Item 3. LEGAL PROCEEDINGS
The Company's subsidiary, Ada Crude Oil Company (Ada), has been named as one of sixty-three defendants in a lawsuit styled The State of Texas et al vs Amerada Hess Corporation. The suit alleges, among other claims, that the defendants as "common purchasers of oil" discriminated against the plaintiffs in favor of the defendants' own production and that of others. The plaintiffs also seek class certification. In response, the Company has filed a general denial and has asserted a number of affirmative defenses. Attorneys for the plaintiff reviewed Ada's response and subsequently informed the Company that Ada has been recommended for dismissal from the lawsuit. This recommendation is currently under review by the plaintiffs, and the plaintiffs appear favorably disposed to such dismissal. The Company will continue to vigorously contest this matter and does not expect it to have a significant adverse effect on its financial position or results of operations.
In the normal course of business, the Company becomes involved in litigation incident to operations. In management's opinion, the ultimate resolution of all litigation matters and disputes will not have a material adverse impact on the Company's financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The persons who are currently serving as executive officers of the Company, their ages and the positions they hold with the Company are as follows:
Each officer has served in his present position for at least five years. No family relationship exists between any of the officers. Mr. Hurst is a partner in the law firm of Chaffin & Hurst.
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PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange. The following table sets forth the high and low sales prices of the common stock as published in The Wall Street Journal for issues listed on the American Stock Exchange for each calendar quarter since January 1, 1998.
At December 31, 1999 there were 765 holders of record of the Company's common stock and the closing price was $8-1/2 per share.
The terms of the Company's bank loan agreement require the Company to retain at least 50% of annual net income as an addition to total shareholders' equity, thus such amount would be available for payment of cash dividends on the Company's common stock.
On each of December 15, 1999, 1998 and 1997, the Company paid an annual cash dividend of $.10 per common share to all holders of its common stock of record on December 1st of each year. Such dividends aggregated $422,000 for each year.
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Item 6.
Item 6. SELECTED FINANCIAL DATA
FIVE YEAR REVIEW OF SELECTED FINANCIAL DATA
- ----------------------
(1) The oil and gas operating loss for 1998 and 1995 resulted principally from a write-down of oil and gas properties due to reduced prices for crude oil and natural gas and, in 1998, additional 3D seismic expense.
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Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- Marketing
Marketing segment profitability is dependent upon the spread between the price paid to suppliers for the commodity purchased (i.e., crude oil, natural gas or refined products) and the sales price to the end market customer, less distribution costs. Since the Company is marketing a commodity, the gross purchase price at the supplier level and the gross sales price at the customer level tend to move in unison. However, the spread between purchase and sales contracts will vary with localized supply and demand conditions. In a commodity business, operating margins as a percentage of gross revenues are typically very narrow; e.g., less than 1/2 of 1% in the case of crude oil and natural gas. As a small margin, high volume business, a relatively minor change in the spread can have a significant impact on earnings.
The Company's marketing revenues and operating earnings are derived primarily from the purchase and sale of crude oil and natural gas. The strategy for this operation is to link purchase and sales contracts to established quotations that move with general market trends. Thus, the Company is insulated from the impact of general movements in hydrocarbon prices. While the Company policy is designed to minimize market risk, some degree of exposure to unforeseen market conditions remains.
Marketing division revenues, operating earnings and significant operating statistics were as follows (in thousands except barrel and price information):
(1) Reflects the volume purchased from third parties at the lease level and shipped to market. (2) Operations commenced June 1, 1998.
Gross revenues for 1999 increased significantly due to both increased purchase volumes and price. The volume increase came through aggressive marketing efforts while world crude oil prices rose steadily during 1999 to a year-end value of approximately $26 per barrel. Crude oil prices began 1997 at the $25 per barrel level, falling to the $17 range by year-end 1997, with a further drop to $10 per barrel at the end of 1998. Thus for 1998 comparative revenues, volume growth was offset by falling prices.
Because of the effect on the value of crude oil inventory, 1999 operating earnings benefited from the general increase in crude oil prices. In contrast, both 1998 and 1997 were adversely affected by falling prices and the resulting impact on inventory carrying values. When crude oil prices fell at year-end 1997, and again at year-end 1998, the Company recognized inventory valuation declines of $1.3 million and $1.1 million, respectively. As of December 31, 1999 the Company carried in inventory approximately 767,000 barrels of crude oil inventory at approximately $25.75 per barrel.
