UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
(MARK ONE)
ý
¨
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For The Fiscal Year Ended December 31, 2013
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Transition Period from ___________ to ________
Commission File Number 1-33926
ARABIAN AMERICAN DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
1650 Hwy 6 S, Suite 190
Sugar Land, TX
(Address of principal executive offices)
75-1256622
(I.R.S. Employer
Identification No.)
77478
(Zip code)
Registrant’s telephone number, including area code: (409) 385-8300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of exchange on which registered
Common stock, par value $0.10 per share New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Noý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ No ý
_____________________
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yesý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yesý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company.
Large accelerated filer ¨ Accelerated filer ý
Non-accelerated filer ¨ Smaller reporting company¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes¨ No ý
The aggregate market value on June 30, 2013, of the registrant’s voting securities held by non-affiliates was approximately $139 million.
Number of shares of registrant’s Common Stock, par value $0.10 per share, outstanding as of March 12, 2014: 24,164,700.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held
on or about May 14, 2014.
TABLE OF CONTENTS
Item Number and Description
PART I
ITEM 1. BUSINESS
General
United States
United States Specialty Petrochemical Operations
United States Mineral Interests
Environmental
Personnel
Competition
Investment in AMAK
Available Information
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
Overview
Business Environment & Risk Assessment
Liquidity and Capital Resources
Results of Operations
New Accounting Standards
Critical Accounting Policies
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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Item 1. Business.
General
PART I
Arabian American Development Company (the “Company”) was incorporated in the State of Delaware in 1967. The Company’s principal
business activity is the manufacturing of various specialty petrochemical products. The Company also owns a 35% interest in Al Masane Al
Kobra Mining Company, a Saudi Arabian closed joint stock mining company (“AMAK”) which is in commercial production of copper and zinc
concentrate and a 55% interest in Pioche Ely Valley Mines, Inc. (“PEVM”), a Nevada mining corporation which presently does not conduct any
substantial business activity but owns undeveloped properties in the United States. Unless the context requires otherwise, references to “we,”
“us,” “our,” and the “Company” are intended to mean consolidated Arabian American Development Company and its subsidiaries. There have
been no significant changes during 2013 in the method of conducting our business.
The Company operates in one business segment; the manufacturing of various specialty petrochemical products.
United States
Our domestic activities are primarily conducted through a wholly owned subsidiary, Texas Oil and Chemical Co. II, Inc. (the “Petrochemical
Company”), which owns all of the capital stock of South Hampton Resources, Inc. (“South Hampton”). South Hampton owns and operates a
specialty petrochemical facility near Silsbee, Texas which produces high purity petrochemical solvents and other petroleum based products
including isopentane, normal pentane, isohexane and hexane which may be used in the production of polyethylene, packaging, polypropylene,
expandable polystyrene, poly-iso/urethane foams, crude oil in the Canadian tar sands, and in the catalyst support industry. Our petrochemical
products are typically transported to customers by rail car, tank truck and iso-container. South Hampton owns all of the capital stock of Gulf
State Pipe Line Company, Inc. (“Gulf State”) which owns and operates pipelines that connect the South Hampton facility to a natural gas line, to
South Hampton’s truck and rail loading terminal and to a major petroleum products pipeline owned by an unaffiliated third party.
United States Specialty Petrochemical Operations
South Hampton’s specialty petrochemical facility is approximately 30 miles north of Beaumont and 90 miles east of Houston. The facility
consists of eight operating units which, while interconnected, make distinct products through differing processes: (i) a Penhex Unit; (ii) a
Reformer Unit; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics Hydrogenation Unit; (vi) a White Oil Fractionation Unit; (vii)
a Hydrocarbon Processing Demonstration Unit and (viii) a P-Xylene Unit. All of these units are currently in operation.
The Penhex Unit has the capacity to process approximately 6,700 barrels per day of fresh feed with the Reforming Unit, the Aromax® Unit, and
the Cyclo-Pentane Unit further processing streams produced by the Penhex Unit. The Aromatics Hydrogenation Unit has a capacity of
approximately 400 barrels per day, and the White Oils Fractionation Unit has a capacity of approximately 3,000 barrels per day. The
Hydrocarbon Processing Demonstration Unit has a capacity of approximately 300 gallons per day. The P-Xylene Unit has a capacity of
approximately 20,000 pounds per year. The facility generally consists of equipment commonly found in most petrochemical facilities such as
fractionation towers and hydrogen treaters except the facility is adapted to produce specialized products that are high purity and very consistent
with precise specifications that are utilized in the petrochemical industry as solvents, additives, blowing agents and cooling agents. We produce
eight distinct product streams and market several combinations of blends as needed in various customer applications. We do not produce motor
fuel products or any other commodity type products commonly sold directly to retail consumers or outlets.
Products from the Penhex Unit, Reformer Unit, Aromax® Unit, and Cyclo-pentane Unit are marketed directly to the customer by our marketing
personnel. The Penhex Unit had a utilization rate during 2013 of approximately 70% based upon 6,700 barrels per day and a utilization rate
during 2012 of approximately 72% based upon 6,000 barrels per day. This compares to a rate of 64% for 2011. During 2013 unit capacity was
determined to be 6,700 barrels per day and therefore, the change in basis was initiated. The Penhex Unit capacity was essentially doubled in
2008 and is now configured in two independent process units. The two unit configuration also improves reliability by reducing the amount of
total down time due to mechanical and other factors. We are in the planning stages for construction of a new
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unit, known as “D-train” to increase Penhex Unit capacity by approximately 4,000 barrels per day. D-train is tentatively scheduled to begin
operation in mid to late 2015.
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, raw material composition,
mechanical integrity, and unforeseen natural occurrences, such as weather events. The nature of the petrochemical process demands periodic
shut-downs for de-coking and other mechanical repairs.
The Aromatics Hydrogenation Unit, White Oils Fractionation Unit, Hydrocarbon Processing Demonstration Unit and P-Xylene Unit are
operated as independent and completely segregated processes. These units are dedicated to the needs of three different toll processing
customers. The customers supply and maintain title to the feedstock, we process the feedstock into products based upon customer specifications,
and the customers market the products. Products may be sold directly from our storage tanks or transported to the customers’ location for
storage and marketing. The units have a combined capacity of approximately 3,400 BPD. Together they realized a utilization rate of 42% for
2013, 37% for 2012 and 59% for 2011. The reduced utilization rate for 2012 is a reflection of raw material issues experienced by one of the
tolling customers. The units are operated in accordance with customer needs, and the contracts call for take or pay minimums of production.
In support of the petrochemical operation, we own approximately 93 storage tanks with total capacity approaching 233,000 barrels, and 230 acres
of land at the plant site, 59 acres of which are developed. We also own a truck and railroad loading terminal consisting of storage tanks, four rail
spurs, and truck and tank car loading facilities on approximately 56 acres of which 13 acres are developed.
We obtain our feedstock requirements from a sole supplier. A contract was signed on June 1, 2004, between South Hampton and the supplier
for the purchase of 65,000 barrels per month of natural gasoline on a secured basis for the period from June 1, 2004 through May 31, 2006,
subsequently extended to May 31, 2007, and annually thereafter with thirty days written notice of termination by either party. In December 2006
the agreement was modified so that all purchases are 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 our use. The arrangement is viewed as a means
of solidifying a dependable, long term supply of feedstock for us. Storage fees for this arrangement were offset by the cancellation of tank rental
fees in place with another party. The tank was completed in July 2007 and began full operation in October 2007.
As a result of various expansion programs and the toll processing contracts, essentially all of the standing equipment at South Hampton is
operational. We have 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 and five (5) 4-inch diameter pipelines aggregating approximately 70 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.
We sell our products to predominantly Fortune 500 companies for use in the production of polyethylene, packaging, polypropylene, expandable
polystyrene, poly-iso/urethane foams, crude oil from the Canadian tar sands, and in the catalyst support industries. Products are marketed via
personal contact and through continued long term relationships. Sales personnel visit customer facilities regularly and also attend various
petrochemical conferences throughout the world. We also have an internet presence. We have adopted a strategy of moving our larger volume
customers to formula based pricing to reduce the effect of feedstock cost volatility. Under formula pricing the price charged to the customer is
based on a formula which includes as a component the average cost of feedstock over the prior month. As a result, with this pricing mechanism,
product prices move in conjunction with feedstock prices without the necessity of announced price changes. However, because the formulas use
an average feedstock price from the prior month, the movement of prices will trail the movement of costs, and formula prices may or may not
reflect our actual feedstock cost for the month during which the product is actually sold. In addition, while formula pricing can benefit product
margins during periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing will follow feed costs down
but will retain higher margins during the period by trailing the movement of costs by approximately 30 days. We believe that the use of formula
pricing helps reduce volatility and increase predictability of product margins. However, we continue to investigate alternative product pricing
methods. During 2013 and 2012,
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sales to two customers exceeded 10% of our revenues. Specifically, in 2013 sales to ExxonMobil represented 16.2% of consolidated revenues
and sales to Flint Hills Resources represented 16.5%. During 2012 sales to ExxonMobil represented 13.2% of consolidated revenues and sales
to Flint Hills Resources represented 12.1%. In both cases these sales represented multiple products at multiple facilities. We believe that we
should be able to place volumes lost to one particular customer with another customer without significantly impacting our operation. In fact,
beginning in 2014, volumes to Flint Hills Resources have been greatly reduced; however, we were able to place those volumes with another
customer without a material impact on business.
United States Mineral Interests
Our only mineral interest in the United States is our 55% ownership interest in an inactive corporation, PEVM. PEVM’s properties include 48
patented and 5 unpatented claims totaling approximately 1,500 acres. All of the claims are located in Lincoln County, NV. The recent real estate
devaluation nation-wide caused the Company to re-evaluate the holdings and a write down of approximately $496,000 was recorded at the end of
2008. No additional impairment was recorded in 2013, 2012, or 2011.
In late 2008 PEVM commenced dialogue with the Bureau of Land Management (“BLM”) to determine how best to remedy a potential
contamination claim on neighboring property. PEVM retained an environmental consultant to assist with the resolution of this matter and as of
December 31, 2013, we had expended approximately $150,000 to cover actual remediation costs as PEVM had no other source of funds to
manage the situation The remediation work was completed in 2013 with the exception of tidying up some haul ramps and brush piles on BLM
land and covering the tailings repository with clean soil. This is expected to be completed in the spring of 2014. While we did not believe we had
any liability for the contamination, it is not our culture to leave a situation such as this to the local community or adjacent landowners. We have
liens on several of the patented claims to secure the funds which were advanced over time.
At this time, neither we nor PEVM have plans to develop the mining assets near Pioche, NV. Periodically proposals are received from outside
parties who are interested in developing or using certain assets. We do not anticipate making any significant domestic mining capital expenditures.
Environmental
General. Our operations are subject to stringent and complex federal, state, local and foreign laws and regulations relating to release of hazardous
substances or wastes into the environment or otherwise relating to protection of the environment. As with the industry generally, compliance with
existing and anticipated environmental laws and regulations increases our overall costs of doing business, including costs of planning,
constructing, and operating plants, pipelines, and other facilities. Included in our construction and operation costs are capital cost items necessary
to maintain or upgrade equipment and facilities. Similar costs are likely upon changes in laws or regulations and upon any future acquisition of
operating assets.
Any failure to comply with applicable environmental laws and regulations, including those relating to equipment failures and obtaining required
governmental approvals, may result in the assessment of administrative, civil or criminal penalties, imposition of investigatory or remedial
activities and, in less common circumstances, issuance of injunctions or construction bans or delays. We believe that we currently hold all
material governmental approvals required to operate our major facilities. As part of the regular overall evaluation of our operations, we have
implemented procedures to review and update governmental approvals as necessary. We believe that our operations and facilities are in
substantial compliance with applicable environmental laws and regulations and that the cost of compliance with such laws and regulations
currently in effect will not have a material adverse effect on our operating results or financial condition.
The clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus
there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future
expenditures may be different from the amounts we currently anticipate. Moreover, risks of process upsets, accidental releases, or spills are
associated with our possible future operations, and we cannot assure you that we will not incur significant costs and liabilities, including those
relating to claims for damage to property and persons as a result of any such upsets, releases, or spills. In the event of future increases in
environmental costs, we may be unable to pass on those cost increases to customers. A
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discharge of hazardous substances or wastes into the environment could, to the extent losses related to the event are not insured, subject us to
substantial expense, including both the cost to comply with applicable laws and regulations and to pay fines or penalties that may be assessed and
the cost related to claims made by neighboring landowners and other third parties for personal injury or damage to natural resources or property.
We will attempt to anticipate future regulatory requirements that might be imposed and plan accordingly to comply with changing environmental
laws and regulations and to minimize costs with respect to more stringent future laws and regulations of more rigorous enforcement of existing
laws and regulations.
Hazardous Substance and Waste. To a large extent, the environmental laws and regulations affecting our operations relate to the release of
hazardous substances or solid wastes into soils, groundwater and surface water, and include measures to prevent and control pollution. These
laws and regulations generally regulate the generation, storage, treatment, transportation and disposal of solid and hazardous wastes, and may
require investigatory and corrective actions at facilities where such waste may have been released or disposed. For instance, the Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, also known as the “Superfund” law, and comparable state laws, impose
liability without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to a release of “hazardous
substance” into the environment. Potentially liable persons include the owner or operator of the site where a release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural
resources, and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in
response to threats to the public health or the environment and to seek to recover from the potentially responsible classes of persons the costs they
incur. We have not received any notification that we may be potentially responsible for cleanup costs under CERCLA or any analogous federal or
state laws, except as expressly provided herein.
We also generate, and may in the future generate, both hazardous and nonhazardous solid wastes that are subject to requirements of the federal
Resource Conservation and Recovery Act, or RCRA, and/or comparable state statutes. From time to time, the Environmental Protection Agency,
or EPA, and state regulatory agencies have considered the adoption of stricter disposal standards for nonhazardous wastes, including crude oil
and natural gas wastes. Moreover, it is possible that some wastes generated by us that are currently classified as nonhazardous may in the future
be designated as “hazardous wastes,” resulting in the wastes being subject to more rigorous and costly management and disposal requirements.
Air Emissions. Our current and future operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws
and regulations regulate emissions of air pollutants from various industrial sources, including our facilities, and impose various monitoring and
reporting requirements. Pursuant to these laws and regulations, we may be required to obtain environmental agency pre-approval for the
construction or modification of certain projects or facilities expected to produce air emissions or result in an increase in existing air emissions,
obtain and comply with the terms of air permits, which include various emission and operational limitations, or use specific emission control
technologies to limit emissions. We will likely be required to incur certain capital expenditures in the future for air pollution control equipment in
connection with maintaining or obtaining governmental approvals addressing air-emission related issues. Failure to comply with applicable air
statutes or regulations may lead to the assessment of administrative, civil or criminal penalties, and may result in the limitation or cessation of
construction or operation of certain air emission sources. We believe such requirements will not have a material adverse effect on our financial
condition or operating results, and the requirements are not expected to be more burdensome to us than any similarly situated company.
Climate Change. In response to concerns suggesting that emissions of certain gases, commonly referred to as “greenhouse gases” (including
carbon dioxide and methane), may be contributing to warming of the Earth’s atmosphere, the U.S. Congress is actively considering legislation to
reduce such emissions. In addition, at least one-third of the states, either individually or through multi-state regional initiatives, have already taken
legal measures intended to reduce greenhouse gas emissions, primarily through the planned development of greenhouse gas emission inventories
and/or greenhouse gas cap and trade programs. In addition, EPA is taking steps that would result in the regulation of greenhouse gases as
pollutants under the federal Clean Air Act. Furthermore, in September 2009 the EPA finalized regulations that require monitoring and reporting
of greenhouse gas emissions on an annual basis including extensive greenhouse gas monitoring and reporting requirements beginning in 2010.
Although the greenhouse gas reporting rule does not control greenhouse gas emission levels from any facilities, it will still cause us to incur
monitoring and reporting costs for emissions that are subject to the rule. Some of our
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facilities include source categories that are subject to the greenhouse gas reporting requirements included in the final rule. In December 2009 the
EPA also issued findings that greenhouse gases in the atmosphere endanger public health and welfare and emissions from mobile sources cause
or contribute to greenhouse gases in the atmosphere. The endangerment findings will not immediately affect our operations, but standards
eventually promulgated pursuant to these findings could affect our operations and ability to obtain air permits for new or modified facilities.
Legislation and regulations relating to control or reporting of greenhouse gas emissions are also in various stages of discussions or
implementation in about one-third of the states. Lawsuits have been filed seeking to force the federal government to regulate greenhouse gases
emissions under the Clean Air Act and to require individual companies to reduce greenhouse gas emissions from their operations. These and
other lawsuits may result in decisions by state and federal courts and agencies that could impact our operations and ability to obtain certifications
and permits to construct future projects.
Passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict emissions of greenhouse
gases in areas in which we conduct business could adversely affect the demand for the products we store, transport, and process, and depending
on the particular program adopted, could increase the costs of our operations including costs to operate and maintain our facilities, install new
emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our greenhouse gas
emissions and/or administer and manage a greenhouse gas emissions program. We may be unable to recover any such lost revenues or increase
costs in the rates we charge customers, and any such recovery may depend on events beyond our control. Reductions in our revenues or
increases in our expenses as a result of climate control initiatives could have adverse effects on our business, financial position, results of
operations and prospects.
Clean Water Act. The Federal Water Pollution Control Act, also known as the Clean Water Act, and comparable state laws impose restrictions
and strict controls regarding the discharge of pollutants, including natural gas liquid related wastes, into state waters or waters of the United
States. Regulations promulgated pursuant to these laws require that entities that discharge into federal and state waters obtain National Pollutant
Discharge Elimination System, or NPDES, and/or state permits authorizing these discharges. The Clean Water Act and analogous state laws
assess administrative, civil and criminal penalties for discharges of unauthorized pollutants into the water and impose substantial liability for the
costs of removing spills from such waters. In addition, the Clean Water Act and analogous state laws require that individual permits or coverage
under general permits be obtained by covered facilities for discharges of storm water runoff. We believe that we are in substantial compliance
with Clean Water Act permitting requirements as well as the conditions imposed there under, and that continued compliance with such existing
permit conditions will not have a material effect on our operations.
TCEQ. In 1993 during remediation of a small spill area, the Texas Commission on Environmental Quality (TCEQ) required South Hampton to
drill a well to check for groundwater contamination under the spill area. Two pools of hydrocarbons were discovered to be floating on the
groundwater at a depth of approximately 25 feet. One pool is under the site of a former gas processing plant owned and operated by Sinclair,
Arco and others before its purchase by South Hampton in 1981. Analysis of the material indicates it entered the ground prior to South
Hampton’s acquisition of the property. The other pool is under the original South Hampton facility and analysis indicates the material was
deposited decades ago. Tests conducted have determined that the hydrocarbons are contained on the property and not migrating in any direction.
The recovery process was initiated in June 1998 and approximately $53,000 was spent setting up the system. The recovery is proceeding as
planned and is expected to continue for many years until the pools are reduced to acceptable levels. Expenses of recovery and periodic migration
testing are being recorded as normal operating expenses. Expenses for future recovery are expected to stabilize and be less per annum than the
initial set up cost, although there is no assurance of this effect. The light hydrocarbon recovered from the former gas plant site is compatible with
our normal Penhex feedstock and is accumulated and transferred into the Penhex feedstock tank. The material recovered from under the original
South Hampton site is accumulated and sold as a by-product. Approximately 71 barrels were recovered during 2013 and 70 barrels during
2012. The recovered material had an economic value of approximately $7,000 during 2013 and $7,000 during 2012. Consulting engineers
estimate that as much as 20,000 barrels of recoverable material may be available to us for use in our process or for sale. At current market values
this material, if fully recovered would be worth approximately $1.7 million. 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. We have 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.
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The Clean Air Act Amendments of 1990. The Clean Air Act Amendments of 1990 had a positive effect on our 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 our product line. We believe our ability to manufacture
high quality solvents in the C5 hydrocarbon market will provide a basis for growth over the coming years. Also, as the use of C6 solvents is
phased out in parts of the industry, several manufacturers of such solvents have opted to no longer market those products. As the number of
producers has consolidated, we have increased our market share at higher sales prices from customers who still require C6 solvents in their
business.
Personnel
The number of regular employees was approximately 166, 168 and 160 at years ended 2013, 2012 and 2011, respectively. Regular employees
are defined as active executive, management, professional, technical and wage employees who work full time or part time for the Company and
are covered by our benefit plans and programs.
Mr. Ghazi Sultan, a director of the Company, is the Company’s representative in Saudi Arabia.
Competition
The petrochemical and mining industries are highly competitive. There is competition within the industries and also with other industries in
supplying the chemical and mineral needs of both industrial and individual consumers. We compete with other firms in the sale or purchase of
needed goods and services and employ all methods of competition which are lawful and appropriate for such purposes. See further discussion
under “Intense competition” in Item 1a.
Investment in AMAK
As of December 31, 2013, we owned a 35% interest in AMAK. On December 9, 2012, AMAK shareholders authorized the issuance of
additional shares in an amount equal to 10% of the then outstanding shares, equaling an additional 5 million shares, in AMAK to raise funds for
working capital requirements and retirement of construction debt. On January 11, 2013, the Company entered into an agreement with AMAK to
purchase an additional 937,500 shares of AMAK at 30 Saudi Riyals (USD $8.00) per share, for a total of USD $7.5 million. As a result of this
purchase, our ownership percentage in AMAK decreased from 37% to approximately 35% when the remaining authorized shares were
subscribed to and issued in May 2013.
AMAK commenced commercial operation in July 2012 and by the end of that year had shipped approximately 20,000 metric tons of copper and
zinc concentrate to smelters in India, Korea and China. During 2013 AMAK shipped approximately 72,000 tons of copper and zinc
concentrate. AMAK owns the Al Masane mine, processing plant and ancillary facilities located in Najran province, southwestern Saudi Arabia
approximately 75 km northwest of the city of Najran.
On October 24, 2010, we executed a limited guarantee in favor of the Saudi Industrial Development Fund (“SIDF”) guarantying up to 41% of
the SIDF loan to AMAK in the principal amount of 330,000,000 Saudi Riyals (US$88,000,000) (the “Loan”). As a condition of the Loan, SIDF
required all shareholders of AMAK to execute personal or corporate guarantees totaling 162.55% of the overall Loan amount. As ownership
percentages have changed over time, the loan guarantee allocation has not changed. The other AMAK shareholders provided personal
guarantees. We were the only AMAK shareholder providing a corporate guarantee. The Loan was required in order for AMAK to fund
construction of the underground and above-ground portions of its mining project in southwest Saudi Arabia and to provide working capital for
commencement of operations.
Accounting Treatment of Investment in AMAK.
During 2013 our participation in the financial and operating decisions of AMAK has remained significant. One of our officers and directors is
chairman of the Nomination, Reward and Compensation Committee of the Board of Directors and is an ex-officio member of the Executive
Committee of the Board of Directors of AMAK. Another one of our directors is chairman of the Audit Committee of the Board of Directors of
AMAK. We also spearheaded the process of locating, interviewing and hiring a new chief executive officer for AMAK. The new chief
executive officer is expected to begin work in March 2014. During 2013 AMAK’s chief operating officer announced his intention to retire for
personal reasons effective March 2014.
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During the quarter ended December 31, 2012, we reintroduced the resolution at a meeting of the AMAK Board of Directors that would require
AMAK to produce annual and quarterly financial statements prepared in accordance with U. S. GAAP or IFRS. The resolution was approved
on October 6, 2012. Subsequently, permission was granted to us and our representatives to have access to AMAK’s books and records to allow
auditing of AMAK financial statements in accordance with the auditing standards of the PCAOB.
