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 SEPTEMBER 30, 2001 COMMISSION FILE NUMBER 0-6247 ARABIAN AMERICAN DEVELOPMENT COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-1256622 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231 DALLAS, TEXAS (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 692-7872 Former name, former address and former fiscal year, if changed since last report. NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at September 30, 2001: 22,731,994. ---------- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
SEPTEMBER 30, 2001 DECEMBER 31, (UNAUDITED) 2000 ------------------ ------------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 311,636 $ 158,977 Trade Receivables 4,536,533 5,239,769 Inventories 909,784 960,494 ------------------ ------------------ Total Current Assets 5,757,953 6,359,240 REFINERY PLANT, PIPELINE AND EQUIPMENT 17,447,905 17,248,891 Less: Accumulated Depreciation (6,603,779) (5,570,930) ------------------ ------------------ Net Plant, Pipeline and Equipment 10,844,126 11,677,961 AL MASANE PROJECT 35,575,850 35,304,240 OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248 MINERAL PROPERTIES IN THE UNITED STATES 1,210,980 1,282,142 OTHER ASSETS 466,684 543,864 ------------------ ------------------ TOTAL ASSETS $ 56,286,841 $ 57,598,695 ================== ================== LIABILITIES CURRENT LIABILITIES Accounts Payable-Trade $ 5,361,160 $ 5,306,121 Accrued Liabilities 1,522,051 1,259,272 Accrued Liabilities in Saudi Arabia 1,062,375 1,062,375 Notes Payable 12,093,780 11,923,780 Current Portion of Long-Term Debt 7,862,983 8,060,981 ------------------ ------------------ Total Current Liabilities 27,902,349 27,612,529 ACCRUED LIABILITIES IN SAUDI ARABIA 1,030,588 841,489 DEFERRED REVENUE 131,794 131,401 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 854,993 999,011 STOCKHOLDERS' EQUITY COMMON STOCK-authorized 40,000,000 shares of $.10 par value; issued and outstanding, 22,431,994 shares in 2001 and 22,488,994 shares in 2000 2,243,199 2,248,899 ADDITIONAL PAID-IN CAPITAL 36,401,306 36,523,606 ACCUMULATED DEFICIT (12,277,251) (10,758,240) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (137) -- ------------------ ------------------ Total Stockholders' Equity 26,367,117 28,014,265 ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,286,841 $ 57,598,695 ================== ==================
See notes to consolidated financial statements. -1- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ SEP. 30, 2001 SEP. 30, 2000 SEP. 30, 2001 SEP. 30, 2000 ------------- ------------- ------------- ------------- REVENUES Refined Product Sales $ 6,769,237 $ 11,095,240 $ 22,006,952 $ 31,542,686 Processing Fees 707,489 669,000 2,670,975 1,690,063 ------------- ------------- ------------- ------------- 7,476,726 11,764,240 24,677,927 33,232,749 OPERATING COSTS AND EXPENSES Cost of Refined Product Sales and Processing 6,539,332 11,496,474 21,997,442 31,322,327 General and Administrative 953,467 988,054 2,501,118 2,641,433 Depreciation 346,381 291,871 1,037,889 754,335 ------------- ------------- ------------- ------------- 7,839,180 12,776,399 25,536,449 34,718,095 ------------- ------------- ------------- ------------- OPERATING LOSS (362,454) (1,012,159) (858,522) (1,485,346) OTHER INCOME (EXPENSE) Interest Income 10,572 25,736 34,310 92,056 Interest Expense (253,266) (291,384) (1,008,071) (757,738) Minority Interest 45,583 37,873 144,019 96,038 Foreign Exchange Transaction Gain (Loss) 107,487 (9,030) 32,485 (27,384) Miscellaneous Income 43,691 49,968 136,768 86,730 ------------- ------------- ------------- ------------- (45,933) (186,837) (660,489) (510,298) ------------- ------------- ------------- ------------- NET LOSS $ (408,387) $ (1,198,996) $ (1,519,011) $ (1,995,644) ============= ============= ============= ============= NET LOSS PER COMMON SHARE: Basic and Diluted $ (0.02) $ (0.05) $ (0.07) $ (0.09) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic and Diluted 22,765,451 22,788,994 22,781,146 22,634,379 ============= ============= ============= =============
See notes to consolidated financial statements. -2- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - --------------------------------------------------------------------------------
ACCUMULATED COMMON STOCK ADDITIONAL OTHER ---------------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL ------------ ------------ ------------ ------------ ------------- ------------ JANUARY 1, 2001 22,488,994 $ 2,248,899 $ 36,523,606 $(10,758,240) $ -- $ 28,014,265 Common Stock Cancelled In Exchange for Receivable (57,000) (5,700) (122,300) -- -- (128,000) COMPREHENSIVE INCOME (LOSS) Net Loss -- -- -- (1,519,011) -- (1,519,011) Fair Value of Cash Flow Hedge -- -- -- -- (137) (137) ------------ ------------ ------------ ------------ --------- ------------ Total Comprehensive Income (Loss) (1,519,148) ------------ ------------ ------------ ------------ --------- ------------ SEPTEMBER 30, 2001 22,431,994 $ 2,243,199 $ 36,401,306 $(12,277,251) $ (137) $ 26,367,117 ============ ============ ============ ============ ========= ============
See notes to consolidated financial statements. -3- ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
