<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
--------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
FOR QUARTER ENDING SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-6247
ARABIAN SHIELD DEVELOPMENT COMPANY
State of Delaware 75-1256622
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 ninety days.
Yes X No
Number of shares of the Registrant's Common Stock par value $0.10 per share,
outstanding at September 30, 1995: 19,928,494.
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31,
(UNAUDITED) 1994
----------- ----
<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS
Cash and Cash Equivalents in U.S. $ 617,239 $ 1,326,119
Accounts Receivable (Net) 1,591,145 1,402,982
Inventories 596,441 471,074
-------------- ---------------
Total Current Assets 2,804,825 3,200,175
CASH IN SAUDI ARABIA 65,847 430,976
PLANT, PIPELINE & EQUIPMENT (AT COST)
Refinery Plant, Pipeline & Equip. 5,563,776 5,440,208
Less: Accumulated Depreciation (2,462,263) (2,187,256)
-------------- ---------------
Net Equipment 3,101,513 3,252,952
AL MASANE PROJECT & SURROUNDING
PROPERTIES 30,387,962 30,112,132
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
INVESTMENT IN AND ADVANCES TO
PIOCHE-ELY VALLEY MINES, INC. 241,644 247,052
GOODWILL 467,978 678,206
OTHER ASSETS (NET) 587,371 704,035
-------------- ---------------
TOTAL ASSETS $ 40,088,388 $ 41,056,776
============== ===============
LIABILITIES
- - -----------
CURRENT LIABILITIES
Accounts Payable $ 690,328 $ 944,007
Accrued Liabilities 557,607 616,459
Accrued Liabilities in Saudi Arabia 785,743 785,743
Notes Payable 15,515,264 15,945,393
Current Portion of Long-Term Debt 64,614 67,968
Current Portion of Long-Term
Obligations 19,964 18,805
-------------- ---------------
Total Current Liabilities 17,633,520 18,378,375
LONG-TERM DEBT 144,127 195,386
LONG-TERM OBLIGATIONS 189,263 206,013
ACCRUED LIABILITIES IN SAUDI ARABIA 675,115 585,918
DEFERRED REVENUE 149,065 160,693
STOCKHOLDERS' EQUITY
- - --------------------
COMMON STOCK-40,000,000 shares of $0.10
par value authorized: 19,928,494
shares issued and outstanding 1,992,849 2,002,849
ADDITIONAL PAID-IN CAPITAL 32,809,119 32,899,119
RECEIVABLES FROM STOCKHOLDERS (126,000) (276,000)
ACCUMULATED DEFICIT (13,378,670) (13,095,577)
-------------- ---------------
Total Stockholders' Equity 21,297,298 21,530,391
-------------- ---------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 40,088,388 $ 41,056,776
============== ===============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT.30, 1995 SEPT.30, 1995 SEPT.30, 1994 SEPT.30, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Refined Product Sales $ 4,442,167 $ 13,578,133 $ 5,064,369 $ 13,824,869
Processing Fees 197,183 418,244 49,140 151,725
------------- ------------- ------------ ------------
4,639,350 13,996,377 5,113,509 13,976,594
OPERATING COSTS AND EXPENSES:
Cost of Refined Product
Sales and Processing 4,051,914 11,962,119 3,955,971 10,558,423
General and Administrative 496,456 1,662,234 453,132 1,399,286
Settlement of Litigation -- -- -- (975,000)
Depreciation & Amortization 206,122 540,471 157,216 482,307
------------- ------------- ------------ ------------
4,754,492 14,164,824 4,566,319 11,465,016
------------- ------------- ------------ ------------
OPERATING INCOME (LOSS) (115,142) (168,447) 547,190 2,511,578
OTHER INCOME (EXPENSES):
Interest Income 6,585 27,726 13,638 43,116
Interest Expense (87,569) (278,060) (73,816) (250,446)
Equity in Income (Loss)
of Affiliate (4,004) (7,049) (6,784) (8,642)
Other Income 58,724 182,965 67,479 360,303
------------- ------------- ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEMS (141,406) (242,865) 547,707 2,655,909
Income Tax Expense (40,228) (40,228) (16,000) (46,000)
------------- ------------- ------------ ------------
ITEM NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (181,634) (283,093) 531,707 2,609,909
Extraordinary Items,
Net of Income Tax -- -- -- 578,150
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (181,634) $ (283,093) $ 531,707 $ 3,188,059
============= ============= ============ ============
PER COMMON SHARE:
Net Income (Loss) Before
Extraordinary Items $ (.01) $ (.01) $ .03 $ .13
Extraordinary Items -- -- -- .03
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (.01) $ (.01) $ .03 $ .16
============= ============= ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,961,827 20,006,272 20,028,494 20,026,938
============= ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 20,028,494 $2,002,849 $32,899,119 $(276,000) $(13,095,577) $21,530,391
Payment on Receivables 50,000 50,000
Cancellation of Common Stock