As a result of these developments we concluded that we have significant influence over the operating and financial policies of AMAK and
accordingly we account for our investment in AMAK using the equity method. See Note 8 to the Notes to the Consolidated Financial
Statements.
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse
effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by
the production of those reserves, as well as recent equity transactions within AMAK.
Available Information
We will provide paper copies of this Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and
amendments to those reports, all as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge
upon written or oral request to Arabian American Development Company, P. O. Box 1636, Silsbee, TX 77656, (409) 385-8300. These reports
are also available free of charge on our website, www.arabianamericandev.com, as soon as reasonably practicable after they are filed
electronically with the SEC. South Hampton also has a website at www.southhamptonr.com, and AMAK has a website at www.amak.com.sa.
These websites and the information contained on or connected to them are not incorporated by reference herein to the SEC filings.
Item 1A. Risk Factors.
Our financial and operating results are subject to a variety of risks inherent in the global petrochemical and mining businesses (due to our
investment in AMAK). Many of these risk factors are not within our control and could adversely affect our business, our financial and operating
results or our financial condition. We discuss some of these risks in more detail below in no particular order of priority.
Dependence on a limited number of customers could adversely impact profitability
During 2013 sales to two customers each exceeded 10 percent of the Company’s revenues. See the information regarding dependence on a
limited number of customers set forth in Part I, Item I Business under the caption “United States Specialty Petrochemical Operation”. The total
loss of a large volume customer could adversely affect our ability to market products on a competitive basis and generate a profit.
Dependence on a limited number of products could adversely affect profitability
We produce high purity petrochemical solvents and other petroleum based products including isopentane, normal pentane, isohexane and
hexane. Our dependence on a relatively limited number of products could adversely affect profitability if demand for one or more of the products
decreases. One goal contained in our long-term strategic plan is to increase our product mix through internal development and/or outside
acquisition.
Climate change and greenhouse gas restrictions
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to
reduce greenhouse gas emissions. These include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency
standards, and incentives or mandates for renewable energy. These requirements could make our products more expensive, lengthen project
implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward relatively lower-carbon sources such as
natural gas. Current and pending greenhouse gas regulations may also increase our compliance costs, such as for monitoring or sequestering
emissions.
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Varying economic conditions could adversely impact demand for products
The demand for petrochemicals and metals correlates closely with general economic growth rates. The occurrence of recessions or other periods
of low or negative growth will typically have a direct adverse impact on our results. Other factors that affect general economic conditions in the
world or in a major region, such as changes in population growth rates or periods of civil unrest, also impact the demand for petrochemicals and
metals. Economic conditions that impair the functioning of financial markets and institutions also pose risks to us, including risks to the safety of
our financial assets and to the ability of our partners and customers to fulfill their commitments to us. In addition, the revenue and profitability of
our operations have historically varied, which makes future financial results less predictable. Our revenue, gross margin and profit vary among
our products, customer groups and geographic markets; and therefore, will likely be different in future periods than currently. Overall gross
margins and profitability in any given period are dependent partially on the product, customer and geographic mix reflected in that period’s net
revenue. In addition, newer geographic markets may be relatively less profitable due to investments associated with entering those markets and
local pricing pressures. Market trends, competitive pressures, increased raw material or shipping costs, regulatory impacts and other factors may
result in reductions in revenue or pressure on gross margins of certain segments in a given period which may necessitate adjustments to our
operations.
Environmental regulation
The petrochemical industry is subject to extensive environmental regulation pursuant to a variety of federal and state regulations. Such
environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with storage, transportation, treatment
and disposal of hazardous substances and waste. Legislation also requires us to operate and maintain our facilities to the satisfaction of applicable
regulatory authorities. Costs to comply with these regulations are significant to our business. Failure to comply with these laws or failure to
obtain permits may expose us to fines, penalties or interruptions in operations that could be material to our results of operations. In addition,
some of the finished goods our customers produce, such as expandable polystyrene (EPS), are subject to increasing scrutiny and regulation,
which could lead to a reduction in demand for our products.
Safety, business controls, environmental and cyber risk management
Our results depend upon management’s ability to minimize the inherent risks of petrochemical operations, to control effectively our business
activities and to minimize the potential for human error. We apply rigorous management systems and continuous focus to workplace safety and
to avoid spills or other adverse environmental events. Substantial liabilities and other adverse impacts could result if our systems and controls do
not function as intended. Business risks also include the risk of cyber security breaches. If our systems for protecting against cyber security
risks prove to be insufficient, we could be adversely affected by having our business systems compromised, our proprietary information altered,
lost or stolen, or our business operations disrupted.
Regulatory and litigation
Even in countries with well-developed legal systems where we do business, we remain exposed to changes in law that could adversely affect our
results, such as increases in taxes, price controls, changes in environmental regulations or other laws that increase our cost of compliance, and
government actions to cancel contracts or renegotiate items unilaterally. We may also be adversely affected by the outcome of litigation or other
legal proceedings, especially in countries such as the United States in which very large and unpredictable punitive damage awards may
occur. AMAK’s mining lease for the Al Masane area in Saudi Arabia is subject to the risk of termination if AMAK does not comply with its
contractual obligations. Further, our investment in AMAK is subject to the risk of expropriation or nationalization. If a dispute arises, we may
have to submit to the jurisdiction of a foreign court or panel or may have to enforce the judgment of a foreign court or panel in that foreign
jurisdiction. Because of our substantial international investment, our business is affected by changes in foreign laws and regulations (or
interpretation of existing laws and regulations) affecting both the mining and petrochemical industries, and foreign taxation. We will be directly
affected by the adoption of rules and regulations (and the interpretations of such rules and regulations) regarding the exploration and development
of mineral properties for economic, environmental and other policy reasons. We may be required to make significant capital expenditures to
comply with non-U.S. governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly
to our operating costs or may significantly limit our business activities. Additionally, our 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.
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We are not currently aware of any specific situations of this nature, but there are always opportunities for this type of difficulty to arise in the
international business environment.
Loss of key personnel and management effectiveness
In order to be successful, we must attract, retain and motivate executives and other key employees including those in managerial, technical, sales,
and marketing positions. We must also keep employees focused on our strategies and goals. The failure to hire or loss of key employees could
have a significant adverse impact on operations. An important component of our competitive performance is our ability to operate efficiently
including our ability to manage expenses and minimize the production of low margin products on an on-going basis. This requires continuous
management focus including technological improvements, cost control and productivity enhancements. The extent to which we manage these
factors will impact our performance relative to competition.
Risk associated with extraordinary transactions
As part of our business strategy, we sometimes engage in discussions with third parties regarding possible investments, acquisitions, strategic
alliances, joint ventures, divestitures and outsourcing transactions (“extraordinary transactions”) and enter into agreements relating to such
extraordinary transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable
candidates for and successfully complete extraordinary transactions, some of which may be large and complex, and manage post-closing issues
such as the integration of acquired companies or employees. Integration and other risks of extraordinary transactions can be more pronounced for
larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and complete successfully
extraordinary transactions that further our strategic objectives, we may be required to expend resources to develop products and technology
internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a
material adverse effect on our revenue, gross margin and profitability. Integration issues are complex, time-consuming and expensive and,
without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include:
•
•
Combining product offerings and entering into new markets in which we are not experienced;
Convincing customers and distributors that the transaction will not diminish client service standards or business focus, preventing
customers and distributors from deferring purchasing decisions or switching to other suppliers (which could result in our incurring
additional obligations in order to address customer uncertainty), and coordinating sales, marketing and distribution efforts;
• Minimizing the diversion of management attention from ongoing business concerns;
•
•
Persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, engaging with
employee works councils representing an acquired company’s non-U.S. employees, integrating employees into the Company, correctly
estimating employee benefit costs and implementing restructuring programs;
Coordinating and combining administrative, manufacturing, and other operations, subsidiaries, facilities and relationships with third parties
in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures;
• Achieving savings from supply chain integration; and
• Managing integration issues shortly after or pending the completion of other independent transactions.
We periodically evaluate and enter into significant extraordinary transactions on an ongoing basis. We may not fully realize all of the anticipated
benefits of any extraordinary transaction, and the timeframe for achieving benefits of an extraordinary transaction may depend partially upon the
actions of employees, suppliers or other third parties. In addition, the pricing and other terms of our contracts for extraordinary transactions
require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not
identify all of the factors necessary to estimate our costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve
contractual obligations could make these agreements less profitable or unprofitable. Managing extraordinary transactions requires varying levels
of management resources, which may divert our attention from other
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business operations. These extraordinary transactions also have resulted and in the future may result in significant costs and expenses and
charges to earnings. Moreover, we have 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, we may be required to incur additional material charges relating to the
impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating dilution for existing
stockholders, or borrow, affecting our financial condition and potentially our credit ratings. Any prior or future downgrades in our credit rating
associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, our
effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. We also may experience
risks relating to the challenges and costs of closing an extraordinary transaction and the risk that an announced extraordinary transaction may not
close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s
expectations in a given quarter.
Guaranteeing performance by others including third parties and others
From time to time, we may be required or determine it is advisable to guarantee performance of loan agreements by others in which we maintain a
financial interest. In such instances, if the primary obligor is unable to perform its obligations, we might be forced to perform the primary
obligor’s obligations which could negatively impact our financial interests.
Economic and political instability; terrorist acts; war and other political unrest
The U.S. military action in Afghanistan, the terrorist attacks that took place in the United States on September 11, 2001, the potential for
additional future terrorist acts and other recent events, including terrorist related activities and civil unrest in the Middle East, the on-going Iranian
nuclear confrontation, as well as the European debt crisis, have caused uncertainty in the world’s financial markets and have significantly
increased global political, economic and social instability, including in Saudi Arabia, a country in which we have a substantial investment. One
significant political risk in Saudi Arabia concerns the issue of succession of the Al-Saud royal family. To date, transition to the next generation
of the Al-Saud royal family has occurred in an orderly manner. However, there is a risk this will not continue. It is possible that further acts of
terrorism may be directed against the United States domestically or abroad, and such acts of terrorism could be directed against our investment in
those locations. Such economic and political uncertainties may materially and adversely affect our business, financial condition or results of
operations in ways that cannot be predicted at this time. Although it is impossible to predict the occurrences or consequences of any such events,
they could result in a decrease in demand for our products, make it difficult or impossible to deliver products to our customers or to receive
components from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions.
We are predominantly uninsured for losses and interruptions caused by terrorist acts, conflicts and wars. Our future revenue, gross margin,
expenses and financial condition also could suffer due to a variety of international factors, including:
• Ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate
fluctuations and actual or anticipated military or political conflicts;
•
•
•
Longer accounts receivable cycles and financial instability among customers;
Trade regulations and procedures and actions affecting production, pricing and marketing of products;
Local labor conditions and regulations;
• Geographically dispersed workforce;
•
Changes in the regulatory or legal environment;
• Differing technology standards or customer requirements;
•
Import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could affect
our ability to obtain favorable terms for labor and raw materials or lead to penalties or restrictions;
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• Difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; and
•
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.
Business disruption
Business disruptions could harm our future revenue and financial condition and increase our costs and expenses. Our operations could be subject
to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather
conditions, medical epidemics and other natural or manmade disasters or business interruptions, for some of which we may be self-insured. The
occurrence of any of these business disruptions could harm our revenue and financial condition and increase our costs and expenses.
Dependence on AMAK management
We rely upon AMAK’s management and Board to employ various respected engineering and financial advisors to assist in the development and
evaluation of the mining projects in Saudi Arabia. During 2013 AMAK utilized the services of Uhuru International Consulting Ltd. for guidance
regarding plant operations and Ocean Partners for assistance regarding marketing of the copper and zinc concentrate. Additionally, AMAK hired
two very experienced persons in 2011 to serve as Chief Operating Officer and Chief Financial Officer. A very experienced Chief Executive
Officer is expected to join AMAK in March 2014. Notwithstanding the utilization of these consultants or hiring of experienced personnel, our
risk will continue to and will ultimately depend upon the AMAK’s ability to use consultants and experienced personnel to manage the operation
in Saudi Arabia.
Inability to control AMAK activities
Although we believe that we have significant influence over the operating and financial policies of AMAK, we do not control AMAK’s
activities. The extent to which we are able to influence specific operating and financial decisions depends on our ability to persuade other AMAK
board members regarding these policies. Our ability to persuade other AMAK board members may be adversely affected by cultural differences,
differing accounting and management practices, differing governmental laws and regulations, and the fact that the AMAK mining project is
halfway around the world from the Company’s main base of operations in the United States.
Inability to recoup investment in AMAK
We will only recover our investment in AMAK through the receipt of dividends from AMAK or the sale of part or all of our interest in AMAK.
There is a risk that we will be unable to recover our investment in AMAK if AMAK is not profitable, or if AMAK’s Board of Directors chooses
not to declare dividends even if AMAK is profitable. With respect to the sale of part or all of our interest in AMAK, under Saudi law, AMAK
must sell a portion of its equity to the public once AMAK has been profitable for two years. While the proceeds of such a sale might allow us to
recover our investment in AMAK, there is no assurance that AMAK will achieve the profitability required for such a public sale, or that the
market conditions for any such public sale will be favorable enough to allow us to recover our investment.
AMAK’s inability to obtain sufficient funding
In the event AMAK is unable to continue to borrow funds in an amount sufficient to fund operations, AMAK may be forced to take other less
desirable methods to raise necessary capital such as selling additional equity in AMAK at a possible discount, operations could cease and the
newly constructed assets could sit unused and deteriorate over time, or worst case the AMAK shareholders could lose their investment or be
forced to sell for a significant loss.
Cancellation of the current mining lease held by AMAK
In the event that the Saudi Ministry of Petroleum and Minerals cancels the current lease, AMAK shareholders including us could lose their
investment or be forced to sell for a loss.
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AMAK could suffer sustained operational difficulties
Operating difficulties are many and various, ranging from unexpected geological variations that could result in significant ground or containment
failure to breakdown of key capital equipment. Reliable roads, rail networks, ports, power generation and transmission, and water supplies are
required to access and conduct AMAK’s operations. AMAK transports all of its products first by truck and then by sea. Limitations or
interruptions in transport infrastructure could impede its ability to deliver products. The operations contract for the mill terminates in November
2014. There is a risk that it might not be renewed.
AMAK may have fewer mineral reserves than its estimates indicate
AMAK’s reserves estimations may change substantially if new information subsequently becomes available. Fluctuations in the price of
commodities, variation in production costs or different recovery rates may ultimately result in AMAK’s estimated reserves being revised. If such
a revision were to indicate a substantial reduction in proven or probable reserves at one or more of AMAK’s projects, it could negatively affect
our investment in AMAK.
AMAK may experience environmental issues that could impact its operations
The mining industry is subject to extensive environmental regulation. Such environmental legislation imposes, among other things, restrictions,
liabilities and obligations in connection with storage, transportation, treatment and disposal of hazardous substances and waste. Legislation also
requires AMAK to operate and maintain their facilities to the satisfaction of applicable regulatory authorities. Costs to comply with these
regulations may be significant to AMAK’s business. Failure to comply with these laws or failure to obtain permits may expose AMAK to fines,
penalties or interruptions in operations that could materially affect our investment in AMAK.
Excess Products
As noted previously, an important component of our competitive performance is our ability to minimize the production of low margin products
on an on-going basis. Although the hydrocarbon constituents comprising the feedstock we use may vary somewhat over time, they tend to fall
into relatively narrow percentage bands as compared to overall feedstock composition. By nature of the fractionation process that we utilize, if
we make one product, we make them all; therefore, when we receive a significant order for a particular finished product, additional products may
be manufactured necessitating sales into secondary, lower margin markets. We continue to investigate options to maintain or improve margins.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
United States Specialty Petrochemical 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 consists of eight operating units which, while interconnected, make distinct products through
differing processes: (i) a Penhex Unit; (ii) a Reformer; (iii) a Cyclo-pentane Unit; (iv) an Aromax® Unit; (v) an Aromatics Hydrogenation Unit;
(vi) a White Oil Fractionation Unit; (vii) a Hydrocarbon Processing Demonstration Unit, and (viii) a P-Xylene Unit. All of these units are
currently in operation.
Gulf State owns and operates three (3) 8-inch diameter pipelines and five (5) 4-inch diameter pipelines aggregating approximately 70 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.
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Investment in AMAK
Prior to December 2008, we held a thirty (30) year mining lease (which commenced on May 22, 1993) covering an approximate 44 square
kilometer area in the Najran Province in southwestern Saudi Arabia. The lease carried an option to renew or extend the term of the lease for
additional periods not to exceed twenty (20) years. The lease and other related assets located in Saudi Arabia were contributed to AMAK in
December 2008. The above-ground ore processing facility is currently in production and underground work on the mine is progressing. The
facility became fully operational during the second half of 2012.
The facility includes an underground mine, ore-treatment plant and related infrastructures. The ore-treatment plant is comprised of primary
crushing, ore storage, SAG milling and pebble crushing, secondary ball milling, pre-flotation, copper and zinc flotation, concentrate thickening,
tailings filtration, cyanide leaching, reagent handling, tailings dam and utilities. Related infrastructure includes a 300 men capacity camp for single
status accommodation for expatriates and Saudi employees, an on-site medical facility, a service building for 300 employees, on-site diesel
generation of 10 megawatts, potable water supply, sewage treatment plant and an assay laboratory. The facilities at the Port of Jazan are
comprised of unloading facilities, concentrate storage and reclamation and ship loading facilities.
Metal price assumptions follow U. S. Securities and Exchange Commission guidance not to exceed a three year trailing average. The following
chart illustrates the change in metal prices from the previous three year average to current levels:
Gold
Silver
Copper
Zinc
Average Price
Spot Price as of
For 2011-2013
$1,577.00 per ounce
$ 28.45 per ounce
$ 3.55 per pound
$ 0.89 per pound
12/31/13
$1,204.00 per ounce
$ 19.50 per ounce
$ 3.34 per pound
$ 0.95 per pound
Percentage
Increase
(Decrease)
(23.65)%
(31.46)%
(5.92)%
6.74%
Three mineralized zones, the Saadah, Al Houra and Moyeath, were outlined by diamond drilling. The following tables set forth a summary of the
diluted recoverable, proven and probable mineralized materials of AMAK in the Al Masane area along with the estimated average grades of these
mineralized materials but have not been adjusted to reflect production that began in July 2012:
Zone
Saadah
Al Houra
Moyeath
Total
Zone
Saadah
Al Houra
Moyeath
Total
Proven
Reserves
(Tonnes)
(000’s)
Copper
(%)
Zinc
(%)
Gold
(g/t)
Silver
(g/t)
448
29
-
477
1.5
0.8
-
1.4
3.7
3.8
-
3.7
0.8
0.7
-
.8
21.0
21.0
-
21.0
Probable
Reserves
(Tonnes)
(000’s)
Copper
(%)
Zinc
(%)
Gold
(g/t)
Silver
(g/t)
5,193
1,894
702
7,789
1.2
0.9
0.8
1.1
3.4
3.8
7.2
3.9
0.8
1.2
1.0
0.9
23.0
39.0
55.0
29.0
Rights related to licenses in other areas were transferred to AMAK in December 2008 as part of our capital contribution to AMAK. Because of
changes in the Saudi mining code in 2004, the rights to these licenses had to be reapplied for by AMAK.
United States Mineral Interest
Our only mineral interest in the United States is its ownership interest in PEVM. See Item 1 – Business – United States Mineral Interests.
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Offices
South Hampton has a leased corporate and sales office in Sugar Land, Texas.
Item 3. Legal Proceedings.
On May 9, 2010, after numerous attempts to resolve certain issues with Mr. Hatem El Khalidi, the Board of Directors terminated the retirement
agreement, options, retirement bonuses, and all outstanding directors’ fees due to Mr. El Khalidi, former CEO, President and Director of the
Company. In June 2010 Mr. El Khalidi filed suit against the Company in the labor courts of Saudi Arabia alleging additional compensation owed
to him for holidays and overtime. The Company believes that the claims are unsubstantiated and continues to vigorously defend the case.
In September 2010 Mr. El Khalidi threatened suit against the Company in the U.S. alleging breach of contract under the above agreements and
other claims. In late 2010 the Company filed suit against Mr. El Khalidi in the United States District Court in the Eastern District of Texas,
Beaumont Division, seeking a declaratory judgment that all monies allegedly owed to Mr. El Khalidi are terminated (the “Federal Court Case”).
On March 21, 2011, Mr. El Khalidi filed suit against the Company in the 14th Judicial District Court of Dallas County, Texas for breach of
contract and defamation (the “State Court Case”). On July 1, 2011, the Company and Mr. El Khalidi entered into an agreement to dismiss the
Federal Court Case and transfer venue for the State Court Case from Dallas County, Texas to Hardin County, Texas. Pursuant to this agreement,
the Federal Court Case was dismissed on July 13, 2011, and the State Court Case was transferred to the 88th Judicial Court of Hardin County,
Texas on July 15, 2011. On July 24, 2013, the 88th Judicial District Court of Hardin County, Texas dismissed all claims and counterclaims for
want of prosecution. Mr. El Khalidi subsequently filed a notice of intent to appeal the dismissal with the Ninth Court of Appeals of Texas.
Liabilities of approximately $1.1 million remain recorded, and the options will continue to accrue in accordance with their own terms until all
matters are resolved.
On September 14, 2010, South Hampton received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas which
was subsequently transferred to the 11th Judicial District Court of Harris County, Texas. The suit alleges that the plaintiff became ill from
exposure to asbestos. There are approximately 44 defendants named in the suit. South Hampton has placed its insurers on notice of the claim
and plans to vigorously defend the case.
On December 20, 2010, South Hampton received notice of a lawsuit filed in the 88th Judicial District Court of Hardin County, Texas. The suit
alleges that the plaintiff sustained injuries when he fell off his employer’s truck while in South Hampton’s facility. South Hampton placed its
insurers on notice of the claim and its insurers are defending the case. On February 26, 2014, South Hampton’s insurer settled the case.
On April 14, 2011, and April 27, 2011, South Hampton received notice of three lawsuits filed in the 58th, 172nd, and 136th Judicial District
Courts of Jefferson County, Texas. The suits allege that the plaintiffs became ill from benzene exposure during their employment with Goodyear
Tire and Rubber Company, an alleged customer of South Hampton. There are numerous defendants named in the suits. On April 10, 2013,
South Hampton entered into agreements with counsel for plaintiffs to settle the 3 lawsuits for an amount not significant to the financial
statements.
No accruals have been recorded for these last 5 claims. We are involved in various claims and lawsuits incidental to our business.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Our common stock traded on the New York Stock Exchange (“NYSE”) beginning on April 2, 2012 and prior to that the Nasdaq Stock Market
LLC (“Nasdaq”) during the last two fiscal years under the symbol: ARSD. The following table sets forth the high and low bid prices for each
quarter as reported by NYSE or Nasdaq as appropriate. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Fiscal Year Ended December 31, 2013
Fourth Quarter ended December 31, 2013
Third Quarter ended September 30, 2013
Second Quarter ended June 30, 2013
First Quarter ended March 31, 2013
Fiscal Year Ended December 31, 2012
Fourth Quarter ended December 31, 2012
Third Quarter ended September 30, 2012
Second Quarter ended June 30, 2012
First Quarter ended March 31, 2012
NYSE/Nasdaq
High
12.85
9.40
8.90
8.64
9.91
10.34
10.95
10.06
$
$
$
$
$
$
$
$
Low
8.41
7.57
7.07
7.01
6.81
8.62
8.10
7.30
$
$
$
$
$
$
$
$
At March 7, 2014, there were approximately 454 recorded holders (including brokers’ accounts) of the Company’s common stock. We have not
paid any dividends since our inception and, at this time, do 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. We were in compliance with this
restriction as of December 31, 2013. See Note 10 to the Consolidated Financial Statements.