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Effective October 1, 1999, the Company significantly expanded the natural gas portion of its marketing business with the hiring of 20 additional personnel. Currently, the Company is purchasing at the lease approximately 930,000 mmbtu's of natural gas per day. The natural gas business contributed $198 million to 1999 revenues and $966,000 to 1999 operating earnings before general and administrative expense. This positive impact on operating earnings was substantially offset however, by a 1999 charge of $765,000 to cover a shortfall of guaranteed throughout volumes on certain offshore crude oil pipeline systems.
- Transportation
Transportation revenues and operating earnings were as follows (in thousands):
(1) Represents the percentage increase (decrease) from the prior year.
Historically, the Company has achieved transportation revenue growth through increased customer demand for its services. Growing customer demand necessitated expanding both the Company's fleet and terminal capacity. In order to maintain high level service, it is necessary to first build the infrastructure prior to servicing a greater volume of business. Because of increased fixed costs, operating margins were adversely impacted in 1999 and 1998 in spite of revenue growth. In addition, 1999 experienced an approximate 4 percent increase in wage rates and a 25 percent increase in fuel costs.
As presently configured, the Transportation division's fixed costs are approximately $18.5 million per year and consist primarily of tractor-trailer rentals, insurance, depreciation and terminal operating expenses. Variable costs, which typically approximate 33 percent of gross revenues, consist primarily of drivers' wages and fuel. As a result of varying demand conditions, revenues and operating earnings may experience significant variations between periods.
- Oil and Gas
Oil and gas division revenues and operating earnings are primarily derived from crude oil and natural gas production volumes and prices. Comparative amounts are as follows (in thousands except average price data):
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As reflected in the table above, oil and gas revenues and operating earnings are reduced primarily as a result of lower natural gas production volumes. Operating earnings for 1998 also included a $1.4 million expense for 3D seismic costs and an approximate $1 million write-down in the carrying value of certain oil and gas properties resulting from year-end price declines.
Other Income (Expense)
General and administrative expenses increased in 1999 because the Company hired additional personnel to handle the doubling of volumes within the Company's crude oil marketing operation, plus the significant expansion of the Company's natural gas marketing operation.
Property sales and other income for 1999 includes a $617,000 gain from the sale of forty-five truck-tractors and $565,000 of interest income while 1998 includes $179,000 of interest income and $182,000 in gains from various property and equipment sales. Other income for 1997 includes $179,000 of interest income, a $400,000 recovery from an insurance carrier and a $230,000 gain realized on the sale of twenty-one truck tractors. Interest expense is reduced in 1999 because generally favorable cash flow enabled full payment of working capital debt during substantial portions of the year.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's liquidity and its capital investment program are primarily a function of annual net earnings as adjusted by the non-cash provision for depreciation, depletion, and amortization. In recent years, the Company has utilized its available cash flow to make discretionary investments in its oil and gas, transportation and marketing businesses. The table below illustrates this relationship.
Historically, the Company's operating earnings from its diversified operations have been stable and reliable. Management relies on the continued stability of this earnings stream in making capital project decisions. All capital projects are divided into manageable segments and the timing of their implementation is accelerated or delayed based on current cash flows.
The balancing factor for the Company's short term cash needs is the Company's bank line of credit. For the past five years the Company has periodically borrowed up to $7-10 million on its bank line of credit. Day-to-day fluctuations in cash flow needs are accommodated by daily borrowing or repayments on the line of credit. While the Company's bank line of credit is fully secured, the bank is primarily relying on the Company's ability to generate cash flow from continuing operations for
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repayment. At year-end 1999, the Company's bank debt outstanding of $9.9 million was more than offset by cash balances of $24.1 million.
Also important to liquidity and capital availability is the Company's ability to conduct its truck fleet management program through lease financing transactions. The Company has readily found lease financing from a number of major national leasing concerns. See Note 7 to Consolidated Financial Statements. The Company's philosophy is to maintain a modern, up-to-date fleet of tractors and trailers to accommodate demand for its services. This requires frequent tractor replacements as well as modest growth in the size of the fleet. Since there is a large active secondary market for truck-tractors, historically, the Company has realized gains upon the disposition of such equipment.