NINE MONTHS ENDED ------------------------------ SEP. 30, 2001 SEP. 30, 2000 ------------- ------------- OPERATING ACTIVITIES Net Loss $ (1,519,011) $ (1,995,644) Adjustments for Non-Cash Transactions Depreciation 1,037,889 754,335 Abandoned Mining Claims 67,560 -- Increase (Decrease) in Deferred Revenue 393 (25,825) Effects of Changes in Operating Assets and Liabilities Decrease (Increase) in Trade Receivables 703,236 (398,759) Decrease (Increase) in Inventories 50,710 (232,984) Decrease (Increase) in Other Assets 77,180 (106,488) Increase in Accounts Payable and Accrued Liabilities 317,681 2,337,868 Increase in Accrued Liabilities in Saudi Arabia 61,099 30,410 Other (149,058) (216,798) ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 647,679 146,115 ------------- ------------- INVESTING ACTIVITIES Proceeds from Sale of Short-Term Investments -- 20,597 Purchase of Business (Net of Cash Acquired) -- (2,279,665) Additions to Al Masane Project (271,610) (329,655) Additions to Refinery Plant, Pipeline and Equipment (199,014) (2,674,956) Reduction in Mineral Properties in the United States 3,602 18,896 ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (467,022) (5,244,783) ------------- ------------- FINANCING ACTIVITIES Additions to Notes Payable and Long-Term Obligations 229,270 3,167,350 Reduction of Notes Payable and Long-Term Obligations (257,268) (1,798,229) ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (27,998) 1,369,121 ------------- ------------- NET INCREASE (DECREASE) IN CASH 152,659 (3,729,547) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 158,977 3,934,313 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 311,636 $ 204,766 ============= =============
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, 2000 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 $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:
SEP. 30, 2001 DEC. 31, 2000 ------------- ------------- Refined products $ 909,784 $ 960,494 ============= =============
Inventories are recorded at the lower of cost, determined on the last-in, first-out method (LIFO), or market. At September 30, 2001, current cost exceeded LIFO value by approximately $30,000. At December 31, 2000, current cost exceeded LIFO value by approximately $178,000. 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 nine months ended September 30, 2001 and 2000, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net Loss $ (408) $ (1,199) $ (1,519) $ (1,996) ========== ========== ========== ========== Weighted average shares outstanding - basic and diluted 22,765 22,789 22,781 22,634 ========== ========== ========== ========== Net Loss per share: Basic and diluted $ (.02) $ (.05) $ (.07) $ (.09) ========== ========== ========== ==========
In the three and nine months ended September 30, 2001 and 2000, options for 872,000 shares and 1,570,000 shares, respectively, were excluded from diluted shares outstanding because their effect was antidilutive. -5- 4. 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 SEPTEMBER 30, 2001 REFINING MINING TOTAL ------------ ------------ ------------ Revenue from external customers $ 7,476,726 $ -- $ 7,476,726 Depreciation 345,799 582 346,381 Operating loss (239,182) (123,272) (362,454) Total assets $ 17,036,026 $ 39,250,815 $ 56,286,841
THREE MONTHS ENDED SEPTEMBER 30, 2000 REFINING MINING TOTAL ------------ ------------ ------------ Revenue from external customers $ 11,764,240 $ -- $ 11,764,240 Depreciation 291,304 567 291,871 Operating loss (938,019) (74,140) (1,012,159) Total assets $ 20,310,986 $ 38,736,517 $ 59,047,503
NINE MONTHS ENDED SEPTEMBER 30, 2001 REFINING MINING TOTAL ------------ ------------ ------------ Revenue from external customers $ 24,677,927 $ -- $ 24,677,927 Depreciation 1,036,143 1,746 1,037,889 Operating loss (644,293) (214,229) (858,522)
NINE MONTHS ENDED SEPTEMBER 30, 2000 REFINING MINING TOTAL ------------ ------------ ------------ Revenue from external customers $ 33,232,749 $ -- $ 33,232,749 Depreciation 752,634 1,701 754,335 Operating loss (1,324,326) (161,020) (1,485,346)
Information regarding foreign operations for the three and nine months ended September 30, 2001 and 2000 follows (in thousands). Revenues are attributed to countries based upon the origination of the transaction.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- REVENUES United States $ 7,172 $ 11,071 $ 23,754 $ 28,470 Mexico 305 693 924 4,763 Saudi Arabia -- -- -- -- ---------- ---------- ---------- ---------- $ 7,477 $ 11,764 $ 24,678 $ 33,233 ========== ========== ========== ========== LONG-LIVED ASSETS United States $ 6,705 $ 7,710 Mexico 5,350 5,698 Saudi Arabia 38,007 37,382 ---------- ---------- $ 50,062 $ 50,790 ========== ==========
-6- 5. LEGAL PROCEEDINGS South Hampton, together with several other companies, is a defendant in five lawsuits filed in Jefferson County and Orange County, Texas filed in the period from December 1997 to December 2000 by former employees of the southeast Texas plants of the Goodyear Tire & Rubber Company, Dupont, Atlantic Richfield and South Hampton. In each of these suits, the plaintiff claims illnesses and diseases resulting from alleged exposure to chemicals, including benzene, butadiene and/or isoprene, during their employment. The plaintiffs claim the defendant companies engaged in the business of manufacturing, selling and/or distributing these chemicals in a manner which subjected each and all of them to liability for unspecified actual and punitive damages. One of the lawsuits brought in Jefferson County, Texas has been settled, with South Hampton contributing $10,000 toward such settlement. South Hampton intends to vigorously defend itself against the remaining 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. 