Total Stockholder Return
The following graph compares the cumulative total stockholder return on our common stock against the NYSE Composite Index and the S&P
Specialty Chemical Index, for the five years ending December 31, 2013. The graph was constructed on the assumption that $100 was invested in
our common stock and each comparative on December 31, 2008, and that any dividends were fully reinvested.
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Item 6. Selected Financial Data.
The following is a five-year summary of selected financial data (in thousands, except per share amounts):
2013
2012
2011
2010
Revenues
Net Income
Net Income Per Share-Diluted
Total Assets (at December 31)
Notes Payable (at December 31)
Current Portion of Long-Term Debt (at December 31)
Total Long-Term Debt Obligations (at December 31)
$
$
236,227
19,498
0.79
143,667
12
1,400
11,839
$
222,858
10,321
0.42
120,376
12
1,500
14,239
199,517
13,884
0.57
117,833
12
1,500
22,739
$
139,110
2,075
0.09
91,916
12
1,865
20,836
2009
117,587
6,627
0.28
90,487
12
1,400
23,439
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
Statements in Items 7 and 7A, as well as elsewhere in or incorporated by reference in, this Annual Report on Form 10-K regarding the
Company’s financial position, business strategy and plans and objectives of the Company’s management for future operations and other
statements that are not historical facts, are “forward-looking statements” as that term is defined under applicable Federal securities laws. In some
cases, “forward-looking statements” can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“contemplates,” “proposes,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially
from those expressed or implied by such statements. Such risks, uncertainties and factors include, but are not limited to, general economic
conditions domestically and internationally; insufficient cash flows from operating activities; difficulties in obtaining financing; outstanding debt
and other financial and legal obligations; lawsuits; competition; industry cycles; feedstock, specialty petrochemical product and mineral prices;
feedstock availability; technological developments; regulatory changes; environmental matters; foreign government instability; foreign legal and
political concepts; and foreign currency fluctuations, as well as other risks detailed in the Company’s filings with the U.S. Securities and
Exchange Commission, including this Annual Report on Form 10-K, all of which are difficult to predict and many of which are beyond the
Company’s control.
Overview
The following discussion and analysis of our financial results, as well as the accompanying consolidated financial statements and related notes to
consolidated financial statements to which they refer, are the responsibility of the management of the Company. Our accounting and financial
reporting fairly reflect our business model involving the manufacturing and marketing of petrochemical products. Our business model involves
the manufacture and sale of tangible products. Our consistent approach to providing high purity products and quality services to our customers
has helped to sustain our current position as a preferred supplier of various petrochemical products.
Business Environment and Risk Assessment
Petrochemical Operations
Worldwide petrochemical demand improved during 2013, and we benefitted from continued operational excellence and competitive advantages
achieved through our business mix and focus on producing high quality products and outstanding customer service.
During 2013 feedstock prices fluctuated within a $0.10 per gallon range allowing us to maintain better margins.
During the past several years we have employed a strategy of moving larger volume customers to formula based pricing to reduce the effect of
feedstock cost volatility. Under formula pricing, the price charged to the customer is based on a formula which includes, as a component the
average cost of feedstock over the prior month. Product prices move in
16
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conjunction with feedstock prices without the necessity of announced price changes. Because the formulas use an average feedstock price from
the prior month, the movement of prices trails the movement of costs, and formula pricing may or may not reflect South Hampton’s actual
feedstock cost for the month during which the product is actually sold. In addition, while formula pricing can benefit product margins during
periods of increasing feedstock costs, during periods of decreasing feedstock costs formula pricing may actually improve margins as formula
prices trail feed costs downward by approximately 30 days. The use of formula pricing has helped reduce volatility and increase the predictability
of product margins. Now that the volatility of feedstock prices appears to be tapering somewhat, we continue to investigate alternative product
pricing methods.
We believe we are well-positioned to participate in new investments to grow the Company. While petrochemical prices are volatile on a short-
term basis and depend on the demand of our customers’ products, our investment decisions are based on our long-term business outlook using a
disciplined approach in selecting and pursuing the most attractive investment opportunities.
Liquidity and Capital Resources
Working Capital
Our approximate working capital days are summarized as follows:
Days sales outstanding in accounts receivable
Days sales outstanding in inventory
Days sales outstanding in accounts payable
Days of working capital
December 31,
December 31,
2013
34.1
18.6
11.4
41.4
December 31,
2011
42.4
17.3
10.7
49.0
2012
25.9
16.1
10.3
31.7
Our days sales outstanding in inventory and our days sales outstanding in accounts receivable both increased over 2012 due to an increase in
deferred sales. Deferred sales increased by approximately $1.8 million from year end 2012 to 2013. Deferred sales are not recognized until the
customer accepts delivery of the product and title has transferred. The majority of these sales are to foreign customers with longer payment terms
due to increased shipping times.
Sources and Uses of Cash
Cash and cash equivalents decreased by $1.9 million during the year ended December 31, 2013. The change in cash and cash equivalents is
summarized as follows:
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and equivalents
Cash and cash equivalents
Operating Activities
2013
2012
2011
(in thousands)
13,242
$
(12,702)
(2,440)
(1,900) $
$
7,608
21,373
$
(10,185)
(8,354)
$
2,834
$
9,508
$
$
$
4,056
(6,638)
1,646
(936)
6,674
Operating activities generated cash of $13.2 million during fiscal 2013 as compared to $21.4 million during fiscal 2012. Although our net
income increased by $9.2 million from 2012 to 2013, cash provided by operations decreased by $8.1 million due primarily to the following
factors:
· Net income for 2013 included non-cash equity in earnings from AMAK of $4.7 million and a gain on equity issued in AMAK of $4.0
million as compared to equity in loss from AMAK $0.9 million and gain on equity issued in AMAK of $0.7 million in 2012;
· Net income for 2013 included a non-cash charge for an unrealized loss on financial contracts of approximately $0.1 million as
compared to 2012 which included a non-cash charge for an unrealized loss on financial contracts of $0.2 million;
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· Trade receivables increased approximately $6.3 million in 2013 (due to a 40.1% increase in volume sold during fourth quarter 2013) as
compared to a decrease of approximately $7.4 million (due to a 2.4% decrease in price per gallon and a 16.8% decrease in volume sold
during the fourth quarter) in 2012;
· Notes receivable increased approximately $0.9 million (due to additional notes receivable from tolling customers for unit
improvements) as compared to an increase of approximately $0.1 million in 2012; and
· Inventory increased approximately $2.2 million in 2013 (due to a 58.8% increase in deferred sales at the end of 2013) as compared to
an increase of approximately $0.4 million (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost per gallon) in
2012.
These sources of cash were partially offset by the following increases in cash provided by operations:
· Net income for 2013 included a non-cash depreciation charge of $4.0 million as compared to 2012 which included a non-cash
depreciation charge of $3.6 million;
· Net income for 2013 included a non-cash share based compensation charge of $1.2 million (due to options being awarded to a new
director and a new officer) as compared to 2012 which included a non-cash share based compensation charge of $0.5 million;
· Net income for 2013 included a non-cash charge for deferred income taxes of $1.5 million as compared to 2012 which included a non-
cash charge for deferred income taxes of $0.5 million;
· Prepaid expenses and other assets increased $0.3 million in 2013 (primarily due to an increase in prepaid insurance) as compared to an
increase of $0.9 million in 2012 (also primarily due to an increase in prepaid insurance);
· Income tax receivable decreased approximately $0.6 million in 2013 (due to the overpayment of 2012 estimated taxes being applied to
2013) as compared to an increase of $1.2 million in 2012 ( due to overpayment of 2012 estimated taxes);
· Other liabilities increased $3.0 million in 2013 as compared to an increase of $0.4 million in 2012 (both years due to the receipt of
funds from toll processing customers for modifications of toll processing facilities within the plant); and
· Accounts payable and accrued liabilities increased approximately $1.4 million in 2013 (primarily due to an increase in the accrual for
raw materials) while in 2012 the same accounts increased by $0.2 million (primarily due to decreases in accruals for freight and utilities
partially offset by an increase in the accrual for derivative settlements and raw material purchases).
Operating activities generated cash of $21.4 million during fiscal 2012 as compared with $4.1 million of cash provided during fiscal
2011. Although the Company’s net income decreased by $3.6 million from 2011 to 2012, the cash provided by operations increased by $17.3
million due primarily to the following factors:
· Net income for 2012 included a non-cash equity in loss from AMAK of $0.9 million and gain on equity issued in AMAK of $0.7
million as compared to equity in loss from AMAK $1.0 million and gain on equity issued in AMAK of $8.9 million in 2011;
· Net income for 2012 included a non-cash depreciation charge of $3.6 million as compared to 2011 which included a non-cash
depreciation charge of $3.2 million;
· Net income for 2012 included a non-cash charge for an unrealized loss on financial contracts of approximately $0.2 million as
compared to 2011 which included a non-cash charge for an unrealized gain on financial contracts of $0.2 million;
· Trade receivables decreased approximately $7.4 million in 2012 (due to a 2.4% decrease in price per gallon and a 16.8% decrease in
volume sold during the fourth quarter) as compared to an increase of approximately $12.0
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· million (due to a 63.3% increase in volume and a 13.8% increase in price per gallon in the fourth quarter) in 2011; and
· Inventory increased approximately $0.4 million in 2012 (due to a 4.8% increase in volume partially offset by a 1.8% decrease in cost
per gallon) as compared to an increase of approximately $3.5 million (due to a 27.5% increase in volume and a 12.4% increase in cost
per gallon) in 2011.
These sources of cash were partially offset by the following decreases in cash provided by operations:
· Net income for 2012 included non-cash compensation charges of $0.5 million as compared to $0.9 million in 2011;
· Prepaid expenses and other assets increased $0.9 million in 2012 (primarily due to an increase in prepaid insurance) as compared to a
decrease of $0.1 million in 2011 (due to expensing of prepaid pipeline services, marketing and insurance);
· Income tax receivable increased approximately $1.2 million in 2012 (due to an overpayment of estimated taxes) as compared to a
decrease of $0.2 million in 2011;
· Other liabilities increased $0.4 million in 2012 (due to the receipt of funds from toll processing customers for modifications of toll
processing facilities within the plant) as compared to an increase of $1.6 million in 2011 (due to the receipt of funds from a toll
processing customer for construction of a pilot plant); and
· Accounts payable and accrued liabilities decreased approximately $0.2 million in 2012 (primarily due to decreases in accruals for
freight and utilities partially offset by an increase in the accrual for derivative settlements and raw material purchases) while in 2011 the
same accounts increased by $4.2 million (primarily due to an increase in accruals for raw material purchases, freight, and
compensation).
Investing Activities
Cash used by investing activities during fiscal 2013 was approximately $12.7 million, representing an increase of approximately $2.5 million
over the corresponding period of 2012. During 2013 we purchased an additional $7.5 million of stock in AMAK as discussed in Note 8,
expended $0.3 million to debottleneck our Penhex Unit, $1.6 million for expansion of the sales loading rack facility, $0.9 million for construction
of a new control room and lab, $0.4 million for transport trucks, and approximately $2.1 million for a new tolling unit (which will be reimbursed
by the customer). These uses of cash were partially offset by the return of approximately $2.0 million from AMAK which was previously
advanced.
Cash used by investing activities during fiscal 2012 was approximately $10.2 million, representing an increase of approximately $3.5 million
over the corresponding period of 2011. During 2012 we advanced $2.0 million to AMAK for interim, short-term funding which was
subsequently repaid in 2013. In May and June 2011 we advanced $0.8 million for the same purpose which was subsequently repaid in August
2011.
During fiscal 2012 we purchased transport trucks and trailers for $1.0 million, land surrounding the facility for $0.2 million, increased/improved
tankage for $0.4 million, made various facility improvements for $0.8 million, converted a processing tower for $0.5 million, made purchases for
expansion of the pipeline of $4.2 million and purchased other equipment for $1.0 million.
Financing Activities
Cash used by financing activities during fiscal 2013 was approximately $2.4 million versus cash used of $8.4 million during the corresponding
period of 2012. During 2013 we drew $6.0 million on our line of credit for working capital purposes and to fund the capital contribution to
AMAK. We also made principal payments of $1.5 million on our term debt and $7.0 million on our line of credit.
Cash used by financing activities during fiscal 2012 was approximately $8.4 million versus cash provided of $1.6 million during the
corresponding period of 2011. During 2012 we drew $2.0 million on our line of credit for working capital purposes and made principal
payments of $10.5 million on our line of credit and term debt.
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Credit Agreement
On May 25, 2006, South Hampton entered into a Credit Agreement, as amended, with Bank of America. All of our obligations under the
Credit Agreement are fully and unconditionally secured pursuant to a perfected first priority security interest on all of South Hampton’s
assets. As of December 31, 2013, the Credit Agreement provided for an aggregate principal amount of up to $32 million available through the
following facilities: (i) $18 million revolving credit facility which includes a $3 million sublimit for use in the hedging program and a $9 million
sublimit for the issuance of standby or commercial letters of credit; and (ii) $14 million term loan (advanced as a $10 million loan and a $4
million loan) obtained in 2007 to finance the expansion of South Hampton’s petrochemical facility. The revolving credit facility matures on
June 30, 2015, and the term loan matures on October 31, 2018.
Under the terms of the Credit Agreement, accrued and unpaid interest is due and payable in arrears on the first business day of each month on
any outstanding borrowings at the lower of: (i) the higher of the federal funds rate plus 0.50% or the prime rate plus applicable margin, or (ii) the
rate equal to the British Bankers Association LIBOR plus the applicable margin. The applicable margin is determined from TOCCO’s most
recent compliance certificate and current financials based on the following:
Level
Leverage Ratio
I
II
III
Greater than or equal to
1.5:1.0
Less than 1.5:1.0 but greater
than or equal to 1.0:1.0
Less than 1.0:1.0
Applicable Margin for Base
Rate Loans
(0.50%)
Applicable Margin for
LIBOR Loans
2.00%
Applicable Margin for
Commitment Fee
0.25%
(0.75%)
(1.00%)
1.75%
1.50%
0.25%
0.25%
In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with respect to the $10.0 million floating rate term loan
under the credit facility. The notional amount of the interest rate swap was $4,250,000 at December 31, 2013. We receive credit for payments
of variable rate interest made on the term loan at the loan’s variable rates which are based upon the London InterBank Offered Rate (LIBOR),
and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap. The swap agreement terminates on December 15,
2017. We designated the interest rate swap agreement as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging. The
derivative instrument is reported at fair value with any changes in fair value reported within other comprehensive income (loss) in our Statement
of Stockholders’ Equity. At December 31, 2013, Accumulated Other Comprehensive Loss net of $197,148 tax was $366,131 related to this
transaction.
Our average floating interest rate on debt outstanding under our credit facility at December 31, 2013, was 3.25%. The Credit Agreement
includes customary representations and warranties made by us to Bank of America.
The Credit Agreement contains customary, affirmative and negative covenants requiring us to take certain actions and restricting us from taking
others. Such covenants include but are not limited to (i) restrictions on certain payments, including dividends, (ii) the use of the loan proceeds
only for certain purposes, and (iii) limitations on the occurrence of liens, certain investments, and/or subsidiary indebtedness (subject to certain
exceptions).
In addition the Credit Agreement contains certain financial covenants, which include but are not limited to:
●
●
●
●
Maintaining a minimum EBITDA of $8.5 million at end of each trailing four fiscal quarter period;
Maintaining a maximum leverage ratio of 2.0:1.0 measured at end of each fiscal quarter;
Prohibition of unfinanced capital expenditures in excess of $6.0 million for trailing four fiscal quarter period; and
Limitations on dividends paid to the parent company of 30% of EDITDA.
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The Credit Agreement contains standard default triggers, which include but are not limited to (i) default on certain of our other indebtedness, (ii)
the entry of certain judgments against South Hampton and its subsidiaries, and (iii) a change in the control of the Company. Upon the
occurrence of any event of default Bank of America may take certain actions including declaring any outstanding amount due and payable. We
were in compliance with all covenants at December 31, 2013.
Anticipated Cash Needs
We believe that the Company is capable of supporting its operating requirements and capital expenditures through internally generated funds
supplemented with debt.
Results of Operations
Comparison of Years 2013, 2012, 2011
The tables containing financial and operating information set forth below are presented to facilitate the discussion of the results of operations, and
should not be considered a substitute for, and should be read in conjunction with, the audited consolidated financial statements.
2013
2012
Change %Change
Petrochemical Product Sales
Processing
Gross Revenue
Volume of sales (thousand gallons)
Cost of Sales
Total Operating Expense*
Natural Gas Expense*
Operating Labor Costs*
Transportation Costs*
General & Administrative Expense
Depreciation**
Equity in Earnings (Losses) of AMAK
Gain on Equity Issuance AMAK
$
$
$
230,643
5,584
236,227
67,066
201,064
44,158
5,204
10,624
18,398
14,672
4,039
4,703
3,997
$
$
(in thousands)
$
218,512
4,346
222,858
$
$
12,131
1,238
13,369
63,553
3,513
$
192,100
39,532
3,914
10,437
15,881
12,782
3,573
(211)
-
8,964
4,626
1,290
187
2,517
1,890
466
4,914
3,997
5.6%
28.5%
6.0%
5.5%
4.7%
11.7%
33.0%
1.8%
15.8%
14.8%
13.0%
2,328.9%
Capital Expenditures
$
6,828
$
8,143
$
(1,315)
(16.1%)
*Included in cost of sales
**Includes $3,518 and $3,053 for 2013 and 2012 which is included in cost of sales and operating expenses
21
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Petrochemical Product Sales
Processing
Gross Revenue
Volume of sales (thousand gallons)
Cost of Sales
Total Operating Expense*
Natural Gas Expense*
Operating Labor Costs*
Transportation Costs*
General & Administrative Expense
Depreciation**
Equity in Losses of AMAK
Gain on Equity Issuance AMAK
$
$
$
2012
2011
Change %Change
(in thousands)
$
218,512
4,346
222,858
$
194,620
4,897
199,517
$
$
23,892
(551)
23,341
12.3%
(11.3%)
11.7%
63,553
54,256
9,297
17.1%
$
192,100
39,532
3,914
10,437
15,881
12,782
3,573
(211)
-
$
173,600
35,314
5,266
8,764
13,234
11,778
3,220
(1,018)
8,850
18,500
4,218
(1,352)
1,673
2,647
1,004
353
807
8,850
10.7%
11.9%
(25.7%)
19.1%
20.0%
8.5%
11.0%
79.3%
Capital Expenditures
$
8,143
$
6,518
$
1,625
24.9%
*Included in cost of sales
**Includes $3,053 and $2,744 for 2012 and 2011 which is included in cost of sales and operating expenses
Gross Revenue
2012-2013
Revenues increased from 2012 to 2013 by approximately 6.0% primarily due to an increase in sales volume of 5.5% and an increase in
processing fees of 28.5%.
2011-2012
Revenues increased from 2011 to 2012 by approximately 11.7% primarily due to an increase in sales volume of 17.1% offset by a decrease in the
average selling price of 4.1% and an 11.3% decrease in processing revenue.
Petrochemical Product Sales
2012-2013
Petrochemical product sales increased 5.6% from 2012 to 2013 due to an increase in total sales volume of 5.5% as noted above while average
selling price remained stable. Even though approximately 50% of our sales are based upon formulas derived from market prices of raw materials
and those prices declined in 2013, we were able to maintain our average selling price. We shipped a record number of isocontainers during 2013
which is the method most frequently used to ship product overseas. Deferred sales volume increased 58.8% from the end of 2012 to 2013 which
delayed recognition until 2014.
2011-2012
Petrochemical product sales increased 12.3% from 2011 to 2012 due to an increase in total sales volume of 17.1% as noted above offset by a
decrease in the average selling price of 4.1%.
Processing
2012-2013
Processing revenues increased 28.5% from 2012 to 2013 due to renegotiation of our tolling contracts. We remain dedicated to maintaining a
certain level of toll processing business in the facility and continue to pursue opportunities.
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Table of Contents
2011-2012
Processing revenues decreased 11.3% from 2011 to 2012 due to one of our tolling customer’s inability to obtain raw material which impacted
their run rates.
Cost of Sales (includes but is not limited to raw materials, total operating expense, natural gas, operating labor and transportation)
2012-2013
Cost of Sales increased 4.7% from 2012 to 2013 due in part to a 38.6% increase in volumes processed partially offset by a 2.3% decrease in the
average cost per gallon of feedstock. We use 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. We are investigating alternative feedstock sources which contain lower percentages of less desirable components in an effort to
reduce the amount of byproduct sold into secondary markets at lower margins, thereby increasing overall profitability.
2011-2012
Cost of Sales increased 10.7% from 2011 to 2012 due in part to a 13.3% increase in volumes processed and hedging losses of $1.8 million
partially offset by a 6.8% decrease in the average cost per gallon of feedstock.
Changes in other components of Cost of Sales are detailed below. See Note 19 of Notes to the Consolidated Financial Statements.
Total Operating Expense (includes but is not limited to natural gas, operating labor and transportation)
2012-2013
Total Operating Expense increased 11.7% from 2012 to 2013. Natural gas, labor and transportation are the largest individual expenses in this
category.
The cost of natural gas purchased increased 33.0% from 2012 to 2013 due to an increase in the average per unit cost and additional volume
used. The average price per MMBTU for 2013 was $3.89 whereas, for 2012 the average per unit cost was $3.03. Volume consumed increased
to approximately 1,342,000 MMBTU from about 1,285,000 MMBTU.
Operating labor costs were slightly higher by 1.8% mainly due to a cost of living adjustment that was given mid-year 2013. Our employee count
remained relatively stable year-over-year.
Transportation costs were higher by 15.8% primarily due to an increase in rail freight and isocontainer shipments. These costs are typically
recovered through our selling price. Higher transportation costs accounted for 54.4% of the increase in operating expense.
2011-2012
Total Operating Expense for the Petrochemical Company increased 11.9% from 2011 to 2012. Natural gas, labor and transportation are the
largest individual expenses in this category.
The cost of natural gas purchased decreased 25.7% from 2011 to 2012 due to a decrease in the average per unit cost. The average price per
MMBTU for 2012 was $3.03 whereas, for 2011 the average per-unit cost was $4.32. The decreased cost was partially offset by increased
volume which increased to approximately 1,285,000 MMBTU from about 1,224,000 MMBTU.
Operating labor costs were higher by 19.1% because we added approximately 8 employees year over year. Increased manpower was required by
increases in production, product shipments, and loading of iso-containers for foreign sales which require special handling. Some of the cost of
additional personnel was borne by a tolling customer per the toll processing arrangement which became operational in the fourth quarter of
2011. Additionally, a number of temporary
23
Table of Contents
personnel were hired to allow the maintenance department to accomplish budgeted maintenance and capital projects in a timely manner.
Transportation costs were higher by 20.0% primarily due to an increase in rail freight. These costs are recovered through our selling
price. Higher transportation costs accounted for 62.8% of the increase in operating expense.
General and Administrative Expense
2012-2013
General and Administrative costs increased 14.8% from 2012 to 2013 due primarily to expenses recorded for administrative payroll costs,
officers’ compensation, directors’ fees, insurance premiums, property taxes, accounting fees, consulting fees, bad debt expense, investor
relations’ expenses, post-retirement benefits, and expenses in Saudi Arabia. Payroll costs increased approximately $0.2 million due to a cost of
living adjustment and an increase in management and officer compensation. Officer compensation increased due to the addition of a new
executive position which occurred at the end of the third quarter 2012. Directors’ fees increased $0.1 million due to the addition of a new director
in the fourth quarter of 2012. Group health insurance premiums increased 11.4% due to the health insurance environment. Property insurance
premiums increased 25.9% due to an increase in the insured basis. Investor relations expense increased 75.2% due to the granting of warrants to
the new investor relations consultants. Property taxes increased 18.8% due to the increase in the taxable basis because of recent expansions and
additions. Accounting fees increased 49.3% due to the addition of a formal internal audit program, the PCAOB audits of AMAK for 2012,
2011, and 2010 and our corresponding amended filings during 2013. Consulting fees increased $0.3 million due to the hiring of a consultant to
assist with marketing efforts in the People’s Republic of China and consultants for marketing surveys and acquisition efforts. Post-retirement
fees increased due to the expense associated with options. In 2012 there was a reversal of these costs due to the expiration of some of those
stock options. Expenses in Saudi Arabia increased due to an increase in contractors utilized by the Company in Saudi Arabia. These increases
were partially offset by decreases in Saudi expenses which will be reimbursed by AMAK, travel costs, and legal fees.