Due to the high volume of the Company's transactions, the components of working capital such as accounts receivable and accounts payable can fluctuate dramatically from day to day. No particular significance should be ascribed to such variations. A key factor that provides order and discipline for cash flow is the practice of the crude oil industry to settle all accounts by cash payment on the 20th of the month following inception of the transaction. A similar procedure exists for the natural gas industry with cash settlement on the 25th of the month. Since 90% of the Company's business is tied to crude oil and natural gas marketing, this settlement process is critical. The Company relies on payments received from its customers to satisfy the requirements to pay its suppliers on the same day. See Note 4 to Consolidated Financial Statements for a discussion of "Concentration of Credit Risk."
Banking Relationships
The Company's bank loan agreement provides for two separate lines of credit with interest at the bank's prime rate minus 1%. The agreement also provides for an interest rate option at the lender's quoted Eurodollar rate (LIBOR) plus 2%. The working capital loan provides for borrowings up to $7,500,000 based on 80% of eligible accounts receivable and 50% of eligible inventories. Available capacity under the line is calculated monthly and as of December 31, 1999 was established at $7,500,000. The oil and gas production loan provides for flexible borrowings subject to a borrowing base established semi-annually by the bank. The borrowing base is presently established at $3,000,000, with the next scheduled redetermination date being September 1, 2000. The working capital loans also provide for the issuance of letters of credit. The amount of each letter of credit obligation is deducted from the borrowing capacity. The line of credit loans are scheduled to expire on October 27, 2001, with the then present balance outstanding converting to a term loan payable in 12 equal quarterly installments. As of December 31, 1999, bank debt outstanding under the Company's two revolving credit facilities totaled $9,900,000, with letters of credit outstanding totaling $25,000.
The Company's GulfMark subsidiary maintains a separate banking relationship in order to support its crude oil purchasing activities. GulfMark has established a bank letter of credit facility that is maintained on a month-to-month basis in order to secure the purchase of crude oil. In addition to providing letters of credit, GulfMark's banking institution will also finance up to $5,000,000 of crude oil inventory and certain accounts receivable associated with crude oil sales. Such financing is provided on a demand note basis with interest at the bank's prime rate plus 1 percent. As of December 31, 1999 the Company had $19.8 million of crude oil inventory eligible for collateral. However, no amounts were outstanding under this facility. In addition to the GulfMark letter of credit facility, the Company's Adams Resources Marketing Ltd group maintains a separate letter of credit facility to support natural gas marketing activities.
Investment Activities
During 1999, the Company invested approximately $2 million in oil and gas projects, $2.1
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million for expansion of its truck terminals and fleet and $3.5 million was invested in facilities, trucks and equipment for the Company's marketing operations. Oil and gas exploration and development efforts continue and the Company plans to invest approximately $5 million toward such projects in 2000. An additional $2 million is anticipated to be invested during 2000 toward the Company's marketing and transportation activities.
During 1999, the Company entered into certain operating lease transactions in order to acquire 45 tractors and 33 trailers for use in its common carrier fleet. Further, during 2000 the Company anticipates entering into certain operating lease transactions in order to acquire approximately 45 additional tractors for use in its trucking fleet. Annual lease costs associated with the planned 2000 additions are estimated to be $650,000.
Year 2000 Computer Systems
Many previously installed computer systems and software products had been coded to accept only two digit entries in the date code field. For the year 2000, these date code fields would need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies needed to be upgraded to comply with such "Year 2000" requirements. During 1999, the Company completed a review of its key computer systems and implemented certain new operating systems applications to resolve potential year 2000 compliance issues. Total costs incurred and expensed by the Company to complete its year 2000 upgrades were approximately $200,000. The Company experienced no other adverse effects associated with this matter and does not anticipate any other significant costs related to the year 2000 issue.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in interest rates and commodity prices.
Interest Rate Risk
Total long-term debt at December 31, 1999 included $9,900,000 of floating rate debt. As a result, the Company's annual interest costs in 2000 will fluctuate based on interest rate changes. Because the interest rate on the Company's long-term debt is a floating rate, the fair value approximates carrying value as of December 31, 1999. A hypothetical 10 percent adverse change in the floating rate would not have had a material effect on the Company's results of operations for the fiscal year ending December 31, 1999.
Commodity Price Risk.