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 increased to approximately $765,000 and that certain corrective action be taken. South Hampton intends to vigorously defend itself against these additional allegations, the proposed penalties and proposed corrective actions. -7- 6. LONG-TERM DEBT South Hampton entered into a $2.25 million credit agreement in September 1999 with Southwest Bank of Texas, N.A., located in Houston, Texas. An amended agreement was entered into on June 30, 2000, which increased the total amount to $3.25 million. A second amended agreement was entered into on May 31, 2001 which extended the due date from May 31, 2001 to July 31, 2001. The debt was not paid on July 31, 2001. A third amended agreement was entered into on July 31, 2001, which extended the due date to October 31, 2001. The debt was not paid on October 31, 2001 and an extension of the agreement is currently being negotiated. At September 30, 2001, the Company was not in compliance with certain covenants contained in the loan agreement. In connection with the acquisition of the common stock of Coin, South Hampton and Gulf State entered into the $3.5 million credit agreement in December 1999 with Heller Financial Leasing, Inc. The credit agreement is secured by a pledge of all of the capital stock of South Hampton and Gulf State, a first lien on all of South Hampton's and Gulf State's present and future machinery and equipment and a ground lease relating to South Hampton's real property, and is guaranteed by the Company, the Refining Company and TOCCO. An amended promissory note dated April 1, 2001 was signed that requires an interest only payment on April 1, 2001, two consecutive monthly installment payments of $25,000 each commencing on May 1, 2001, and the remaining principal and interest payable in thirty-one (31) consecutive monthly installments commencing July 1, 2001. At September 30, 2001, the Company was not in compliance with certain covenants contained in the loan agreement; therefore this debt has been classified as a current liability in the financial statements. 7. HEDGING ACTIVITY Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities", establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. In July and October 2001, the Company entered into two swap agreements to limit the effect of significant fluctuations in natural gasoline prices. The agreements expire in January and August 2002. They are designated as cash flow hedges. The Company's primary source of feedstock is natural gasoline. The effect of these agreements is to limit the Company's exposure by fixing the natural gasoline price of approximately 25,000 barrels (1,050,000 gallons) of feedstock per month over the term of the agreements. This amount of material will approximate 50% of the Company's average monthly sales volume. The agreements had no cost to the Company. At September 30, 2001, the July agreement had a negative fair value of approximately $108,000. 8. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" addresses the manner in which certain adjustments to shareholders' equity are displayed in the financial statements. Comprehensive income includes net earnings (losses) and items of other comprehensive income or loss. The following table provides information regarding comprehensive income, net of tax (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2001 2000 2001 2000 ----- ------- ------- ------- Net loss $(408) $(1,199) $(1,519) $(1,996) Other comprehensive loss: Unrealized loss on derivatives held as cash flow hedges (108) -- (108) -- Reclassification adjustment for gains realized (29) -- (29) -- ----- ------- ------- ------- Other comprehensive loss (137) -- (137) -- ----- ------- ------- ------- Comprehensive loss $(545) $(1,199) $(1,656) $(1,996) ===== ======= ======= =======
-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. Historically, this segment has contributed 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. However, significant increases in the prices of feedstock and natural gas resulted in a loss from operations in 2000 of $2.8 million which, in turn, resulted in violations of certain loan agreement covenants and a lack of liquidity. These prices have declined in 2001 allowing a return to positive cash flows in February. Feedstock prices, in particular, have declined so that operating margins are returning to sustainable levels. Sales are currently sustainable and there has been little downturn in demand. Management expects adequate margins throughout the remainder of 2001, although there can be no assurance of this effect, and has taken steps, beginning in July 2001, to protect the operations from extreme fluctuations in the price of its feedstock purchases by hedging approximately 50% of its needs through July 2002. In addition, the purchase price of natural gas, which is used as fuel gas, has recently been fixed by agreement for the period from July 2001 through March 2002. As mentioned in Note 6, South Hampton was not in compliance with certain covenants contained in two loan agreements at September 30, 2001, and therefore, the creditors have the right to declare the debt to be immediately due and payable. If this were to occur, the Company would currently be unable to pay the entire amount due. MINING SEGMENT. This segment is in the development stage. Its most significant asset is the Al Masane