2011-2012
General and Administrative costs increased 8.5% from 2011 to 2012 due primarily to expenses recorded for administrative payroll costs,
officers’ compensation, directors’ fees, insurance premiums, travel costs, property taxes, accounting fees, investor relations’ expenses, and
expenses in Saudi Arabia. Payroll costs increased approximately $0.2 million due to a cost of living adjustment and an increase in management
and officer compensation. Officer compensation increased due to the award of bonus compensation upon meeting target performance as outlined
in the executive compensation policy and the addition of a new executive position. Directors’ fees increased $0.1 million due to the addition of a
new director. Group health insurance premiums increased 21.6% due to the health insurance environment. General liability and property
insurance premiums increased 37.9% due to the insurance market and an increase in the insured basis. Travel and investor relations’ expenses
increased due to an increase in the number of trips to Saudi Arabia, the investor trip to the mine and investor conferences. Property taxes
increased due to the increase in the taxable basis because of recent expansions. Accounting fees increased due to the addition of a formal internal
audit program. Expenses in Saudi Arabia increased due to an increase in the Company’s presence in Saudi Arabia and the investor trip to the
mine. These increases were offset by decreases in consulting fees, post-retirement benefits, bad debt expense and legal fees. Consulting fees
decreased approximately $0.1 million, post-retirement fees dropped $0.4 million due to the expiration of stock options, bad debt expense
decreased $0.1 million due to no additional allowance being necessary, and legal fees declined about $0.1 million due to decreased assistance
provided by outside parties.
Our general and administrative expenses have two principle components; general and administrative expenses for our petrochemical operation
and general corporate expenses.
General & Administrative Expenses for our Specialty Petrochemicals Operations
Petrochemical Company
General & Administrative Expense
2013
2012
Change %Change
$
10,971
(in thousands)
$
9,658
$
1,313
13.6%
General and Administrative costs increased from 2012 to 2013 due primarily to expenses recorded for administrative payroll costs, insurance
premiums, office rent, subscriptions, consulting fees and property taxes. Payroll costs increased
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Table of Contents
approximately $0.1 million due to a cost of living adjustment. Group health insurance premiums increased 11.4% due to the health insurance
environment. Property insurance premiums increased 25.9% due to an increase in the insured basis. Office rent increased $0.1 million due to
relocation to a new, larger office space in Sugar Land, Texas. Subscriptions increased $46,000 due to additional publications required for market
development purposes. Consulting fees increased $0.3 million due to the hiring of a consultant to assist with marketing efforts in the People’s
Republic of China and consultants for marketing surveys and acquisition efforts. Property taxes increased 18.8% due to the increase in the
taxable basis because of recent expansions and additions.
Petrochemical Company
General & Administrative Expense
2012
2011
Change %Change
$
9,658
(in thousands)
$
8,593
$
1,065
12.4%
General and Administrative costs increased from 2011 to 2012 due primarily to expenses recorded for administrative and management payroll
costs, insurance premiums, travel costs, and property taxes. Payroll costs increased approximately $0.1 million due to a cost of living adjustment
and an increase in management compensation. Group health insurance premiums increased 21.6% due to the health insurance
environment. General liability and property insurance premiums increased 37.9% due to the insurance market and an increase in the insured
basis. Travel expenses increased due to an increase in the number of trips abroad for marketing purposes. Property taxes increased due to the
increase in the taxable basis because of recent expansions. These increases were slightly offset by decreases in consulting fees, bad debt expense
and legal fees.
General Corporate Expenses
General corporate expenses
(in thousands)
2013
3,701
$
2012
3,124
$
Change % Change
577
18.5%
$
General corporate expenses increased from 2012 to 2013 primarily due to increases in officer compensation, directors’ fees, post-retirement
benefits, accounting fees, insurance expense, bad debt expense, investor relations expense, and administrative expenses in Saudi Arabia. Officer
compensation increased $0.1 million due to the addition of an executive during the second half of 2012. Directors’ fees also increased $0.1
million due to the addition of a director in the fourth quarter of 2012. Post-retirement benefits increased due to the return to normal accrual for
stock options, whereas for 2012 expired options were reversed. Accounting fees increased $0.2 million due to the PCAOB audits of AMAK for
the years ended December 31, 2012, 2011, and 2010 as well as, our 2012 amended filings including AMAK. Insurance expense increased
approximately $0.1 million due to changes in policy limits. Investor relations expense increased $0.2 million due to the granting of warrants to
the new investor relations firm. Administrative expenses in Saudi increased $0.1 million due to additional staffing requirements. These increases
were partially offset by decreases in travel, legal fees, and expenses associated with AMAK in Saudi Arabia.
General corporate expenses
(in thousands)
2012
3,124
$
2011
3,185
$
Change % Change
(61)
(2.0%)
$
General corporate expenses decreased from 2011 to 2012 primarily due to decreases in post-retirement benefits, consulting fees, and legal
expenses. Consulting fees decreased approximately $0.1 million, post-retirement fees dropped $0.4 million due to the expiration of stock
options, and legal fees declined about $0.1 million due to decreased assistance provided by outside parties. These decreases were partially offset
by increases in officer compensation, directors’ fees, travel expense, accounting fees, investor related expenses and expenses in Saudi
Arabia. Officer compensation increased due to the award of bonus compensation upon meeting target performance as outlined in the executive
compensation policy and the addition of a new executive position. Directors’ fees increased $0.1 million due to the addition of a new
director. Travel and investor relations’ expenses increased due to an increase in the number of trips to Saudi Arabia, the investor trip to the mine
and investor conferences. Accounting fees increased due to the addition of a formal internal audit program. Expenses in Saudi Arabia increased
due to an increase in the Company’s presence in Saudi Arabia and the investor trip to the mine.
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Table of Contents
Depreciation
2012-2013
Depreciation expense increased 13.0% from 2012 to 2013 due to an increase in the amount of depreciable assets year over year.
2011-2012
Depreciation expense increased 11.0% from 2011 to 2012 due to an increase in the amount of depreciable assets year over year.
Equity in Earnings (Losses) of AMAK/Gain on Equity Issuance of AMAK
2012-2013
Equity in earnings of AMAK increased $4.9 million from 2012 to 2013 due to AMAK being in operation for the entire 2013 year versus only a
partial year in 2012. Gain on equity issuance of AMAK increased $4.0 million from 2012 to 2013 due to the completion of an equity raise in
May 2013 as discussed in Note 8.
2011-2012
Equity in losses of AMAK decreased $0.8 million from 2011 to 2012 due to AMAK becoming operation in the second half of 2012. Gain on
equity issuance of AMAK decreased $8.9 million from 2011 to 2012 due to the completion of an equity raise in July 2011 as discussed in Note
8.
Capital Expenditures
2012-2013
Capital Expenditures decreased 16.1% from 2012 to 2013. See capital expenditures discussion below for more detail.
2011-2012
Capital Expenditures increased 24.9% from 2011 to 2012. See capital expenditures discussion below for more detail.
Capital Resources and Requirements
2012-2013
Capital expenditures decreased 16.1% from 2012 to 2013. During 2013 we expended $0.3 million to debottleneck our Penhex Unit, $1.6 million
for expansion of the sales loading rack facility, $0.9 million for construction of a new control room and lab, $0.4 million for transport trucks,
$2.1 million for a new tolling unit, and $1.5 million for other equipment.
2011-2012
Capital expenditures increased 24.9% from 2011 to 2012. During fiscal 2012 we purchased transport trucks and trailers for $1.0 million, land
surrounding the facility for $0.2 million, increased/improved tankage for $0.4 million, made various facility improvements for $0.8 million,
converted a processing tower for $0.5 million, made purchases for expansion of the pipeline of $4.2 million and purchased various other
equipment.
Capital expenditures typically average $4.0 million per year for facility improvements. At December 31, 2013, there was $11.5 million available
on the Company’s line of credit. We believe that operating cash flows along with credit availability will be sufficient to finance our 2014
operations and capital expenditures.
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The table below summarizes the following contractual obligations of the Company:
Payments due by period
Less than
Contractual Obligations
Operating Lease Obligations
Long-Term Debt Obligations
Total
Total
5,690
13,239
18,929
$
$
$
$
1 year
1-3 years
(thousands of dollars)
$
$
1,742
1,400
3,142
$
3,008
9,289
12,297
$
3-5 years
More than 5
years
809
2,550
3,359
$
$
131
-
131
The anticipated source of funds for payments due within three years that relate to contractual obligations is from a combination of continuing
operations and long-term debt refinancing.
Investment in AMAK
Information concerning our investment in AMAK is set forth in Note 8 of the Notes to Consolidated Financial Statements.
New Accounting Standards
In July 2012 the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for
Impairment. This is amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment.
After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired; entities
must perform the quantitative impairment test. Otherwise, the quantitative test is optional. The amended guidance is effective for annual and
interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The update had no impact
on the Company’s consolidated financial statements.
In February 2013 the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other
Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in
the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required
to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an
entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the
current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective for reporting
periods beginning after December 15, 2012. The update had no impact on the Company’s consolidated financial statements.
Critical Accounting Policies
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized when the carrying amount of the asset exceeds the estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual disposition. Our long-lived assets include our petrochemical facility and our
investments in AMAK and PEVM.
Our petrochemical facility is currently our only revenue generating asset. The facility was in full operation at December 31, 2013. Plant, pipeline
and equipment costs are reviewed annually to determine if adjustments should be made.
We assess the carrying values of our assets on an ongoing basis. Factors which may affect carrying values include, but are not limited to, mineral
prices, capital cost estimates, equity transactions, the estimated operating costs of any mines and related processing, ore grade and related
metallurgical characteristics, the design of any mines and the timing of any mineral production. There are no assurances that, particularly in the
event of a prolonged period of depressed mineral prices, we will not be required to take a material write-down of any of its mineral properties.
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Investment in AMAK
We account for our investment in AMAK using the equity method of accounting under which we record in income our share of AMAK’s
income or loss for each period. The amount recorded is also adjusted to reflect the amortization of certain differences between the basis in our
investment in AMAK and our share of the net assets of AMAK as reflected in AMAK’s financial statements (see Note 8).
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse
effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by
the production of those reserves, as well as, recent equity transactions within AMAK.
Environmental Liabilities
The Petrochemical Company is subject to the rules and regulations of the TCEQ, which inspects the operations at various times for possible
violations relating to air, water and industrial solid waste requirements. As noted in Item 1. Business, evidence of groundwater contamination was
discovered in 1993. The recovery process, initiated in 1998, is proceeding as planned and is expected to continue for many years.
In 2008 we learned of a claim by the U.S. Bureau of Land Management (“BLM”) against World Hydrocarbons, Inc. for contamination of real
property owned by the BLM north of and immediately adjacent to the processing mill situated on property owned by PEVM. The BLM’s claim
alleged that mine tailings from the processing mill containing lead and arsenic migrated onto BLM property during the first half of the twentieth
century. World Hydrocarbons, Inc. responded to the BLM by stating that it does not own the mill and that PEVM is the owner and responsible
party. PEVM subsequently retained an environmental consultant and a local contractor to assist with the cleanup. In June and July 2013, the
contractor excavated and transported tailings from BLM property and other surrounding properties to an impoundment area located on PEVM
property. The cleanup is complete except for some minor work involving haul ramps and brush piles on BLM property. Once this is complete
PEVM expects to receive a no-further-action letter (NFA), or equivalent, from BLM. The environmental consultant submitted a report to the
Nevada Division of Environmental Protection on the entire removal project including a neighbor’s adjoining property, and PEVM received an
NFA on October 30, 2013. Finally, PEVM will need to cover the tailings impoundment where all of the tailings were placed and improve the
impoundment walls. Once that work is complete and fencing is repaired, all of the remaining work will be complete. The contractor is expected
to start on the finish work in 2014 as soon as the ground thaws enough to excavate clean cover soil. The Company agreed to advance
approximately $250,000 to PEVM for payment of the contractor and in return, PEVM will transfer interest in selected patented mining claims of
equivalent value to the Company. An accrual for $350,000 was recorded by PEVM in 2010 and $203,000 remained outstanding at December
31, 2013.
Share-Based Compensation
We 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. We use the Black-Sholes model to calculate the fair value of the equity instrument on the grant date.
Off Balance Sheet Arrangements
Off balance sheet arrangements as defined by the SEC means any transaction, agreement or other contractual arrangement to which an entity
unconsolidated with the registrant is a party, under which the registrant has (i) obligations under certain guarantees or contracts, (ii) retained or
contingent interest in assets transferred to an unconsolidated entity or similar arrangements, (iii) obligations under certain derivative arrangements,
and (iv) obligations arising out of a material variable interest in an unconsolidated entity. Our guarantee for AMAK’s debt is considered an off
balance sheet arrangement. Please see further discussion under “Investment in AMAK” in Item 1. Business.
Income Taxes
In determining our income tax provision, we assess the likelihood our deferred tax assets will be recovered through future taxable income. Based
on this assessment, a valuation allowance against all or a portion of our deferred tax asset that will, more likely than not, be realized. If these
estimates, assumptions, or actual results of operations change in the
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future, we may reverse the valuation allowance against deferred tax assets. Income tax liabilities are determined based on judgment and estimates
assuming it is more likely than not that the position will be sustained upon examination by a taxing authority. There are no uncertain income tax
positions taken or expected to be taken at January 1, 2007 (adoption date), and at December 31, 2013.
Derivative Instruments
We use financial commodity agreements to hedge the cost of natural gasoline, the primary source of feedstock, and natural gas used as fuel to
operate our plant to manage risks generally associated with price volatility. The commodity agreements are recorded in our consolidated balance
sheets as either an asset or liability measured at fair value. Our commodity agreements are not designated as hedges; therefore, all changes in
estimated fair value are recognized in cost of petrochemical product sales and processing in the consolidated statements of operations.
On March 21, 2008, South Hampton entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to the
$10.0 million term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008,
and terminates on December 15, 2017. The notional amount of the interest rate swap was $4.25 million at December 31, 2013. We receive credit
for payments of variable rate interest made on the term loan at the loan’s variable rates, which are based upon the London InterBank Offered Rate
(LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest rate swap. We designated the transaction as a cash
flow hedge according to ASC Topic 815, Derivatives and Hedging. Beginning on August 15, 2008, the derivative instrument was reported at
fair value with any changes in fair value reported within other comprehensive income (loss) in our Consolidated Statement of Stockholders’
Equity. We 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, 2013, and 2012 totaled $0.6 million and $0.9
million, respectively. The cumulative loss from the changes in the swap contract’s fair value that is included in other comprehensive loss is
reclassified into income when interest is paid.
We assess the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of
the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy).
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The market risk inherent in our financial instruments represents the potential loss resulting from adverse changes in interest rates, foreign
currency rates and commodity prices. Our exposure to interest rate changes results from our variable rate debt instruments which are vulnerable
to changes in short term United States prime interest rates. At December 31, 2013, 2012 and 2011, we had approximately $13.2 million, $15.7
million and $24.0 million, respectively, in variable rate debt outstanding. A hypothetical 10% change in interest rates underlying these borrowings
would result in annual changes in our earnings and cash flows of approximately $1.3 million, $1.6 million and $2.4 million at December 31,
2013, 2012 and 2011, respectively. However, the interest rate swap will limit this exposure in future periods on $4.25 million of the outstanding
term debt.
We do not view exchange rates exposure as significant and have not acquired or issued any foreign currency derivative financial instruments.
We purchase all of our 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, our revenues and gross margins could be affected by changes in the price and availability of feedstock and
natural gas. As market conditions dictate, from time to time we engage in various hedging techniques including financial swap and option
agreements. We do not use such financial instruments for trading purposes and are not a party to any leveraged derivatives. Our 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 2013, market risk for 2014 was estimated as a hypothetical 10% increase in the cost of natural gas and feedstock over the market
price prevailing on December 31, 2013. Assuming that 2014 total petrochemical product sales volumes stay at the same rate as 2013 and that
feed prices stay in the range that they were at the end of the year, the
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10% market risk increase will result in an increase in the cost of natural gas and feedstock of approximately $16.2 million in fiscal 2014.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and the consolidated financial statement schedules, including the report of our independent
registered public accounting firm thereon, are set forth beginning on Page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation under the supervision
and with the participation of our management, including our Chief Executive Officer, Executive Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act. Based upon that evaluation, our Chief Executive Officer, Executive Vice President and Chief Financial Officer concluded that
as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be
disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer, Executive
Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as such term in defined in Rule 13a-15(f) of the Exchange Act. Under the
supervision and with the participation of our management, including our Chief Executive Officer, Executive Vice President, and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal
Control – Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Attestation Report of the Registered Public Accounting Firm. BKM Sowan Horan, LLP, an independent registered public accounting firm,
has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report,
included herein, on the effectiveness of our internal control over financial reporting.
(c) Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Arabian American Development Company
We have audited Arabian American Development Company’s internal control over financial reporting as of December 31, 2013, 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 including obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
In our opinion, Arabian American Development Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2013, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Arabian American Development Company as of December 31, 2013 and 2012 and the related consolidated statements of
income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013, and
our report dated March 14, 2014 expressed an unqualified opinion.
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 14, 2014
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Item 9B. Other Information.
None
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Incorporated by reference from our Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2013.
We have adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting
officer and controller, and to persons performing similar functions. A copy of the Code of Ethics has been filed as an exhibit to this Annual
Report on Form 10-K and is available on our website.
Item 11. Executive Compensation.
Incorporated by reference from our Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference from our Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2013.
Item 13. Certain Relationships, Related Transactions, and Director Independence.
Incorporated by reference from our Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2013.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference from our Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2013.
ITEM 15. Exhibits, Financial Statement Schedules.
PART IV
(a)1. The following financial statements are filed with this Report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets dated December 31, 2013 and 2012
Consolidated Statements of Income for the three years ended December 31, 2013
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013
Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2013
Consolidated Statements of Cash Flows for the three years ended December 31, 2013
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, 2013.
3. The financial statements of Al Masane Al Kobra Mining Company (AMAK) for the years ended December 31, 2013,
2012, and 2011, required by Rule 3-09 of Regulation S-X.
32
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Exhibit
Number
3(a)
3(b)
10(a)*
10(b)*
10(c)
10(d)
10(e)
10(f)
14
16
21
23.1
24
31.1
4. 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.
Description
- 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))
- 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))
- Retirement Awards Program dated January 15, 2008 between Arabian American Development Company and Hatem El
Khalidi (incorporated by reference to Exhibit 10(h) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008 (file No. 001-33926))
- Arabian American Development Company Stock and Incentive Plan adopted April 3, 2012 (incorporated by reference to
Exhibit A to the Company’s Form DEF 14A filed April 25, 2012 (file No. 001-33926))
- Articles of Association of Al Masane Al Kobra Mining Company, dated July 10, 2006 (incorporated by reference to
Exhibit 10(m) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (file No. 001-
33926))
- Bylaws of Al Masane Al Kobra Mining Company (incorporated by reference to Exhibit 10(n) to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009 (file No. 001-33926))
- Letter Agreement dated August 5, 2009, between Arabian American Development Company and the other Al Masane Al
Kobra Company shareholders named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed
on August 27, 2009 (file No. 001-33926))
- Limited Guarantee dated October 24, 2010, between Arabian American Development Company and the Saudi Industrial
Development Fund (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 27, 2010 (file
No. 001-33926))
- 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))
- Letter re change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on
Form 8-K dated June 21, 2010 (File No. 001-33926))
- Subsidiaries (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K/A for the year
ended December 31, 2012 (File No. 001-33926))
- Consents of Independent Registered Public Accounting Firms
- Power of Attorney (set forth on the signature page hereto).
- Certification of Chief Executive Officer pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934
33
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Exhibit
Number
31.2
31.3
32.1
32.2
32.3
101.INS
- Certification of Executive Vice President pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934
- Certification of Chief Financial Officer pursuant to Rule 13A-14(A) of the Securities Exchange Act of 1934
Description
- 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
- Certification of Executive Vice President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 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
- XBRL Instance Document
101.SCH
- XBRL Taxonomy Schema Document
101.CAL
- XBRL Taxonomy Calculation Linkbase Document
101.LAB
- XBRL Taxonomy Label Linkbase Document
101.PRE
- XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
- XBRL Taxonomy Extension Definition Linkbase Document
(b) Exhibits required by Regulation 601 S-K
See (a) 3 of this Item 15
(c) Financial Statement Schedules
See (a) 2 of this Item 15
34
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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.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARABIAN AMERICAN DEVELOPMENT COMPANY
SIGNATURES
Dated: March 14, 2014 By: /s/ Nicholas Carter
Nicholas Carter
President and Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of
the Registrant in the capacities indicated on March 14, 2014.
Signature
/s/ Nicholas Carter
Nicholas Carter
/s/ Simon Upfill-Brown
Simon Upfill-Brown
/s/ Connie Cook
Connie Cook
/s/ John R. Townsend
John R. Townsend
/s/ Allen P. McKee
Allen P. McKee
/s/ Joseph P. Palm
Joseph P. Palm
/s/ Ghazi Sultan
Ghazi Sultan
/s/ Gary K. Adams
Gary K. Adams
Title
President, Chief Executive Officer and Director
(principal executive officer)
Executive Vice President
Chief Financial Officer
(principal financial and accounting officer)
Director
Director
Director
Director
Director
36
Table of Contents
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Income For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statement of Stockholders’ Equity For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows For the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II – Valuation and Qualifying Accounts For the Three Years Ended December 31, 2013
Financial Statements of Al Masane Al Kobra Mining Company for the Years Ended December 31, 2013, 2012 and 2011
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Arabian American Development Company
We have audited the accompanying consolidated balance sheets of Arabian American Development Company and Subsidiaries (the Company) as
of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows
for each of the years in the three-year period ended December 31, 2013. Our audit also includes the financial statement schedule listed in the
index at Item 15(a). Arabian American Development Company’s management is responsible for these financial statements and schedule. Our
responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arabian
American Development Company and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2013 in conformity with U. S. generally accepted accounting principles. Also
in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole present
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arabian American
Development Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 14, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 14, 2014
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Trade receivables, net (Note 5)
Advance to AMAK (Note 8)
Prepaid expenses and other assets
Contractual based intangible assets (Note 2)
Inventories (Note 6)
Deferred income taxes (Note 15)
Taxes receivable
Total current assets
PLANT, PIPELINE, AND EQUIPMENT – AT COST
LESS ACCUMULATED DEPRECIATION
PLANT, PIPELINE, AND EQUIPMENT, NET (Note 7)
INVESTMENT IN AMAK (Note 8)
MINERAL PROPERTIES IN THE UNITED STATES (Note 9)
CONTRACTUAL BASED INTANGIBLE ASSETS, net of current portion (Note 2)
OTHER ASSETS
$
December 31,
2013
2012
(thousands of dollars)
$
7,608
22,069
536
2,075
104
12,063
1,324
571
9,508
15,802
2,162
1,561
250
9,840
1,054
1,182
46,350
41,359
75,128
(33,203)
68,482
(28,062)
41,925
40,420
54,095
588
-
709
37,894
588
104
11
TOTAL ASSETS
$
143,667
$
120,376
See notes to the consolidated financial statements.