The Company's major market risk exposure is in the pricing applicable to its marketing and production of crude oil and natural gas. Realized pricing is primarily driven by the prevailing spot prices applicable to oil and gas. Commodity price risk in the Company's marketing operations represents the potential loss that may result from a change in the market value of an asset or a commitment. As part of its marketing operations, the Company enters into forward contracts to minimize the impact of market fluctuations on its purchases of crude oil and natural gas. The Company also enters into natural gas price support contracts with certain customers to secure a floor price on the purchase of certain natural gas supply. In each instance, the Company locks in a separate matching price support contract with a third
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party in order to minimize the risk of these financial instruments. The forward contracts are no longer than one year in duration. The Company monitors all commitments and positions and endeavors to maintain a balanced portfolio.
Historically, prices received for oil and gas production have been volatile and unpredictable. Price volatility is expected to continue. Gas price realizations ranged from a monthly low of $1.78 per Mcf to a monthly high of $2.41 per Mcf during 1999. Oil prices ranged from a low of $10.50 per barrel to a high to $26.10 per barrel during the same period.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
Item 8.
Item 8.
II-9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Adams Resources & Energy, Inc.:
We have audited the accompanying consolidated balance sheet of Adams Resources & Energy, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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 Adams Resources & Energy, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas March 14, 2000
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
II-11 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
II-12 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
II-13 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Adams Resources & Energy, Inc., a Delaware corporation, and its subsidiaries (the "Company") after elimination of all significant intercompany accounts and transactions. The Company accounts for its operating or working interests in oil and gas joint ventures through pro-rata consolidation. Certain prior year amounts have been reclassified to conform with the current year presentations.
Nature of Operations
The Company is engaged in the business of crude oil, natural gas and petroleum products marketing, as well as tank truck transportation of liquid chemicals and oil and gas exploration and production. Its primary area of operation is within a 500 mile radius of Houston, Texas.
Cash and Cash Equivalents
Cash and cash equivalents include any treasury bill, commercial paper, money market fund or federal fund with a maturity of 30 days or less. Included in the cash balance at December 31, 1999 and 1998 are deposits of $3 million and $2 million, respectively, to collateralize the Company's month-to-month crude oil letter of credit facility. See Note 2 to Consolidated Financial Statements.
Inventories
Crude oil and petroleum products inventories are carried at the lower of cost or market. Petroleum products inventories include gasoline, lubricating oils and other petroleum products purchased for resale and are priced at cost determined on the first-in, first-out basis, while crude oil inventory is priced at average cost. Materials and supplies inventories are included in inventories at specific cost, with a valuation allowance provided if needed. Components of inventory are as follows (in thousands):
Property and Equipment
Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are expensed as incurred. Interest costs incurred in connection with major capital expenditures are capitalized and amortized over the lives of the related assets. When properties are retired or sold, the related cost and accumulated depreciation, depletion and amortization ("DD&A") are removed from the accounts and any gain or loss is reflected in earnings.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil and gas exploration and development expenditures are accounted for in accordance with the successful efforts method of accounting. Direct costs of acquiring developed or undeveloped leasehold acreage, including lease bonus, brokerage and other fees, are capitalized. Exploratory drilling costs are initially capitalized until the properties are evaluated and determined to be either productive or nonproductive. If an exploratory well is determined to be nonproductive, the capitalized costs of drilling the well are charged to expense. Costs incurred to drill and complete development wells, including dry holes, are capitalized.
Producing oil and gas leases, equipment and intangible drilling costs are depleted or amortized over the estimated recoverable reserves using the units-of-production method. Other property and equipment is depreciated using the straight-line method over the estimated average useful lives of three to twenty years for marketing, three to fifteen years for transportation and ten to twenty years for all others.
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" requires that long-lived assets be reviewed for impairment whenever there is evidence that the carrying value of such assets may not be recoverable. This consists of comparing the carrying value of the asset with the asset's expected future undiscounted cash flows without interest costs. Estimates of expected future cash flows are to represent management's best estimate based on reasonable and supportable assumptions. The Company reviews its proved oil and gas properties on a field by field basis when such evidence exists. Any impairment recognized in accordance with SFAS No. 121 is permanent and may not be restored. Due principally to the prolonged depressed state of oil and natural gas prices during 1998, one of the Company's proved oil and gas fields was deemed impaired at year-end 1998. A $1 million charge for this asset impairment was included in DD&A for 1998.
Other Assets
Included in other assets at December 31, 1998 was $1,195,000 held in escrow as part of the Company's efforts to comply with State of Kentucky regulations governing certain of the Company's former coal mining operations. During 1999, the State approved the Company's resolution of such matters and the escrowed cash was returned to the Company.
