<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, 1997
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, 1997: 20,656,494.
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,1997 DECEMBER 31,
(UNAUDITED) 1996
----------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents in U.S. $ 308,618 $ 209,251
Short-term Investments 357,106 298,726
Accounts Receivable (Net) 2,989,981 2,643,691
Inventories 552,944 565,346
------------ ------------
Total Current Assets 4,208,649 3,717,014
CASH IN SAUDI ARABIA 77,832 176,039
REFINERY PLANT, PIPELINE & EQUIPMENT (AT COST)
Refinery Plant, Pipeline & Equip 5,922,882 5,758,852
Less: Accumulated Depreciation (3,200,723) (2,911,823)
------------ ------------
Net Equipment 2,722,159 2,847,029
AL MASANE PROJECT 33,293,598 32,882,838
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE U.S. 1,385,358 1,418,615
GOODWILL -- 117,598
OTHER ASSETS 390,413 505,566
------------ ------------
TOTAL ASSETS $ 44,509,257 $ 44,095,947
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable $ 1,009,961 $ 1,408,677
Accrued Liabilities 824,645 520,445
Accrued Liabilities in Saudi Arabia 1,174,229 1,174,229
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 898,000 992,729
Current Portion of Long-Term
Obligations 80,210 150,904
------------ ------------
Total Current Liabilities 15,362,825 15,622,764
LONG-TERM DEBT 3,310,773 3,544,112
LONG-TERM OBLIGATIONS 21,150 35,009
ACCRUED LIABILITIES IN SAUDI ARABIA 755,456 714,143
DEFERRED REVENUE 118,057 129,685
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 978,384 1,003,590
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 21,456,494
shares issued and outstanding 2,145,649 2,095,649
ADDITIONAL PAID-IN CAPITAL 35,382,700 34,932,700
RECEIVABLES FROM STOCKHOLDERS (126,000) (126,000)
ACCUMULATED DEFICIT (13,439,737) (13,855,705)
------------ ------------
Total Stockholders' Equity 23,962,612 23,046,644
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 44,509,257 $ 44,095,947
============ ============
</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.30,1997 Sept.30,1996 Sept.30,1997 Sept.30, 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Refined Product Sales $ 6,459,566 $ 5,727,289 $ 18,849,743 $ 15,553,465
Processing Fees 146,505 171,308 397,235 514,741
------------ ------------ ------------ ------------
6,606,071 5,898,597 19,246,978 16,068,206
OPERATING COSTS AND EXPENSES:
Cost of Refined Product
Sales and Processing 5,470,319 5,156,186 16,566,461 13,862,547
General and Administrative 618,999 534,200 1,734,621 1,580,258
Depreciation and Amortization 100,380 174,485 425,993 518,833
------------ ------------ ------------ ------------
6,189,698 5,864,871 18,727,075 15,961,638
------------ ------------ ------------ ------------
OPERATING INCOME 416,373 33,726 519,903 106,568
OTHER INCOME (EXPENSES):
Interest Income 20,043 5,183 31,414 19,636
Interest Expense (103,614) (84,242) (317,942) (256,515)
Minority Interest 6,788 6,703 25,578 10,931
Miscellaneous Income 44,802 45,617 157,015 147,944
------------ ------------ ------------ ------------
NET INCOME BEFORE INCOME TAXES 384,392 6,987 415,968 28,564
Income Tax Expense -- -- -- --
------------ ------------ ------------ ------------
NET INCOME $ 384,392 $ 6,987 $ 415,968 $ 28,564
============ ============ ============ ============
PER COMMON SHARE:
NET INCOME $ .02 $ .01 $ .02 $ .01
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,456,494 20,356,494 21,367,605 20,273,160
============ ============ ============ ============
</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, 1997
- --------------------------------------------------------------------------------
<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, 1996 20,956,494 $ 2,095,649 $ 34,932,700 $ (126,000) $(13,855,705) $ 23,046,644
Common Stock and Common
Stock Subscriptions Sold 500,000 50,000 450,000 500,000
Net Income 415,968 415,968
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 21,456,494 $ 2,145,649 $ 35,382,700 $ (126,000) $(13,439,737) $ 23,962,612
============ ============ ============ ============ ============ ============
</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. 30,1997 SEPT. 30,1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 415,968 $ 28,564
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 425,993 518,833
Recognition of Deferred Revenue (11,628) (11,628)
Effect of Changes in:
Decrease (Increase) in Accounts
Receivable (346,290) (874,513)
Decrease (Increase) in Inventories 12,402 (105,615)
Decrease (Increase) in Other Assets 115,153 62,825
(Decrease) Increase in Accounts
Payable and Accrued Liabilities (94,516) 635,931
Other (44,701) (21,857)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 472,381 232,540
--------- ---------
INVESTING ACTIVITIES:
Additions to Short-Term Investments (58,380) (4,038)
Additions to Al Masane Project (410,760) (343,795)
Additions to Plant, Pipeline & Equipment (164,030) (177,907)
Reduction in Mineral Properties in U.S. 33,257 --
(Increase) Decrease in Cash in
Saudi Arabia 98,207 183,974
Increase (Decrease) in Accrued
Liabilities in Saudi Arabia 41,313 43,867
--------- ---------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (460,393) (297,899)
--------- ---------
FINANCING ACTIVITIES:
Common Stock Issued for Cash 500,000 450,000
Additions to Notes Payable &
Long-Term Obligations -- --
Reductions of Notes Payable &
Long-Term Obligations (412,621) (308,935)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 87,379 141,065
--------- ---------
NET INCREASE (DECREASE) IN CASH 99,367 75,706
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 209,251 302,039
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 308,618 $ 377,745
========= =========
</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. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q. These financial statements have not been examined by independent
certified public accountants, but in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of consolidated results of operations, consolidated
financial position and consolidated cash flows at the dates and for the
periods indicated, have been included.
These financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the nine month
period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For
further information, refer to the Consolidated Financial Statements and
notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
These 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 Refining Company owns all
of the outstanding common stock of Texas Oil and Chemical Company II,
Inc. ("TOCCO"). South Hampton Refining Company ("South Hampton")is a
wholly-owned subsidiary of TOCCO, and Gulf State Pipe Line Company,
Inc. ("Gulf State")is a wholly-owned subsidiary of South Hampton. The
Company also has voting rights to approximately 55%, and directly owns
approximately 46%, of the capital stock of an inactive Nevada mining
company, Pioche-Ely Valley Mines, Inc. ("Pioche"). At December 31,
1996, the Company concluded that its voting control of Pioche was no
longer temporary and consolidated the accounts of Pioche in its
financial statements for 1996. Previously, the investment in Pioche was
accounted for on the equity method.
2. GOING CONCERN
These financial statements have been prepared assuming the Company will
continue as a going concern. The Company's sources of cash flow in 1996
and the first nine months of 1997 were the operations of South
Hampton's refinery and the proceeds from stock sales to Saudi Arabian
investors. The Company is not currently generating cash flow from any
other activities. As the cash flow attributable to the refinery is
fully dedicated to repayment of debt and funding of refinery
operations, the cash flow attributable to the refinery currently is not
adequate to support the Company's operations. The Company is liable to
the Saudi Arabian government for an $11,000,000 loan. The Company does
not currently have the financial resources to pay this obligation.
Management plans to fund future operations through sales of its common
stock and borrowings. It is expected that the operations and
obligations of the Company will be eventually funded from operations of
the Al Masane mine. However, because of uncertainties with respect to
future sales of
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<PAGE> 7
common stock, obtaining suitable financing, and reaching an agreement
on the repayment of the loan to the Saudi Arabian government, there is
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. LEGAL PROCEEDINGS
South Hampton, together with over twenty-five other companies, has been
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
entered into a settlement agreement with one of the plaintiffs on March
13, 1997, by agreeing to pay such plaintiff the amount of $45,000 in
full and final settlement of all claims by such plaintiff against South
Hampton. The second suit has recently been verbally settled for a
similar nominal amount and the final papers are being completed.
On August 18, 1997, the Texas Natural Resource Conservation Commission
notified South Hampton that it has violated various rules and
procedures and has proposed administrative penalties totaling $709,408
and recommends that South Hampton undertake certain actions necessary
to bring its operations at the refinery into compliance. The violations
generally relate to various air and water quality issues. South Hampton
feels the penalty is greatly overstated and intends to vigorously
defend against it. A preliminary hearing will be held in mid-November.