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ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Accrued interest
Current portion of derivative instruments (Notes 4 and 19)
Accrued liabilities (Note 11)
Accrued liabilities in Saudi Arabia (Note 12)
Notes payable (Note 10)
Current portion of post-retirement benefit (Note 20)
Current portion of long-term debt (Note 10)
Current portion of other liabilities
Total current liabilities
LONG-TERM DEBT, net of current portion (Note 10)
POST- RETIREMENT BENEFIT, net of current portion (Note 20)
DERIVATIVE INSTRUMENTS, net of current portion (Notes 4 and 19)
OTHER LIABILITIES, net of current portion
DEFERRED INCOME TAXES (Note 15)
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 13)
$
December 31,
2013
2012
(thousands of dollars)
$
7,362
102
292
3,048
140
12
278
1,400
1,654
6,306
96
301
2,687
140
12
269
1,500
880
14,288
12,191
11,839
649
319
1,369
11,984
14,239
649
592
379
10,094
40,448
38,144
EQUITY
Common Stock - authorized 40 million shares of $.10 par value; issued and outstanding, 23.8 million and
23.8 million shares in 2013 and 2012, respectively
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Total Arabian American Development Company Stockholders’ Equity
Noncontrolling interest
Total equity
2,383
46,064
(366)
54,849
102,930
289
103,219
2,381
44,791
(580)
35,351
81,943
289
82,232
TOTAL LIABILITIES AND EQUITY
$
143,667
$
120,376
See notes to the consolidated financial statements.
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Table of Contents
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
Revenues
Petrochemical product sales
Processing
Operating costs and expenses
Cost of petrochemical product sales and Processing (including depreciation of $3,518,
$3,053,
and $2,744, respectively)
Gross Profit
General and Administrative Expenses
General and administrative
Depreciation
Operating income
Other income (expense)
Interest income
Interest expense
Losses on cash flow hedge reclassified from OCI
Equity in earnings (loss) of AMAK (Note 8)
Gain from additional equity issuance by AMAK (Note 8)
Miscellaneous income (expense)
Income before income tax expense
Income tax expense
Net income
2013
2012
(thousands of dollars)
2011
$
$
230,643
5,584
236,227
$
218,512
4,346
222,858
194,620
4,897
199,517
201,064
35,163
192,100
30,758
173,600
25,917
14,672
521
15,193
12,782
520
13,302
11,778
476
12,254
19,970
17,456
13,663
15
(520)
(301)
4,703
3,997
(219)
7,675
27,645
3
(547)
(359)
(211)
--
(117)
(1,231)
16,225
4
(699)
(414)
(1,018)
8,850
3
6,726
20,389
8,147
5,904
6,505
19,498
10,321
13,884
Net loss attributable to Noncontrolling Interest
--
--
--
Net income attributable to Arabian American Development Company
Net income per common share
Basic earnings per share (dollars)
Diluted earnings per share (dollars)
Weighted average number of common
shares outstanding
Basic
Diluted
$
$
$
19,498
$
10,321
$
13,884
0.81
0.79
$
$
0.43
0.42
$
$
0.58
0.57
24,115
24,745
24,081
24,745
23,993
24,267
See notes to the consolidated financial statements.
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Table of Contents
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
2013
2012
(thousands of dollars)
2011
NET INCOME
$
19,498
$
10,321
$
13,884
OTHER COMPREHENSIVE GAIN (LOSS), NET OF TAX
Unrealized holding gains (losses) arising during period
Less: reclassification adjustment included in net income
OTHER COMPREHENSIVE GAIN (LOSS), NET OF TAX (Note 19)
515
301
214
527
359
168
(426)
(414)
(12)
COMPREHENSIVE INCOME
$
19,712
$
10,489
$
13,872
See notes to the consolidated financial statements.
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Table of Contents
JANUARY 1, 2011
Stock options
Issued to Directors
Issued to Employees
Issued to Former
Director
Common Stock
Issued to Directors
Issued to Employees
Unrealized Loss
on Interest Rate
Swap (net of income
tax benefit of $6)
Net Income
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2013, 2012, and 2011
ARABIAN AMERICAN DEVELOPMENT STOCKHOLDERS
Common Stock
Accumulated
Additional
Other
Paid-In Comprehensive Retained
Non-
Controlling Total
Shares
(thousands)
23,682
Amount Capital
Income (Loss) Earnings Total
Interest
Equity
$
2,368
$
43,163
$
(thousands of dollars)
$
(736) $
11,146
55,941
$
289
$
56,230
-
-
-
41
8
-
-
-
-
-
4
1
-
-
190
585
97
87
16
-
-
-
-
-
-
-
-
-
-
-
-
190
585
97
91
17
(12)
-
-
13,884
(12)
13,884
-
-
-
-
-
-
-
190
585
97
91
17
(12)
13,884
DECEMBER 31, 2011
23,731
$
2,373
$
44,138
$
(748) $
25,030
$
70,793
$
289
$
71,082
Stock options
Issued to Directors
Issued to Employees
Issued to Former
Director
Common Stock
Issued to Directors
Issued to Employees
Unrealized Gain
on Interest Rate
Swap (net of income tax
expense of $73)
Net Income
-
-
-
53
21
-
-
-
-
-
5
3
-
-
270
489
(317)
92
119
-
-
-
-
-
-
-
-
-
-
270
489
(317)
97
122
-
-
168
-
-
10,321
168
10,321
-
-
-
-
-
-
-
270
489
(317)
97
122
168
10,321
DECEMBER 31, 2012
23,805
$
2,381
$
44,791
$
(580) $
35,351
$
81,943
$
289
$
82,232
Stock options
Issued to Directors
Issued to Employees
Issued to Former
Director
Warrants
Common Stock
Issued to Directors
Issued to Employees
Unrealized Gain
on Interest Rate
Swap (net of income tax
expense of $115)
Net Income
-
-
-
-
12
15
-
-
-
-
-
-
1
1
-
-
377
559
97
181
6
53
-
-
-
-
-
-
-
-
-
-
-
-
-
-
377
559
97
181
7
54
214
-
-
19,498
214
19,498
-
-
-
-
-
-
-
-
377
559
97
181
7
54
214
19,498
DECEMBER 31, 2013
23,832
$
2,383
$
46,064
$
(366) $
54,849
$ 102,930
$
289
$ 103,219
See notes to the consolidated financial statements.
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Table of Contents
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
Operating activities
Net income attributable to Arabian American Development Co.
Adjustments to reconcile net income
of Arabian American Development Co. to Net cash provided by operating activities:
Depreciation
Accretion of notes receivable discounts
Unrealized loss (gain) on derivative instruments
Share-based compensation
Provision for doubtful accounts
Amortization of contractual based intangible asset
Deferred income taxes
Postretirement obligation
Equity in (income) loss of AMAK
Gain from additional equity issuance by AMAK
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables
(Increase) decrease in notes receivable
(Increase) decrease in income tax receivable
Increase in inventories
(Increase) decrease in prepaid expenses and other assets
Increase in other liabilities
Increase in accounts payable and accrued liabilities
Increase (decrease) in accrued interest
Increase (decrease) in accrued liabilities in Saudi Arabia
Net cash provided by operating activities
Investing activities
Additions to plant, pipeline and equipment
Net payment from (advances to) AMAK
Addition to Investment in AMAK
Net cash used in investing activities
Financing Activities
Issuance of common stock
Additions to long-term debt
Repayment of long-term debt
Net cash provided by (used) in financing activities
2013
2012
(thousands of dollars)
2011
$
19,498
$
10,321
$
13,884
4,039
(15)
57
1,215
-
250
1,495
5
(4,703)
(3,997)
(6,267)
(871)
611
(2,223)
(325)
3,048
1,415
6
4
13,242
3,573
(3)
246
515
-
250
889
8
211
-
7,396
(56)
(1,182)
(384)
(940)
353
193
(20)
3
21,373
(6,828)
1,626
(7,500)
(12,702)
(8,143)
(2,042)
-
(10,185)
60
6,000
(8,500)
(2,440)
146
2,000
(10,500)
(8,354)
3,220
(1)
(215)
872
55
250
3,238
11
1,018
(8,850)
(12,041)
35
216
(3,539)
110
1,628
4,246
(5)
(76)
4,056
(6,518)
(120)
-
(6,638)
108
6,000
(4,462)
1,646
See notes to the consolidated financial statements.
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Table of Contents
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the years ended December 31,
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash payments for interest
Cash payments (net of refunds) for taxes
Supplemental disclosure of non-cash items:
Other liabilities for capital expansion amortized to depreciation expense
Unrealized loss/(gain) on interest rate swap, net of tax benefit/expense
2013
2012
(thousands of dollars)
(1,900)
2,834
9,508
6,674
2011
(936)
7,610
7,608
$
9,508
$
6,674
802
6,006
$
$
912
6,650
$
$
1,071
3,045
1,284
$
(214) $
1,102
$
(168) $
210
12
$
$
$
$
$
See notes to the consolidated financial statements.
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Table of Contents
NOTE 1 - 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 activity is manufacturing various specialty petrochemical products (also referred to as the “Petrochemical Operations”). At December
31, 2013, the Company also owned 35% of a Saudi Arabian joint stock company, Al Masane Al Kobra Mining Company (“AMAK”) (see
Note 8) and approximately 55% of the capital stock of a Nevada mining company, Pioche Ely Valley Mines, Inc. (“PEVM”), which does not
conduct any substantial business activity but owns undeveloped properties in the United States.
The Company’s petrochemical operations are primarily conducted through a wholly-owned subsidiary, Texas Oil and Chemical Co. II, Inc.
(“TOCCO”). TOCCO owns all of the capital stock of South Hampton Resources Inc. (“South Hampton”). South Hampton owns all of the
capital stock of Gulf State Pipe Line Company, Inc. (“Gulf State”). South Hampton owns and operates a specialty petrochemical product
facility near Silsbee, Texas which manufactures high purity solvents used primarily in polyethylene, packaging, polypropylene, expandable
polystyrene, poly-iso/urethane foams, Canadian tar sands, and in the catalyst support industry. Gulf State owns and operates 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 attributes revenues to countries based upon the origination of the transaction. All of our revenues for the years ended
December 31, 2013, 2012, and 2011, originated in the United States. In addition, all of our long-lived assets are in the United States.
For convenience in this report, the terms “Company”, “our”, “us” or “we” may be used to refer to Arabian American Development Company
and its subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the balance sheets, statements of income, statements of
comprehensive income, statement of stockholders’ equity, and cash flows of the Company, TOCCO, South Hampton, Gulf State and PEVM.
Other entities which are not controlled but over which the Company has the ability to exercise significant influence such as AMAK, are
accounted for using the equity method of accounting.
Cash, Cash Equivalents and Short-Term Investments - Our 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.
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 – We evaluate the collectability of our accounts receivable and adequacy of
the allowance for doubtful accounts based upon historical experience and any specific customer financial difficulties of which we become
aware. For the years ended December 31, 2013, 2012, and 2011, the allowance balance was increased by $0, $0, and $55,000
respectively. We track customer balances and past due amounts to determine if customers 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 2013, 2012 or 2011.
Notes Receivable – We periodically make changes in or expand our toll processing units at the request of the customer. The cost to make
these changes is shared by the customer. Upon completion of a project a non-interest note receivable is recorded with an imputed interest
rate. Interest rates used on outstanding notes during December 31, 2013, and 2012, were between 4% and 9%. The unearned interest is
reflected as a discount against the note balance. The Company evaluates the collectability of notes based upon a working knowledge of the
customer. The notes are receivable from toll processing customers with whom we maintain a close relationship. Thus, all amounts
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due under the notes receivable are considered collectible, and no allowance was recorded at December 31, 2013 and 2012.
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. At December 31, 2013, and 2012, our remaining mining assets held by PEVM had not reached the commercial
exploitation stage. No indirect overhead or general and administrative costs have been allocated to this project.
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 plant, pipeline and equipment and are depreciated over the service life of the related assets.
Platinum catalyst is included in plant, 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).
Investment in AMAK – We account for our investment in AMAK using the equity method of accounting under which we record in income
our share of AMAK’s income or loss for each period. The amount recorded is also adjusted to reflect the amortization of certain differences
between the basis in our investment in AMAK and our share of the net assets of AMAK as reflected in AMAKs financial statements (see
Note 8).
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an
adverse effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be
generated by the production of those reserves, as well as, recent equity transactions within AMAK.
Contractual Based Intangible Assets – The contractual based intangible asset represented Silsbee Trading and Transportation Company’s
(“STTC”) right under its lease agreement to lease equipment to and receive lease payments from South Hampton through May 2014. The
amount recorded for this asset was based on the discounted net cash flows STTC would have received, and represents South Hampton’s cost
to cancel the lease by acquiring STTC. These costs are being amortized straight line over the remaining life of the lease at acquisition which at
December 31, 2013, and 2012, was 5 and 17 months, respectively. The amortization expense expected to be recognized for the year ending
December 31, 2014, is approximately $104,000.
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 based on the undiscounted net cash flows to be generated from the asset’s use. 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 – Revenue is recorded when (1) the customer accepts delivery of the product and title has been transferred or when the
service is performed and we have no significant obligations remaining to be performed; (2) a final understanding as to specific nature and
terms of the agreed upon transaction has occurred; (3) price is fixed and (4) collection is assured. For our petrochemical product sales these
criteria are generally met, and revenue is
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recognized, when the product is delivered or title is transferred to the customer. Sales are presented net of discounts, allowances, and sales
taxes. Freight costs billed to customers are recorded as a component of revenue.
Shipping and handling costs - Shipping and handling costs are classified as cost of petrochemical product sales and processing and are
expensed as incurred.
Retirement plan – We offer employees the benefit of participating in a 401(K) plan. We match 100% up to 6% of pay with vesting occurring
over 7 years. For years ended December 31, 2013, 2012, and 2011, matching contributions of approximately $554,000, $518,000, and
$472,000, respectively were 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 – We periodically make changes in or expand our toll processing units at the request of the customer. The cost to make
these changes is shared by the customer. Upon completion of a project a note receivable and a deferred liability are recorded to recover the
project costs which are then capitalized. At times instead of a note receivable being established, the customer pays an upfront cost. The
amortization of other liabilities is recorded as a reduction to depreciation expense over the life of the contract with the customer. As of
December 31 of each year, depreciation expense was reduced by approximately $1.3 million for 2013, $1.1 million for 2012, and $0.2 million
for 2011.
Net Income Per Share - We compute 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 16).
Foreign Currency - The functional currency for the Company and each of the Company’s subsidiaries is the US dollar (USD). Transaction
gains or losses as a result of transactions denominated and settled in currencies other than the USD are reflected in the statements of income as
foreign exchange transaction gains or losses. We do not employ any practices to minimize foreign currency risks. The functional and
reporting currency of AMAK is the Saudi Riyal (SR). In June 1986 the SR was officially pegged to the USD at a fixed exchange rate of 1
USD to 3.75 SR; therefore, we translate SR into our reporting currency of the USD for income statement and balance sheet purposes using
the fixed exchange rate. As of December 31, 2013, 2012 and 2011, foreign currency translation adjustments were not significant.
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 periods. Significant estimates include allowance for doubtful accounts receivable; assessment of impairment of
our long-lived assets and investments, financial contracts, litigation liabilities, post-retirement benefit obligations, guarantee obligations,
environmental liabilities and deferred tax valuation allowances. Actual results could differ from these estimates.
Share-Based Compensation – We recognize share-based compensation of stock options granted based upon the fair value of options on the
grant date using the Black-Scholes pricing model (see Note 14). 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 statements of income for the years ended December 31, 2013, 2012, and 2011 includes compensation expense
based on the estimated grant date fair value for awards that are ultimately expected to vest, and accordingly has been reduced for estimated
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forfeitures. Estimated forfeitures at the time of grant are revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
Guarantees – We may enter into agreements which contain features that meet the definition of a guarantee under FASB ASC 460
“Guarantees” (see Note 13). These arrangements create two types of obligations:
a) We have a non-contingent and immediate obligation to stand ready to make payments if certain future triggering events occur.
For certain guarantees, a liability is recognized for the stand ready obligation at the inception of the guarantee; and
b) We have an obligation to make future payments if those certain future triggering events do occur. A liability for the payment
under the guarantee is recognized when 1) it becomes probably that one or more future events will occur triggering the
requirement to make payments under the guarantee and 2) when the payment can be reasonably estimated.
Derivatives – We record derivative instruments as either an asset or liability measured at fair value. Changes in the derivative instrument’s fair
value are recognized currently in earnings unless specific 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.
Our estimate of the potential outcome of any uncertain tax issues is subject to management’s assessment of relevant risks, facts, and
circumstances existing at that time. We use a more likely than not threshold for financial statement recognition and measurement of tax position
taken or expected to be taken in a tax return. To the extent that our assessment of such tax position changes, the change in estimate is recorded
in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense. We
recognized no material adjustment in the liability for unrecognized income tax benefits. As of December 31, 2013, and 2012, no interest or
penalties related to uncertain tax positions had been accrued.
New Accounting Pronouncements
In July 2012 the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets
for Impairment. This is amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for
impairment. After an assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is
impaired; entities must perform the quantitative impairment test. Otherwise, the quantitative test is optional. The amended guidance is
effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption
permitted. The update had no impact on the Company’s consolidated financial statements.
In February 2013 the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other
Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or
in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is
required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does
not change the current requirements for reporting net income or other comprehensive
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income in the financial statements. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The update had no
impact on the Company’s consolidated financial statements.
NOTE 3 - CONCENTRATIONS OF REVENUES AND CREDIT RISK
We sell our products and services to companies in the chemical, plastics, and petroleum industries. We perform periodic credit evaluations of
our customers and generally do not require collateral from our customers. For the year ended December 31, 2013, two customers accounted
for 16.5% and 16.2% of total product sales. For the year ended December 31, 2012, two customers accounted for 13.2% and 12.1% of total
product sales. For the year ended December 31, 2011, two customers accounted for 12.9% and 12.6% of total product sales. The associated
accounts receivable balances for those customers were approximately $7.7 million and $1.9 million and $2.4 million and $1.1 million as of
December 31, 2013 and 2012, respectively. The carrying amount of accounts receivable approximates fair value at December 31, 2013.
Accounts receivable serving as collateral for our line of credit with a domestic bank was $17.7 million and $11.7 million at December 31,
2013 and 2012, respectively (see Note 10).
We market our products in many foreign jurisdictions. For the years ended December 31, 2013, 2012 and 2011, sales revenue in foreign
jurisdictions accounted for approximately 26.2%, 24.7%, and 22.2%, respectively.
We utilize one major supplier for our feedstock supply. The feedstock is a commodity product commonly available from other suppliers if
needed. The percentage of feedstock purchased from the supplier during 2013, 2012, and 2011 was 99%, 100% and 98%, respectively. At
December 31, 2013, and 2012, we owed the supplier approximately $5.2 million and $3.7 million, respectively for feedstock purchases.
We hold our 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. We have not experienced any losses in such accounts and do not believe we are exposed
to any significant risk of loss related to cash.
NOTE 4 – FAIR VALUE MEASUREMENTS
The carrying value of cash and cash equivalents, accounts receivable, taxes receivable, advance to AMAK, accounts payable, accrued interest,
accrued liabilities, accrued liabilities in Saudi Arabia and other liabilities approximate fair value due to the immediate or short-term maturity of
these financial instruments. The carrying value of notes receivable approximates the fair value due to their short-term nature and historical
collectability. The fair value of variable rate long term debt and notes payable reflect recent market transactions and approximate carrying
value. We used other observable inputs that would qualify as Level 2 inputs to make its assessment of the approximate fair value of its cash
and cash equivalents, accounts receivable, notes receivable, taxes receivable, advance to AMAK, accounts payable, accrued interest, accrued
liabilities, accrued liabilities in Saudi Arabia, other liabilities and variable rate long term debt and notes payable. The fair value of the derivative
instruments are described below.
We measure fair value by ASC Topic 820 Fair Value. ASC Topic 820 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. ASC Topic 820 applies to reported balances that are required or permitted to be
measured at fair value under existing accounting pronouncements; accordingly, the standard amends numerous accounting pronouncements
but does not require any new fair value measurements of reported balances. ASC Topic 820 emphasizes that fair value, among other things, is
based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a
market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in
pricing the asset or liability, ASC Topic 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based
on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the
hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of
the hierarchy). The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.
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Level 1 inputs
Level 2 inputs
Level 3 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 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 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. Our 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
We periodically enter into financial instruments to hedge the cost of natural gasoline (the primary feedstock) and natural gas (used as fuel to
operate the plant). We use financial swaps on feedstock and options on natural gas to limit the effect of significant fluctuations in price on
operating results.
We assess 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). At December 31, 2013, we had derivative contracts with settlement dates through February 2014. At December 31,
2012, no commodity financial instruments were outstanding. For additional information see Note 19.
Interest Rate Swaps
In March 2008 we entered into an interest rate swap agreement with Bank of America related to the $10.0 million term loan secured by plant,
pipeline and equipment. The interest rate swap was designed to minimize the effect of changes in the LIBOR rate. We have designated the
interest rate swap as a cash flow hedge under ASC Topic 815 (see Note 19).
We assess 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 at December 31, 2013 and 2012:
December 31, 2013
Liabilities:
Interest rate swap
Commodity financial instruments
December 31, 2012
Liabilities:
Interest rate swap
Fair Value Measurements Using
Level 2
Level 1
Total
(thousands of dollars)
Level 3
$
$
563
48
$
-
48
$
563
-
-
-
Fair Value Measurements Using
Level 2
Level 1
Total
(thousands of dollars)
Level 3
$
893
-
$
893
-
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We have consistently applied valuation techniques in all periods presented and believe we have obtained the most accurate information
available for the types of derivative contracts it holds.
NOTE 5 – TRADE RECEIVABLES
Trade receivables, net, at December 31, 2013, and 2012, respectively, consisted of the following:
Trade receivables
Less allowance for doubtful accounts
Trade receivables, net
2013
2012
(thousands of dollars)
$
$
22,279
$
(210)
16,012
(210)
22,069
$
15,802
Trade receivables serving as collateral for our line of credit with a domestic bank was $17.7 million and $11.7 million at December 31, 2013,
and 2012, respectively (see Note 10).
NOTE 6 – INVENTORIES
Inventories include the following at December 31:
Raw material
Finished products
Total inventory
2013
2012
(thousands of dollars)
$
$
$
2,403
9,660
3,591
6,249
12,063
$
9,840
Inventory serving as collateral for our line of credit with a domestic bank was $4.9 million and $5.1 million at December 31, 2013, and 2012,
respectively (see Note 10).
At December 31, 2013, and 2012, current cost exceeded the LIFO value by approximately $1.5 million and $2.2 million, respectively.
Inventory included products in transit valued at approximately $4.4 million and $2.9 million at December 31, 2013, and 2012, respectively.
NOTE 7 – PLANT, PIPELINE AND EQUIPMENT
Platinum catalyst
Land
Plant, pipeline and equipment
Construction in progress
Total plant, pipeline and equipment
Less accumulated depreciation
Net plant, pipeline and equipment
2013
2012
(thousands of dollars)
$
1,612
1,577
71,115
824
75,128
(33,203)
$
41,925
1,612
1,577
64,356
937
68,482
(28,062)
40,420
$
$
Plant, pipeline and equipment serve as collateral for a $14.0 million term loan with a domestic bank (see Note 10).
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Interest capitalized for construction for 2013, 2012 and 2011 was not significant to the consolidated financial statements.
Catalyst amortization relating to the platinum catalyst which is included in cost of sales was $38,232, $19,268 and $12,736 for 2013, 2012 and
2011, respectively.
