Khashoggi's Pet Cash Cow Happy Milking Is Over

Times Staff Writer

It is a long way from the high-gloss world of Saudi arms merchant and erstwhile billionaire Adnan Khashoggi to the Long Beach intersection of Artesia and Paramount, a gritty neighborhood where crude oil is refined into asphalt and the air smells bad.

But venerable Edgington Oil Co., founded in 1942 to make asphalt for paving military airfields in the South Pacific, might have been the only smart investment Khashoggi made in recent years. And its sale on Sept. 1 should free up tens of millions of dollars for various angry creditors of the famous Saudi.

Under the stewardship of Khashoggi and his brother, Essam, the people at Edgington Oil had an uncomfortably close ringside seat from which to watch the developing financial problems of the man once reputed to be the world's richest. He was more recently described by an associate as "the great un-billionaire."

Now, Edgington executives are eager for the world to know that their historically profitable company is out from under the crumbled Khashoggi empire. And they say it didn't happen a minute too soon.

The Khashoggi enterprise used the solvent oil company as a virtual private bank account, draining off some $89 million that was spent to keep its personal aircraft aloft, to keep other parts of the empire afloat and to buy Edgington itself, according to court documents and interviews.

"We all feel relieved . . . to be out from under Khashoggi and his method of operation, or lack thereof," said Arch H. Humphrey, now Edgington's president and chief executive.

Khashoggi, who parlayed his ties to Saudi Arabia's royal family into a reputedly colossal fortune, is now in deep financial and legal trouble. Most of his U.S. operations, centered under Triad America Corp. of Salt Lake City, are in bankruptcy, and he is the target of more than 50 lawsuits. As reported by The Times, he is also under scrutiny by a federal grand jury in connection with deposed Philippine dictator Ferdinand Marcos.

Jewel of Their Assets

Court affidavits suggest that the Khashoggis repeatedly turned to Edgington, which took in up to $500 million a year from its asphalt sales, for cash during a period when Adnan Khashoggi couldn't pay the crew of his $70-million yacht or the 60 servants at his estate in Marbella, Spain.

"Edgington was the jewel of their American assets, and I believe the only one that consistently generated profits," said William G. McLendon, a vice president at Heller Financial Inc. in New York and a former San Francisco-based General Electric Credit Corp. executive in charge of the Edgington account.

A Triad subsidiary, Newedge, bought Edgington from Pennsylvania Co. in 1983 for a reported $55 million. This month, Edgington was finally sold to John D. Castellucci, owner of a small Salinas, Calif., firm called Sulphur Mountain Oil Corp., for $52.5 million in cash and the assumption of $22 million in debt. An oil-storage unit of Edgington was sold separately to Atlantic Richfield for $25 million.

Negative publicity about Khashoggi's mounting financial difficulties and his role as a middleman in the secret sale of U.S. arms to Iran had all but dried up Edgington's sources of credit despite the company's profitability, according to Humphrey and court papers.

A former Edgington executive said in a court deposition that if the company hadn't managed to extricate itself from Khashoggi, its longtime lender, GE Credit, intended to terminate its credit agreement.

Used Credit Cards

And in its search for other forms of credit, Humphrey recalled, a Security Pacific National Bank officer told him: "When you're no longer owned by the Khashoggis, come back and see us."

He said that Adnan Khashoggi used Edgington credit cards to buy nearly $3 million in jet fuel to power his luxurious fleet of aircraft around the world--funds that were never repaid. The company finally deactivated his credit card.

Humphrey said Khashoggi wrote a series of bad checks to Edgington's aviation-fuel subsidiary, one for $750,000 that bounced twice in May, 1986, drawn on a Monaco bank. It was a Khashoggi bank account in Monaco where some $20 million in secret Iranian payments for U.S. arms were funneled beginning in 1985, leading to the Iran-Contra scandal that put Khashoggi's name before the public.

Humphrey also complains that Edgington was made to buy a $350,000 helicopter to ferry Essam Khashoggi, Adnan's brother and Triad's main contact with Edgington, from his Santa Barbara home to Edgington's Long Beach office.

"I think he came once, maybe twice," recalled Humphrey, then Edgington's chief financial officer. He said he sent Essam Khashoggi a monthly report on Edgington's financial performance, and that was the only regular contact with the brothers. Adnan never visited the company's offices, he said.

Humphrey said it was Edgington's own lines of credit that enabled the Khashoggis to buy Edgington in the first place, with a mere $10,000 in cash. In a classic leveraged buyout, the rest was paid with money borrowed by Edgington itself from GE Credit (now GE Capital Corp.)