Subscription (100,000) (10,000) (90,000) (100,000) --
Net Income (Loss) (283,093) (283,093)
---------- ---------- ----------- --------- ------------ -----------
BALANCE, SEPTEMBER 30, 1995 19,928,494 $1,992,849 $32,809,119 $(126,000) $(13,378,670) $21,297,298
========== ========== =========== ========= ============ ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30.1995 SEPT. 30,1994
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) $ (283,093) $ 3,188,059
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 540,471 482,307
Equity in (Income) Loss of Affiliate 7,049 8,642
(Decrease) Increase in Deferred Revenue (11,628) (11,628)
Decrease (Increase) in Accounts
Receivable (188,163) (650,850)
Decrease (Increase) in Inventories (125,367) 97,489
(Decrease) Increase in Accounts
Payable and Accrued Liabilities (312,531) (294,775)
Decrease (Increase) in Other Assets 116,664 (129,110)
Settlement of Litigation -- (975,000)
Extraordinary Item -- (578,150)
Other (56,877) 3,447
-------------- ---------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (313,475) 1,140,431
-------------- ---------------
INVESTING ACTIVITIES:
Additions to Al Masane Project
and Surrounding Properties (275,830) (799,250)
Additions to Other Interests
in Saudi Arabia -- (52,157)
Additions to Plant, Pipeline & Equipment (123,568) (219,085)
(Increase) Decrease in Cash in
Saudi Arabia 365,129 1,080,591
Increase (Decrease) in Accrued
Liabilities in Saudi Arabia 89,197 35,550
-------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES 54,928 45,649
-------------- ---------------
FINANCING ACTIVITIES:
Common Stock Issued for Cash -- 14,000
Cancellation of Stock Subscription (100,000) --
Decrease in Receivables from
Stockholders 150,000 --
Additions to Notes Payable &
Long-Term Obligations 123,000 --
Reductions to Notes Payable &
Long-Term Obligations (623,333) (1,061,038)
-------------- ---------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (450,333) (1,047,038)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH (708,880) 139,042
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,326,119 118,828
-------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 617,239 $ 257,870
============== ===============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. REPORTING POLICIES
The consolidated financial statements include the accounts of Arabian
Shield Development Company (the "Company") and its wholly-owned
subsidiaries, American Shield Refining Company (the "Refining
Company") and American Shield Coal Company (the "Coal Company"). The
accounts of the Refining Company include its wholly owned subsidiary,
Texas Oil and Chemical Company II, Inc. ("TOCCO") and TOCCO's accounts
include its wholly owned subsidiaries, South Hampton Refining Company
("South Hampton") and Gulf States Pipeline Company, Inc. ("Gulf
States"). The Company accounts for its 46% ownership interest in
Pioche-Ely Valley Mines, Inc. ("Pioche") by the equity method. In
1992, the Company began to fully consolidate the Al Masane Project
(see Note 3). Previously, the Company accounted for the Project by the
equity method.
2. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company's current
primary source of revenue attributable to its wholly owned subsidiary,
South Hampton Refining Company, is fully dedicated to repayment of
debt and funding refining operations. Additionally, the Company is not
generating cash flow from any of its other activities.
Management of Arabian Shield Development Company plans to fund its
future operations through sales of its common stock, borrowings, and
from the anticipated profits of its mining operations in Saudi Arabia,
which are anticipated to commence in 1996.
In the event the Company is unable to finance the Al Masane mining
project or realize cash flow from its refining operations, or through
the further sale of stock, or reach a final agreement on the repayment
of the $11,000,000 loan from the Saudi government, there will then be
substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
3. AL MASANE PROJECT
The Company and National Mining Company ("NMC"), a Saudi Arabian
Company, entered into an agreement in 1971 to explore and develop
certain areas in Saudi Arabia. The Company and NMC jointly entered
into an interest-free loan agreement for $11,000,000 in January 1979,
with the Saudi Arabian Ministry of Finance and National Economy, the
proceeds of which loan were required to be used for the underground
development program at Al Masane. Repayment of the loan was to begin
December 31, 1984, in ten equal annual installments. None of the
scheduled payments have been made.