NOTE 8 - INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”)
We have concluded that we have significant influence over the operating and financial policies of AMAK, and accordingly should account for
our investment in AMAK using the equity method. As of December 31, 2013, and 2012, we had a non-controlling equity interest of
approximately $54.1 million and $37.9 million, respectively.
We have received and attached to this Form 10-K as an attachment the financial statements of AMAK prepared in accordance with generally
accepted accounting principles in the United States of America as of December 31, 2013, 2012, and 2011, and for the years then ended. These
financial statements have been prepared in the functional currency of AMAK which is the Saudi Riyal (SR). In June 1986 the SR was
officially pegged to the U.S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR.
The summarized results of operation and financial position for AMAK are as follows:
Results of Operations
Sales
Gross Profit
General, administrative and other expenses
Net Income (loss)
Financial Position
$
$
Current assets
Noncurrent assets
Total assets
Current liabilities
Long term liabilities
Shareholders' equity
Years Ended December 31,
2013
2012
(Thousands of Dollars)
$
$
104,990
21,881
12,360
9,521
15,594
3,825
6,328
(2,503) $
2011
-
-
2,621
(2,621)
$
$
$
$
$
December 31,
2013
2012
(Thousands of Dollars)
32,923
264,997
297,920
22,497
75,826
199,597
297,920
$
$
$
$
32,827
261,620
294,447
135,111
9,260
150,076
294,447
The equity in the income or loss of AMAK reflected on the consolidated statement of income for the years ended December 31, 2013, 2012,
and 2011, is comprised of the following:
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Company’s share of earnings (losses) reported by AMAK
Amortization of difference between Company’s investment in AMAK
and Company’s share of net assets of AMAK
Equity in earnings (losses) of AMAK
2013
3,356
1,347
4,703
$
$
$
$
2012
(885) $
674
(211) $
2011
(1,018)
-
(1,018)
A gain of approximately $16.2 million for the difference between our initial investment in AMAK and our share of AMAK’s initial assets
recorded at fair value was not recognized in 2008. This basis difference is being amortized over the life of AMAK’s mine which is estimated
to be twelve years beginning with its commencement of production in July 2012 as an adjustment to our equity in AMAK’s income or loss.
In December 2012 the Board of Directors of AMAK authorized the issuance of additional shares of AMAK in an amount equal to ten percent
of the then outstanding shares to raise funds for working capital requirements and retirement of construction debt. In January 2013 we entered
into an agreement with AMAK to purchase an additional 937,500 shares of AMAK at 30 Saudi Riyals (USD $8.00) per share, for a total of
USD $7.5 million. Due to the continued improvement in the operations of AMAK and a desire to prevent a substantial dilution of its
investment, we elected to purchase these additional shares. As a result of this purchase and upon completion of the raise on May 27, 2013,
our ownership percentage in AMAK became approximately 35%. All existing AMAK shareholders had the opportunity to buy into the issue
and all shares were placed within that group. As a result of the equity raise in 2013, the Company’s share of the net assets of AMAK
increased approximately $4.0 million which the Company recognized as a gain (with a corresponding increase in its investment) in accordance
with ASC 323-10-40-1.
In July 2011 Arab Mining Company (“ARMICO”) invested US $37.3 million in AMAK and acquired 5 million shares, representing a 10%
interest in AMAK. ARMICO also acquired a seat on AMAK’s board which is being held by Mr. Sultan Al-Shawli, Saudi Deputy Minister
for Petroleum and Minerals. Mr. Al-Shawli’s election increased the total number of board members to nine with us retaining four. This
transaction changed our ownership percentage in AMAK to 37% and the ownership interest of the Saudi shareholders to 53%. As a result of
the ARMICO transaction, our share of the net assets of AMAK increased by approximately $8.9 million which we recognized as a gain (with
a corresponding increase in its investment) in 2011 in accordance with ASC 323-10-40-1.
We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an
adverse effect on the fair value of the investment. We consider recoverable ore reserves and the amount and timing of the cash flows to be
generated by the production of those reserves, as well as, recent equity transactions within AMAK. No impairment charges were recorded in
2013, 2012, or 2011.
Working Capital Advances to AMAK
During 2012 we advanced $2,041,000 to AMAK for working capital purposes of which approximately $2,016,000 was repaid in May of
2013. Additional amounts have been paid on behalf of AMAK during 2013 for marketing advisory services and spare parts inventory
management. These amounts are expected to be repaid during 2014. The amounts due from AMAK at December 31, 2013, and 2012, were
approximately $536,000 and $2,162,000, respectively.
NOTE 9 - MINERAL PROPERTIES IN THE UNITED STATES
The principal assets of PEVM 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 PEVM Mining District in southeast Nevada. In August 2001, 75
unpatented claims were abandoned since they were deemed to have no future value to PEVM. Due to the lack of capital, the properties held
by PEVM have not been commercially operated for approximately 35 years.
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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:
Notes payable:
Other
Long-term debt:
Revolving note to domestic bank (A)
Term notes to domestic bank (B)
Term note to CEO (C)
Total long-term debt
Less current portion
2013
2012
(thousands of dollars)
12
12
6,489
6,750
-
7,489
8,150
100
13,239
15,739
1,400
1,500
Total long-term debt, less current portion
$
11,839
$
14,239
(A) 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 loan was originally due to expire on October 31, 2008, but has been amended to extend the termination
date to June 30, 2015. Additional amendments were entered into during 2008 and 2009 which ultimately increased the availability of
the line to $18.0 million based upon the Company’s accounts receivable and inventory. At December 31, 2013, and 2012, there was a
long-term amount outstanding of $6.5 million and $7.5 million, respectively. The credit agreement contains a sub-limit of $3.0 million
available to be used in support of the hedging program. The interest rate on the loan varies according to several options and the amount
outstanding. At December 31, 2013 the rate was 3.25%, and approximately $11.5 million 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. Interest is paid
monthly. Covenants that must be maintained include EBITDA, capital expenditures, dividends payable to parent, and leverage
ratio. At December 31, 2013, we were in compliance with all covenants of the agreement.
(B) 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 plant, pipeline and equipment. The agreement
expires October 31, 2018. At December 31, 2013, and 2012, there was a short-term amount of $1.4 million and $1.4 million and a
long-term amount of $5.4 million and $6.8 million outstanding, respectively. The interest rate on the loan varies according to several
options. At December 31, 2013, the variable interest rate under the loan was 3.25%. However, as discussed in Note 19, effective
August 2008 we entered into a pay-fixed, receive-variable interest rate swap with the lending bank which has the effect of
converting the interest rate on $10.0 million of the loan to a fixed rate. Principal payments of $350,000 are paid quarterly with
interest being paid monthly.
(C) On November 30, 2010, as part of the consideration paid for the acquisition of STTC, a note payable issued to our CEO, previous
owner of STTC, for $300,000. Principal of $100,000 plus accrued interest at 4.0% per annum is payable annually on November
30th of each year. At December 31, 2013, and 2012, there was a short-term amount of $0 and $100,000 outstanding, respectively.
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Principal payments of long-term debt for the next five years and thereafter ending December 31 are as follows:
Year Ending December 31,
2014
2015
2016
2017
2018
Total
NOTE 11 – ACCRUED LIABILITIES
Accrued liabilities at December 31 are summarized as follows:
Accrued state taxes
Accrued payroll
Accrued officers’ compensation
Accrued environmental costs (Note 13)
Other liabilities
Total
NOTE 12 – ACCRUED LIABILITIES IN SAUDI ARABIA
Long-Term
Debt
(thousands of
dollars)
$
$
1,400
7,889
1,400
1,400
1,150
13,239
2013
2012
(thousands of dollars)
224
1,238
650
203
733
3,048
$
$
197
1,035
547
350
558
2,687
$
$
The following liabilities represent amounts owed to the former CEO who retired in 2009. These amounts remain outstanding due to the
lawsuits described in Note 13. Accrued liabilities in Saudi Arabia at December 31 are summarized as follows:
Termination benefits
Other liabilities
Total
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Guarantees –
2013
2012
(thousands of dollars)
$
43
97
140
$
43
97
140
$
$
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, 2012 and 2011 is $66,570 related to this guaranty.
On October 24, 2010, we executed a limited guarantee in favor of the Saudi Industrial Development Fund (“SIDF”) whereby we agreed to
guaranty up to 41% of the SIDF loan to AMAK in the principal amount of 330,000,000 Saudi Riyals (US$88,000,000) (the “Loan”). The
term of the loan is through June 2019. As a condition of the Loan, SIDF required all shareholders of AMAK to execute personal or corporate
guarantees; as a result, the Company’s guarantee is for approximately 135,300,000 Saudi Riyals (US$36,080,000). The loan was necessary to
continue construction of the AMAK facilities and provide working capital needs. Our current assessment is that the probability of contingent
performance was remote based on our analysis of the contingent portion of the guarantee which included but was not limited to the
following: (1) the SIDF has historically not called guarantees, (2) the value of the assets exceeds the amount of the loan (3) the other
shareholders have indicated that they would
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prioritize their personal guarantees ahead of the corporate guarantee, and (4) according to Saudi Arabian legal counsel, assets outside of Saudi
Arabia are protected from the Saudi Court System. We received no consideration in connection with extending the guarantee and did so to
maintain and enhance the value of our investment. Our non-contingent and immediate obligation to stand ready to make payments if the events
of default under the guarantee occur was not material to the financial statements.
Operating Lease Commitments –
We have operating leases for the rental of over 200 railcars for shipping purposes with expiration dates through 2020. Invoices are received
and paid on a monthly basis. The total amount of the commitment is approximately $5.3 million over the next 7 years.
We also have an operating lease for our office space in Sugar Land, TX. The expiration date for this lease is 2018. The total amount of the
commitment is approximately $0.4 million. In addition we are required to make periodic payments for property taxes, utilities and common
area operating expenses.
Future minimum property and equipment lease payments under the non-cancelable operating leases at December 31, 2013, are as follows:
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Long-Term
Debt
(thousands of
dollars)
$
$
1,742
1,639
1,369
606
203
131
5,690
Rental expense for these operating leases for the years ending December 31, 2013, 2012, and 2011 was $1.8 million, $1.7 million and $1.0
million, respectively.
Litigation -
On May 9, 2010, after numerous attempts to resolve certain issues with Mr. Hatem El Khalidi, the Board of Directors terminated the
retirement agreement, options, retirement bonuses, and all outstanding directors’ fees due to Mr. El Khalidi, former CEO, President and
Director of the Company. In June 2010 Mr. El Khalidi filed suit against the Company in the labor courts of Saudi Arabia alleging additional
compensation owed to him for holidays and overtime. The Company believes that the claims are unsubstantiated and continues to vigorously
defend the case.
In September 2010 Mr. El Khalidi threatened suit against the Company in the U.S. alleging breach of contract under the above agreements and
other claims. In late 2010 the Company filed suit against Mr. El Khalidi in the United States District Court in the Eastern District of Texas,
Beaumont Division, seeking a declaratory judgment that all monies allegedly owed to Mr. El Khalidi are terminated (the “Federal Court
Case”). On March 21, 2011, Mr. El Khalidi filed suit against the Company in the 14th Judicial District Court of Dallas County, Texas for
breach of contract and defamation (the “State Court Case”). On July 1, 2011, the Company and Mr. El Khalidi entered into an agreement to
dismiss the Federal Court Case and transfer venue for the State Court Case from Dallas County, Texas to Hardin County, Texas. Pursuant to
this agreement, the Federal Court Case was dismissed on July 13, 2011, and the State Court Case was transferred to the 88th Judicial Court of
Hardin County, Texas on July 15, 2011. On July 24, 2013, the 88th Judicial District Court of Hardin County, Texas dismissed all claims and
counterclaims for want of prosecution. Mr. El Khalidi subsequently filed a notice of intent to appeal the dismissal with the Ninth Court of
Appeals of Texas.
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Liabilities of approximately $1.1 million remain recorded, and the options will continue to accrue in accordance with their own terms until all
matters are resolved.
On September 14, 2010, South Hampton received notice of a lawsuit filed in the 58th Judicial District Court of Jefferson County, Texas
which was subsequently transferred to the 11th Judicial District Court of Harris County, Texas. The suit alleges that the plaintiff became ill
from exposure to asbestos. There are approximately 44 defendants named in the suit. South Hampton has placed its insurers on notice of the
claim and plans to vigorously defend the case.
On December 20, 2010, South Hampton received notice of a lawsuit filed in the 88th Judicial District Court of Hardin County, Texas. The suit
alleges that the plaintiff sustained injuries when he fell off his employer’s truck while in South Hampton’s facility. South Hampton placed its
insurers on notice of the claim, and its insurers are defending the case. On February 26, 2014, South Hampton’s insurer settled the case.
On April 14, 2011, and April 27, 2011, South Hampton received notice of three lawsuits filed in the 58th, 172nd, and 136th Judicial District
Courts of Jefferson County, Texas. The suits allege that the plaintiffs became ill from benzene exposure during their employment with
Goodyear Tire and Rubber Company, an alleged customer of South Hampton. There are numerous defendants named in the suits. On April
10, 2013, South Hampton entered into agreements with counsel for plaintiffs to settle the 3 lawsuits for an amount not significant to the
financial statements.
No accruals have been recorded for these last 5 claims. We are involved in various claims and lawsuits incidental to our business.
Environmental Remediation -
In 2008 we 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 Ely Valley
Mines, Inc. (“PEVM”). The BLM’s claim alleged that mine tailings from the processing mill containing lead and arsenic migrated onto BLM
property during the first half of the twentieth century. World Hydrocarbons, Inc. responded to the BLM by stating that it does not own the
mill and that PEVM is the owner and responsible party. PEVM subsequently retained an environmental consultant and a local contractor to
assist with the cleanup. In June and July 2013 the contractor excavated and transported tailings from BLM property and other surrounding
properties to an impoundment area located on PEVM property. The cleanup is complete except for some minor work involving haul ramps
and brush piles on BLM property. Once this is complete PEVM expects to receive a no-further-action letter (NFA), or equivalent, from
BLM. The environmental consultant submitted a report to the Nevada Division of Environmental Protection on the entire removal project
including a neighbor’s adjoining property, and PEVM received an NFA on October 30, 2013. Finally, PEVM will need to cover the tailings
impoundment where all of the tailings were placed and improve the impoundment walls. Once that work is complete and fencing is repaired,
all of the remaining work will be complete. The contractor is expected to start on the finish work in 2014 as soon as the ground thaws enough
to excavate clean cover soil. We agreed to advance approximately $250,000 to PEVM for payment of the contractor and in return, PEVM will
transfer interest in selected patented mining claims of equivalent value to the Company. An accrual for $350,000 was recorded by PEVM in
2010 and $203,000 remained outstanding at December 31, 2013.
Amounts charged to expense for various activities related to environmental monitoring, compliance, and improvements were approximately
$386,000 in 2013, $404,000 in 2012 and $543,000 in 2011.
NOTE 14 - SHARE-BASED COMPENSATION
Common Stock – In September 2012 we issued 7,500 shares of restricted common stock to our newly appointed Executive Vice
President. Compensation expense of $72,600 was recognized in connection with this issuance.
Stock Options – On April 3, 2012, the Board of Directors of the Company adopted the Arabian American Development Company Stock and
Incentive Plan (the “Plan”) subject to the approval of Company’s shareholders.
F-22
Table of Contents
Shareholders approved the Plan at the 2012 Annual Meeting of Shareholders on June 6, 2012. We filed Form S-8 to register the 1,500,000
shares allocated to the Plan on May 8, 2013.
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. We filed Form
S-8 to register the 1,000,000 shares allocated to the Stock Option Plans on October 23, 2008.
A summary of all 2013 issuances is as follows:
On May 29, 2013, we awarded 10 year options to Simon Upfill-Brown for 90,000 shares. These options have an exercise price equal to the
closing price of the stock on May 29, 2013, which was $7.71 and vest in 25% increments over a 4 year period. Compensation expense
recognized during 2013 in connection with this award was approximately $84,000. The fair value of the options granted was calculated using
the Black-Scholes option valuation model with the following assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk free interest rate
85%
None
6.25
1.33%
On February 1, 2013, we issued a warrant for the purchase of 100,000 shares of common stock to Genesis Select Corporation (“Genesis”) at
a strike price of $10.00 per share. The term of the warrant is 5 years with 50% vesting in equal increments of 1/12th each calendar month
throughout the first year. The remaining 50% will vest in equal increments of 1/36th each calendar month over years 2 through 4 contingent
upon continuous investor relations service under the consulting agreement with Genesis. Investor relations expense recognized in connection
with this warrant was approximately $180,000 in 2013.
A summary of all 2012 issuances is as follows:
On November 15, 2012, we awarded 10 year options to Director Gary Adams for 100,000 shares. These options have an exercise price equal
to the closing price of the stock on November 15, 2012, which was $7.14 and vest in 20% increments over a 5 year period. Compensation
expense recognized during 2013 and 2012 in connection with this award was approximately $ 120,000 and $15,000, respectively. The fair
value of the options granted was calculated using the Black-Scholes option valuation model with the following assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk free interest rate
A summary of all 2011 issuances is as follows:
87%
None
6.5
0.92%
On May 20, 2011, we awarded 10 year options to Director Joseph Palm for 19,333 shares with the intent to increase the aggregate grant to
100,000 shares as they become available. The initial grant of 19,333 options has an exercise price equal to the closing price of the stock on
May 20, 2011, which was $3.90 and vest after 1 year. Compensation expense recognized during 2013, 2012, and 2011 in connection with
this award was approximately $0, $24,000, and $33,000, respectively. On September 25, 2011, additional shares became available under the
plan; therefore, we awarded 10 year options to Mr. Palm for 80,000 shares with an exercise price equal to the closing price of the stock on
September 23, 2011, (the latest closing date available) which was $3.52. These options vest over 4.67 years with the first 20,000 vesting on
May 19, 2013, and subsequent 20,000 share lots vesting each anniversary of that date subsequent until entirely vested. No compensation
expense was recognized in connection with this award during
F-23
Table of Contents
2011 due to the unvested nature of the options. Compensation expense recognized for 2013 and 2012 was approximately $65,000 and
$38,000, respectively.
On May 2, 2011, we awarded 10 year options to Director John Townsend for 100,000 shares. These options have an exercise price equal to
the closing price of the stock on May 2, 2011, which was $4.09 and vest in 20% increments over a 5 year period. Compensation expense
recognized during 2013, 2012, and 2011 in connection with this award was approximately $80,000, $80,000, and $54,000, respectively.
On January 12, 2011, we awarded 10 year options to key employees for 391,000 shares. These options have an exercise price equal to the
closing price of the stock on January 12, 2011, which was $4.86 and vest in 25% increments over a 4 year period. Compensation expense
recognized during 2013, 2012, and 2011 in connection with this award was approximately $475,000 each year.
The fair value of the 2011 options granted was calculated using the Black-Scholes option valuation model with the following range of
assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk free interest rate
A summary of all 2010 issuances is as follows:
96% to 413%
None
5-10
1.26% to 3.34%
In January 2010 we awarded fully vested options to our non-employee directors for 32,667 shares in total for their service during 2009. The
exercise price of the options is $2.21 per share based upon the closing price on January 28, 2010. The options have a remaining life of 6.1
years as of December 31, 2013. In January 2010 the Company also awarded 95,000 options to officers and key employees for their service
during 2009. The exercise price of the options was also $2.21. These options vest over a 2 year period. Compensation expense recognized
during 2013, 2012 and 2011 in connection with this award was approximately $0, $8,000 and $97,000, respectively.
In February 2010 we awarded 500,000 options to non-employee directors for their service during 2010 subject to attendance and service
requirements. These options vest over a 5 year period. The exercise price of these options is $2.82 based upon the closing price on February
23, 2010. Directors’ fee expense recognized during 2013, 2012 and 2011 in connection with this award was approximately $113,000,
$113,000 and $103,000, respectively.
In June 2010 we awarded a 7 year option to purchase 10,000 shares of restricted stock to a key employee with a vesting period of 2
years. The exercise price of the options is $2.47 per share based upon the closing price on June 22, 2010. The options have a remaining life
of 3.5 years as of December 31, 2013. Compensation expense recognized in connection with this award during 2013, 2012 and 2011 was
approximately $0, $6,000 and $12,000, respectively.
The fair value of the 2010 options granted was calculated using the Black-Scholes option valuation model with the following range of
assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk free interest rate
A summary of unvested 2009 issuances is as follows:
338% to 467%
None
5-10
2.37% to 3.68%
On July 2009 we awarded two stock options to Mr. Hatem El Khalidi and his wife, Ingrid El Khalidi, tied to the performance of AMAK as
follows: (1) an option to purchase 200,000 shares of the Company’s common stock with
F-24
Table of Contents
an exercise price of $3.40 per share, equal to the closing sale price of such a share as reported on the Nasdaq National Market System on July
2, 2009, provided that said option may not be exercised until such time as the first shipment of ore from the Al Masane mining project is
transported for commercial sale by AMAK, and further that said option shall terminate and be immediately forfeited if not exercised on or
before June 30, 2012; and (2) an option to purchase 200,000 shares of the Company’s common stock with an exercise price equal to the
closing sale price of such a share as reported on the Nasdaq Stock Market on July 2, 2009, provided that said option may not be exercised
until such time as the Company receives its first cash dividend distribution from AMAK, and further that said option shall terminate and be
immediately forfeited if not exercised on or before June 30, 2019. Compensation expense of approximately $97,000, $97,000 and $97,000
was recognized during the years ended December 31, 2013, 2012, and 2011, respectively, related to the options awarded to Mr. El Khalidi.
Approximately $413,000 was reversed during 2012 due to the performance condition associated with 200,000 shares in options not being met
as required by the terms of the award by June 30, 2012. Previously, on May 9, 2010, the Board of Directors determined that Mr. El Khalidi
forfeited all options and other retirement benefits when he made various demands against the Company and other AMAK Saudi shareholders
which would benefit him personally and were not in the best interests of the Company and its shareholders. As discussed in Note 13 we are
currently in litigation with Mr. El Khalidi and in connection therewith, we are currently reviewing our legal right to withdraw the options and
benefits. However, as of December 31, 2013, the options vesting upon a cash dividend distribution from AMAK continue to be shown as
outstanding.
A summary of the status of the Company’s stock option awards is presented below:
Outstanding at December 31, 2012
Granted
Expired
Exercised
Forfeited
Outstanding at December 31, 2013
Expected to vest
Exercisable at December 31, 2013
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Life
Intrinsic
Value
(in
thousands)
4.04
7.71
-
3.41
-
4.32
5.07
3.74
6.7
7.7
6.1
$
$
$
10,093
4,380
3,884
Stock
Options
1,173,180
90,000
-
$
(36,820)
-
1,226,360
585,504
440,856
$
$
$
The aggregate intrinsic value of options was calculated as the difference between the exercise price of the underlying awards and the quoted
price of our common stock. At December 31, 2013, options to purchase approximately 1.2 million shares of common stock were in-the-
money.
The weighted average grant-date fair value per share of options granted during the years 2013, 2012, and 2011 was $7.71, $7.14 and $4.43,
respectively. During 2013 the aggregate intrinsic value of options exercised was approximately $142,000 determined as of the date of option
exercise. During 2012 the aggregate intrinsic value of options exercised was approximately $445,000 determined as of the date of option
exercise. During 2011 the aggregate intrinsic value of options exercised was approximately $267,000 determined as of the date of option
exercise.
The Company received approximately $60,000 in cash from the exercise of options during the year ended December 31, 2013. The tax benefit
realized from the exercise was insignificant.
F-25
Table of Contents
A summary of the status of the Company’s non-vested options is presented below:
Non-vested at January 1, 2013
Granted
Expired
Vested
Non-vested at December 31, 2013
Weighted
Average
Grant-Date
Fair Value
Per Share
4.31
7.71
-
4.57
5.07
Shares
673,252
90,000
-
$
(177,748)
$
585,504
Total fair value of options that vested during 2013 was approximately $812,000.