Statement of Cash Flows
Interest paid totaled $75,000, $327,000 and $323,000 during the years ended December 31, 1999, 1998 and 1997, respectively. Income taxes paid during these same periods totaled $895,000, $566,000 and $2,075,000, respectively.
Earnings Per Share
The Company computes and presents earnings per share in accordance with SFAS No. 128, "Earnings Per Share", which requires the presentation of basic earnings per share and diluted earnings per share for potentially dilutive securities. Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Such shares outstanding on both a basic and diluted basis averaged 4,217,596 for 1999 and 1998, and 4,210,471 for 1997.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Example of significant estimates used in the accompanying consolidated financial statements include the accounting for depreciation, depletion and amortization, income taxes and contingencies.
Use of Derivatives
The Company has a price risk management program that utilizes derivative financial instruments, principally crude oil swaps, to reduce the price risk associated with fluctuations in crude oil prices. Such contracts usually are placed with major derivative dealers that the Company believes are minimal credit risks. The Company accounts for its derivative financial instruments using the hedge (or deferral) method of accounting. Under this method, realized gains and losses from the Company's price risk management activities are recognized in cost of sales when the associated production occurs and the resulting cash flows are reported as cash flows from operating activities. Gains and losses on derivative financial instruments that are closed before the hedged production occurs are deferred until the production month originally hedged. As a result of these activities, the Company recognized net hedging losses of $1,199,000 for the year ended December 31, 1999. No such agreements were entered into in 1998 and this activity was not material to the Company's financial position or results of operations in 1997.
As of December 31, 1999, the Company had open swaps through December 2000 covering a total of 396,800 barrels of crude oil at an average fixed price of $19.62 per barrel. The estimated fair value of open commodity price hedges as of December 31, 1999 was a loss of $1,103,000. No open commodity price hedges existed for any other period presented herein.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. A company may implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance, however, the statement cannot be applied retroactively. The Company does not plan to early adopt SFAS No. 133. The Company is currently assessing the potential impact of adopting SFAS No. 133. Applications of this standard could increase volatility in earnings and shareholders' equity through other comprehensive income.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 1999 the Company adopted the Emerging Issues Task Force's (EITF) Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Issue 98-10 is effective for fiscal years beginning after December 15, 1998, and requires energy trading contracts (as defined) to be recorded at fair value on the balance sheet, with the change in fair value included in earnings. The effect of initial adoption on January 1, 1999 was not significant. The accompanying statement of operations includes pretax income of $2,535,000 to reflect the future income from marketing operations based upon the year-end prices of the underlying commodities being traded. The accompanying balance sheet reflects the fair value of the trading asset of $4,420,000 in current assets and the fair value of the trading liability of $1,885,000 in current liabilities.
Revenue Recognition
Under the provision of EITF 98-10, the Company's natural gas marketing operation is classified as trading activity and is subject to mark-to-market accounting treatment. Conversely for crude oil marketing activities, gains and losses due to changes in underlying market values are recognized in cost of sales in the month of physical delivery. From time to time, the Company enters into forward contracts to minimize the impact of market fluctuations on its purchases of crude oil. The Company does not consider these contracts to be financial instruments since the contracts permit settlement by the delivery of crude oil. These contracts are no longer than one year in duration.
Transportation customers are invoiced, and the related revenue is recognized as the service is provided. Oil and gas revenue from the Company's interests in producing wells is recognized as oil and gas is produced from these wells.
(2) LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
The Company's revolving bank loan agreement provides for two separate lines of credit with interest at the bank's prime rate minus 1%. The agreement also provides for an interest rate option at the lender's quoted Eurodollar rate (LIBOR) plus 2%. The first line of credit or working capital loan provides for borrowings up to $7,500,000 based on the total of 80% of eligible accounts receivable and 50% of eligible inventories. Available borrowing capacity under the working capital line is calculated monthly and as of December 31, 1999 was established at $7,500,000 with $7,000,000 outstanding at December 31, 1999. The second line of credit or oil and gas production loan provides for flexible borrowings, subject to a borrowing base established semi-annually by the bank. The borrowing base is
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
presently established at $3,000,000, with the next scheduled redetermination date being September 1, 2000. As of December 31, 1999, $2,900,000 was outstanding under the oil and gas production loan facility. The working capital loans also provide for the issuance of letters of credit. The amount of each letter of credit obligation is deducted from the borrowing capacity. As of December 31, 1999, letters of credit under this facility totaled $25,000. The revolving line of credit loans are scheduled to expire on October 27, 2001, with the then present balance outstanding converting to a term loan payable in 12 equal quarterly installments.