On April 13, 1992, the Company and NMC signed an agreement whereby NMC
transferred to the Company all of its rights and interests in the Al
Masane Area in return for the Company assuming sole responsibility for
the repayment of the $11 million loan obtained from the Saudi Arabian
government in 1979. The loan is to be rescheduled so that repayment
would be made from the profits of mining after the mining lease is
issued. On April 30, 1992, the Minister of Petroleum
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<PAGE> 7
and Mineral Resources was informed by the Company about the agreement
with NMC and that the Company would not ask for the loan which was
approved by the Saudi Arabian government in 1984. On October 4, 1992,
the Company and the Minister of Petroleum and Mineral Resources
initialed approval of a new mining lease which was submitted to the
Council of Ministers for approval.
On April 26, 1993, the Council of Ministers passed the resolution
granting the Company the mining lease, and on May 22, 1993, a Royal
Decree was issued by the King. The initial period of the mining lease
is 30 years, which can be renewed for another period or periods, not
to exceed 20 years. The lease area is 44 square kilometers in size.
The lease agreement stipulates that the Company is to pay the Saudi
government a surface rental of approximately $117,000 a year. The
Company made the first year's surface rental payment in August 1993.
All subsequest payments are being deferred to be paid by a Saudi
limited liability company which will be 50% owned by the Company with
the other 50% owned by Saudi shareholders of the Company. This new
company will be formed to initially operate the Project when approval
is received for the loan from the Saudi Industrial Development Fund
("SIDF"), which was applied for on September 30, 1995. The lease
agreement also stipulates that, after two years of profitable mine
operations, a Saudi public stock company can be formed in which the
Company will contribute its interest in the Al Masane Project in
return for 50% of the stock. The Petroleum and Mineral Organization
("PETROMIN"), a company wholly-owned by the Saudi government, has an
option to acquire up to 25% of the stock with the remaining 25%
interest to be put out for public subscription to Saudi citizens.
In the Al Masane Lease area, proven and probable reserves of the ore
of copper, zinc, silver and gold, which the Company discovered and
developed, are estimated to be 7.2 million tonnes, and the exploration
potential to increase these reserves at the mine site and in the area
remain excellent, as reported by the Company's geological and
engineering consultant. A 1994 report on the Al Masane Project by the
consulting firm, Watts, Griffis and McQuat, which was begun in 1993
subsequent to the granting of the mining lease was completed in July
1994. The purpose of this report is to provide a feasibility study for
the Project to be used in obtaining financing, as well as an
implementation plan for the Project. The report projects production of
the proven and probable ore reserves of 7.2 million tonnes over a ten
year period commencing in 1996. The total capital cost of the Project
is estimated to be $81.3 million. The cash flow projection was made
based on the assumption that 50% of the financing of the Project's
cost will come from loans from the Saudi Industrial Development Fund,
25% from bank loans, and 25% from equity financing. This financing is
anticipated to be completed in 1995. Revenues were estimated
utilizing projected mineral prices from a third party pricing expert.
Since positive net cash flows are indicated in the report, the
consultants have recommended that the mine be brought into production.
In March 1995, the Company entered into an agreement with Carlyle SEAG
("Carlyle"), whereby Carlyle has been retained as the Company's
financial advisor in connection with the Al Masane mining project.
Carlyle's services will include, but not be limited to, (1) advising
on the capitalization structure of the proposed Saudi company to be
established for the project; (2) the raising of capital funds for the
project implementation; and (3) assisting the Company in the filing of
all licenses and necessary documents for regulatory purposes. In
addition to compensation for their services, including the grant of an
option allowing Carlyle to purchase 2,000,000 shares of the Company's
common stock at $1 per share, Carlyle will nominate one member to the
Board of Directors at the Company's next Board meeting and will
nominate a second board member upon the
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<PAGE> 8
closing of the financing for the Al Masane project.
4. OTHER PROJECTS IN SAUDI ARABIA
In December 1993, the Company commissioned Sherritt Ltd, of Fort
Saskatchawan, Canada, to prepare a conceptual engineering design for a
proposed zinc refinery based on Sherritt's two stage pressure leach
process, to be built by the Company and Saudi partners at the Red Sea
port of Yanbu, Saudi Arabia; the refinery would have the capacity to
produce 100,000 tonnes of slab zinc per year, with elemental sulfur as
a by-product. Sherritt Ltd. completed the study in May 1994, and it
contains a proposed flow sheet that has been commercialized and
designed for a state of the art zinc refinery. Sherritt's zinc
pressure leach technology provides significant advantages over other
existing zinc production processes, including being known as the most
favored technology for environmental considerations. In its study
Sherritt concluded that all the elements of the project that could be
identified to date are included in its study, and these offer a strong
potential for the project and enhance the concept. Sherritt encouraged
the Company to proceed to carry out further studies toward the
implemention of the project.