As of December 31, 2013, there was approximately $2.1 million of unrecognized compensation costs related to non-vested share-based
compensation that is expected to be recognized over a weighted average period of 2.5 years.
The Company expects to issue shares upon exercise of options from its authorized but unissued common stock.
NOTE 15 – INCOME TAXES
The provision for income taxes consisted of the following:
2013
Year ended December 31,
2011
2012
Current federal provision
Current state provision
Deferred federal provision
Deferred state provision (benefit)
Income tax expense
$
(thousands of dollars)
$
$
4,821
199
6,748
233
1,173
(7)
882
2
3,072
191
3,237
5
$
8,147
$
5,904
$
6,505
The difference between the effective tax rate in income tax expense and the Federal statutory rate of 35% for the years ended December 31,
2013 and 2012, and 34% for the year ended December 31, 2011, is as follows:
Income taxes at U.S. statutory rate
State taxes, net of federal benefit
Permanent and other items
Increase (decrease) in valuation allowance
Total tax expense
$
$
$
9,675
139
(644)
(1,023)
$
8,147
5,679
132
(250)
343
5,904
$
2013
2012
(thousands of dollars)
$
2011
6,933
127
(567)
12
6,505
Permanent and other items primarily include non-deductible expenses offset by the manufacturers’ deduction under §199 of the Internal
Revenue Code and increase in the effective tax rate for the year ended December 31, 2012. We concluded that our current and future Federal
effective tax rate to be 35% based on review of current period income and expectation for future periods.
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:
F-26
Table of Contents
Deferred tax liabilities:
Plant, pipeline and equipment
Contractual based asset
Investment in AMAK
Total deferred tax liabilities
Deferred tax assets:
Accounts receivable
Inventory
Mineral interests
Unrealized loss on interest rate swap
Environmental
Post-retirement benefits
Stock-based compensation
Deferred revenue
Gross deferred tax assets
Valuation allowance
Total net deferred tax assets
Net deferred tax liabilities
The current and non-current classifications of the deferred tax balances are as follows:
Current:
Deferred tax asset
Non-current:
Deferred tax assets
Deferred tax liability
Valuation allowance
Non-current deferred tax liability, net
Total deferred liabilities, net
December 31,
2013
2012
(thousands of dollars)
$
$
(8,507) $
(43)
( 4,757)
(13,307) $
(8,260)
(124)
( 1,712)
(10,096)
260
131
376
214
71
373
1,015
654
3,094
(447)
$
2,647
(10,660) $
$
$
201
95
376
313
123
370
716
332
2,526
(1,470)
1,056
(9,040)
2013
2012
(thousands of dollars)
$
1,324
$
1,054
1,764
(13,301)
(447)
(11,984)
2,434
(11,058)
(1,470)
(10,094)
$
(10,660) $
(9,040)
We have provided a valuation allowance in 2013 and 2012 against certain deferred tax assets because of uncertainties regarding their
realization. The 2013 decrease in the valuation allowance of $1,023,000 is due largely to changes in our investment in AMAK.
We had no Saudi Arabian income tax liability in 2013, 2012, or 2011.
We file an income tax return in the U.S. federal jurisdiction and a margin tax return in Texas. Tax returns for various jurisdictions remain open
for examination for the years 2010 through 2013.
F-27
Table of Contents
NOTE 16 - NET INCOME PER COMMON SHARE
Net income
Basic earnings per common share:
Weighted average shares outstanding
Per share amount (dollars)
Diluted earnings per common share:
Weighted average shares outstanding
Per share amount (dollars)
Weighted average shares-denominator basic computation
Effect of dilutive stock options
Weighted average shares, as adjusted denominator diluted computation
Year ended December 31,
2013
2012
2011
(thousands of dollars)
$
19,498
$
10,321
$
13,884
$
$
24,115
24,081
23,993
0.81
$
0.43
$
0.58
24,745
24,745
24,267
0.79
$
0.42
$
0.57
24,115
630
24,745
24,081
664
24,745
23,993
274
24,267
At December 31, 2013, 2012, and 2011, 1,226,360, 1,173,180 and 1,347,750 potential common stock shares, respectively, were issuable
upon the exercise of options.
The earnings per share calculations for the periods ended December 31, 2013, 2012, and 2011, include 300,000 shares of the Company that
are held in the treasury of TOCCO.
NOTE 17 - 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,
2013 (in thousands, except per share data):
Revenues
Gross profit
Net income
Basic EPS
Diluted EPS
Revenues
Gross profit
Net income
Basic EPS
Diluted EPS
Year Ended December 31, 2013
Second
Quarter
Third
Quarter
Fourth
Quarter
55,975
8,567
6,309
0.26
0.26
$
$
$
60,870
10,098
5,221
0.22
0.21
$
$
$
66,637
9,819
3,182
0.13
0.13
$
$
$
Year Ended December 31, 2012
Second
Quarter
Third
Quarter
Fourth
Quarter
61,849
8,367
3,472
0.14
0.14
$
$
$
54,278
8,767
3,004
0.13
0.12
$
$
$
49,936
6,906
1,850
0.08
0.08
$
$
$
Total
236,227
35,163
19,498
0.81
0.79
Total
222,858
30,758
10,321
0.43
0.42
$
$
$
$
$
$
First
Quarter
52,745
6,679
4,786
0.20
0.19
$
$
$
First
Quarter
56,795
6,718
1,995
0.08
0.08
$
$
$
F-28
Table of Contents
NOTE 18 – RELATED PARTY TRANSACTIONS
Legal fees in the amount of $160,000, $237,000, and $270,000 were incurred during 2013, 2012, and 2011, respectively to the law firm of
Germer Gertz, PLLC 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. Mr. Goehringer chose not to stand for re-election at the 2011 Annual Meeting;
therefore, his term expired in June 2011. At December 31, 2013, and 2012, we had an outstanding liability payable to Germer Gertz, PLLC of
approximately $4,000 and $15,000, respectively.
Ghazi Sultan, a Company director, was paid $138,000, $138,000 and $110,000 during 2013, 2012 and 2011, respectively for serving in the
capacity of representing the Company in the Kingdom of Saudi Arabia.
Consulting fees of approximately $98,000, $0 and $0 were incurred during 2013, 2012, and 2011, respectively from IHS Global FZ LLC of
which Company Director Gary K. Adams holds the position of Chief Advisor – Chemicals. At December 31, 2013, and 2012, we had an
outstanding liability payable to IHS Global FZ LLC of approximately $0 and $0, respectively.
NOTE 19 – DERIVATIVE INSTRUMENTS
Commodity Financial Instruments
Hydrocarbon based manufacturers such as TOCCO are significantly impacted by changes in feedstock and natural gas prices. Not
considering derivative transactions, feedstock and natural gas used for the years ended December 31, 2013, 2012, and 2011, represented
approximately 80.6%, 81.3% and 82.9% of TOCCO’s operating expenses, respectively.
On February 26, 2009, the Board of Directors rescinded its original commodity trading resolution from 1992 and replaced it with a new
resolution. The 2009 resolution allows the Company to establish a commodity futures account for the purpose of maximizing our resources
and reducing risk as pertaining to our purchases of natural gas and feedstock for operational purposes by employing a four step process. This
process, in summary, includes, (1) education of employees who are responsible for carrying out the policy, (2) adoption of a derivatives policy
by the Board explaining the objectives for use of derivatives including accepted risk limits, (3) implementation of a comprehensive derivative
strategy designed to clarify the specific circumstances under which we will use derivatives, and (4) establishment and maintenance of a set of
internal controls to ensure that all of the derivatives transactions taking place are authorized and in accord with the policies and strategies that
have been enacted. On August 31, 2009, the Company adopted a formal risk management policy which incorporates the above process, as
well as, established a “hedge committee” for derivative oversight.
We endeavor to acquire feedstock and natural gas at the lowest possible cost. The primary feedstock (natural gasoline) is traded over the
counter and not on organized futures exchanges. Financially settled instruments (fixed price swaps) are the principal vehicle used to give
some predictability to feed prices. We do not purchase or hold any derivative financial instruments for trading purposes.
The following tables detail (in thousands) the impact the feedstock and natural gas instruments had on the financial statements:
Realized gain (loss)
Unrealized gain (loss)
Net gain (loss)
F-29
December 31,
2013
2012
2011
$
$
40
$
(48)
(8) $
(1,386) $
(393)
(1,779) $
188
215
403
Table of Contents
Fair value of derivative liability
$
48 $
December 31,
2013
2012
--
Realized and unrealized gains / (losses) are recorded in Cost of Petrochemical Product Sales and Processing for the years ended December 31,
2013, 2012, and 2011.
Interest Rate Swaps
On March 21, 2008, South Hampton entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to
the $10.0 million (later increased to $14 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate
swap agreement was August 15, 2008, and terminates on December 15, 2017. The notional amount of the interest rate swap was $4.25
million at December 31, 2013. We receive credit for payments of variable rate interest made on the term loan at the loan’s variable rates, which
are based upon the London InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest
rate swap. We designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging. Beginning on August
15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income
(loss) in the Company’s Statement of Stockholders’ Equity. We entered into the interest rate swap to minimize the effect of changes in the
LIBOR rate.
The following tables detail (in thousands) the impact the agreement had on the financial statements:
Other Comprehensive Loss
Cumulative loss
Deferred tax benefit
Net cumulative loss
Interest expense reclassified from other
comprehensive loss
Fair value of derivative liability
$
$
$
December 31,
2013
2012
2011
(563) $
197
(366) $
(892) $
312
(580) $
(1,134)
386
(748)
301
$
359
$
414
December 31,
2013
2012
$
563 $
893
The cumulative loss from the changes in the swap contract’s fair value that is included in other comprehensive loss will be reclassified into
income when interest is paid. The unrealized loss on the interest rate swap for 2013 included in other comprehensive loss is $213,809 (net of
$115,128 of income tax expense).
The net amount of pre-tax loss in other comprehensive income (loss) as of December 31, 2013, predicted to be reclassified into earnings
within the next 12 months is approximately $244,000.
NOTE 20- POST-RETIREMENT OBLIGATIONS
In January 2008 an amended retirement agreement, replacing the February 2007 agreement, was entered into with Hatem El Khalidi. The
amended agreement provided $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 would be paid to his surviving spouse for the remainder of her life. A health insurance benefit was also to be
provided. An additional $382,000 was accrued in January 2008 for the increase in benefits. A liability of approximately $927,000 based upon
an annuity single premium value contract was outstanding at December 31, 2013, and was included in post-retirement benefits. Mr. El Khalidi
retired effective June 30, 2009. As of December 31, 2013, no payments have been made pursuant to this agreement.
F-30
Table of Contents
In June 2009 the Company’s Board of Directors awarded Mr. El Khalidi a retirement bonus in the amount of $31,500 for 42 years of
service. While there is no written policy regarding retirement bonus compensation, the Company has historically awarded all employees
(regardless of job position) a retirement bonus equal to $750 for each year of service. Since Mr. El Khalidi was employed by the Company
for 42 years, the Board of Directors voted to award him a $31,500 retirement bonus, consistent with that provided to all other retired
employees. This amount was outstanding at December 31, 2013, and was included in post-retirement benefits.
On May 9, 2010, the Board of Directors terminated the retirement agreement, options, retirement bonus, and any outstanding directors’ fees
due to Mr. El Khalidi; however, due to the litigation discussed in Note 13, all amounts remain outstanding until a resolution is achieved.
NOTE 21- SUBSEQUENT EVENTS
On February 21, 2014, 10 year options were granted to the executives and certain key employees for 500,000 shares. These options have an
exercise price equal to the closing price of the stock on February 21, 2014, which was $12.26 and vest in 25% increments over a 4 year
period.
F-31
Table of Contents
ARABIAN AMERICAN DEVELOPMENT COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 2013
Description
ALLOWANCE FOR DEFERRED
TAX ASSET
December 31, 2011
December 31, 2012
December 31, 2013
Description
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
December 31, 2011
December 31, 2012
December 31, 2013
Beginning
balance
Charged
(credited)
to earnings
Deductions
Ending
balance
1,115,418
1,127,348
1,470,034
-
-
(1,023,115)
11,930
342,686
-
1,127,348
1,470,034
446,919
Beginning
balance
Charged
to earnings Deductions
Ending
balance
155,000
210,000
210,000
55,000
-
-
-
-
-
210,000
210,000
210,000
F-32
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Financial Statements
with
Report of Independent Registered Public Accounting Firm
December 31, 2013, 2012, and 2011
F-33
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Table of Contents
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Page
1
2 - 3
4
5
6 - 7
8 - 26
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Al Masane Al Kobra Mining Company
Jeddah, Kingdom of Saudi Arabia
We have audited the accompanying balance sheets of Al Masane Al Kobra Mining Company (the Company) as of December 31, 2013 and 2012,
and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2013. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these 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.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 financial statements referred to above present fairly, in all material respects, the financial position of Al Masane Al Kobra
Mining Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Mamdouh Al Majed CPAs
Riyadh, Saudi Arabia
March 14, 2014
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Advances to contractors and other
Total current assets
Non-current assets:
Deferred finance costs, net
Property and equipment, net
Development costs, net
Deferred mine closure costs
Total non-current assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bridge credit facility
Current portion due on long-term debt
Pre-export advance payments
Accounts payable and accrued liabilities
Advances from shareholders
Capital lease obligations, current portion
Total current liabilities
Non-current liabilities:
Provision for mine closure costs
Long-term debt, net of current portion
Capital lease obligations, net of current portion
End-of-service indemnities
Deferred tax liabilities
Total non-current liabilities
See accompanying notes to financial statements.
- 2 -
December 31,
2013
2012
(Expressed in Saudi Riyals)
67,076,986
10,614,160
19,611,157
26,159,542
22,957,022
11,305,182
68,161,791
20,677,692
123,461,845
123,101,687
17,720,010
710,733,287
254,116,511
11,167,500
16,683,857
673,457,230
278,648,247
12,284,250
993,737,308
981,073,584
1,117,199,153
1,104,175,271
-
20,000,000
-
46,021,793
2,110,606
16,230,382
165,000,000
182,938,000
58,395,180
55,834,843
30,348,765
14,147,850
84,362,781
506,664,638
13,524,728
259,808,000
4,353,325
1,395,330
5,267,758
13,067,371
-
20,583,719
1,075,784
-
284,349,141
34,726,874
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Balance Sheets – (Continued)
Commitments and contingencies (Note 17)
Shareholders’ equity
Share capital
Share premium
Retained Earnings (Accumulated Deficit)
Total shareholders’ equity
See accompanying notes to financial statements.
- 3 -
December 31,
2013
2012
(Expressed in Saudi Riyals)
550,000,000
190,000,000
8,487,231
500,000,000
90,000,000
(27,216,241)
748,487,231
562,783,759
1,117,199,153
1,104,175,271
Table of Contents
Revenues
Costs of sales
Gross Profit
AL MASANE AL KOBRA MINING COMPANY
Statements of Operations
2013
December 31,
2012
(Expressed in Saudi Riyals)
2011
393,713,017
58,476,883
311,658,686
44,134,961
82,054,331
14,341,922
-
-
-
General and Administrative Expenses
25,817,039
15,497,681
9,667,417
Income (loss) from operations
Other income (expense)
Finance charges
Other income (expense)
Income (loss) before taxes
Deferred income tax expense
Net income (loss)
56,237,292
(1,155,759)
(9,667,417)
(14,472,280)
(793,782)
(15,266,062)
(8,416,422)
187,056
(8,229,366)
(161,109)
-
(161,109)
40,971,230
(9,385,125)
(9,828,526)
(5,267,758)
-
-
35,703,472
(9,385,125)
(9,828,526)
See accompanying notes to financial statements.
- 4 -
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Statements of Shareholders’ Equity
Share
Capital
(Expressed in Saudi Riyals)
Accumulated
Deficit
Premium
Share
Total
Balance at December 31, 2010
450,000,000
-
(8,002,590
441,997,410
Capital increase and sale of shares
50,000,000
90,000,000
-
140,000,000
Net loss
-
-
(9,828,526)
(9,828,526)
Balance at December 31, 2011
500,000,000
90,000,000
(17,831,116) 572,168,884
Net loss
-
-
(9,385,125)
(9,385,125)
Balance at December 31, 2012
500,000,000
90,000,000
(27,216,241) 562,783,759
Capital increase and sale of shares
50,000,000
100,000,000
-
150,000,000
Net income
-
-
35,703,472
35,703,472
Balance at December 31, 2013
550,000,000
190,000,000
8,487,231
748,487,231
See accompanying notes to financial statements.
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Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Statements of Cash Flows
2013
December 31,
2012
(Expressed in Saudi Riyals)
2011
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization
Accretion of deferred mine closure costs
Amortization of prepaid finance charges
Loss on disposal of property and equipment
Changes in operating assets and liabilities:
Accounts receivables
Inventories
Advances to contractors and other
Accounts payable and accrued expenses
Pre-export advance payment
Zakat and income tax liability
End-of-service indemnities
35,703,472
(9,385,125)
(9,828,526)
91,340,865
457,357
4,724,634
716,003
36,175,329
224,746
4,374,179
-
(11,305,182)
(68,161,791)
691,022
48,550,634
(5,481,850) 18,793,380
(9,813,050) 11,624,821
(58,395,180) 58,395,180
-
549,921
5,267,758
319,546
-
-
-
-
-
-
10,169,643
(38,857,786)
-
-
254,365
Net cash provided by (used in) operating activities
114,081,211
41,285,458
(38,262,304)
Cash flows from investing activities
Additions to property and equipment
Additions to development costs
Cash received from disposal of property and equipment
Net cash used in investing activities
(101,928,773) (88,422,684) (169,958,231)
(14,409,861)
-
(100,518,593) (93,537,027) (184,368,092)
-
1,410,180
(5,114,343)
-
See accompanying notes to financial statements.
- 6 -
Table of Contents
AL MASANE AL KOBRA MINING COMPANY
Statements of Cash Flows – (Continued)
2013
December 31,
2012
(Expressed in Saudi Riyals)
2011
Cash flows from financing activities:
Advances from credit facility and long-term debt
Deferred finance charges
Issuance of share capital and premium
Payments on capital lease obligations
Payments on debt obligations
Net advances from (repayments to) shareholders
138,120,000
(4,202,000)
150,000,000
(18,872,496)
(206,250,000)
-
-
166,688,000
(680,000) (21,468,000)
140,000,000
(5,449,407)
-
(13,316,954)
(9,947,698)
-
(28,238,159) 30,348,765
Net cash provided by financing activities
30,557,345
19,721,067
266,453,639
Net change in cash and cash equivalents
Cash, beginning of period
Cash, end of period
See Note 16 for supplemental cash flow information
44,119,963
(36,904,681) 43,823,243
22,957,022
59,861,703
16,038,460
67,076,985
22,957,022
59,861,703
See accompanying notes to financial statements.
- 7 -
Table of Contents
Note 1 – Organization and Business
Al Masane Al Kobra Mining Company is a Saudi Arabian closed joint stock company approved by the Minister of Commerce and Industry
Decree Number 247/Q dated 9/10/1428 (October 21, 2007) and registered in Jeddah under Commercial Registration No. 4030175345 on
7/1/1429 (January 16, 2008). Unless the context requires otherwise, references to “we”, “us”, “our”, “AMAK”, and the “Company” are intended
to mean Al Masane Al Kobra Mining Company. All amounts are expressed in Saudi Riyals (SR) unless otherwise noted.
During 2009 the authorized capital of the Company was 450,000,000 consisting of 45 million shares of 10 each of which 50% was fully paid in
cash. The remaining 50% were paid through the contribution of mining rights and assets from Arabian American Development Company
(AADC) subject to AADC’s liability for a loan in the amount of 41,250,000 due to the Ministry of Finance and National Economy (see Note
11). The mining rights in Al Masane mine were originally granted by Royal Decree Number M/17 effective 1/12/1413 (May 22, 1993) for a
period of thirty years, with a right of renewal for further period of twenty years to AADC. The mining rights granted AADC the right of
exploitation in Al Masane mine located in Najran, Saudi Arabia, with an area of 44 square kilometers for a surface rental of 10,000 per square
kilometer per year, i.e. 440,000 per year. As per the Ministry of Petroleum and Mineral Resources resolution dated
13/9/1429 (13/9/2008) and the ministry subsequent letter dated 2/1/1430 (30/12/2008), the aforementioned rights were transferred to
us.
During 2011 the Company increased its authorized share capital by 50,000,000 to 500,000,000 and issued 5,000,000 shares of 10 each at a price
of 28 each resulting in a share premium of 90,000,000. The entire 5,000,000 shares were subscribed for cash by Arab Mining Company
(ARMICO) headquartered in Amman, Jordan.
During 2013 the Company increased its authorized share capital by 50,000,000 to 550,000,000 and issued 5,000,000 shares of 10 each at a price
of 30 each resulting in a share premium of 100,000,000. The shares were subscribed for cash by existing shareholders.
Except for AADC and ARMICO, all other shareholders are Saudi nationals or companies wholly owned by Saudi nationals. Our share capital is
owned by the shareholders as follows:
- 8 -
Table of Contents
Note 1 – Organization and Business – (Continued)
Saudi shareholders
AADC (US Company)
ARMICO – Pan Arab Organization
Shares of 10
Each
Ownership
Percentage
Paid-Up
Capital
27,090,950
19,387,500
8,521,550
49.26
35.25
15.49
270,909,500
193,875,000
85,215,500
55,000,000
100.0
550,000,000
Our principal activity is to produce zinc and copper concentrates and silver and gold doré as per the license Number 993/2 dated 16/7/1428 (July
31, 2007) issued by Saudi Arabian General Investment Authority (SAGIA). We commenced our commercial production on July 1, 2012.
Note 2 - Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in compliance with U.S. generally accepted accounting standards. The following is a
summary of our significant accounting policies:
Subsequent events
We have evaluated events and transactions subsequent to the date of the financial statements for matters requiring recognition or disclosure in the
financial statements. The accompanying financial statements consider events through March 14, 2014, the date on which the financial statements
were available to be issued.
Cash and cash equivalents
We consider all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts receivable
We evaluate the collectability of our accounts receivable and the adequacy of the allowance for doubtful accounts based upon historical experience
and any specific customer financial difficulties of which the Company becomes aware. During the years ended December 31, 2013 and 2012, we
sold our concentrates pursuant to a sales contract with one customer. No amounts have been written off since inception and at December 31,
2013 and 2012, we determined that an allowance for doubtful accounts was not necessary.
- 9 -
Table of Contents
Note 2 - Summary of Significant Accounting Policies - (Continued)
Inventories
The components of inventories include mill stockpiles, materials, spare parts, and mining supplies. The mill stockpiles and materials and mining
supplies are stated at the lower of weighted-average cost or market. Costs of mill stockpiles inventories include labor and benefits, supplies,
energy, depreciation, depletion, amortization, and other necessary costs with the extraction and processing of ore. Corporate general and
administrative costs are not included in inventory costs.
Because it is generally impracticable to determine the minerals contained in mill stockpiles by physical count, reasonable estimation methods are
employed. The quantity of material delivered to the mill stockpiles is based on surveyed volumes of mined material and daily production records.
Expected mineral recovery rates from the mill stockpiles are determined by various metallurgical testing.
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Expenditures for replacements and improvements are capitalized.
Costs related to periodic maintenance are expensed as incurred. Depreciation of the mining assets is determined using the unit-of-production
method based on total estimated proven and probable reserves. Depreciation, depletion and amortization using the unit-of-production method is
recorded upon extraction of the ore, at which time it is allocated to inventory cost and then included as a component of cost of goods sold. Other
assets are depreciated on a straight-line basis over estimated useful lives ranging from 3 to 20 years.