The revolving loan agreement, among other things, places certain restrictions on the Company with respect to additional borrowings and the purchase or sale of assets, as well as requiring the Company to comply with certain financial covenants, including maintaining a 1.0 to 1.0 ratio of consolidated current assets to consolidated current liabilities. The Company is also required to restrict from dividend payment at least 50% of annual net income. At December 31, 1999, the Company was in compliance with all loan covenants.
A subsidiary of the Company (GulfMark Energy, Inc. ("GulfMark"), maintains a separate banking relationship to provide letters of credit and to provide financing for up to $5 million of crude oil inventories and certain accounts receivable associated with sales of crude oil. Such financing is provided on a demand note basis with interest at the bank's prime rate plus 1 percent. The letter of credit and demand note facilities are secured by substantially all of GulfMark's assets. GulfMark had approximately $150 million and $105 million in letters of credit outstanding as of December 31, 1999 and 1998, respectively, in support of its crude oil purchasing activities. As of December 31, 1999, the Company had $19.8 million of crude oil inventory eligible for collateral. However, no amounts were outstanding under the GulfMark term loan facility. The Company's Adams Resources Marketing, Ltd. subsidiary ("ARM") maintains a separate letter of credit facility to support its natural gas purchasing business. At year-end December 31, 1999, ARM had $13 million of letters of credit outstanding under this facility.
The Company's weighted average effective interest rate for 1999, 1998, and 1997 was 7.5%, 6.75% and 7.5%, respectively. No interest was capitalized during 1999, 1998, or 1997. At December 31, 1999, the scheduled aggregate principal maturities of the Company's long-term debt are: 2000 - None; 2001 - $825,000; 2002 - $3,300,000; and 2003 - $3,300,000; 2004 - $2,475,000.
(3) INCOME TAXES
The following table shows the components of the Company's income tax provision (in thousands):
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 and 1998, the Company's deferred tax liability totaled $2,095,000 and $560,000, respectively, and consisted principally of financial statement carrying amounts in excess of the underlying tax basis of fixed assets.
A reconciliation of taxes computed at the corporate federal income tax rate to the reported income tax provision is as follows (in thousands):
The Company was able to use its remaining statutory depletion carryforwards in 1999 to reduce taxable earnings.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Fair Value of Financial Instruments
The carrying amount of cash equivalents are believed to approximate their fair values because of the short maturities of these instruments. Substantially all of the Company's long and short-term debt obligations bear interest at floating rates. As such, carrying amounts approximate fair values.
Concentration of Credit Risk
Credit risk represents the account loss which the Company would absorb if its customers failed to perform pursuant to contractual terms. Management of credit risk involves a number of considerations, such as the financial profile of the customer, the value of collateral held, if any, specific terms and duration of the contractual agreement, and the customer's sensitivity to economic developments. The Company has established various procedures to manage credit exposure, including initial credit approval, credit limits, and rights of offset. Letters of credit and guarantees are also utilized to limit credit risk.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's largest customers consist of large multinational integrated oil companies and utilities. In addition, the Company transacts business with independent oil producers, major chemical concerns, crude oil and natural gas trading companies and a variety of commercial energy users. Accounts receivable associated with crude oil and natural gas marketing activities comprise approximately 95% of the Company's total receivables as of December 31, 1999, and industry practice requires payment for purchases of crude oil to take place on the 20th of the month following a transaction, while natural gas transactions are settled on the 25th of the month. The Company's credit policy and the relatively short duration of receivables mitigates the uncertainty typically associated with longer term receivables management. Accordingly, the amount of the allowance for doubtful accounts required is minimal. The Company had accounts receivable from one customer that comprised 31% of total receivables at December 31, 1999 and from two customers that comprised 16% and 15% of total receivables at December 31, 1998.
An allowance for doubtful accounts is provided where appropriate and accounts receivable are presented herein net of allowances for doubtful accounts of $223,000 and $235,000 at December 31, 1999 and 1998, respectively.