In May 1993, the Company had discussions with Chevron Chemical Company
regarding the Company's proposal to purchase 5,000 barrels per day of
mixed pentanes from an Aromax petrochemical project to be built in
Jubail, Saudi Arabia by Chevron Chemical in a joint venture with the
Saudi Venture Capital Group (SVCS). The Company and some Saudi joint
venture partners, all of whom are stockholders of the Company,
contemplate building a processing plant located next to the Chevron
Aromax plant, On July 6, 1993, the Company received a letter from
Chevron Chemical stating that Chevron Chemical and SVCS have jointly
agreed to commit to supply the Company's proposed pentane project with
up to 5,000 barrels per day of mixed pentane feedstock. Subsequently,
engineering and marketing studies were made for the project by outside
consultants which reflected positive results. The Company, Chevron
Chemical and SVCS have been waiting for new regulations from the Saudi
government regarding private investments in petrochemical projects
before proceeding further with these projects. These regulations were
recently issued and planning has begun toward the construction and
operation of the Chevron Aromax plant and the Company's processing
plant. Construction is estimated to be completed in late 1996. The
Company will begin applying to the Saudi government for a license for
the project when the Aromax project receives final approval from the
Saudi government.
5. MINERAL EXPLORATION AND DEVELOPMENT PROJECTS IN THE UNITED STATES
A major component of the Company's activities relates to the
acquisition, exploration, and development of mineral deposits. All
direct costs incurred in these activities are capitalized as mineral
exploration and development costs until such time as (1) the Company
commences commercial exploitation of the related mineral deposits, at
which time that project's costs will be amortized, (2) the related
project is abandoned, at which time the capitalized costs will be
written off, or (3) when any or all deferred costs are permanently
impaired. The Coal Company defaulted in 1988 under its lease
agreement and forfeited its interests in the coal properties. The Coal
Company was required by the Colorado Mined Land Reclamation Division
to complete reclamation work on the property. The reclamation work was
secured by a letter of credit in favor of the Division which was
backed by a certificate of deposit for $36,000. In March 1994 the
Division exercised its right under the letter of credit, and the
$36,000 was paid to the Division. This action concludes the Coal
Company's involvement in the reclamation project. The Coal Company has
a tax loss carry-forward of
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<PAGE> 9
approximately $5.9 million which is limited to its net income. The
Coal Company is currently negotiating with a company toward the
possible use of this amount.
In August 1993, Pioche-Ely Valley Mines, Inc. ("Pioche") entered into
a new lease of the Wide Awake mine property with the same joint
venturer it had previously leased to in 1990. The new agreement
stipulates a 6% royalty on net smelter returns with no annual rental
required. The lease commenced on October 1, 1993, for a primary term
of twenty-seven months (to December 31, 1995). In August 1995, it was
agreed by all parties concerned that the lease will be extended for
one year to December 31, 1996, under the same terms, and will continue
as long as minerals are produced in commercial quantities or unless
terminated by the parties. A significant core hole is planned to be
drilled on the Wide Awake claim in 1995 or early 1996.
Based on geophysical work of the mining claims in 1989 by a major
mining company, Pioche drilled a test hole in September 1994 in search
of zinc deposits similar to those found and mined by another company
on its claims between 1924-1958, which amounted to 2.6 million tons of
ore containing 11.8% zinc, 4.6% lead and 4.8 ounces of silver per ton.
The nearest ore body of the above mined ore is located only 2,500 feet
to the west of the Pioche claims. The drill hole, which was to go down
to 1,500 feet, encountered formation problems at 700 feet and further
drilling had to be abandoned. A new site will be selected and a second
hole is expected to be drilled in early 1996.
6. REFINERY OPERATIONS
The principal assets of the Refining Company are a special products
refinery located near Beaumont, Texas, and 45 miles of pipelines to
the Gulf of Mexico. South Hampton, the Company's only revenue
producing asset, sells its products primarily to companies in the
petroleum industry. Downturns in the industry could negatively impact
the refinery operations in the future. Various refinery upgrade and
expansion projects initiated in 1988 and 1989 were completed in 1989
and early 1990. South Hampton's source of funds for these projects
included advances by the Company of proceeds from the sale of
additional shares of the Company's common stock. All of the amounts
advanced by the Company to South Hampton are subordinated to the liens
securing the indebtedness of South Hampton to Den norske Bank.
7. LEGAL PROCEEDINGS
In 1990 and 1991, Cajun Energy, Inc. and E-Z Mart Stores, Inc.,
respectively, each filed a lawsuit against South Hampton alleging that
South Hampton manufactured and sold defective gasoline and/or failed
to properly test its product prior to sale. Before the initiation of
the lawsuit by Cajun, claims in excess of $906,000 were paid by South
Hampton's insurance carrier under a $1 million liability policy. The
plaintiffs were seeking to recover all claims and related costs paid.