Borrowing costs that are directly attributable to the acquisition, construction of production of assets are capitalized as part of the cost of those
assets. Assets under construction are capitalized in the construction in progress account. Upon completion, the cost of the related asset is
transferred to the appropriate category of property, plant and equipment.
Development costs
Mineral exploration costs, as well as drilling and other costs incurred for the purpose of converting mineral resources to proven and probable
reserves or identifying new mineral resources, are charged to expense as incurred. Development costs are capitalized beginning after proven and
probable reserves have been established. Development costs include costs incurred in mine pre-production activities undertaken to gain access to
proven and probable reserves, including shafts, drifts, ramps, permanent excavations, infrastructure and removal of
- 10 -
Table of Contents
Note 2 - Summary of Significant Accounting Policies - (Continued)
Development costs - continued
overburden. These costs are deferred net of the proceeds from the sale of any production during the development period and then amortized over
using an estimated unit-of-production method. If a mine is no longer considered economical, the accumulated costs are charged to the statement of
operations in the year in which the determination is made.
Asset impairment
We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amounts may not
be recoverable. Long-lived assets are evaluated for impairment under the two-step model. An impairment is considered to exist if total estimated
future cash flows on an undiscounted basis are less than the carrying amount of the asset. Once it is determined that an impairment exists, an
impairment loss is measured as the amount by which the asset carrying value exceeds its fair value. Fair value is generally determined using
valuation techniques, such as estimated future cash flows.
In evaluating our mining operations’ long-lived assets for recoverability, estimates of after-tax undiscounted future cash flows of our individual
mining operations are used, with impairment losses measured by reference to fair value. As quoted market prices are unavailable for our mining
operations, fair value is determined through the use of discounted estimated future cash flows. Estimates of future cash flows include near- and
long-term metal price assumptions; estimates of commodity-based and other input costs; proven and probable reserve estimates, including any
costs to develop the reserves and the timing of producing the reserves; and the use of appropriate current escalation and discount rates.
We recorded no impairment losses during the years ended December 31, 2013, 2012, and 2011.
End-of-service indemnities
End-of-service indemnities are required by Saudi Arabian Labor Law and are provided and accrued in the financial statements based on the
respective employees' length of service.
Deferred finance costs
Deferred financing costs comprise the Saudi Industrial Development Fund (SIDF) and other bank loans origination charges which are amortized
over the period of the related loans. Deferred financing costs are shown net of accumulated amortization of 8,629,990 and 5,464,143 at December
31, 2013 and 2012, respectively. Amortization expense of deferred finance charges was approximately 3,165,847, 2,708,642, and 2,683,500 for
the years ended December 31, 2013, 2012, and 2011, respectively.
- 11 -
Table of Contents
Note 2 - Summary of Significant Accounting Policies - (Continued)
Foreign currency
Our functional currency is the Saudi Riyal (SR). In June 1986, the riyal was officially pegged to the US Dollar at a fixed exchange rate of 1 U.S.
Dollar equals 3.75 riyals. Foreign currency transactions are translated into Saudi Riyals at the rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates
prevailing at that date. Gains and losses from settlement and translation of foreign currency transactions are included in the statement of
operations. There were no material foreign-currency exchange gains or losses or translation adjustments during the years ended December 31,
2013, 2012, and 2011.
Leasing arrangements
We periodically lease operating equipment, facilities, and office buildings. Rentals payable under operating leases are charged to the statements of
operations on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the
inception of the lease is reflected as an asset and a liability in the balance sheet. Amounts due within one year are classified as short-term liabilities
and the remaining balance as long-term liabilities. Finance charges are charged to the statement of operations.
Payments under operating lease arrangements amounted to approximately 456,000, 650,000, and 107,000 for the years ended December 31,
2013, 2012, and 2011, respectively.
Environmental costs
Environmental costs are expensed or capitalized, depending upon their future economic benefits. Accruals for such expenditures are recorded
when it is probable that obligations have been incurred and the costs can reasonably be estimated. Ongoing compliance costs are expensed as
incurred.
Asset retirement obligations and costs
We record the fair value of our estimated asset retirement obligations (AROs) associated with tangible long-lived assets in the period in which the
obligation was incurred. AROs associated with long-lived assets are those for which there is a legal obligation to settle under various laws,
statues, or regulations. These obligations, which are initially estimated based on discounted cash flow estimates, are accreted to full value over
time through charges to cost of sales. In addition, asset retirement costs (ARCs) are capitalized as part of the related asset’s carrying value and are
depreciated (primarily on a unit-of-production basis) over the asset’s respective useful life. Our AROs consist primarily of costs associated with
mine reclamation and closure activities. At least annually, we review our ARO estimates for changes in the projected timing and changes in cost
estimates and additional AROs incurred during the period.
- 12 -
Table of Contents
Note 2 - Summary of Significant Accounting Policies - (Continued)
Zakat and income tax
We are subject to the Regulations of the Directorate of Zakat and Income Tax (DZIT) in the Kingdom of Saudi Arabia. Under these regulations,
Zakat is payable at 2.5% on the basis of the portion of our zakat base attributable to our Saudi stockholders, and income tax is payable at 20% on
the portion of our taxable income attributable to our non-Saudi stockholders. Zakat and income tax are provided on an accrual basis. Any
difference in the estimate is recorded when the final assessment is approved, at which time the provision is cleared.
We account for deferred income taxes on non-Saudi owners utilizing an asset and liability method, whereby deferred tax assets and liabilities are
recognized based on the tax effects of temporary differences between the financial statements and the tax basis of assets and liabilities, as
measured by the effective tax rate. When appropriate, we evaluate the need for a valuation allowance based on a more likely than not threshold to
reduce deferred tax assets to estimated recoverable amounts.
We account for uncertain income tax positions using a 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. We report tax-related interest and penalties as a component of income
tax expense. We recognized no material adjustment for unrecognized income tax liabilities.
Reclassifications
Certain reclassifications have been made to the prior period to conform with current year presentation.
Revenue recognition
We sell our products pursuant to sales contracts entered into with a customer which acts as an intermediary and resells our products to end users.
Revenue is recognized when title and risk of loss pass to the customer and when collectability is reasonably assured. The passing of title and risk
of loss to the customer are based on terms of the sales contract, generally upon shipment or delivery of product.
Sales are recorded based on a provisional sales price or a final sales price calculated in accordance with the terms specified in the relevant sales
contract. Under the long-established structure of sales agreements prevalent in the industry, the copper and zinc contained in concentrate is
generally “provisionally” priced at the time of shipment. The provisional price xxx
- 13 -
Table of Contents
Note 2 - Summary of Significant Accounting Policies - (Continued)
Revenue recognition
received at the time of shipment is later adjusted to a “final” price based on quoted monthly average spot prices on the London Metal Exchange
(LME) for a specified future month. We record revenues at the time of shipment (when title and risk of lass pass) based on then-current LME
prices, and we account for any changes between the sales price recorded at the time of shipment and subsequent changes in the LME prices
through the date of final pricing as gains or losses from a derivative embedded in the sales contract (a futures contract initiated at the date of
shipment and settled upon the determination of the “final price”) which is bifurcated and separately accounted for at fair value. See Note 18.
Revenues from concentrate sales are recorded net of treatment and all refining charges. These allowances are a negotiated term of each contract.
Treatment and refining charges represent payments or price adjustments to smelters and refiners and are either fixed or, in certain cases, vary with
the price of metals (referred to as price participation).
Management estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. The most
significant areas requiring the use of management estimates include mineral reserve estimation; useful asset lives for depreciation, depletion and
amortization; income taxes; environmental obligations; reclamation and closure costs; estimates of recoverable materials in mill stockpiles; fair
value of embedded derivatives; end-of-service indemnities; and asset impairment, including estimates used to derive future cash flows associated
with those assets. Actual results could differ from these estimates.
Note 3 – Liquidity and Capital Resources
We have taken steps to increase liquidity and provide additional capital resources. In the 2nd quarter of 2013, we completed our capital raise which
provided 150,000,000. These proceeds were used for working capital and to repay shareholder advances as well as a portion of the short-term
debt.
- 14 -
Table of Contents
Note 3 – Liquidity and Capital Resources – (Continued)
We received additional funding from draws on the SIDF loan during 2013. These funds were used to pay off the short and long-term debt to
both Al Fransi and MoF KSA as well as, for working capital purposes. We expect to have profitable operations in 2014 and generate cash flows
to meet our ongoing operating needs.
Note 4 – Inventories
Inventories consisted of the following:
Mill stockpiles
Explosives
Chemicals
Parts and other
December 31,
2013
2012
6,824,503
1,179,578
8,041,518
3,565,558
56,164,172
1,303,005
10,694,614
-
19,611,157
68,161,791
As discussed in Note 9, we received advances on a pre-export basis, which were fully repaid in 2013 from the proceeds of concentrate sales.
Note 5 – Advances to Contractors and Other
Prepaid and other consisted of the following:
Advances to contractors
Prepaid expenses
Other miscellaneous advances and receivables
- 15 -
December 31,
2013
2012
20,608,669
3,652,496
1,898,377
16,568,245
2,338,674
1,770,773
26,159,542
20,677,692
Table of Contents
Note 6 – Property and Equipment
Property and equipment consisted of the following:
Buildings
Leasehold improvements
Heavy equipment
Motor vehicles
Civil works
Tailings dam
Plant and machinery
Mining assets – rehabilitation costs
Mining assets – underground development costs
Construction in progress
Less accumulated depreciation, depletion and amortization
December 31,
2013
2012
180,440,997
1,692,373
100,402,879
20,069,433
14,262,600
22,626,394
267,292,045
98,894,826
116,072,532
-
180,427,997
1,692,373
87,522,866
19,544,833
2,462,600
22,626,394
262,634,915
98,894,826
35,426,936
11,356,001
821,754,079
722,589,741
(111,020,792) (49,132,511)
710,733,287
673,457,230
On 16/11/1428 (November 26, 2007), and while the Company was in the registration process, the Company signed contracts with China
National Geological and Mining Corporation for
underground mine rehabilitation, pre-production activity, and on-going mine
development/production and with Nesma & Partners Contracting Company Limited for engineering, procurement, construction, commissioning
and hand over of the copper and zinc mine and the concentrator surface works and the related infrastructure facilities. The total value of the
surface works contract was USD $110,828,000 equivalent to 415,605,000. The hand-over of these facilities was finalized on November 28,
2011, and until July 1, 2012 these facilities were still under commissioning. We also entered in a separate agreement with METAFCO to build
our warehouse at the port of Jizan. We use a variety of handling facilities that belong to the port.
- 16 -
Table of Contents
Note 6 – Property and Equipment - (Continued)
The expenditures incurred under the above contract, as well as other related expenditures, were capitalized as construction in progress. Once these
facilities were completed, the capital work-in-progress was transferred to the appropriate property, plant and equipment. During the years ended
December 31, 2013 and 2012, the amounts of 11,356,001 and 550,869,189, respectively were transferred from the work-in-progress to the
appropriate category of property, plant and equipment.
Property, plant and equipment included assets that were purchased under capital leases having costs of 50,128,674 and 50,128,674 and
accumulated depreciation of 15,511,204 and 9,236,172 at December 31, 2013 and 2012, respectively. See Note 9.
During the year ended December 31, 2012, borrowing costs of 4,242,397 were capitalized on property, plant and equipment, respectively. No
borrowing costs were capitalized during 2013.
Note 7 – Development Costs
Development costs consisted of the following:
Cost
Accumulated amortization
December 31,
2013
2012
289,973,237
289,973,237
(35,856,726) (11,324,990)
254,116,511
278,648,247
- 17 -
Table of Contents
Note 8 – Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consisted of the following:
Accounts payable
Retention payable
Accrued salaries and expenses
Note 9 – Capital Lease Obligations
December 31,
2013
2012
29,778,407
14,744,250
1,499,136
38,724,997
15,693,745
1,416,101
46,021,793
55,834,843
We lease certain heavy equipment under capital lease obligations that are set to expire at various dates through 2015. The future minimum lease
payments under the capital lease obligations are as follows:
2013
2014
2015
Less: deferred financial charges
Total capital lease obligations
Less: current portion of capital lease obligations
Total long term portion, net current portion
December 31,
2013
2012
-
18,871,496
4,607,487
18,872,496
18,871,496
4,607,487
23,478,983
2,895,276
42,351,479
7,619,910
20,583,707
16,230,382
34,731,569
14,147,850
4,353,325
20,583,719
The finance charges charged to the statement of operations were 5,921,787, 4,724,646 and 3,604,593 during the years ended December 31, 2013,
2012 and 2011, respectively.
- 18 -
Table of Contents
Note 10 – Pre-export Advance Payment
During 2013 and 2012, we received advances on a pre-export basis of approximately 252 million and 58 million, respectively. These advances
bore interest at 2.5% and were repaid from the proceeds from concentrate sales. There were no amounts outstanding at December 31, 2013.
Note 11 – Zakat and Income Tax
The zakat base for the Saudi shareholders was negative in 2013, 2012, and 2011. Therefore, no zakat liability is due. There was no taxable profit
attributable to the foreign shareholders for 2013, 2012, and 2011. Therefore, no current income tax is due.
The principal elements of the zakat base are as follows:
Non-current assets
Non-current liabilities
Shareholders’ equity, opening balance
Net income
2013
2012
964,750,055
279,081,384
610,636,647
(4,998,319)
964,505,519
192,914,874
572,168,884
1,557,068
The zakat declarations for the years 2008, 2009, 2010, 2011, and 2012 are currently under review by the DZIT. We are in the process of
preparing and submitting its zakat and tax return for the year 2013.
The provision for income taxes attributable to our non-Saudi shareholders consisted of the following:
Deferred income tax expense (benefit)
Change in valuation allowance
Income tax expense
- 19 -
Years ended December 31,
2013
2012
2011
4,250,316
1,017,442
(1,073,897)
1,073,897
794,762
(794,762)
5,267,758
-
-
Table of Contents
Note 11 – Zakat and Income Tax – (Continued)
Tax effects of temporary differences that give rise to significant portions of non-Saudi owners deferred tax assets and deferred tax liabilities were
as follows:
Deferred tax assets:
Loss carryforward
Other
Deferred tax liabilities:
Property and Equipment
Gross deferred tax liabilities
Valuation allowance
Net deferred tax liability
December 31,
2013
2012
6,445,882
204,669
5,358,275
121,990
6,650,551
5,480,265
(10,900,867)
(5,090,942)
(4,250,316)
(1,017,442)
389,323
(389,323)
(5,267,758)
-
At December 31, 2013, we had tax loss carryforwards totaling approximately 32,200,000. Tax losses may be carried forward indefinitely subject
to certain annual limitations for non-Saudi shareholders. We have provided a valuation allowance for our gross deferred tax assets at December
31, 2013 and 2012.
Note 12 - Credit Facility
The Company obtained a bridge credit facility from the Banque Saudi Fransi amounting to 165,000,000. The facility was secured by an order
note of 165,000,000 and personal and joint guarantees from the shareholders of the Company. The facility accrued interest at the Saudi Arabia
Interbank Rate (SIBOR) plus 2.5% (approximately 3.5% at December 31, 2012). The facility agreement included certain covenants which
provide, amongst other items, that the acknowledged assignment of the loan proceeds from Saudi Industrial Development Fund (SIDF) should
be secured prior to any drawdown of the financing. The facility was closed during 2013 and the loan of SR 165,000,000 was entirely settled by
the Company.
- 20 -
Table of Contents
Note 13 - Long-term Debt
Long-term debts are summarized as follows:
Ministry of Finance and National Economy (A)
SIDF(B)
Less current portion
Total long-term debt, less current portion
December 31,
2013
2012
-
279,808,000
41,250,000
141,688,000
279,808,000
20,000,000
182,938,000
182,938,000
259,808,000
-
(A) The Company recorded the long-term loan in the amount of 41,250,000 due to the Ministry of Finance and National Economy based on the
shareholders’ resolution dated August 5, 2009 under which the Company assumed certain mining assets and related liabilities of AADC (see
Note 1). The loan was fully paid during 2013.
(B) During 2010, the Company entered into a loan agreement with the Saudi Industrial Development Fund (SIDF) for an amount of
330,000,000. The loan agreement contains certain financial covenants and is repayable as follows, maturing in 2019:
Years Ending
December 31,
2014
2015
2016
2017
2018
Thereafter
- 21 -
20,000,000
30,000,000
40,000,000
50,000,000
120,000,000
70,000,000
330,000,000
Table of Contents
Note 13 - Long-term Debt – (Continued)
We received an amount of SR 141,688,000 disbursement of the approved loan amount during 2011. The finance charges relating to this portion
of the loan amounting to SR 21,468,000 were fully deducted upfront from the first disbursement of the loan.
We received an additional amount of SR 138,120,000 disbursement of the approved loan amount during the year. The finance charges relating to
this portion of the loan amounting to SR 3,532,000 were fully deducted upfront from the second disbursement of the loan.
The loan is repayable in increasing semi-annual installments starting from 15 Rabi’II, 1434 (January 27, 2013) till 15 Shawal, 1440 (June 19,
2019), however, the management agreed with SIDF to reschedule the payment of the loan of which the first installment will be paid after January
2014.
Under the terms of the facility agreement with SIDF, We, among other items, are required to maintain a minimum current ratio.
Note 14 – End-of-Service Indemnities
The change in the end-of-service indemnities provision is as follows:
January 1
Provision for the year
Paid during the year
December 31
- 22 -
Years Ended December 31,
2013
2012
1,075,784
955,983
(636,437)
1,395,330
525,863
756,022
(206,101)
1,075,784
Table of Contents
Note 15 – Asset Retirement Obligations
During 2012, we recorded an ARO for deferred mine closure costs of 12,842,625. These deferred mine closure costs are being amortized over
the estimated life of the mine which is approximately 11.5 years. Amortization during 2013 and 2012 was 1,116,750 and 558,375 respectively.
There was no amortization during the year ended December 31, 2011.
Deferred mine closure costs consisted of the following:
Cost
Accumulated amortization
A summary of changes in our provision for mine closure costs is as follows:
Balance at beginning of year
Liabilities incurred
Accretion expense
December 31,
2013
2012
12,842,625
(1,675,125)
12,842,625
(558,375)
11,167,500
12,284,250
Years Ended December 31,
2013
2012
2011
13,067,371
-
457,357
-
12,842,625
224,746
13,524,728
13,067,371
-
-
-
-
ARO costs may increase or decrease significantly in the future as a result of changes in regulations, changes in engineering designs and
technology, permit modifications or updates, changes in mine plans, inflation or other factors and as actual reclamation spending occurs.
- 23 -
Table of Contents
Note 16 – General and Administrative Expenses
A summary of general and administrative expenses is as follows:
Wages, salaries and related costs
Depreciation
Mine closure and environmental
Office expenses
Travel and accommodation
Professional fees
Other
Years Ended December 31,
2013
2012
15,873,435
781,039
1,574,108
3,438,800
2,230,722
490,292
1,428,642
6,736,482
979,674
783,121
2,361,445
2,706,627
337,393
1,592,939
2011
4,736,508
-
-
1,503,215
1,640,785
1,590,026
196,883
25,817,038
15,497,681
9,667,417
Note 17 – Supplemental Cash Flow Information
Supplemental cash flow information and noncash investing and financing activities are as follows:
Supplemental Information:
Cash paid for interest
Cash paid for zakat and income tax
Non-cash investing and financing activity:
Depreciation and amortization capitalized to development costs prior to commencing
commercial production
Equipment acquired through capital leases
Deferred mine closure costs
- 24 -
Years Ended December 31,
2013
2012
2011
5,921,787
6,315,779
21,629,109
-
-
-
-
-
-
11,062,996
10,135,617
2,774,252
47,354,422
12,842,625
-
Table of Contents
Note 18 - Commitments and Contingencies
Lease commitment
Our lease commitment for our surface mining lease was initially granted for a period of 30 years through 2024. The lease allows for renewal for
an additional 20 years. A summary of this commitment is as follows:
Years Ending
December 31,
2014
2015
2016
2017
2018
Thereafter
440,000
440,000
440,000
440,000
440,000
2,640,000
4,840,000
Note 19 – Embedded Derivatives
As described in Note 2 under “Revenue Recognition,” our concentrate sales contracts provide for provisional pricing based on the LME price at
the time of shipment as specified in the contract. Sales contracts with a provisional sales price contain an embedded derivative (i.e., the price
settlement mechanism that is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale
of the metals contained in the concentrates at the then-current LME price as defined in the contract. Mark-to-market price fluctuations recorded
through the settlement date are reflected in revenues for sales contracts.
A summary of our embedded derivatives at December 31, 2013, follows:
Embedded derivatives :
Copper (thousands of pounds)
Zinc (thousands of pounds)
- 25 -
Average Price Per Unit
Open
Positions
Contract
Market (in
SR)
527
7,895
12.60
3.57
12.60
3.57
Table of Contents
Note 19 – Embedded Derivatives – (Continued)
A summary of our embedded derivatives at December 31, 2012, follows:
Embedded derivatives :
Copper (thousands of pounds)
Zinc (thousands of pounds)
Average Price Per Unit
Open
Positions
Market (in
Contract
SR)
1,790
8,607
13.54
3.47
13.54
3.47
For the years ended December 31, 2013 and 2012, there were no significant gains or losses on the embedded derivatives.
Note 20 - Fair Value Measurement
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to
unobservable inputs (Level 3 inputs).
Level
1
Level
2
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted
prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data
by correlation or other means; and
Level
3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by
little or no market activity).
We did not have any significant transfers in or out of Levels 1, 2, or 3 in 2013. The embedded derivatives in our provisional sales contracts are
considered Level 2 measurements.
- 26 -
Table of Contents
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-154708 and 333-188451) and Form
S-3 (No. 333-183350) of Arabian American Development Company (the “Company”) of our reports dated March 14, 2014 with respect to the
consolidated financial statements and financial statement schedule and the effectiveness of internal control over financial reporting both which
appears in this Form 10-K.
We also consent to the reference to our firm under the caption “Experts” in the Registration Statement on Form S-3.
/s/ BKM Sowan Horan, LLP
Addison, Texas
March 14, 2014
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-154708 and 333-188451) and Form
S-3 (No. 333-183350) of Arabian American Development Company of our report dated March 14, 2014, with respect to the financial statements
of Al Masane Al Kobra Mining Company for the years ended December 31, 2013, 2012, and 2011, which appears in this Form 10-K.
/s/ Mamdouh Al Majed CPAs
Riyadh, Saudi Arabia
March 14, 2014
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.1
I, Nicholas Carter, certify that:
1. I have reviewed this annual report on Form 10-K of Arabian American Development Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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:
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: March 14, 2014
/s/ Nicholas Carter
Nicholas Carter
President and Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.2
I, Simon Upfill-Brown, certify that:
1. I have reviewed this annual report on Form 10-K of Arabian American Development Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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:
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: March 14, 2014
/s/ Simon Upfill-Brown
Simon Upfill-Brown
Executive Vice President
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.3
I, Connie Cook, certify that:
1. I have reviewed this annual report on Form 10-K of Arabian American Development Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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:
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: March 14, 2014
/s/ Connie Cook
Connie Cook
Chief Financial Officer
CERTIFICATION PURSUANT TO
18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Arabian American Development Company (the “Company”) on Form 10-K for the year ending
December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nicholas Carter, President and
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Nicholas Carter
Nicholas Carter
President and Chief Executive Officer
March 14, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Arabian American Development Company (the “Company”) on Form 10-K for the year ending
December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Simon Upfill-Brown, Executive
Vice President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to
my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Simon Upfill-Brown
Simon Upfill-Brown
Executive Vice President
March 14, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18. U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.3
In connection with the Annual Report of Arabian American Development Company (the “Company”) on Form 10-K for the year ending
December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Connie Cook, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Connie Cook
Connie Cook
Chief Financial Officer
March 14, 2014
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.