mining project in Saudi Arabia, which is a net user of the Company's available cash and capital resources. In order to commercially develop the Al Masane project, the Company entered into a joint venture arrangement with Al Mashreq Company for Mining Investments ("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian investors (including certain of the Company's shareholders). The partners formed The Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability company ("Arabian Mining"), which was officially registered and licensed in August 1998 to conduct business in Saudi Arabia and authorized to mine and process minerals from the Al Masane lease area. Arabian Mining received conditional approval for a $38.1 million interest-free loan from the Saudi Industrial Development Fund ("SIDF"), and deposited $26 million of equity capital into its bank account. 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 and all equity capital was returned. By letter dated May 11, 1999, the Company informed the Ministry of Petroleum and Mineral Resources that the joint venture was dissolved and that implementation of the project would be delayed until open market prices for the minerals to be produced by the Al Masane project improve to the average price levels experienced during the period from 1988 through 1997. At that time, the Company will attempt to locate a joint venture partner, form a joint venture and, together with the joint venture 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 -9- 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, which may improve the commercial viability of the project. 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. If the Saudi Arabian government does not issue the exploration license, the Company believes that it will be entitled to a refund of the monies expended, since the Company was authorized by the Saudi Arabian government to carry out exploration work in this area while waiting for the exploration license to be issued. 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, 2000 and its future, if any, is uncertain. Pioche has been inactive for many years. Its properties include 48 patented and 5 unpatented claims totaling approximately 1,500 acres in Lincoln County, Nevada. In August 2001, 75 unpatented claims were abandoned since they were deemed to have no future value to Pioche. 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 $1,062,000 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 $1,030,000). 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 has 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 and has requested formal negotiations to restructure this obligation. 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 by making certain changes at the Refining Company. With respect to the accrued salaries and termination benefits due employees working in Saudi Arabia, the Company plans to continue employing these individuals until it is able to generate sufficient excess funds to begin payment of this liability. Management will then begin the process of gradually releasing certain employees and paying its obligations as they are released from the Company's employment. The salary and social security benefits for these employees currently total approximately $108,000 per year. At this time, the Company has no definitive plans for the development of its domestic mining assets. It periodically receives proposals from outside parties who are interested in possibly developing or using certain assets. Management will continue to review these proposals as they are received, but at this time does not anticipate making any significant domestic mining capital expenditures or receiving any significant proceeds from the sale or use of these assets. If the Company seeks additional outside financing, there is no assurance that sufficient funds could be obtained. It is also possible that the terms of any additional financing that the Company would be able to obtain would be unfavorable to the Company and its existing shareholders. -10- RESULTS OF OPERATIONS SPECIALTY PETROCHEMICALS SEGMENT. In the quarter ended September 30, 2001, total revenues decreased approximately $4,288,000 ($1,230,000 attributable to Coin) or 36%, while the cost of sales (excluding depreciation) decreased approximately $4,957,000 ($1,187,000 attributable to Coin) or 43% from the same period in 2000. Consequently, the total gross profit margin in the third quarter of 2001 increased approximately $669,000 compared to the same period in 2000. This includes Coin's gross profit margin, which decreased approximately $43,000. In the nine months ended September 30, 2001, total revenues decreased approximately $8,555,000 ($3,839,000 attributable to Coin) or 26%, while the cost of sales (excluding depreciation) decreased approximately $9,325,000 ($3,662,000 attributable to Coin) or 30% from 2000. Consequently, the total gross profit margin in 2001 decreased approximately $770,000. The primary factor, which has adversely affected the operating results in the last year, was the dramatic rise in the cost of feedstock. Beginning in late 1999 and continuing into the first few months of 2001, feedstock costs rose in conjunction with the large increase in crude oil prices worldwide. These costs increased from $.33 per gallon in the first quarter of 1999 to over $.95 per gallon in the fourth quarter of 2000, an increase of 188%. The prices peaked in December 2000 and January 