(5) EMPLOYEE BENEFITS
The Company maintains a 401(k) plan for the benefit of its employees. Company contributions to the plan were $314,000 in 1999, $210,000 in 1998, and $180,000 in 1997.
(6) TRANSACTIONS WITH RELATED PARTIES
Sakco, Ltd. ("Sakco"), Kenada Oil & Gas, Ltd. ("Kenada") and Kasco, Ltd. ("Kasco"), family limited partnerships of which Mr. K. S. Adams, Jr., Chairman and President, is a limited partner, Sakdril, Inc. ("Sakdril"), a wholly owned subsidiary of KSA Industries Inc. (KSAI), a major stockholder of the Company, and certain officers and members of the Board of Directors of the Company have participated as working interest owners in certain oil and gas wells administered by the Company. Sakco, Kenada, Kasco, Sakdril and the officers and directors participated in each of the wells under terms no better than those afforded other non-affiliated working interest owners. As of December 31, 1999, the Company was owed $120,000 from these related parties and the Company owed $225,000 to these related parties. As of December 31, 1998, the Company was owed $40,000 from these related parties, and the Company owed $285,000 to these related parties.
II-21 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
David B. Hurst, Secretary of the Company, is a partner in the law firm of Chaffin & Hurst. The Company has been represented by Chaffin & Hurst since 1974 and plans to use the services of that firm in the future. Chaffin & Hurst currently leases office space from the Company. Transactions with Chaffin & Hurst are on the same terms as those prevailing at the time for comparable transactions with unrelated entities.
The Company also enters into certain transactions in the normal course of business with other affiliated entities. These transactions with affiliated companies are on the same terms as those prevailing at the time for comparable transactions with unrelated entities.
(7) COMMITMENTS AND CONTINGENCIES
The Company has operating lease arrangements for tractors, trailers, office space, warehousing and other equipment and facilities. Rental expense for the years ended December 31, 1999, 1998, and 1997 was $7,573,000, $7,093,000 and $5,933,000, respectively. At December 31, 1999, commitments under long-term noncancelable operating leases for the next five years and thereafter are payable as follows: 2000 - $4,898,000; 2001 - $4,655,000; 2002 - $3,817,000; 2003 - $3,105,000; 2004 - $1,815,000; 2005 and thereafter - $1,575,000.
The Company's subsidiary, Ada Crude Oil Company (Ada), has been named as one of sixty-three defendants in a lawsuit styled The State of Texas et al vs. Amerada Hess Corporation. The suit alleges, among other claims, that the defendants as "common purchasers of oil" discriminated against the plaintiffs in favor of the defendants' own production and that of others. The plaintiffs also seek class certification. In response, the Company has filed a general denial and has asserted a number of affirmative defenses. Attorneys for the plantiff reviewed Ada's response and subsequently informed the Company that Ada has been recommended for dismissal from the lawsuit. This recommendation is currently under review by the plaintiffs, and the plaintiffs appear favorably disposed to such dismissal. The Company will continue to vigorously contest this matter and does not expect it to have a significant adverse effect on its financial position or results of operations.
In the normal course of business, the Company and its subsidiaries become involved in litigation incident to operations. In management's opinion, the ultimate resolution of all litigation matters and disputes will not have a material adverse impact on the Company's financial position or results of operations.
II-22
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SEGMENT REPORTING
The Company is engaged in the business of crude oil, natural gas and petroleum products marketing as well as tank truck transportation of liquid chemicals, and oil and gas exploration and production. Information concerning the Company's various business activities is summarized as follows (in thousands):
- ---------------
(1) Includes a $5,899,000 comparative earnings decrease caused by 3D seismic expense, decreased crude oil and natural gas prices and a related write-down of oil and gas properties.
II-23
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intersegment sales are insignificant. Other identifiable assets are primarily corporate cash, accounts receivable, and properties not identified with any specific segment of the Company's business. All sales by the Company occurred in the United States.
During 1999 and 1998, the Company had sales to one customer that totaled $565 million and $319 million, respectively, or more than 10% of total sales. During 1997, the Company had sales to two customers which totaled more than 10% of total sales of $267 million and $261 million.
Earnings from operations by segment represent revenues less operating costs and expenses and depreciation, depletion and amortization and are reconciled to operating earnings and earnings from operations before income taxes, as follows (in thousands):
II-24
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Quarterly Financial Data (Unaudited) -
Selected quarterly financial data and earnings per share of the Company are presented below for the years ended December 31, 1999 and 1998 (in thousands, except per share data):
- -----------------
(1) Reflects basic and diluted earnings per share for indicated periods.
