future, if any, is uncertain. Pioche has been inactive for many years. Its properties include 48 patented and 80 unpatented claims totaling approximately 3,500 acres in Lincoln County, Nevada. There are prospects and mines on these claims that previously produced silver, gold, lead, zinc and copper. Management also is addressing two other significant financing issues within this segment. These issues are the $11.0 million note payable due the Saudi Arabian government and accrued salaries and termination benefits of approximately $900,000 due employees working in Saudi Arabia (this amount does not include any amounts due the Company's President and Chief Executive Officer who also primarily works in Saudi Arabia and is owed approximately $759,000). Regarding the note payable, this loan was originally due in ten annual installments beginning in 1984. The Company has not made any repayments nor has it received any payment demands or other communications regarding the note payable from the Saudi government. By memorandum to the King of Saudi Arabia in 1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0 million note be incorporated into a loan from SIDF to finance 50% of the cost of the Al Masane project, repayment of the total amount of which would be made through a mutually agreed upon repayment schedule from the Company's share of the operating cash flows generated by the project. The Company remains active in Saudi Arabia and received the Al Masane mining lease at a time when it had not made any of the agreed upon repayment installments. Based on its experience to date, management believes that as long as the Company diligently attempts to explore and develop the Al Masane project no repayment demand will be made. The Company recently communicated to the Saudi government that its delay in repaying the note is a direct result of the government's lengthy delay in granting the Al Masane lease. Based on its interpretation of the Al Masane mining lease and other documents, management believes the government is likely to agree to link repayment of this note to the Company's share of the operating cash flows generated by the commercial development of the Al Masane project and to a long-term installment repayment schedule. In the event the Saudi government were to demand immediate repayment of this obligation, which management considers unlikely, the Company would be unable to pay the entire amount due. If a satisfactory rescheduling agreement could not reached, and there are no assurances that one could be, the Company believes it could obtain the necessary resources to meet the rescheduled installment payments from the cash flows generated by its two specialty petrochemical refineries while maintaining the mining lease. With respect to the accrued salaries and termination benefits due employees working in Saudi Arabia, the Company plans to continue employing these individuals until it is able to generate sufficient excess funds to begin payment of this liability. Management will then begin the process of gradually releasing certain employees and paying its obligation as they are released from the Company's employment. At this time, the Company has no definitive plans for the development of its domestic mining assets. It periodically receives proposals from outside parties who are interested in possibly developing or using certain assets. Management will continue to review these proposals as they are received, but at this time does not anticipate making any significant domestic mining capital expenditures or receiving any significant proceeds from the sale or use of these assets. If the Company seeks additional outside financing, there is no assurance that sufficient funds can be obtained. It is also possible that the terms of any additional financing that the Company would be able to obtain may be unfavorable to the Company. -10- RESULTS OF OPERATIONS SPECIALTY PETROCHEMICALS SEGMENT. A 92% interest in the Coin refinery in Mexico was purchased on January 25, 2000, therefore, its revenues and expenses for February through June are included in the financial statements for the first half of 2000. While there have been some additional expenses involved in the acquisition, the primary factor affecting first half results was the dramatic rise in the cost of feedstock in late 1999 and early 2000. In the quarter ended June 30, 2000, total revenue increased approximately $4,587,000 ($1,619,000 attributable to Coin) or 73%, while the cost of sales (excluding depreciation) increased approximately $5,596,000 ($2,552,000 attributable to Coin) or 129% from the same period in 1999. In the six months ended June 30, 2000, total revenue increased approximately $9,614,000 ($4,173,000 attributable to Coin) or 81%, while the cost of sales (excluding depreciation) increased approximately $11,946,000 ($4,055,000 attributable to Coin) or 152% from 1999. Consequently, the gross profit margin in 2000 decreased approximately $2,332,000 or 59%. Some of the revenue increase came from sales of the acquired company but product prices and toll processing fees were also higher than in the previous year. Product prices have increased approximately 15% as the Company has worked to catch up with the feedstock market and regain its gross margin. Sales volume of 16.1 million gallons in the first half of 2000 was an increase of 23% over the same period in 1999. Toll processing fee income in the first half of 2000 rose by 118%, which partially offsets the feedstock price increases. The increase in these fees is primarily due to the addition of a new unit added in May 1999. An additional unit has recently been constructed and began