2001, and in February they dropped back into the $.70 per gallon range. They remained at this level for the balance of the first quarter of 2001 and decreased to the $.55 to $.65 per gallon range in the second and third quarters of 2001. The cost of natural gas, which is the single largest expense other than feedstock costs, also rose in 2000 due to the increases in worldwide prices. In the second quarter of 1999, the Company was paying $1.70 per MMBTU for fuel gas, which increased to $4.50 per MMBTU by the end of the second quarter of 2000. The gas market prices have currently dropped to about $2.20 per MMBTU after reaching a peak of $9.94 per MMBTU in January 2001, and are expected to remain strong for the remainder of this year. The drop in 2001 sales volume is a result of the slower economy and the decision by the Company to concentrate its business only on those high quality customers who value the service the Company provides and the high quality of its products. To avoid a repeat of the rapid rise in feedstock costs that occurred in the winter of 2000, the Company has hedged approximately 50% of its needs through July 2002. The hedge is not designed to totally lock in feed costs but is designed to slow any significant price changes so that corresponding changes in product prices have time to take effect. Management feels that the hedged feedstock prices will allow the Company to remain competitive throughout the remainder of 2001 and into 2002. Management has also hedged 50% of its natural gas needs until April 2002 to avoid the rapid and unrecoverable expense that was experienced last winter. If the market opportunity is available a larger percentage may be fixed. The hedging programs began in July and August 2001 and will be continued and modified as necessary to help stabilize performance in the future. Toll processing fee income increased approximately $38,000 and $981,000 in the third quarter and the first nine months of 2001, respectively over the same prior year periods, which has helped to offset the feedstock cost increases. This part of the business has steadily increased and has contributed in large part to offset reductions in earnings and cash flow. The increase in these fees is primarily due to the addition of a new unit in May 1999 and an additional unit in July 2000. The Company currently has toll processing contracts with four different entities. While some of the contracts are being renewed on a year-to-year basis, the outlook on all the contracts is that they will be longer-term operations. Administrative expenses in the third quarter and the first nine months of 2001 for this segment were lower than in the same prior year periods by approximately $35,000 and $140,000, respectively due primarily to management's efforts to reduce all possible costs. Sales of the Company's prime products remain stable. Industry observers maintain that the demand for product volume will increase in the second or third quarter of 2002. The Company believes it is positioned to achieve acceptable cash flow and profitability when the chemical industry rebounds. The Mexico refinery was shut down in August 2000, due to the increased feedstock and natural gas costs, with cash flow coming only from brokerage sales. The refinery has recently operated for short periods to insure mechanical integrity in preparation for full time operations. The market for its products remains weak and under priced and the Company has made progress in changing its product mix to better match the current domestic demand. The market share in Mexico has been maintained with production from the Silsbee refinery. The 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. The plant economics are being evaluated and it is expected that the plant will operate approximately 50% of the time in the fourth quarter of 2001. -11- MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's other operations generate significant operating or other revenues. The minority interest amount represents the Pioche and Coin minority stockholders' share of the losses from the Pioche and Coin operations. Pioche losses 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 $1.05 per pound for copper, $.60 per pound for zinc, $400 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, there were no asset impairments. 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 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 2002 annual meeting of shareholders, which is tentatively scheduled sometime in May 2002, must be received by the Company at its principal executive office no later than December 3, 2001 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 2002 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, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10 (a) - Third Amendment to Loan Agreement dated as of July 31, 2001 between South Hampton Refining Company and Southwest Bank of Texas, N.A., together with related Promissory Note. (b) REPORTS ON FORM 8-K No Reports on Form 8-K were filed during the quarter ended September 30, 2001. ---------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: November 12, 2001 ------------------------ 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 -13- INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10 (a) - Third Amendment to Loan Agreement dated as of July 31, 2001 between South Hampton Refining Company and Southwest Bank of Texas, N.A., together with related Promissory Note.