<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------
FOR QUARTER ENDING SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-6247
ARABIAN SHIELD DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at September 30, 1996: 20,656,494.
----------
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,1996 DECEMBER 31,
(UNAUDITED) 1995
-------------- ---------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents in U.S. $ 377,745 $ 302,039
Short-term Investments 298,648 294,610
Accounts Receivable (Net) 2,666,334 1,791,821
Inventories 536,347 430,732
-------------- ---------------
Total Current Assets 3,879,074 2,819,202
CASH IN SAUDI ARABIA 212,835 396,809
PLANT, PIPELINE & EQUIPMENT (AT COST)
Refinery Plant, Pipeline & Equip. 5,741,683 5,563,776
Less: Accumulated Depreciation (2,833,066) (2,557,454)
-------------- ---------------
Net Equipment 2,908,617 3,006,322
AL MASANE PROJECT 31,241,678 30,897,883
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
INVESTMENT IN AND ADVANCES TO
PIOCHE-ELY VALLEY MINES, INC. 230,838 239,032
GOODWILL (NET) 184,732 397,902
OTHER ASSETS (NET) 554,194 617,019
-------------- ---------------
TOTAL ASSETS $ 41,643,216 $ 40,805,417
============== ===============
LIABILITIES
- -----------
CURRENT LIABILITIES:
Accounts Payable $ 1,163,455 $ 674,641
Accrued Liabilities 765,112 617,995
Accrued Liabilities in Saudi Arabia 1,011,980 1,011,980
Notes Payable 14,855,796 15,086,191
Current Portion of Long-Term Debt 86,268 78,090
Current Portion of Long-Term
Obligations 21,535 20,285
-------------- ---------------
Total Current Liabilities 17,904,146 17,489,182
LONG-TERM DEBT 637,010 708,534
LONG-TERM OBLIGATIONS 169,431 185,875
ACCRUED LIABILITIES IN SAUDI ARABIA 679,914 636,047
DEFERRED REVENUE 133,561 145,189
STOCKHOLDERS' EQUITY
- --------------------
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 20,656,494
shares issued and outstanding 2,065,649 2,020,649
ADDITIONAL PAID-IN CAPITAL 33,615,750 33,210,750
RECEIVABLES FROM STOCKHOLDERS (126,000) (126,000)
ACCUMULATED DEFICIT (13,436,245) (13,464,809)
-------------- ---------------
Total Stockholders' Equity 22,119,154 21,640,590
-------------- ---------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 41,643,216 $ 40,805,417
============== ===============
</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 THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT.30,1996 SEPT.30,1995 SEPT.30,1996 SEPT.30,1995
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Refined Product Sales $ 5,727,289 $ 4,442,167 $ 15,553,465 $ 13,578,133
Processing Fees 171,308 197,183 514,741 418,244
------------- ------------- ------------ ------------
5,898,597 4,639,350 16,068,206 13,996,377
OPERATING COSTS AND EXPENSES:
Cost of Refined Product
Sales and Processing 5,156,186 4,051,914 13,862,547 11,962,119
General and Administrative 521,303 496,456 1,560,160 1,662,234
Depreciation and Amortization 174,485 206,122 518,833 540,471
------------- ------------- ------------ ------------
5,851,974 4,754,492 15,941,540 14,164,824
------------- ------------- ------------ ------------
OPERATING INCOME (LOSS) 46,623 (115,142) 126,666 (168,447)
OTHER INCOME (EXPENSES):
Interest Income 5,183 6,585 19,636 27,726
Interest Expense (83,929) (87,569) (255,577) (278,060)
Equity in Losses
of Affiliate (5,707) (4,004) (9,305) (7,049)
Miscellaneous Income 44,817 58,724 147,144 182,965
------------- ------------- ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES 6,987 (141,406) 28,564 (242,865)
Income Tax Expense -- -- -- --
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ 6,987 $ (141,406) $ 28,564 $ (242,865)
============= ============= ============ ============
PER COMMON SHARE:
NET INCOME (LOSS) $ .01 $ (.01) $ .01 $ (.01)
============= ============= ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,356,494 19,961,827 20,273,160 20,006,272
============= ============= ============ ============
</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, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 20,206,494 $2,020,649 $33,210,750 $(126,000) $(13,464,809) $21,640,590
Common Stock and Common
Stock Subscriptions 450,000 45,000 405,000 450,000
Net Income (Loss) 28,564 28,564
---------- ---------- ----------- --------- ------------ -----------
BALANCE, SEPTEMBER 30, 1996 20,656,494 $2,065,649 $33,615,750 $(126,000) $(13,436,245) $22,119,154
========== ========== =========== ========= ============ ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30.1996 SEPT. 30, 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) $ 28,564 $ (242,865)
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 518,833 540,471
Equity in (Income) Losses of Affiliate 9,305 7,049
Recognition of Deferred Revenue (11,628) (11,628)
Effect of Changes in:
Decrease (Increase) in Accounts
Receivable (874,513) (188,163)
Decrease (Increase) in Inventories (105,615) (125,367)
Decrease (Increase) in Other Assets 62,825 116,664
(Decrease) Increase in Accounts
Payable and Accrued Liabilities 635,931 (352,759)
Other (31,162) (56,877)