In May 1994, the E-Z Mart lawsuit went to trial and a judgement was
entered against South Hampton. In consideration of the judgement and,
since the issues were identical to the claims asserted in the Cajun
lawsuit, there has been a dismissal by Cajun of its lawsuit against
South Hampton. At the trial, South Hampton consented to a settlement
agreement whereby the plaintiffs took a judgement against South
Hampton for the amounts sought and the plaintiffs signed a
"nonexecution agreement" not to execute upon the judgement in return
for the assignment by South Hampton of certain claims against its
insurance carrier. South Hampton also agreed not to pursue its 1992
lawsuit against the insurance company. The total judgement granted to
the plaintiffs was approximately $5.5 million, after credit of
approximately $1.0
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<PAGE> 10
million was given to the plaintiffs by another defendant in the causes
of action. This concludes the claims and actions against South Hampton
in these matters.
South Hampton, together with over twenty-five other companies, is a
defendant in two proceedings pending in the 60th Judicial District
Court in Jefferson County, Texas, and in the 136th Judicial District
Court in Jefferson County, Texas, respectively, brought on July 21,
1993 and July 18, 1994, respectively, by two former employees of the
Goodyear Tire & Rubber Company plant located in Beaumont, Texas,
claiming illness and diseases resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during their
employment with Goodyear. Plaintiffs claim that the defendant
companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjects each and all
of them to liability for unspecified actual and punitive damages.
South Hampton intends to vigorously defend against these lawsuits.
On May 15, 1991, Arabian Shield Development Company filed a complaint
with the U. S. Department of Justice (DOJ) against Hunt Oil Company of
Dallas, Texas, alleging violations of the Foreign Corrupt Practices
Act by Hunt Oil Company in obtaining its Petroleum Production Sharing
Agreement (PSA) in Yemen in 1981, at the time when Arabian Shield was
a serious contender for the PSA which it had presented to the Yemen
government for the same area before Hunt Oil Company made its
application. On May 5, 1995, Arabian Shield Development Company
attorneys opined that, because the PSA of Hunt Oil Company is still
extant as of this date, and under its auspices, payments and receipts
occur daily, the DOJ still has ample jurisdiction to continue its
investigation with further credible evidence that may be discovered.
Arabian Shield is pursuing the matter.
8. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
SEPT. 30, 1995 DEC. 31, 1994
-------------- -------------
<S> <C> <C>
Refinery feedstock $142,364 $226,265
Refined products 454,077 244,809
-------- --------
Total inventories $596,441 $471,074
======== ========
</TABLE>
Refined products and feedstock are recorded at the lower of cost,
determined on the last-in, first-out method (LIFO), or market. The
market value of the inventory at September 30, 1995 was below the LIFO
value by approximately $41,000 and at December 31, 1994, the market
value exceeded the LIFO value by approximately $193,000.
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<PAGE> 11
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Effective January 1, 1988, the Company determined it had ceased to be
a development stage Company due to the significant revenues generated
by the Refining Company. The Refining Company generates substantially
all of the revenues of the Company.
The Company had a net loss of $293,093 for the nine months ending
September 30, 1995, compared to net income of $3,188,059 for the same
period in 1994, resulting in a net income decrease of $3,471,152 in
1995 from the comparable period in 1994. $1,553,150 of the decrease
from 1994 was attributable to two factors: (1) a credit of $975,000
relating to the reversal of a charge in 1992 for potential expenses
relating to litigation that was settled in 1994, and (2) an
extraordinary credit of $578,150 attributable to the settlement in
1994 of an indebtedness owed to a vendor. The remaining decrease in
income from 1994 was primarily due to higher feedstock prices in 1995
and slower sales in recent months. For the nine months ending
September 30, 1995, the Refining Company had gross operating income of
$201,781, and net income of $133,478. The Refining Company cash flow
during the period was a positive $673,544. The gross operating income
in 1995 includes processing fees of $418,244, compared to processing
fees of $151,725 in 1994. The Refining Company had gross operating
income for the same period in 1994 of $1,555,947 and net income of
$3,371,619. The amount of gross sales in 1995 was $246,736 lower than
in 1994 due to reduced volumes and prices and the margins were not as
good due to higher feedstock prices. The cost of product sales in 1995
was $1,403,696 higher and amounted to 88% of gross sales compared to
76% in 1994. Feedstock prices in 1995 were about $.08 per gallon
higher than in the same period a year ago. This rise in the cost of
feed is having a significant difference in the performance so far in
1995. This cost, however, has been coming down in recent months. The
refinery has been running at its full capacity of 2,200 barrels per
day since July 1994 and will continue to do so in the coming months.