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
("FCPA")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
believed would further support its allegations. 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 FCPA. 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 that time, the DOJ did not intend to pursue
its investigation. On November 18, 1996, legal counsel retained by the
Company, after studying the facts of the case, sent the DOJ an analysis
concluding that, while the statute of limitations of FCPA may have
lapsed, the statute of limitations for conspiracy to violate the FCPA
had not lapsed, and that, as a consequence, the DOJ could criminally
prosecute
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<PAGE> 8
Hunt for conspiracy to violate the FCPA. The legal counsel met with the
Fraud Section of the DOJ on December 13, 1996 and was told that the DOJ
would take a more aggressive stance if more information of evidentiary
quality were presented to them. The Company intends to vigorously
pursue obtaining such further information in the United States and in
Yemen.
Late in 1994, articles were published in two prominent Yemen newspapers
in which Yemen Hunt Oil Company, a wholly-owned subsidiary of Hunt Oil
Company of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a
petroleum production sharing agreement in Yemen in 1981 through the
corruption of Yemen officials in order to exclude the application of
the Company and it then partner, Dorchester Gas Company, from
consideration for the same area. A letter to the editor of one of these
newspapers, published on December 7, 1994 and signed by the executive
vice president of Yemen Hunt, after explicitly mentioning the Company
and Dorchester Gas Company, stated that "(Yemen Hunt) knows well those
suspicious companies who are mainly engaged in political activities for
the purpose of undermining the economic interest of Yemen..." 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, alleging that Yemen Hunt, in its published letter to the
prominent Yemen newspaper, had criminally libeled the Company, which,
if not addressed, could seriously affect the business and reputation of
the Company and its employees in the Middle East. In October 1996, the
Company received the official decision from the Deputy Attorney General
for Publications of Yemen which stated that, after taking the statement
of the President of the Company and the statement of the chief of the
legal department of Yemen Hunt, it was evident that the letter from
Yemen Hunt published in the Yemen newspaper on December 7, 1994 was
libelous to the Company. However, since the four month statute of
limitations period under Yemen criminal law had run, Yemen Hunt could
not be prosecuted for criminal libel. The Company intends to vigorously
pursue the matter under the civil libel laws of Yemen.
4. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
SEPT. 30, 1997 DEC. 31, 1996
-------------- -------------
<S> <C> <C>
Refinery feedstock $148,654 $ --
Refined products 404,290 565,346
-------- --------
Total inventories $552,944 $565,346
======== ========
</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, 1997 the carrying value of inventories approximated
current cost and at December 31, 1996, current cost exceeded LIFO value
by approximately $163,000.
5. NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which is
effective for financial statements issued after December 15, 1997.
Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of
this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
-7-
<PAGE> 9
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 $415,968 for the nine months ending
September 30, 1997, compared to net income of $28,564 for the same
period in 1996, resulting in a net income increase of $387,404 in 1997.
For the first nine months ending September 30, 1997 and 1996, the
refinery had operating income of $902,735 and $576,105, respectively
and net income of $690,256 and $480,788, respectively, a net income
increase in 1997 of $209,468 compared to the same prior year period.
The refinery had positive cash flow from operations of $606,717 for the
third quarter of 1997, which was in contrast to the comparable figure
of $245,867 in 1996. Sales volume was higher in 1997 by 10.2% to
7,311,426 total gallons and the average selling price per gallon was
higher than that for the third quarter of 1996 by $.025 per gallon.
Feedstock prices were lower by almost $.035 per gallon average than the
prices for the same period in 1996. Sales for the third quarter in 1997
continued the trend set in the first two quarters of 1997 and stayed at
record volume levels for the premium pentane products. The rapidly
rising feed costs for the last two months of the fourth quarter 1996
and the first two months of the first quarter of 1997, started the year
off poorly, however, the refinery's strong results since March have
made up for the early deficit. Pricing commitments and competitive
pressures prevent raising product prices instantly as feed prices go
up, therefore the gross margin is always squeezed for a time during
periods of rapidly rising prices which affected January and February
results. The reverse is true in times of falling prices. Margins are
larger for a period of time until product prices start easing down.