-------------- ---------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 232,540 (313,475)
-------------- ---------------
INVESTING ACTIVITIES:
Additions to Al Masane Project (343,795) (275,830)
Additions to Other Interests
in Saudi Arabia -- --
Additions to Plant, Pipeline & Equipment (177,907) (123,568)
(Increase) Decrease in Short-term
Investments (4,038) --
(Increase) Decrease in Cash in
Saudi Arabia 183,974 365,129
Increase (Decrease) in Accrued
Liabilities in Saudi Arabia 43,867 89,197
-------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES (297,899) 54,928
-------------- ---------------
FINANCING ACTIVITIES:
Common Stock Issued for Cash 450,000 --
Decrease in Receivables from
Stockholders -- 50,000
Additions to Notes Payable &
Long-Term Obligations -- 123,000
Reduction of Notes Payable &
Long-Term Obligations (308,935) (623,333)
-------------- ---------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 141,065 (450,333)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH 75,706 (708,880)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 302,039 1,326,119
-------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 377,745 $ 617,239
============== ===============
</TABLE>
See notes to consolidated financial statements.
-4-
<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"). TOCCO's accounts
include its wholly owned subsidiary, South Hampton Refining Company
("South Hampton"). South Hampton's accounts include its wholly owned
subsidiary, Gulf State Pipe Line Company, Inc. ("Gulf State"). The
Company also beneficially owns approximately 55%, and directly owns
approximately 46%, of the capital stock of an inactive Nevada mining
company. Pioche-Ely Valley Mines, Inc. ("Pioche"). The Company
accounts for its 46% ownership interest in Pioche 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 is attributable to South Hampton and is
fully dedicated to the repayment of debt and funding refining
operations. The Company is not generating cash flow from any of its
other activities.
Management of the 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. Assuming financing
can be obtained, the results of the updating of the 1994 feasibility
study in 1996 contemplate that construction of an ore treatment plant
and all infrastructure for a mining facility at Al Masane is estimated
to take 18 months to complete. The updated 1994 feasibility study in
1996 estimated the total cost of the project to be $88.6 million.
In the event the Company is unable to finance the Al Masane mining
project or realize cash flow from its refining operations, or from the
future 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
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<PAGE> 7
$11 million loan obtained from the Saudi Arabian government in 1979.
NMC also has orally advised the Company that it has relinquished its
rights in all other areas in Saudi Arabia and assigned them to the
Company. 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 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 subsequent 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. 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 joint stock company will 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 McOuat, 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. The total capital cost of the Project, as indicated by
the updated feasibility study in 1996, is estimated to be $88.6
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 1996. 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"), of Washington, D.C. and Saudi Arabia, whereby Carlyle was
retained as the Company's financial advisor in connection with the Al
Masane mining project. In February 1996, the agreement with Carlyle
was effectively terminated by mutual consent. In March 1996, the Board
of Directors approved a Financial and Legal Services and Advice
Agreement (which was signed on May 20, 1996) between the Company, a
Saudi attorney and a Saudi financial consulting company
-6-
<PAGE> 8
("financial advisors") to be the Company's advisors in connection with
the development of the Al Masane mining project. The financial
advisors' services will include (1) the formation and capitalization
of the proposed Saudi limited liability company; (2) finalizing the
required procedures toward issuance of the Industrial License; (3)
finalizing the necessary procedures to obtain the loan from the SIDF;
(4) applying for and receiving the necessary loans from commercial
banks and (5) applying for and obtaining approval from the Saudi
government for the transfer of the mining lease to the Company and the
new Saudi limited liability company jointly. In addition to cash
compensation of $30,000 for these services as they are performed, the
financial advisors will be entitled to receive up to a total of
4,300,000 shares of the Company's common stock when, and if, the above
services are performed. Up to 2,000,000 shares would be granted
without consideration and up to 2,300,000 shares at $1.00 per share
would be subject to options for a five-year period from the date of
registration of the new Saudi company.