Processing fees in 1995 were higher than in 1994 by $266,519 and are
expected to be even better in the near future. Negotiations were
completed in February on a toll processing agreement with a large
chemical company which began operating in April, after equipment
modifications were made by the refinery. Minimum monthly fees of
$16,000 are expected which are anticipated to increase up to $50,000
per month within nine months if their markets develop as they expect.
A toll processing contract for racing fuel blending was renewed in
February for a three year term and another contract was renewed in
May. The refinery has recently been spending extra time and money in
replacing old pipes and equipment, cleaning up tank bottoms and
complying with environmental regulations. A continuous effort is being
made to control and reduce all expenses.
General and administrative expenses for the first nine months in 1995
were higher by $192,372 than for the same period in 1994. The expenses
and time demands of regulatory and environmental compliance and
reporting continue to increase and are reflected in the higher G & A
costs. Interest expense in 1995 and 1994 was practically all
attributable to the debt of the refinery and increased by $27,614 due
to higher interest rates in 1995.
The equity in loss of affiliate of $7,049 for the nine months in 1995
was attributable to Pioche-Ely Valley Mines, Inc. A charge for
amortization of
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<PAGE> 12
goodwill of $138,570 for the same period in 1995 and 1994 relates to
the goodwill recognized on the purchase of the refinery in 1987.
Interest income in both periods was primarily from time deposits of
the refinery operation and from excess cash invested in Saudi Arabia.
Other income in both periods primarily includes income from leases,
rentals, and miscellaneous items at the refinery. The income tax
expense of $40,228 in 1995 resulted from the payment in September of
the 1994 federal corporate income tax. Due to the loss for the first
nine months of 1995, there is no provision for income taxes for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition in June 1987 of the refinery in Silsbee,
Texas, the Company had substantially no significant operating revenues
since 1972. Because of the lack of operating revenues, it has been
necessary for the Company continually to seek additional debt and
equity financing in order to have funds to continue operations. The
Company has required additional debt or equity financing in order to
continue development activities on its various projects and to fund
its general and administrative costs.
Due to the granting by Saudi Arabia of the Al Masane mining lease in
May 1993, the Company has begun planning for the mobilization program
and financing to implement the construction and commissioning of the
mining treatment plant and housing facilities for the mine. The firm
of Watts, Griffis and McOuat of Toronto, Canada, has been appointed as
owner's agent and project manager. The Company will also soon start an
intensive exploration program to increase the reserves at the mine
site and elsewhere in the lease area. In addition, the Company is now
actively engaged in studies for the feasibility of the establishment
of a petrochemical plant in Saudi Arabia similar to the one owned by
it in Silsbee, Texas. The products to be manufactured would be
solvents for the plastics industry and they are anticipated to be sold
in the Middle East, Europe and the Far East.
Since the coal leases in Colorado were relinquished in 1988, there is
only a small amount of overhead expenses incurred regarding the Coal
Company. Primarily as a result of the write-off of the coal leases in
1988, the Company has net operating loss tax carryforwards from prior
years of approximately $24.1 million, of which approximately $5.9
million is limited to the net income of the Coal Company and
approximately $1.1 million is limited to the net income of TOCCO.
These carryforwards expire during the years 1995 through 2008. The
Company is actively seeking a means of utilizing these tax loss
carryforwards.
The refinery completed an expansion project in early 1990 which
increased the processing capacity from 1,500 to 2,200 barrels a day.
The cost of the total refinery upgrade and expansion was approximately
$2.5 million. The Company advanced funds for some of these
expenditures and put them in the form of a note from the refinery.
This note, in the principal amount of $1,363,355 at September 30,
1995, is secured by a second lien on the refinery assets, and was
approved by the Den norske Bank AS.
On September 30, 1995, the outstanding principal amount under the
Amended and Restated Credit Agreement with Den norske Bank AS was
$2,366,951. The entire balance under the Amended and Restated Credit
Agreement facility, including amounts drawn under the letter of credit
facility, is due on December 31, 1995. South Hampton has agreed to
make minimum quarterly principal payments of $150,000, and the Company
has committed to use its best efforts to obtain new equity financing
of at least $1,500,000 by December 31, 1995, to be remitted to the
bank.
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<PAGE> 13
In July 1994, South Hampton established a hedging program to help
decrease the volatility of the price of fuel gas to the refinery.
South Hampton purchased several commodity based derivative futures
contracts. Gains and losses related to these contracts have been
recognized when the contracts expire and are reflected in the fuel gas
costs in the statement of operations. The natural gas market suffered
severe price declines in the last few months of 1994 and into 1995,
and the contracts held by South Hampton showed concurrent price
declines. The first month of these recognized losses was in October
1994, and there was a total net recognized loss of $117,000 in 1994.