Feedstock prices began falling in late February and have continued to
be competitive through September, so the third quarter resulted in good
earnings which are expected to continue on into the fourth quarter.
Expenses at the refinery for the third quarter in 1997 were higher than
a year ago. In addition to rapid feedstock cost rises early in the
year, the price of natural gas used to fuel the refinery processes rose
rapidly for the same four month period and have continued to be higher
than a year ago. Natural gas prices rose to a peak of $3.85 per MMBTU
for the month of January 1997 before starting to fall off in February.
While prices have dropped from the high winter months, they still
remain in a range which is higher than was experienced in previous
periods. The refinery has recently established a natural gas hedging
program in an attempt to flatten the cost of fuel to the refinery
throughout the year. Contributing to the higher operating expenses is
the effort the refinery is making toward clean up of the operating area
and the efficient management of the higher production rates. The
additional expenses stem mainly from increased maintenance personnel,
increased environmental testing and analysis and increased preventative
maintenance efforts. Administrative expenses were flat or decreased
slightly compared to prior periods.
Processing fees remained flat for the year and were $146,505 for the
quarter which is a decrease of about 14% from the same period in 1996.
One unit used for toll processing remains idle at this time. Another
has begun full production for what the customer has represented as an
extended
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<PAGE> 10
run to meet the growing demand for their product. This alone should
help fees increase for the fourth quarter. Expectations are that
processing fees should grow as a new customer is found for the idle
unit. The refinery 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
processing services on streams which the larger companies no longer
want to handle themselves. The refinery is in the process of erecting
four process towers to increase the capacity and capabilities of the
toll processing side of the business. Completion is expected in the
first quarter of 1998 with the results on net income to become evident
by the end of the second quarter of 1998.
The outlook for the industry is good from the perspective of increased
opportunities for toll processing. The refinery is currently operating
processes for three 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 and expanded marketing efforts have kept
the plant at capacity through the winter and early spring months which
are historically the weakest.
Maintenance and capital items are on schedule in accordance with the
refinery's budget plan for the year. The maintenance program to install
secondary seals on the tank roofs was completed during the second
quarter. The design of a new control room is complete and the building
was completed in the third quarter. It is expected to be operational by
year-end. Refinery personnel are doing much of the work to keep the
costs to a minimum. The modifications of the Chevron sponsored Aromax
unit were completed in the second quarter and the unit is operating as
planned. The outlook for the fourth quarter is good. Sales remain firm
and, as of early November, there is no immediate outlook for higher
feed prices. The refinery bought feedstock ahead for the next three
months to hedge against any winter spikes in prices and the natural gas
hedging program should control any sudden rises in the single largest
expense.
General and Administrative Expenses for the first nine months in 1997
were $154,363 higher than for the same period in 1996, a slight
increase of 10%. Interest Expense in 1997 and 1996 was practically all
attributable to the debt of the refinery and increased by $61,427 in
1997 due to a larger amount of interest-bearing debt, which was a
result of a major debt restructuring in October 1996 when accrued
interest was rolled over into principal and the new interest rates were
higher.
In 1996, the Company concluded that its voting control of Pioche was no
longer temporary and, therefore, the accounts of Pioche have been
consolidated into the Company's financial statements. The Minority
Interest amount in the first nine months of 1997 and 1996 of $25578 and
$10,931, respectively, represents the Pioche minority shareholders'
portion of Pioche's losses. There has been no activity in several years
on the Pioche properties primarily due to the lack of financing for
claims to be explored and developed. The losses in Pioche are
attributable to the costs of maintaining the Nevada mining properties.
A charge for Amortization of Goodwill of $115,447 during the first six
months of 1997 and $207,855 during the first nine months of 1996
relates to the goodwill recognized on the purchase of the refinery in
1987. In the second quarter of 1997, the goodwill amortization over the
ten year period ended. Interest Income in both periods was primarily
from a short-term investment by the refinery and from the investment of
temporary excess
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<PAGE> 11
cash in time deposits 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. Miscellaneous Income in June 1997 included a profit amount of
approximately $48,000 applicable to the down payment portion received
from the installment sale of an office building at the refinery. The
sale price will be received in annual note installment payments over a
ten year period with each installment payment including a portion of
the total profit amount of approximately $387,000. The current portion
of the discounted installment note receivable at September 30, 1997 was
approximately $20,000 and the non-current portion (reflected in "Other
Assets") was approximately $267,000. Offsetting this profit in June was
a charge of approximately $34,000 for the write down of the value of a
pipeline which had never been used by 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.