4. OTHER PROJECTS IN SAUDI ARABIA
The Company has held exploration licenses for the Wadi Qatan, Jebel
Harr and Greater Al Masane areas in Saudi Arabia. Although the
licenses have expired, the Saudi Arabian government has orally advised
the Company that they will be extended as long as mineral exploration
is being carried out on the areas which they cover. The Company is
planning to apply for formal extensions of these licenses in 1996. The
Company has had positive results from its exploration work at these
sites; however, it has directed limited amounts of time and resources
on them in recent years while it negotiated with the Saudi government
for the Al Masane lease. The Company does not intend to abandon these
sites.
In December 1993, the Company commissioned Sherritt Ltd, of Fort
Saskatchewan, 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, which
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 having the reputation as
the most favored technology for environmental considerations. In its
study Sherritt concluded that, after considering all of the presently
identifiable elements, they offer a strong potential for the project
and enhance the concept. Sherritt encouraged the Company to carry out
further studies toward the implementation of the project. The Company
has had recent inquiries about this project from a zinc smelting
refining company in Asia.
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 directors and/or stockholders of the
Company, contemplate building a processing plant located next to the
Chevron Aromax plant in Saudi Arabia. Chevron Chemical advised the
Company by letter on July 6, 1993, that Chevron Chemical and SVCS have
jointly agreed to commit to supply the joint venture's proposed
pentane project with up to 5,000 barrels per day of mixed pentane
feedstock. As proposed, the Company would have a 25% interest in the
joint venture. Engineering and marketing
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<PAGE> 9
studies of the project have been made by outside consultants which
reflect positive results. Planning has begun toward the construction
and operation of the Aromax plant and the joint venture's processing
plant, but was delayed during 1995 because of the absence of a final
approval from the Saudi government to go ahead with the Aromax
project. The Chevron Aromax project received final approval from the
Saudi government in March 1996 and the Company, following the
confirmation of its agreement with Chevron, recently applied for a
license from the Ministry of Industry to build the processing plant in
a joint venture with its Saudi partners. The Company is awaiting
approval by the Ministry.
5. MINERAL EXPLORATION AND DEVELOPMENT PROJECTS IN THE UNITED STATES
The Company's United States operations include the ownership and
operation of a petroleum refinery and the leasing of mineral
properties.
The Company owns all of the capital stock of the Coal Company which
does not own or hold any mineral interest and is presently inactive.
The Coal Company has tax loss carryovers of approximately $5.9 million
which are limited to its net income. The Coal Company has been
negotiating with several companies toward the possible use of this
amount, although there can be no assurance that any agreement relating
thereto will be reached.
The principal assets of Pioche are an undivided interest in 48
patented and 84 unpatented mining claims and a 300 ton-per-day mill
located on the aforementioned properties in southeastern Nevada. The
properties held by Pioche have not been commercially operated for
approximately 35 years. During 1994, Pioche attempted to drill a core
hole on this property. The core hole was intended to go down to 1,500
feet but encountered formation problems at 700 feet and further
drilling had to be abandoned. A new site will be selected and
management expects a second core hold to be drilled when financing
becomes available.
In August 1993, Pioche entered into a lease of the Wide Awake mine
property. This 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 would 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. No
royalties have been earned to date. A core hole is planned to be
drilled on the Wide Awake property in the near future. In 1995, the
Company received an extension of its option to buy 720,000 shares of
Pioche common stock at $.20 per share. The option expires on June 1,
1997.