The first nine months of 1995 reflected losses of $104,000. Since it
appears that fuel prices are expected to decrease and soften in the
next year or two, the hedging program has been discontinued at the
present time.
In 1994, the Company (1) negotiated an extension until June 30, 1995
of the maturity of the Amended and Restated Credit Agreement with Den
norske Bank AS, (2) issued 14,000 shares of its Common Stock of $1.00
per share pursuant to an option exercised by the Company's Chairman of
the Board in exchange for the cancellation of certain indebtedness,
(3) consolidated two notes payable by the Company's President and
Chief Executive Officer, in the amounts of $99,000 and $27,000, which
matured on December 31, 1993 and January 31, 1994, respectively, into
one note for $126,000 having a December 31, 1995 maturity date and
bearing interest at the rate of six percent per annum, (4) received
$50,000 from a 1993 sale of its Common Stock to a private Saudi
company controlled by a director of the Company pursuant to a partial
option exercise and (5) offset $30,000 in unpaid compensation due to
the Company's Chairman of the Board against amounts owed to the
Company by four companies owned by the Chairman of the Board.
In the first nine months of 1995, the Company received an additional
$50,000 pursuant to the partial option exercise of the 1993 sale to a
private Saudi company. The balance of $100,000 in subscriptions to the
Company's common stock was to be paid in equal amounts of $50,000 in
May and August 1995; however, the Saudi company decided in August not
to purchase the remaining 100,000 shares at $1.00 per share. As a
result, the Stockholders' Equity for 1995 on the Balance Sheet
reflects a decrease of $100,000 in Receivables from Stockholders and a
corresponding decrease of $100,000 in Common Stock and Additional
Paid-In Capital. Also, the number of outstanding shares at September
30, 1995 has accordingly been reduced by 100,000 shares. In July 1995,
South Hampton negotiated an extension until December 31, 1995 of the
maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS and, also, reduced the required minimum quarterly principal
payments from $200,000 to $150,000. Efforts are currently being made
for the sale of up to one million shares of Company stock, which was
authorized by the Board of Directors in July 1994. As of September 30,
1995, none of this stock has been sold; however, three of the
Company's largest stockholders agreed in August to loan the Company a
total of $528,000, of which $123,000 was received in September. In
addition, the President of the Company, Hatem El-Khalidi, loaned the
Company $53,000 in August. These loans are for a two year period and,
if not paid before then, will be due on demand. Interest will be
accumulated at the LIBOR rate plus 2%. The lenders have the option to
convert the loan balances, including accumulated interest, into the
Company's common stock at $1.00 per share at any time within five
years. These funds will be used to cover present and future cash
requirements for continued operations. In October 1995, the Board of
Directors adopted a resolution to restructure the loan of $1,500,000
owed by South Hampton to Saudi Fal Co. Ltd., a Saudi company owned by
a shareholder of the Company. The loan is to be converted into a note
payable, to be repaid no later than December 30, 1998 with interest
payable monthly at the LIBOR rate plus 2%. This note is to be secured
by a second lien on the assets of South Hampton. The
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<PAGE> 14
present second lien held by the Company on loans owed to it by South
Hampton will be released and the Company loans will then be secured
by a third lien. The note payable to Saudi Fal is to contain a clause
providing for an option until December 31, 1998 to convert the note
and any unpaid interest to Company common stock at $1.00 per share. If
the loan is still unpaid and the option is not exercised by December
31, 1998, the loan will be extended to December 31, 1999. Also in
October 1995, the Board adopted a resolution to give the Company's
President an option to convert at any time any of the unpaid retainers
owed to him into Company common stock at $1.00 per share. The unpaid
amount at September 30, 1995 was approximately $400,000.
In February 1993, South Hampton entered into an agreement to lease to
a third party a building with a net book value at December 31, 1993 of
$341,868 which South Hampton did not use in its operations. The lease
provides for an option to the lessee to purchase the building after
three or five years. The lease is recorded as an operating lease and
the building cost is included in Other Assets. The leased building is
pledged as collateral for a note payable. Rental income to the Company
pursuant to this lease totalled $93,170 in 1994 and $76,230 for the
nine months ending September 30, 1995.