Helped Losing Operations

On top of the cash "advance" from Edgington "to purchase ourselves," in Humphrey's words, Khashoggi lieutenants routinely ordered Edgington to wire funds totaling up to $40 million over a three-year period.

"The other $35 to $40 million was either to finance other losing operations or . . . I remember sending a . . . payment for $1.5 million because he was having some tinkering done to his DC-8," Humphrey said. "We went out and borrowed it."

GE Credit raised Edgington's credit limit to accommodate Triad's huge appetite for funds. A formal procedure was established for the hundreds of wire transfers of funds that Edgington was ordered to send to various banks and other entities it knew nothing about.

"We never made any advances without our lenders knowing what it was for, and we had received letters or promises . . . that the money was going to be returned. False promises," Humphrey said.

McLendon, the former GE Credit executive, said: "Triad America and Newedge were very creative in their approaches to getting cash flow out of Edgington. Technically, there was nothing that was in violation of the security agreements with GE Credit.

"It's fair to say that anytime you have a parent in a cash-hungry position, you're concerned," McLendon added. "We raised the limits, but never so much as to create substantial hardship for the borrower."

To hear Humphrey tell it, there wouldn't be much left of Edgington if the company hadn't finally put its foot down and refused to use its hard-earned credit to borrow any more money to pay various Khashoggi debts.

Really Couldn't Win

"We at Edgington were probably one of the few people who told Khashoggi to stuff it," said Humphrey.

Of course, it was the Khashoggis' company, and they could have stuffed Humphrey. A former colleague said: "Arch raised hell with them, but ultimately he couldn't win because they would say, 'It's our company, it's our money."'

Humphrey said one of the Khashoggis' pilots called to threaten his job when he cut off their jet-fuel credit cards with an unpaid balance $2.7 million. But the Khashoggis' attention was apparently diverted by the unraveling of the Salt Lake City-based real estate empire and then the Iran-Contra scandal.

The final "indebtedness" of Triad America to Edgington came to $89 million, according to a report by an examiner appointed by the federal bankruptcy court hearing the Khashoggis' Chapter 11 case for Newedge, the holding company for Edgington Oil that was in turn a subsidiary of Triad America.

Nobody has claimed that Triad or Newedge broke laws in connection with Edgington. But the examiner, Leonard L. Gumport of Los Angeles, concluded the Khashoggi entities were guilty of gross mismanagement, dishonesty and possibly fraud in its dealings with the Long Beach firm. He urged that Edgington be sold for its own protection.

In a deposition, former Edgington President Mark G. Newgard said he met with Essam Khashoggi at his estate in the affluent Hope Ranch section of Santa Barbara in April, 1986, to recommend that he sell Edgington because of the mounting credit problems. Newgard, now president of Pauley Petroleum of Los Angeles, said Khashoggi immediately agreed.

Sale Was Blocked

But the Khashoggis then struck a deal to sell Edgington to another company of which Khashoggi was chairman, Skyhigh Resources Ltd. of Vancouver, B.C., in late 1986. It was that move that triggered the threat by GE Credit to terminate its credit agreement with Edgington.

Triad America creditors led by Sheraton Corp., the hotel chain, displeased "to see Adnan Khashoggi recycled as a new owner" of Edgington, as Newgard put it, persuaded a judge to block that sale. The sale to Castellucci was announced last May and completed Sept. 1.

The Khashoggis couldn't have been too mad at Humphrey, he said, because they tried to hire him as president of Triad America. He said he refused, but agreed to spend several months in Salt Lake City in 1986 to help out the stumbling centerpiece of the Saudi's U.S. operations.

In addition to a glimpse of the storied opulent life style maintained by Khashoggi--"they have gold-woven wallpaper," he said, and 30 or 40 employees were using company-issued MasterCards for lavish personal use--he got what he thinks was a hint of the brewing arms scandal in Washington.

"They kept telling me, 'Just hold it together for another 30 days, Arch, we've got this big deal that's super secret that we can't tell you about,' " he recalled. "Later I realized it must have been the Iran deal."

Edgington claims 35% of California's market for paving and roofing asphalt. It said average pretax earnings since 1983 have exceeded $8 million a year on average revenue of $400 million.

In addition to its 40,000-barrel-per-day refinery in Long Beach and related facilities, the company owns Triad Aviation in Ventura, an aviation fuel firm that said it has more than 2,100 jet aircraft under contract for refueling.

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