6. REFINERY OPERATIONS
The principal assets of the Refining Company are a special products
refinery located near Beaumont, Texas, and 50 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
chemical and plastics industries. Downturns in these industries could
negatively impact refinery operations in the future. South Hampton's
largest customer accounted for approximately 17% of total sales in the
first nine months of 1996 and 25% and 13% in 1995 and 1994,
respectively.
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<PAGE> 10
7. LEGAL PROCEEDINGS
South Hampton filed suit on July 18, 1994 in the 88th Judicial
District Court in Hardin County, Texas against National Union Fire
Insurance Company arising from the claim of South Hampton under the
Uniform Declaratory Judgment Act for a ruling as to the construction
of an insurance contract issued by National Union insuring South
Hampton. The case was removed to the United States District Court on
August 22, 1994. The Court recently ruled in favor of National Union.
No further action is planned by South Hampton in this matter.
South Hampton, together with more than 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, the Company filed a complaint with the U. S.
Department of Justice ("DOJ") against Hunt Oil Company of Dallas,
Texas ("Hunt"), alleging violations of the Foreign Corrupt Practices
Act by Hunt in obtaining its Petroleum Production Sharing Agreement
("PSA") in Yemen in 1981, subsequent to the Company presenting a bid
to the Yemen government for the same area before Hunt made its
application. On May 5, 1995, Company's attorneys in Washington, D.C.
informed the Company that, because the PSA of Hunt is still ongoing,
and under its auspices, payments and receipts occur daily, the DOJ
still has ample jurisdiction to continue its investigation. A letter
from the DOJ on December 19, 1995 stated its interest in receiving
additional documentation regarding the Company's allegations. On
February 28, 1996, the Company sent more documents to the DOJ which it
believes will further support its allegations and is awaiting a
response by the DOJ. The Company's attorneys in Washington, D.C.
believe that the Victim Restitution Act provides for restitution to
the Company of monies lost as a result of the alleged wrongdoing by
Hunt, if Hunt is convicted under the Foreign Corrupt Practices Act. On
October 1, 1996, the DOJ wrote that the documents presented did not
suggest that any criminal events happened within the statute of
limitations, and that, at this time, the DOJ does not intend to pursue
its investigation. However, the Company intends to pursue this matter
to locate and present further information and evidence of criminal
wrongdoing by Hunt which will be acceptable to the DOJ.
On December 26, 1995, the Company filed a complaint of criminal libel
with the Yemen Attorney General for Publications in Sana'a, Yemen
against Yemen Hunt Oil Company ("Yemen Hunt"), a wholly-owned
subsidiary of Hunt Oil Company of Dallas, Texas, alleging that Yemen
Hunt, in a published letter in a prominent Yemen newspaper, accused
the Company of engaging in political activities for the purposes of
undermining the economic interests of Yemen. The Company believes that
this is a malicious libel which could seriously affect the business
and reputation of the Company and its employees in the Middle East.
The Company was recently informed that the statute of limitations had
run out on any criminal prosecution, however, the Company intends to
vigorously pursue the matter under the civil libel laws of Yemen.
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<PAGE> 11
8. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
SEPT. 30, 1996 DEC. 31, 1995
-------------- -------------
<S> <C> <C>
Refinery feedstock $ 77,289 $ 59,358
Refined products 459,058 371,374
-------- --------
Total inventories $536,347 $430,732
======== ========
</TABLE>
Refined products and feedstock are recorded at the lower of cost,
determined on the last-in, first-out method (LIFO), or market. At
September 30, 1996 and December 31, 1995, the market value of the
inventory exceeded the LIFO value by approximately $81,000 and
$150,000, respectively.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and Statement No. 123,
"Accounting for Stock- Based Compensation." Both Statements must be
adopted in 1996, if applicable.
Statement No. 121 requires the review for impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets whenever circumstances indicate that the carrying amount of the
asset may not be recoverable. An impairment loss is to be recognized
if the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset. The
amount of the impairment loss would be measured as the difference
between the carrying amount of the asset and its estimated fair value.