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 the establishment of a petrochemical plant in Jubail, Saudi
Arabia similar to the one at the refinery. 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.
An industrial license for the plant has recently been received. Dialog
on feedstock supply and transportation has been productive. The market
is currently being reassessed to determine the optimum capacity for
the facility . There has been a strong interest from a German firm who
would like to participate in the development of the site with
processes of their own.
The principal assets of Pioche are an undivided interest in 48 patented
and 81 unpatented mining claims and a 300 ton-per-day mill located in
southeastern Nevada. Due to lack of capital, the properties held by
Pioche have not been commercially operated for approximately 35 years.
In late 1996, Pioche was extended a proposal from a prominent mining
company for the lease of its mining claims. On October 21, 1997, an
"Exploration Agreement and Option to Purchase" was executed between the
two parties. The agreement provides for annual payments to Pioche of
$50,000 for seven years until, or unless, an option is exercised to
purchase an 85% interest in the mining claims for $3,000,000. The
mining company will pay all annual taxes and claim rentals and has
agreed to expend at least $50,000 in exploration work each year and to
drill at least one hole during the first year.
During 1996 and the first three quarters of 1997, the Company took
certain actions designed to generate additional equity capital and
improve its financial condition, including: (1) the completion at
October 15, 1996 of
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<PAGE> 12
negotiations by South Hampton of a restructuring of its debt to Den
norske Bank to provide for a revolving credit facility in an aggregate
principal amount of up to $1,965,000; (2)the restructuring at October
15, 1996 of the indebtedness of South Hampton to Saudi Fal Co., Ltd., a
Saudi Arabian limited liability company owned by a stockholder of the
Company, and to American Shield Refining Company, whereby accrued
interest to October 15, 1996 was added to principal, resulting in new
promissory notes in the principal amounts of $1,945,773 and $1,694,605,
respectively, which promissory notes are subordinated to the Den norske
note; (3)approval by the Company's Board of Directors in June 1996 of
the sale of up to 1 million shares of common stock through private
placements at a price no less than $1.00 per share, and the approval in
July 1997 by the Board for the sale of another 1 million shares at no
less than $1.00 per share; (4)the sale in 1996 of 450,000 shares of
common stock at $1.00 per share to a Saudi Arabian investor who is a
stockholder of the Company and the sale in 1997 of an additional
450,000 shares of common stock at $1.00 per share to the same investor;
and (5) the sale in January 1997 of 50,000 shares of common stock at
$1.00 per share to a Saudi Arabian investor.
At September 30, 1997, the outstanding principal amount under the new
Amended and Restated Credit Agreement with Den norske was $1,665,000,
with $1,365,000 classified as long-term debt. The entire balance under
the Amended and Restated Credit Agreement is now due on December 31,
1998. Prior to the restructuring of this debt at October 15, 1996, the
Agreement had been extended on a month-to-month basis pending the final
approval of new terms. South Hampton has now agreed to make minimum
quarterly principal payments of $75,000 plus interest at the Den norske
prime rate plus 1%, and under certain conditions, can make
distributions to Saudi Fal and the Company. The debt is secured by all
of the assets of the refinery and all of the issued and outstanding
shares of the Company's three subsidiaries there.
On October 15, 1996, there was also a restructuring of the loan of
$1,500,000 owed by South Hampton to Saudi Fal, pursuant to Board of
Director approval in October 1995. The loan, plus accrued interest, was
converted into a Second Lien Promissory Note in the principal amount of
$1,945,773 bearing interest at the Den norske prime rate plus 1%.
Interest only is due and payable monthly on the note and the entire
unpaid balance of principal and accrued interest is due on December 31,
1998. The principal amount at September 30, 1997 remained at
$1,945,773. No interest payments have been made through September 30,
1997 and the amount of accrued unpaid interest was approximately
$175,000. The note is secured by all of the assets of the refinery and
is subordinate to the Den norske note.