II-25
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Oil and Gas Producing Activities (Unaudited) -
Total costs incurred in oil and gas exploration and development activities, all incurred within the United States, were as follows (in thousands, except per barrel information):
The aggregate capitalized costs relative to oil and gas producing activities are as follows (in thousands):
II-26
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Estimated Oil and Natural Gas Reserves (Unaudited) -
The following information regarding estimates of the Company's proved oil and gas reserves, all located in the United States, is based on reports prepared on behalf of the Company by petroleum engineers. Because oil and gas reserve estimates are inherently imprecise and require extensive judgments of reservoir engineering data, they are generally less precise than estimates made in conjunction with financial disclosures. The revisions of previous estimates as reflected in the table below result from more precise engineering calculations based upon additional production histories.
Standarized Measure of Discounted Future Net Cash Flows from Oil and Gas Operations and Changes Therein (Unaudited)-
The standardized measure of discounted future net cash flows was determined based on the economic conditions in effect at the end of the years presented, except in those instances where fixed and determinable gas price escalations are included in contracts. The disclosures below do not purport to present the fair market value of the Company's oil and gas reserves. An estimate of the fair market value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and risks inherent in reserve estimates.
The reserve estimates provided at December 31, 1999 are based on year-end market prices of $24.06 per barrel for crude oil and $2.36 per Mcf natural gas.
II-27
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
II-28
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Results of Operations for Oil and Gas Producing Activities (Unaudited)-
The results of oil and gas producing activities, excluding corporate overhead and interest costs, are as follows:
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-29
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning executive officers of the Company is included in Part I. The information concerning directors of the Company is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 26, 2000, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 11, 12 and 13 is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 26, 2000, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
III-1
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Earnings for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Supplementary Financial Data (All unaudited)
2. Exhibits required to be filed
3(a) - Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3(a) filed with the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1987)
3(b) - Bylaws of the Company, as amended (Incorporated by reference to Exhibits 3.2 and 3.2.1 of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 29, 1973 - File No. 2-48144)
3(c) - Amendment to the Bylaws of the Company to add an Article VII, Section 8. Indemnification of Directors, Officers, Employees and Agents (Incorporated by reference to Exhibit 3(c) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1986)
4(a) - Specimen common stock Certificate (Incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1991)
IV-1
4(c)* - Sixth Amendment to Loan Agreement between Service Transport Company et al and Bank of America, N.A. dated October 29, 1999.
21* - Subsidiaries of the Registrant
27* - Financial Data Schedule
- ------------------------------ * - Filed herewith
All other financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
The separate financial statements of Adams Resources & Energy, Inc. (the "Parent") are omitted because the conditions specified in Rules 5-04 and 12-04 of regulation S-X are met.
Copies of all agreements defining the rights of holders of long-term debt of the Company and its subsidiaries, which agreements authorize amounts not in excess of 10% of the total consolidated assets of the Company, are not filed herewith but will be furnished to the Commission upon request.
IV-2 SIGNATURES
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.
ADAMS RESOURCES & ENERGY, INC. (Registrant)
By /s/ RICHARD B. ABSHIRE By /s/ K. S. ADAMS, JR. ------------------------------------- ---------------------------------- (Richard B. Abshire, (K. S. Adams, Jr., Vice President-Finance, Director President, Chairman of the Board, Chief Financial Officer) and Chief Executive Officer)
Date: March 14, 2000
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 and in the capacities and on the date indicated.
By /s/ CLAUDE H. LEWIS By /s/ E. C. REINAUER, JR. ------------------------------ ----------------------------------- (Claude H. Lewis, Director) (E. C. Reinauer, Jr., Director)
By /s/ THOMAS S. SMITH By /s/ E. JACK WEBSTER, JR. ------------------------------ ----------------------------------- (Thomas S. Smith, Director) (E. Jack Webster, Jr., Director)
By /s/ JUANITA G. SIMMONS By /s/ EDWARD WIECK ------------------------------ ----------------------------------- (Juanita G. Simmons, Director) (Edward Wieck, Director)
By /s/ JOHN A. BARRETT ------------------------------ (John A. Barrett, Director)
Date: March 14, 2000
V-1 EXHIBIT INDEX
- ------------------------------ * - Filed herewith