South Hampton Refining Company entered into a five-year lease
agreement beginning in October 1989 with Silsbee Trading and
Transportation Corp., a company owned by the President and Vice
President of TOCCO. Under the terms of the agreement, South Hampton
will lease vehicles and equipment for use in its operations for
$24,140 per month, including vehicle maintenance and other executory
costs. South Hampton incurred costs under the lease agreement of
approximately $341,000, $320,000, and $291,000 in 1994, 1993, and
1992, respectively. The costs for the first nine months of 1995 were
$228,920. At September 30, 1995, South Hampton had no unpaid truck
expenses. The agreement expired in September 1994 and is currently
continuing on a month to month basis.
In July 1991, a partnership in which Silsbee Trading and
Transportation Corp. and M. A. Bomer, the former owner of the
refinery, each owned a 50% interest, obtained a line of credit with a
bank in Silsbee,, Texas to facilitate the purchase of feedstock by
South Hampton. Under this arrangement, feedstock was purchased by the
partnership and, at the expense of South Hampton transported and
stored until such time as the feedstock was needed by South Hampton in
its operations. South Hampton purchased the feedstock from the
partnership at a price equal to the cost of the feedstock to the
partnership plus two cents per gallon, South Hampton personnel
arranged all purchases, transportation and testing of the feedstock
and the partnership provided the financing for the feedstock
purchases, On June 1, 1992 the arrangement with the partnership was
terminated. On July 1, 1992, South Hampton entered into a new
agreement whereby Silsbee Trading would assist South Hampton in
maintaining its refinery throughput rate by providing feedstock
inventory for pipeline fill in its eight-inch pipeline. Silsbee
Trading would provide the feedstock inventory at a price to South
Hampton of one-half cent per gallon. The volume of feedstock to be
carried for this purpose was 453,600 gallons which is the capacity of
the pipeline. The agreement expired in December 31, 1993, and was
continued on a month to month basis until August 1995 when it was
terminated. The fees paid to Silsbee Trading under the agreement were
$21,525 in 1992, $88,974 in 1993, $103,212 in 1994, and $76,080 in the
first nine months of 1995.
At September 30, 1995, accrued unpaid salaries and termination
benefits to Company employees in Saudi Arabia, and to the Company's
President, Hatem El-Khalidi, were $645,724 and $675,115, respectively.
The payment of these amounts has been deferred until the Company's
working capital position improves. Also,
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<PAGE> 15
at September 30, 1995, the Company had not made all of the surface
rental payments due to the Saudi government under the terms of the Al
Masane Project lease. The past due amount of these rental payments was
approximately $117,000 at September 30, 1995. Management believes this
lack of compliance will not have any effect on the planned operations
in Saudi Arabia.
A major component of the Company's activities relates to the
acquisition, exploration and development of mineral deposits. There
can be no assurance that the Company will successfully develop any of
its properties, and if developed, whether the mineral acquisition,
exploration and development costs incurred will ultimately be
recovered. The recovery of such costs is dependent upon a number of
future events, some of which are beyond the control of the Company.
The ability of the Company to develop any of these properties is
dependent upon obtaining additional financing as may be required and,
ultimately, its financial success depends on its ability to attain
successful operations from one or more of its projects.
The Company management is currently devoting a significant amount of
its attention to addressing the Company's immediate and longer term
needs for the funds required to continue its business, and maintain
and develop its properties. Management believes that, with the
expected improved cash flows from expanded refinery operations,
adequate financing can be arranged.
ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ... Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS No. 121"). This Statement must be adopted no later
than the 1996 reporting year, but can be adopted earlier. The Company
is currently analyzing the impact which SFAS No. 121 may have on its
financial statements.
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<PAGE> 16
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM III - OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ending September 30, 1995.
---------------------
The information in this report is unaudited, but, in the opinion of Management,
all adjustments for a fair statement of the results for the interim period have
been made.
DATED: 11-9-95 SIGNATURES
ARABIAN SHIELD DEVELOPMENT COMPANY
/s/ J. A. CRICHTON
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON
Drew Wilson, Secretary/Treasurer
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<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 617,239
<SECURITIES> 0
<RECEIVABLES> 1,735,162
<ALLOWANCES> 144,017
<INVENTORY> 596,441
<CURRENT-ASSETS> 2,804,825
<PP&E> 5,563,776
<DEPRECIATION> 2,462,263
<TOTAL-ASSETS> 40,088,388
<CURRENT-LIABILITIES> 17,633,520
<BONDS> 0
<COMMON> 1,992,849
0
0
<OTHER-SE> 19,304,449
<TOTAL-LIABILITY-AND-EQUITY> 40,088,388
<SALES> 13,578,133
<TOTAL-REVENUES> 13,996,377
<CGS> 11,962,119
<TOTAL-COSTS> 14,164,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,060
<INCOME-PRETAX> (242,865)
<INCOME-TAX> 40,228
<INCOME-CONTINUING> (283,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (283,093)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