The Company, through its subsidiary American Shield Refining Company,
advanced funds in 1990 for some of the costs to increase the processing
capacity of the refinery. These advances were in the form of a note
from the refinery. This note was also restructured at October 15, 1996,
whereby accrued interest of $361,250 was added to principal with the
note bearing interest at the Den norske prime rate plus 1%. This
resulted in a new principal amount of $1,694,605 at that time, which
remained the same at September 30, 1997. No interest payments have been
made by the refinery to the Company through September 30, 1997 and the
amount of accrued unpaid interest was approximately $153,000. The note
is secured by all of the assets of the refinery and is subordinate to
the promissory note issued to Saudi Fal.
-11-
<PAGE> 13
On September 3, 1995, the Company made a formal application to the
Saudi Industrial Development Fund ("SIDF")to obtain 50% of the capital
needed to finance the development of the Al Masane project. Before the
loan could be approved, the Company had to obtain an industrial license
for the project. This license was applied for on February 10, 1996 and
was issued on December 23, 1996. The industrial license and the 1996
update to the Watts Griffis feasibility study were presented to the
SIDF on December 23, 1996. A presentation by Watts Griffis of
additional information requested by the SIDF was made in May 1997, and
representatives of the SIDF have recently visited the Company office in
Jeddah and the mining facility. Negotiations are continuing toward the
approval of the loan, and the Company is in the process of forming the
Saudi limited liability company in whose name the mining lease will be
transferred.
In May 1996, the Company entered into a one-year agreement with two
Saudi Arabian advisors to assist the Company in obtaining financing for
the Al Masane project. The advisors assisted in obtaining the
industrial license in December 1996 and in obtaining some of the equity
funds for the proposed Saudi limited liability company. The agreement
was terminated by the Company in August 1997 according to its terms and
negotiations are being held to complete a new agreement.
At September 30, 1997, a total of approximately $1,531,000 in salaries
and termination benefits accrued since 1971 was due to Company
employees in Saudi Arabia in accordance with Saudi Arabian employment
laws. This amount includes approximately $755,000 due to Hatem
El-Khalidi, the Company's President and Chief Executive Officer. The
payment of these amounts has been deferred until the Company's working
capital position improves. Also, the Company has not made all of the
surface rental payments due to the Saudi Arabian government under the
terms of the Al Masane Project lease. The unpaid amount of these rental
payments at September 30, 1997 was approximately $426,000. The payments
are being deferred to be paid by the Saudi Arabian 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
operations in Saudi Arabia.
The annual meeting of the stockholders of the Company was held on May
5, 1997 for the purpose of electing six directors to serve until the
next annual meeting. Directors elected at the meeting were Messrs.
John A. Crichton, Hatem El-Khalidi, Harb S. Al Zuhair, Mohammed O.
Al-Omair and Ghazi Sultan. Mr. Oliver W. Hammonds received only 48.7%
of the shares voted and was not elected. The total number of shares
voted by proxy and in person represented approximately 51% of the
total shares owned and outstanding as of the record date of March 17,
1997. In June 1997, Mr. Harb S. Al Zuhair resigned from the Board,
citing personal reasons. No replacements for the two directors have
been made yet.
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. Company management is
devoting a significant amount of its attention to addressing the
Company's immediate and longer term needs.
-12-
<PAGE> 14
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 6, 1997 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
-13-
<PAGE> 15
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 308,618
<SECURITIES> 357,106
<RECEIVABLES> 2,989,981
<ALLOWANCES> 0
<INVENTORY> 552,944
<CURRENT-ASSETS> 4,208,649
<PP&E> 5,922,882
<DEPRECIATION> 3,200,723
<TOTAL-ASSETS> 44,509,257
<CURRENT-LIABILITIES> 15,362,825
<BONDS> 0
0
0
<COMMON> 2,145,649
<OTHER-SE> 21,816,963
<TOTAL-LIABILITY-AND-EQUITY> 44,509,257
<SALES> 18,849,743
<TOTAL-REVENUES> 19,246,978
<CGS> 16,566,461
<TOTAL-COSTS> 18,727,075
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 317,942
<INCOME-PRETAX> 415,968
<INCOME-TAX> 0
<INCOME-CONTINUING> 415,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 415,968
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