The Company has determined that any adoption of Statement No. 121 in
1996 could result in an impairment loss of $2,431,248 on the Other
Interests in Saudi Arabia. The Company is currently analyzing the
impact which Statement No. 121 may have on its financial statements.
An impairment loss to conform to Statement No. 121 would not represent
the abandonment of this exploration effort. The Company is planning to
apply for extensions of its exploration licenses from the Saudi
Arabian government covering these interests and fully intends to
develop them in the future.
Statement No. 123 establishes accounting and reporting standards for
various stock-based compensation plans. Statement No. 123 encourages
the adoption of a fair value-based method of accounting for employee
stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25
("Opinion 25"), "Accounting for Stock Issued to Employees". Entities
that continue to apply the provisions of Opinion 25 must make pro
forma disclosures of net income and earnings per share as if the fair
value-based method of accounting had been applied. The Company will
adopt Statement No. 123 in 1996 and currently expects to continue to
account for its employee stock options in accordance with the
provisions of Opinion 25.
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<PAGE> 12
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company had net income of $28,564 for the nine months ending
September 30, 1996, compared to a net loss of $242,865 for the same
period in 1995, resulting in a net income increase of $271,429 in 1996
over the comparable period in 1995.
The Refining Company cash flow of $257,755 for the third quarter of
1996 was approximately 10% higher than the comparable period in 1995.
Sales volume was higher in the third quarter of 1996 by 31% to
6,632,233 gallons and the average selling price per gallon was higher
than that for the second quarter of 1996 by $.055 per gallon.
Feedstock prices were lower by $.03 per gallon than the prices for
the same period in 1995 which were $.125 per gallon higher than the
third quarter of 1994. Due to the larger volume of sales in 1996, the
gross margin on operations for the third quarter of 1996 increased 36%
over the comparable period in 1995.
For the nine months ending September 30, 1996 and 1995, the Refining
Company had operating income of $365,402 and $201,781, respectively
and net income of $306,979 and $133,478, respectively. The Refining
Company cash flow for the same nine-month period in each year was
$825,596 and $673,544, respectively, representing an increase of
approximately 23% in 1996. The cost of product sales in 1996 was
$1,900,428 higher than in 1995 which amounted to 89% of gross sales in
1996 compared to 88% in 1995. Sales volume of 18,114,282 gallons in
1996 was higher by 15%, but the average sales price per gallon was
down by $.08 per gallon. Increased sales volumes have counteracted
lower margins. Income from processing fees continued to rise as it has
over the past two years and was $514,741 in 1996, which was an
increase of 23% over the amount of $418,244 for the same period in
1995. The Refining Company has found that, in this period of
"right-sizing" which many of the major oil and chemical companies are
experiencing, there are many opportunities for a smaller company to
provide a processing service on streams which the larger companies no
longer want to handle themselves.
The outlook for the industry is good from the perspective of increased
opportunities for toll processing. The refinery is currently operating
processes for four different entities and, while the contracts are
being renewed on a year to year basis, the outlook on all the
contracts is that they will be longer term operations. Sales of the
refinery's prime products remain stable but have shown some weakness
when compared to the demand from previous periods. The weakness has
shown up primarily in the delivery schedules which have tended to be
in spurts rather than smooth regular flows. The refinery believes this
peak and valley type of demand indicates that its customers are not
planning ahead, but are processing based upon short term demand and
are trying to minimize inventories. Feedstock prices, while currently
higher than they have been in recent history, are not expected to
remain so as there seems to be a lack of basic fundamentals to support
such higher prices. The refinery has most of its major expenditures
behind it on the cleanup of the facility which was initiated in late
1994, and intends to focus on process efficiency and control of costs
for the remainder of 1996.
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<PAGE> 13
General and administrative expenses for the first nine months in 1996
were $102,074 lower than for the same period in 1995, primarily due to
higher costs in 1995 for insurance, consulting fees and profit-sharing
costs. Interest expense in 1996 and 1995 was practically all
attributable to the debt of the refinery and decreased by $22,483 due
to a reduced amount of debt in 1996.
The equity in losses of affiliate of $9,305 for the first nine months
in 1996 was attributable to the cost of maintaining the Nevada mining
properties of Pioche. There was no activity in either the current or
prior period on the Pioche properties primarily due to the lack of
financing for claims to be explored and developed. A charge for
amortization of goodwill of $69,285 per quarter during the same
periods in 1996 and 1995 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. Miscellaneous income in both periods
primarily includes income from tank rentals, building rentals,
commission income and occasional small asset sale proceeds at the
refinery.
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 also plans to start an
intensive exploration program to increase the reserves at the mine
site and elsewhere in the lease area. In addition, the Company is
engaged in studies for the feasibility of the establishment of a
petrochemical plant in Saudi Arabia similar to the one owned by the
Refining Company. The products to be manufactured would be solvents
for the plastics industry which 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 its total
investment in the coal leases in 1988, the Company has net operating
loss carryovers from prior years of approximately $33 million, of
which approximately $5.9 million is limited to any future net income
of the Coal Company and approximately $1.7 million is limited to any
future net income of TOCCO. These tax carryovers expire during the
years 1996 through 2009. The Company has had negotiations with several
companies toward the possible use of the Coal Company's carryover
amount.
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 $1,333,355 at September
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<PAGE> 14
30, 1996, is secured by a second lien on the refinery assets, and was
approved by the Den norske Bank AS ("Den norske").
On September 30, 1996, the outstanding principal amount under the
Amended and Restated Credit Agreement with Den norske was $1,986,951.
The entire balance under the Amended and Restated Credit Agreement
facility, including amounts drawn under the letter of credit facility,
was extended from December 31, 1995 to June 1, 1996. Subsequent to
June 1, the Agreement has been extended on a month-to-month basis
pending the final approval of new terms. South Hampton has agreed to
make monthly principal payments of $50,000 plus interest during the
extension period. The extension is designed to permit Den norske and
South Hampton to negotiate a restructuring of the loan into a two-year
revolving credit loan, which has been agreed to in principle by the
parties. Formal agreements are being circulated for signatures at the
current time.
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 during 1994. Gains and losses related to these contracts
were recognized when the contracts expired. Losses were recognized in
1994 and 1995 and were included as a cost of refined product sales and
processing in the consolidated statement of operations. Since the fuel
prices decreased in 1995 and were expected to soften in the next year
or two, the hedging program was discontinued in June 1995.
During 1995, the Company took certain actions designed to generate
additional equity capital and improve its financial condition,
including: (1) the negotiation by South Hampton of an extension until
June 1, 1996 of the maturity of the Den norske note (2) borrowed
$721,000 in the aggregate from four individuals, including a
stockholder of the Company, the President and Chief Executive Officer
of the Company and a relative of such officer, pursuant to loans
payable on demand two years after their issuance bearing interest at
LIBOR plus 2%, such lenders having the option for a period of five
years from the date of the loan to convert the principal amount of
their loan and all accrued interest into shares of the Company's
Common Stock at the rate of $1.00 per share, (3) received a $50,000
payment on a stockholder receivable from a 1993 sale of shares to a
private Saudi company controlled by a director and (4) granted the
President and Chief Executive Officer of the Company an option to
convert at any time $400,000 of deferred compensation for services
rendered to the Company into shares of the Company's Common Stock at
the rate of $1.00 per share.
In the first nine months of 1996, negotiations have been continuing 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,
pursuant to Board of Director approval in October 1995. It is
anticipated that the loan will be converted into a note payable, to be
repaid no later than December 30, 1998 with interest payable monthly
at LIBOR plus 2%. This note would be secured by a second lien on the
assets of South Hampton. The present second lien held by the Company
on loans owed to it by South Hampton would be released and the Company
loans would then be secured by a third lien. The note payable to Saudi
Fal would 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 was still unpaid and the option
was not exercised by December 31, 1998, the loan would be extended to
December 31, 1999.
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<PAGE> 15
On September 3, 1995, the Company made a formal application to the
Saudi Industrial Development Fund to obtain 50% of the capital needed
to finance the development of the Al Masane project. The Watts Griffis
feasibility studies have been presented to the Fund for consideration.
Before a loan can be approved, the Company must obtain an Industrial
License. This license was applied for on February 10, 1996 and is
expected to be granted at any time.
In June 1996, the Board of Directors approved a resolution to
authorize the Company's President to sell one million shares of common
stock through private placements for no less than $1.00 per share. At
September 30, 1996, the Company ad sold 450,000 shares to a Saudi
investor (who is also a shareholder of the Company) at $1.00 per share
under any installment payment agreement. Payment for 300,000 shares
had been received at September 30, 1996, with the remaining 50,000
shares paid for in October and November.
In February 1993, South Hampton entered into an agreement to lease to
a third party a building with a net book value at September 30, 1996
of $254,305 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 net building cost is included in Other Assets. The leased
building is pledged as collateral for a note payable. If the essee
exercises its option to purchase the building, the proceeds will be
used to pay down the note payable. Miscellaneous Income in the first
six months of 1996 and 1995 includes $70,230 of rental income pursuant
to this lease.
South Hampton leases vehicles and equipment for use in operations for
$26,655 per month plus certain reimbursed costs under a lease
agreement with Silsbee Trading and Transportation Corp. ("STTC", a
company owned by the president and vice-president of TOCCO). The lease
agreement expired in September 1994 and is currently continuing on a
month to month basis. South Hampton incurred costs (most of which are
billed to customers) related to this agreement of $261,495 and
$228,920 in the first nine months of 1996 and 1995, respectively.
South Hampton entered into an arrangement in July 1991 with a
partnership, in which STTC and M.A. Bomer (the former owner of the
refinery) each owned a 50% interest, to facilitate the future purchase
of feedstock. In June 1992, Mr. Bomer withdrew from the partnership
and the feedstock agreement was terminated. On July 1, 1992, South
Hampton entered into a new agreement with STTC whereby STTC financed
the feedstock in the pipeline. As a result, South Hampton had a
liability to STTC for the cost of the 453,600 gallons of capacity of
the pipeline. This amount was $215,460 at December 31, 1994. Also, in
connection with this agreement, South Hampton paid a one-half cent per
gallon fee to STTC on each gallon of feedstock transported through the
pipeline. The agreement was operating on a month-to-month basis and
was terminated in August 1995. The fees paid by South Hampton to STTC
pursuant to this agreement were $76,080 in 1995.
On January 1, 1996, South Hampton entered into a five-year supply
contract with a natural gas supplier to purchase natural gas for use
in its refinery. The contract stipulates that South Hampton may
purchase up to 1,500 million Btu per day at an indexed price adjusted
for an agreed discount.
At September 30, 1996, accrued salaries and termination benefits
payable to Company employees in Saudi Arabia, and to the Company's
President, Hatem El-Khalidi, were approximately $722,000 and $680,000,
respectively. The payment of these amounts has been deferred until the
Company's working capital position improves. Also, at September 30,
1996, the Company has not made all of the surface rental payments due
to the Saudi government under the terms of the Al
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<PAGE> 16
Masane Project lease. The past due amount of these rental payments at
September 30, 1996 was approximately $309,000. The payments are being
deferred to be paid by the Saudi limited liability company after it is
formed. In addition, the Company has not complied with certain
statutory reporting requirements in Saudi Arabia. Management of the
Company believes that the lack of compliance with these license
requirements will not have any effect on the Company's 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.
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<PAGE> 17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 12, 1996 ARABIAN SHIELD DEVELOPMENT COMPANY
-------------------------- -------------------------------------
(Registrant)
/s/ J. A. CRICHTON
-------------------------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON, JR.
-------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
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<PAGE> 18
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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 377,745
<SECURITIES> 298,648
<RECEIVABLES> 2,666,334
<ALLOWANCES> 0
<INVENTORY> 536,347
<CURRENT-ASSETS> 3,879,074
<PP&E> 5,741,683
<DEPRECIATION> 2,833,066
<TOTAL-ASSETS> 41,643,216
<CURRENT-LIABILITIES> 17,904,146
<BONDS> 0
0
0
<COMMON> 2,065,649
<OTHER-SE> 20,053,505
<TOTAL-LIABILITY-AND-EQUITY> 41,643,216
<SALES> 15,553,465
<TOTAL-REVENUES> 16,068,206
<CGS> 13,862,547
<TOTAL-COSTS> 15,941,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255,577
<INCOME-PRETAX> 28,564
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,564
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,564
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