operations in July 2000. The new unit is expected to add approximately $70,000 per month in processing fee income, if operated at minimum levels and up to $110,000 per month at capacity. The Company currently has toll processing contracts with five different entities. In late 1999 and the first two months of 2000, feedstock costs rose in conjunction with the large increase in crude oil prices worldwide. Costs of feedstock increased from $.33 per gallon in the first half of 1999 to over $.78 per gallon in the first half of 2000, an increase of 136%. In the second quarter of 2000, feedstock costs fell during the latter part of April and through May, but rose again for June. During periods of rapid feedstock price increases, it is not possible to raise product prices quickly enough to cover the increased costs; therefore any changes in costs will not affect the profitability on a one to one basis in the near term. The cost of natural gas, which is the single largest expense other than feedstock costs, rose by 265% in the first half of 2000 due to the increases in worldwide prices. In the second quarter of 1999, the Company was paying $1.70 per MMBTU for fuel gas, which increased to $4.48 per MMBTU by the end of the first half of 2000. Administrative expenses in the first half of 2000 were higher by approximately $249,000, with about 25% of the increase attributable to the acquired refinery. Sales of the Company's products remain stable and expanded marketing efforts have kept the Silsbee refinery at near capacity since the second quarter of 1997. At the Mexico refinery, process modifications are being designed which should produce an additional 60,000 gallons per month of premium product for sale in the U.S. The work should be completed by the end of the year. Capital costs are estimated at approximately $225,000 and should pay back in less than one year. Their marketing capability has been upgraded with the addition of experienced petrochemical sales personnel, which is expected to result in moving more products to Central and South America. Management expects that the acquisition of the refinery in Mexico and the blending of its similar operations with the Silsbee refinery will produce improved results in the second half of 2000. Margins are improving and, if the U.S. economy continues its growth pattern, sales volumes should remain high. MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's other operations generate significant operating or other revenues. Minority interest amounts represent the Pioche minority stockholders' share of Pioche losses that are primarily attributable to the costs of maintaining the Nevada mining properties. The Company periodically reviews and evaluates its mineral exploration and development projects as well as its other mineral properties and related assets. The recoverability of the Company's carrying values of its development properties are assessed by comparing the carrying values to estimated future net cash flows from each property. In 2000, for purposes of estimating future cash flows, the price assumptions used by its mining consultant were taken from the projections of a major international metal's company. These latest price assumptions are averages over the projected life of the Al Masane mine and are $1.08 per pound for copper, $.55 per pound for zinc, $350 per ounce for gold, and $6.00 per ounce for silver. For its other mineral properties and related assets, carrying values were compared to estimated net realizable values on market comparables. Using these price assumptions, no asset impairments were evident. -11- The Company intends to assess the carrying values of its assets on an ongoing basis. Factors which may affect carrying values include, but are not limited to, mineral prices, capital cost estimates, the estimated operating costs of any mines and related processing, ore grade and related metallurgical characteristics, the design of any mines and the timing of any mineral production. There are no assurances that, particularly in the event of a prolonged period of depressed mineral prices, the Company will not be required to take a material write-down of its mineral properties. -12- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION SHAREHOLDER' PROPOSALS Any proposal by a shareholder of the Company intended to be presented at the 2001 annual meeting of shareholders, which is tentatively scheduled sometime in May 2001, must be received by the Company at its principal executive office no later than December 4, 2000 for inclusion in the Company's Proxy Statement and form of proxy. Any such proposal must also comply with the other requirements of the proxy solicitation rules of the Securities and Exchange Commission. The Company intends to exercise discretionary voting authority granted under any proxy which is executed and returned to the Company on any matter that may properly come before the 2001 annual meeting of shareholders, unless written notice of the matter is delivered to the Company at its principal executive office no later than February 15, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 27 Financial Data Schedule (b) REPORTS ON FORM 8-K No Reports on Form 8-K were filed during the quarter ended June 30, 2000. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 10, 2000 ARABIAN AMERICAN DEVELOPMENT COMPANY --------------- ------------------------------------ (Registrant) /s/ J. A. CRICHTON ------------------------------------ J. A. Crichton, Chairman of the Board of Directors /s/ DREW WILSON, JR. ------------------------------------ Drew Wilson, Jr. Secretary/Treasurer INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule