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Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _________________
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
Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (l) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. []
Number of shares of registrant's Common Stock, par value $0.10 per
share, outstanding as of March 17, 1997: 20,656,494.
The aggregate market value on March 17, 1997 of the registrant's
voting securities held by non-affiliates was $23,269,688.
DOCUMENTS INCORPORATED BY REFERENCE
(a) Selected portions of the registrant's Annual Report to
Stockholders for the year ended December 31, 1996.
- Parts II and IV
(b) Selected portions of the registrant's definitive Proxy
Statement for the Annual Meeting to be held May 5, 1997.
- Part III
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PART I
Item 1. Business.
General
Arabian Shield Development Company (the "Company") was organized as a
Delaware corporation in 1967 and is principally engaged in the business of
developing its undeveloped mineral properties. None of the undeveloped mineral
properties are currently producing and significant capital expenditures will be
necessary before any commercial operations are commenced. The Company has
operations in both the United States and Saudi Arabia. The Company is
primarily engaged in the exploration and development of minerals in Saudi
Arabia.
The Company holds a mining lease covering a 44 square kilometer area
in the Al Masane area in southwestern Saudi Arabia. In a 1996 update to the
1994 full bank feasibility study of the Al Masane lease area conducted by an
independent mining consulting firm, the consultants estimate the total capital
costs of the Al Masane project to be $88.6 million. The Company will
diligently pursue the financing of the project so that commercial production
can begin as contemplated in the updated feasibility study. There can be no
assurance that adequate capital for the project can be obtained in order for
commercial production to begin as contemplated. The ultimate recovery of
mineral exploration and development costs of the Company's other mineral
properties cannot presently be determined.
The Company, through its indirect wholly owned subsidiary, South
Hampton Refining Company ("South Hampton"), owns and operates a special
products refinery which is the Company's only significant revenue producing
asset.
Saudi Arabian Activities. On May 22, 1993, the Company was granted a
30-year mining lease covering a 44 square kilometer area in the Al Masane area
in southwestern Saudi Arabia. National Mining Company, a private Saudi company
("National Mining"), which previously had a 50% interest in the joint venture
formed to explore and develop the Al Masane area, relinquished its rights to
the mining lease and assigned them to the Company.
The Company was granted exploration licenses for the Wadi Qatan and
Jebel Harr areas in southwestern Saudi Arabia, approximately 30 kilometers east
of the Al Masane area, in 1971 and 1977, respectively. The exploration
licenses by their terms have expired, and although Saudi Arabian government
officials have orally advised the Company that the licenses will be extended as
long as mineral exploration is being carried out on the areas which they cover,
formal extensions from the government have not been obtained and there can be
no assurance that the Company's license rights will be honored. Although the
exploration licenses were awarded jointly to the Company and National Mining,
the exploration work on the license areas has been carried on exclusively by
the Company. Pursuant to an agreement among the Company, National Mining and
the Petroleum and Mineral Organization ("Petromin"), the official mining and
petroleum company of the Saudi Arabian government, which governed the rights of
the parties if an exploration license was converted into a mining lease,
National Mining's rights in these jointly held expired exploration licenses
entailed responsibilities of joint exploration expenditures which National
Mining did not want to assume. For this reason, National Mining has orally
advised the Company that it has relinquished its rights in all other areas in
Saudi Arabia and assigned them to the Company. No consideration was paid by
the Company to National Mining for the relinquishment of National Mining's
rights in all other areas of Saudi Arabia. The Company remains a party to the
agreement with Petromin notwithstanding National Mining's relinquishment of its
rights. When financing for the Al Masane project is completed, the Company
plans to make an application for an expanded exploration license for an area of
approximately 2,800 square kilometers which includes the original Greater Al
Masane area and the Wadi Qatan and Jebel Herr areas. See Item 2. Properties.
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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(R) petrochemical project to be built in Jubail, Saudi
Arabia by Chevron Chemical in a joint venture with Saudi Venture Capital Group
(SVCS). The Company and some Saudi partners, all of whom are directors and/or
stockholders of the Company, plan to form a Saudi limited liability company
which will build and manage a processing plant located next to the Aromax(R)
plant in Saudi Arabia. The Company would have a 25% interest in the limited
liability company and would manage the plant. The plant will be similar to
the South Hampton refinery in producing purified pentanes from a feedstock of
mixed pentanes obtained from the Aromax(R) plant. Chevron Chemical advised
the Company by letter in July 1993 that Chevron Chemical and SVCS have jointly
agreed to commit to supply the proposed pentane project with up to 5,000
barrels per day of mixed pentane feedstock. Engineering and marketing studies
of the project made in 1994 by outside consultants reflected positive results.
Planning then began toward the construction and operation of the Aromax(R)
plant and the processing plant but was delayed during 1995 because of the
absence of a firm commitment for the feedstock supply to the Aromax(R) plant.
The Aromax(R) plant received final approval from the Saudi Arabian government
in March 1996 and the Company and its Saudi partners, following the
confirmation of their agreement with Chevron Chemical, are preparing an
application for an industrial license from the Ministry of Industry to build
the processing plant. The application will be submitted in the near future.
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,
after considering all of the presently identifiable elements, that 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. There has been a recent inquiry about this project from a zinc
smelting and refining company in Asia.
United States Activities. The Company has two direct 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 capital stock of Texas Oil and Chemical Co. II, Inc. ("TOCCO").
TOCCO owns all of the capital stock of South Hampton, and South Hampton owns
all of the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State").
South Hampton owns and operates a special products refinery near Silsbee,
Texas. Gulf State owns and operates three pipelines which connect the South
Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
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").
Al Masane Project
Prior Feasibility Studies. In the years following the granting of the
exploration licenses in August 1971, substantial geological and geophysical
work was accomplished on the Al Masane and Wadi Qatan license areas. Core
drilling on the licensed areas and studies conducted by independent consulting
firms indicated that the copper, zinc, gold and silver prospects at Al Masane
had a chance of being put into production sooner than the nickel prospect at
Wadi Qatan. Metallurgical tests also showed difficulty in separating the
nickel at Wadi Qatan. During 1977, a pre- feasibility mining study was conduct
at Al Masane by the mining consulting firm of Watts, Griffis and McOuat of
Toronto, Canada ("WGM"). WGM concluded that the Al Masane prospect should be
further developed and recommended an extensive development program for the
area.
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Phase I of the development program recommended by WGM for Al Masane
was completed in April 1981 and involved underground development in the form of
a decline (700 meters) and tunnels (3,100 meters) parallel to the ore bodies
from where extensive underground core drilling was done to prove the ore
reserves. The project was financed for the most part with an $11 million
interest-free loan from the Saudi Arabian government (Ministry of Finance).
After completion of Phase I, the Company's consultants concluded that
sufficient ore reserves had been established to justify a full bank feasibility
study to determine the economic potential of establishing a commercial mining
and ore treatment operation at Al Masane. The study was conducted principally
by WGM, assisted by SNC/GECO of Montreal, Canada in engineering and costing.
The consultants concluded in their 1982 study that the Al Masane deposits would
support commercial production of copper, zinc, gold and silver and recommended
implementation of Phase II of the Al Masane development program, which involves
the construction of mining, ore treatment and support facilities. WGM
reevaluated the Al Masane project in September 1984 and concluded that the
cumulative effect of the factors considered in the reevaluation was positive.
Additional exploration work conducted at Al Masane and substantial
changes in metal prices and capital and operating costs occurring since 1984
led the Company to request WGM to reevaluate the project in early 1989. The
additional exploration occurring after 1984 in the Al Houra and Moyeath zones
resulted in a better definition of and addition to these zones. Consequently,
the consultants revised their reserve estimates. Some of the reserves
previously defined as possible were reclassified as proven or probable. Based
on its reevaluation of the Al Masane project, WGM again concluded that under
the most realistic scenarios the proposed mining operation was economically
viable and had the potential to provide a satisfactory return on investment.
In May 1992, WGM, at the Company's request, revised its cash flow
projections for the Al Masane project based on then current metal prices. The
cash flow projections were positive.
In both the 1989 reevaluation and the 1992 cash flow projections, WGM
continued to regard Al Masane as having high potential for the discovery of
additional ore zones.
1994 Feasibility Study. Following the granting of the mining lease to
the Al Masane area on May 22, 1993, the Company commissioned WGM to prepare a
new fully bankable feasibility study for presentation to financial institutions
in connection with obtaining financing for the project. The feasibility study
includes more metallurgical work incorporating advances in grinding of the ore;
incorporation of the latest advances in technology and reagents developed
during the past ten years; incorporation of new mill designs and the latest
water recycling methods; investigation into the shipping and marketing of zinc
and copper concentrates; and an economic analysis of the project. The
feasibility study contains specific recommendations to insure that the
construction of the project is accomplished as expeditiously and economically
as possible. Engineering design and costing of the project was done by Davy
International of Toronto, Canada. The feasibility study cost the Company
approximately $1 million and was presented to the Company on July 22, 1994.
The Al Masane ore is located in three mineralized zones known as
Saadah, Al Houra and Moyeath. The following table sets forth a summary of the
diluted minable, proven and probable ore reserves at the Al Masane project,
along with the estimated average grades of these reserves:
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<TABLE>
<CAPTION>
=========================================================================================================================
Reserve Copper Zinc Gold Silver
Zone (Tonnes) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Saadah 3,872,400 1.67 4.73 1.00 28.36
Al Houra 2,465,230 1.22 4.95 1.46 50.06
Moyeath 874,370 0.88 8.92 1.29 64.85
--------- ---- ---- ---- -----
Total 7,212,000 1.42 5.31 1.19 40.20
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of calculating, proven and probable reserves, a dilution
of 5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra
and Moyeath zones was assumed. A mining recovery of 80% has been used for the
Saadah zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the
amount of wallrack adjacent to the ore body which is included in the ore
extraction process.
Proven reserves are those mineral deposits for which quantity is
computed from dimensions revealed in outcrops, trenches, workings or
drillholes, and grade is computed from results of detailed sampling. For ore
deposits to be proven, the sites for inspection, sampling and measurement must
be spaced so closely and the geologic character must be so well defined that
the size, shape, depth and mineral content of reserves are well established.
Probable reserves are those for which quantity and grade are computed from
information similar to that used for proven reserves, but the sites for
inspection, sampling and measurement are farther apart or are otherwise less
adequately spaced. However, the degree of assurance, although lower than that
for proven reserves, must be high enough to assume continuity between points of
observation.
A review by WGM of the equipment and process flowsheet contained in
the 1982 feasibility study prepared by WGM indicated that new technology
developed during the past ten years could be used to reduce the capital cost
and improve the metallurgical recoveries. In particular, the use of
semi-autogenous grinding to reduce the capital cost of the grinding section and
developments in reagents were believed to hold the greatest potential for
improving the economies of the project. A detailed metallurgical testwork
program was undertaken by Lakefield Research in 1994 to address potential
improvements and provide detailed design criteria for the concentrator design.
Results from this testwork program showed that copper recovery could be
improved by 5.7% and zinc recoveries improved by 13% compared to the 1982
results.
The metallurgical studies conducted on the ore samples taken from the
zones indicated that 87.7% of the copper and 82.6% of the zinc could be
recovered in copper and zinc concentrates. Overall, gold and silver recovery
from the ore was estimated to be 77.3% and 81.3%, respectively, partly into
copper concentrate and partly as bullion through cyanide processing of zinc
concentrates and mine tailings.
A test program to evaluate the economies of the cyanidation of the
zinc concentrate and tailings in order to improve gold and silver recoveries
found gold and silver recoveries to range from 50% to 77%. To recover gold and
silver from the zinc concentrate and tailings, WGM recommended that a
cyanidation plant be included in the process flowsheet. Dore bullion would be
produced. WGM concluded that the inclusion of a cyanidation plant would make a
positive contribution to the economies of the project under the base
conditions.
The mining and milling operation recommended by WGM for Al Masane
would involve the production of 2,000 tonnes of ore per day (700,000 tonnes per
year), with a mine life of over ten years. Annual production is estimated to
be 34,900 tonnes of copper concentrate (25% copper per tonne) containing
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precious metal and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total
output per year of gold and silver is estimated to be 22,000 ounces of gold and
800,000 ounces of silver from the copper concentrate and bullion produced. The
construction of mining, milling and infrastructure facilities is estimated to
take 18 months to complete. Construction necessary to bring the Al Masane
project into production includes the construction of a 2,000 tonne per day
concentrator, infrastructure with a 300 man housing facility and the
installation of a cyanidation plant to increase the recovery of precious metals
from the deposit. Project power requirements will be met by diesel generated
power.
WGM recommended that the Al Masane reserves be mined by underground
methods using trackless mining equipment. Once the raw ore is mined, it would
be subjected to a grinding and treating process resulting in three products to
be delivered to smelters for further refining. These products are zinc
concentrate, copper concentrate and dore bullion. The copper concentrate will
contain valuable amounts of gold and silver. These concentrates are estimated
to be 22,000 ounces of gold and 800,000 ounces of silver and will be sold to
copper and zinc custom smelters and refineries worldwide.
WGM prepared an economic analysis of the project utilizing cash flow
projections. In the feasibility study, WGM recommends that the Company make a
decision to bring the Al Masane mine into production.
In the feasibility study, WGM states that there is potential to find
more reserves within the lease area, as the ore zones are all open at depth.
Further diamond drilling, which will be undertaken by the Company, is required
to quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.
1996 Update. The Company requested WGM and Davy International to
update the 1994 feasibility study of the project. The update details various
changes required to update the 1994 feasibility study to reflect costs as of
the first quarter of 1996. Capital and operating cost updates to the surface
infrastructure and mill components were done by Davy International of Toronto,
Canada. WGM was responsible for updating mining, mining related activities and
an economic analysis.
The 1996 update shows the estimated capital cost to bring the project
into operation to be $88.6 million, a 9% increase over the $81.3 million
capital cost estimated in the 1994 feasibility study. At a production rate of
700,000 tonnes per year, the operating cost of the project (excluding
concentrate freight, ship loading, smelter charges, depreciation, interests and
taxes) was estimated to be $38.49 per tonne of ore milled compared to $36.86
per tonne of ore milled estimated in the 1994 feasibility study.
WGM prepared an economic analysis of the project utilizing cash flow
projections. A base case was prepared that included those project elements
which are most likely to be achieved. WGM believed that a majority of the base
case assumptions used in the 1994 feasibility study remained valid, including
the ore reserves, mill feed grade, production rate, metal recoveries and
concentrate grade and smelter returns. Metal prices, capital costs, operating
costs and the corporate structure were adjusted to reflect more current
information. Capital and operating costs were adjusted in conformity with the
updated estimates prepared by Davy International.
The base case assumes the corporate structure of the entity to be
formed to operate the project, currently planned to be a Saudi limited
liability company, will be owned 50% by the Company and 50% by Saudi Arabian
investors and that the owners of this entity would contribute an aggregate of
$21.2 million to the cost of the project. The base case further assumes
financing for the project from commercial loans in the aggregate amount of
$21.2 million bearing interest at the rate of 8% per year and a loan in the
amount of $43.8 million from the Saudi Industrial Development Fund ("SIDF")
repayable in equal annual installments
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over the initial life of the mine. The remainder of the project financing
would be contributed by cash generated by the operation of the project. The
base case assumes that the $11 million loan outstanding to the Saudi Arabian
government will be paid by the Company in accordance with a repayment schedule
to be agreed upon with the Saudi Arabian government. Based on these
assumptions, and assuming the average prices of metal over the life of the mine
to be $1.05 per pound for copper, $.60 per pound for zinc, $400 per ounce of
gold and $6.00 per ounce of silver, WGM's economic analysis of the base case
shows the project will realize an internal rate of return of 13.1%, the
Company's and the Saudi Arabian investors' internal rates of return would be
27.3% and 12.1%, respectively, and projected net cash flow from the project of
$95.1 million. The 1994 feasibility study base case showed the project would
realize a 14.05% internal rate of return. Cash flow under the base case is
exclusive of income tax as the base case assumes that any such tax would be
paid by individual investors and not by the project. Assuming a 10% discount
rate, the net present value of the project as shown in the update is $12.16
million compared to the $15.5 million net present value of the project shown in
the 1994 feasibility study. Based on the update, WGM believes that the
economic analysis shows that the project remains viable.
Project Financing and Mining Lease. The 1996 update to the 1994
feasibility study shows the estimated total capital cost to bring the Al Masane
project into production to be $88.6 million. At the present time, the Company
does not have sufficient funds to bring the project into production.
To assist the Company in obtaining financing for the project, on March
27, 1995, the Company retained Carlyle SEAG of Washington, D.C. ("Carlyle") as
the Company's financial advisor. On March 13, 1996, the agreement with Carlyle
was terminated by mutual consent after Carlyle informed the Company that it had
to withdraw as the Company's financial advisor because of a conflict of
interest since the Carlyle Group, which owns Carlyle, advises the Saudi Arabian
government on its offset program.
After the agreement with Carlyle was terminated, on May 20, 1996, the
Company entered into a Financial and Legal Services and Advice Agreement with
Nasir Ali Kadasah, for legal advice, and Dar Al Khaleej, for research and
economic advice. The purpose of this agreement is for the two Saudi Arabian
advisors to assist the Company in obtaining financing for the Al Masane
project. To this end, the agreement contemplates that the Saudi Arabian
advisors will perform the following:
1. The formation of a Saudi limited liability company, "The Saudi
Company for Mining Industries," 50% of which would be owned by the Company and
the remaining 50% of which would be owned by Saudi Arabian investors who will
contribute 25% of the capital cost of the project.
2. Obtain an industrial license for the project from The Ministry of
Industry and Electricity. This license is a necessary prerequisite for
obtaining an interest-free loan from the SIDF to fund 50% of the capital cost
of the project.
3. Finalize the necessary procedures to obtain such loan from the
SIDF, the application for which was submitted on September 30, 1995.
4. Apply for and receive loans from commercial banks necessary to
finance the project.
5. Apply for and obtain the Ministerial Resolution from the Minister
of Petroleum and Mineral Resources approving the transfer of the mining lease
to the Saudi limited liability company.
The agreement provides that the Saudi Arabian advisors are solely
responsible for the performance of the foregoing obligations and that the
Company has no obligation therefor.
As consideration for performing these obligations, the Company has
agreed to pay Mr. Kadasah and Dar Al Khaleej $10,000 each upon the issuance of
the industrial license and Mr. Kadasah $10,000 upon approval of the loan by the
SIDF. The Company has also agreed to issue to Mr. Kadasah and Mr. Tawfiq
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Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, up to 1,025,000 and 975,000
shares of the Company's Common Stock, respectively, and to grant Mr. Kadasah
and Mr. Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, options to
purchase up to 1,425,000 and 875,000 shares of the Company's Common Stock,
respectively. The Company is obligated to issue such shares and grant such
options in designated amounts upon completion of each of the foregoing
obligations. The issuance of the shares would be for consideration consisting
solely of services rendered to the Company. The options are immediately
exercisable on the date of grant, have a five-year term commencing on the date
of formation of the Saudi limited liability company and an exercise price of
$1.00 per share.
The SIDF makes interest-free loans to industrial projects in Saudi
Arabia and charges a 2.5% service fee. The Company believes that it may also
be able to finance the remaining cost of the project through arrangements with
suppliers and equipment manufacturers, custom smelters and additional debt or
equity financing secured by the Company, however, there can be no assurances to
that effect.
Pursuant to the mining lease agreement, when the profitability of the
project is established, the Company is obligated to form a Saudi public stock
company with Petromin. The Company will own 50% of the shares of the Saudi
public stock company and Petromin no more than 25% of the shares. The
remaining shares will be offered for sale in Saudi Arabia pursuant to a public
subscription. Title to the mining lease and the other obligations specified in
the mining lease will be transferred to the Saudi public stock company.
Responsibility for the repayment of the $11 million loan from the Saudi Arabian
government will remain with the Company. In December 1994, the Company
received instructions from the office of the Minister of Petroleum and Mineral
Resources stating that it is possible for the Company to form the Saudi public
stock company without Petromin but that the sale of stock to the Saudi public
could occur only after two years of profits from commercial operations of the
mine. The instructions added that Petromin will still have the right to
purchase shares in the Saudi public stock company any time it desires.
As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for the rental payments and other
obligations provided for by the mining lease and repayment of the $11 million
loan jointly secured by the Company and National Mining from the Saudi Arabian
government. The mining lease provides that the Company will repay the loan in
accordance with a repayment schedule to be agreed upon with the Saudi Arabian
government. The initial term of the lease is for a period of thirty (30) years
from May 22, 1993, with the Company having the option to renew or extend the
term of the lease for additional periods not to exceed twenty (20) years.
Under the lease, the Company agreed to pay in advance a surface rental at the
rate of ten thousand Saudi Riyals (approximately $2,667 at the current exchange
rate) per square kilometer per year (approximately $117,300 annually) during
the period of the lease. The Company made the rental payments for the first
year of the lease. As of December 31, 1996, the Company has not paid for
rentals of approximately $309,000. It is contemplated that responsibility for
the payment of these arrearages and all future rental payments would be assumed
by the Saudi limited liability company when title to the Al Masane mining lease
is transferred to it. In addition, the Company must pay income tax in
accordance with the income tax laws of Saudi Arabia then in force and pay all
infrastructure costs. Under the Saudi Arabian Mining Code, income tax will not
be due during the first stage of mining operations, which is the period of five
years starting from the earlier of (a) the date of the first sale of products
or (b) the beginning of the fourth year since the issue of the mining lease.
The lease gives the Saudi Arabian government priority to purchase the Company's
whole production of gold or any part thereof from the project. The lease also
gives the Saudi Arabian government the right to purchase up to 10% of the
Company's annual production of other minerals on the same terms and conditions
then available to other similar buyers and at current prices then prevailing in
the free market. The lease contains provisions requiring that preference be
given to Saudi Arabian suppliers and contractors and that the Company employ
Saudi Arabian citizens and provide training to Saudi Arabian personnel.
Reference is made to the map on page 12 of this Report for information
concerning the location of the Al Masane project.
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Other Exploration Areas in Saudi Arabia
During the course of the exploration and development of the Al Masane
area, the Company has carried on exploration work in other areas in Saudi
Arabia and is planning to apply for an additional exploration license for these
areas. With respect to these other areas, the Company has an agreement with
Petromin which governs the rights of the parties if the exploration licenses
granted to the Company are converted into a mining lease. Under this
agreement, Petromin is granted an option to acquire, at any time, a 25%
interest in any project to mine minerals in Saudi Arabia the exploration for
which has been conducted under exploration licenses originally granted to the
Company and National Mining. National Mining has relinquished its rights in
these areas and assigned them to the Company.
U.S. Mineral Interests
The Company's mineral interests in the United States include its
equity interest in Pioche and the Coal Company. The Coal Company no longer
owns or holds any mineral interests and is presently inactive. Pioche is also
presently inactive. The future of the Coal Company's and Pioche's operations
is uncertain.
Special Products Refinery
South Hampton owns and operates a special products refinery near
Silsbee, Texas and currently employs 51 people. The refinery is presently
devoted to specialized processing activities. The refinery currently consists
of seven operating units which, while interconnected, make distinct products
through differing processes: (1) a pentane- hexane unit; (2) a catalytic
reformer; (3) an aromatics hydrotreating and fractionation unit; (4) a
cyclopentane unit; (5) an Aromax(R) unit; (6) an aldehyde hydrogenation unit;
and (7) a specialty fractionation unit. All of these units are presently in
operation.
The design capacity of the pentane-hexane unit is approximately 2,200
BPD of feedstock. The unit averaged 1,895 barrels per stream day during 1996.
The unit consists of a series of fractionation towers and hydrotreaters capable
of producing high purity solvents which are sold primarily to expandable
polystyrene and high density polyethylene producers. South Hampton purchases
most of its feedstock for this unit on the spot market.
The catalytic reforming unit is a standard industry design using
platinum-rhenium catalyst which produces an aromatics concentrate used as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 4,000 BPD.
The unit is operated as a source of hydrogen for the pentane-hexane unit and
operates in tandem with the Aromax(R) unit as feedstock balances dictate. The
unit averaged 385 barrels per stream day during 1996.
The aromatics hydrotreating and fractionation unit consists of a
hydrotreating reactor and a single fractionation tower and has a design
capacity of 500 BPD. By-product chemical streams have historically been
processed by this unit into two products, high octane gasoline blendstocks and
heavy aromatic oils sold as fuel oil blending stock. This unit is leased to a
customer for its own use pursuant to a contract providing for the payment of a
minimum daily charge.
The cyclopentane unit consists of three specialized fractionation
towers designed to produce a consistently high quality product which is used in
the expandable polystyrene industry. The design capacity of the cyclopentane
unit is 400 BPD. The unit operates according to the feedstock supplied by the
pentane-hexane unit and averaged 190 barrels per stream day during 1996.
The Aromax(R) unit is the world's first commercial unit using a
proprietary process of Chevron Research Company to produce a high benzene
content product which is sold as feedstock to refiners operating benzene
extraction units. The process converts petroleum naphtha into liquid
hydrocarbons having a higher aromatic hydrocarbon content. The aromax unit
capacity is 400 BPD and uses a by-product of the pentane-
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<PAGE> 11
hexane unit as feedstock. The unit operates according to the feedstock
supplied from the pentane-hexane unit and the other hydrotreaters. The unit
averaged throughput of 150 barrels per stream day during 1996. Chevron
Research has agreed to continue development of the Aromax(R) process. The unit
has continued to successfully operate as designed.
The specialty fractionation unit consists of two fractionation towers
and has a design capacity of 1,000 BPD. This unit is leased to a customer for
its own use pursuant to a contract providing for the payment of a minimum daily
charge.
South Hampton also owns approximately 70 storage tanks with a total
capacity of approximately 250,000 barrels. The refinery is situated on 100
acres of land, approximately 70 acres of which is developed. South Hampton
owns a truck and railroad loading terminal consisting of eight storage tanks, a
rail spur and truck and tank car loading facilities.
As a result of an expansion program of the production capacity of the
South Hampton refinery completed in 1990, essentially all of the standing
equipment at South Hampton is operational. The Company has surplus equipment
in storage on site with which to assemble further processing units, such as a
hydrocracking unit with a 2,000 BPD capacity.
In January 1996, Gulf State acquired an additional five miles of
natural gas pipeline and now owns and operates three 8" pipelines aggregating
approximately 50 miles in length which connect the South Hampton refinery to a
natural gas line, to South Hampton's truck and rail loading terminal and to a
marine terminal owned by an unaffiliated third party. South Hampton leases
storage facilities at the marine terminal.
Revenues and Financing
With the exception of revenues generated by the operations of the
refinery, the Company has been without significant operating revenues since
1972. Accordingly, it has been necessary for the Company continually to seek
additional debt and equity financing in order to have funds to continue
development activities.
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 at $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 owned to the Company by four companies
owned by the Chairman of the Board.
In 1995, the Company (1) negotiated an extension until April 30, 1996
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (2) borrowed $721,000 in the aggregate from four individuals,
including a stockholder of the Company who is the Vice Chairman of National
Mining Company, a stockholder of the Company, the President and Chief Executive
Officer of the Company and a relative of such executive 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 the loan and all
accrued interest into shares of the Company's Common Stock at the rate of $1.00
per share, (3) received $50,000 payment on a stockholder receivable from a 1993
sale of shares of its Common Stock to a private Saudi company controlled by a
director and (4) granted the President and
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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 1996, the Company (1) through South Hampton negotiated an Amended
and Restated Credit Agreement with Den norske Bank ASA, amending and restating
the then outstanding credit agreement to provide for a revolving credit
facility in an aggregate principal amount of up to $1,965,000, (2) restructured
certain indebtedness of South Hampton owed to Saudi Fal Co., Ltd., a limited
liability company owned by a stockholder of the Company ("Saudi Fal"), and the
Refining Company pursuant to promissory notes in the original principal amounts
of $1,945,773.49 and $1,694,605.08, respectively, which promissory notes are
subordinated to the Amended and Restated Credit Agreement with Den norske Bank
ASA, (3) approved the sale of up to 1 million shares of the Company's Common
Stock through private placements at a price no less than $1.00 per share, (4)
sold 450,000 shares of the Company's Common Stock at $1.00 per share to a
Saudi Arabian investor who is a stockholder of the Company and approved the
sale of an additional 450,000 shares of the Company's Common Stock at $1.00 per
share to the same investor, the purchase price for such additional shares being
payable in monthly installments of $100,000 and (5) approved the sale of 50,000
shares of the Company's Common Stock to a Saudi Arabian investor.
It may be necessary to secure funds to continue operations through the
sale of portions of the Company's properties, its investments or a portion of
the Company's interest therein. There are no assurances that these sales could
be arranged or that sufficient additional equity or debt financing can be
obtained.
On October 15, 1996, South Hampton entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with Den norske Bank ASA
(the "Bank"), amending and restating the then outstanding credit agreement to
provide for a revolving loan facility in an aggregate principal amount of up to
$1,965,000. The Bank's commitment to make funds available under the credit
facility will be reduced by (i) $75,000 on the last day of each fiscal quarter
commencing December 31, 1996 and (ii) the amount of any distribution by South
Hampton to Saudi Fal, the Company, the Refining Company or TOCCO in excess of
amounts permitted under the Credit Agreement. Advances under the Credit
Agreement may not at any time exceed the lesser of the commitment or a
borrowing base calculated based upon the cash collateral account, eligible
accounts receivable and inventory. Interest is payable monthly in arrears on
all outstanding advances under the credit facility at the Bank's prime lending
rate, as in effect from time to time, plus 1%. Principal and accrued and
unpaid interest are payable on December 31, 1998. Subject to certain
conditions and South Hampton maintaining various financial covenants and
ratios, the Credit Agreement permits South Hampton to make distributions to (i)
Saudi Fal, the Company, the Refining Company and TOCCO for legal, auditing and
accounting fees attributable to the operations of South Hampton in an annual
aggregate amount not in excess of $60,000, (ii) Saudi Fal and the Company in
respect of accrued interest on any debt owned by South Hampton to Saudi Fal or
the Company in an amount not in excess of $17,500 per month and (iii) Saudi Fal
and the Company in respect of principal on any debt owed by South Hampton to
Saudi Fal or the Company. The Credit Agreement is secured by all of the assets
of South Hampton and Gulf State and all of the issued and outstanding shares of
TOCCO, South Hampton and Gulf State. South Hampton is required to collect all
receivables through a cash collateral account at a local bank. South Hampton
was not in compliance with a certain financial covenant as of December 31,
1996, which noncompliance has been waived by the Bank.
In connection with South Hampton's entry into the Credit Agreement
with the Bank, South Hampton issued a Second Lien Promissory Note to Saudi Fal
and a Third Lien Promissory Note to the Refining Company in the original
principal amounts of $1,945,773.49 and $1,694,605.08, respectively, evidencing
certain indebtedness of South Hampton owed to such parties. The promissory
notes bear interest at the Bank's prime lending rate, as in effect from time to
time, plus 1%. Interest only is due and payable monthly on the promissory
notes, and the entire unpaid balance of principal and accrued and unpaid
interest is due on December 31, 1998. The promissory notes are secured by all
of the assets of South Hampton and Gulf State. The promissory notes and
related liens are subordinated to the Credit Agreement. The promissory note
issued to the Refining Company and related liens are subordinate to the
promissory note issued to Saudi Fal.
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The refinery had operating income of approximately $655,000, before
depreciation and amortization of approximately $413,000, on gross refined
product sales of approximately $21,367,000 for the 1996 fiscal year compared
with operating income of approximately $916,000, before depreciation and
amortization of approximately $396,000, on gross refined product sales of
approximately $17,742,000 for the 1995 fiscal year, and operating income of
approximately $3,395,000, before depreciation and amortization of $366,000, on
gross refined product sales of approximately $17,564,000 for the 1994 fiscal
year.
There can be no assurance that the Company will successfully develop
any of its undeveloped mineral properties or, if developed, that they will be
commercially productive. None of the Company's undeveloped mineral properties
currently produces revenues, and such properties will not produce revenues from
operations to the Company unless and until exploration is completed and
successful development is accomplished. Meaningful progress in some of these
efforts is currently hampered by the Company's lack of sufficient operating
funds.
In the case of the Al Masane project, the Company must secure the
financing and construction of the mining and milling facilities before revenues
from that project may be realized. The Coal Company's lack of significant
assets, combined with the Company's lack of operating funds, inhibits any
future activities of the Coal Company. The Company intends to conduct limited
exploration of the Pioche properties when funds are available.
The Company believes that acceptable financing for the estimated cost
of the Al Masane project can be arranged, although there can be no assurance
that such financing could be obtained. The results of the 1996 update to the
1994 feasibility study show the estimated total capital costs of the project to
be $88.6 million.
See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Item 12. Security Ownership of Certain
Beneficial Owners and Management and Item 13. Certain Relationships and
Related Transactions for further discussion of these matters.
Foreign Operations
Since a substantial portion of the Company's mineral properties and
interests are located outside of the United States, its business and properties
are subject to foreign laws and foreign conditions, with the attendant varying
risks and advantages. Foreign exchange controls, foreign legal and political
concepts, foreign government instability, international economics and other
factors create risks not necessarily comparable with those involved in doing
business in the United States.
Competition
If it reaches the point of engaging in commercial mineral production,
the Company expects to encounter strong competition from established mining
companies which in many cases will be more extensively capitalized and have
more extensive facilities and more numerous personnel than does the Company.
Personnel
In order to conserve all available funds, the Company continues to
keep its general and administrative personnel to a minimum. Its only officers
resident in the United States are Mr. John A. Crichton, Chairman of the Board,
and Mr. Drew Wilson, Jr., who works on a part-time basis for the Company and
serves as its Secretary and Treasurer. The other employees of the Company,
numbering approximately 28, consist of the office personnel and field crews
conducting core drilling and other exploration activities in Saudi Arabia under
the supervision of Mr. Hatem El-Khalidi, President and Chief Executive Officer
of the Company. South Hampton currently employs 51 persons.
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[map]
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<PAGE> 15
Item 2. Properties.
Saudi Arabia Mining Properties
Al Masane. The Al Masane project, which consists of an area of
approximately 44 square kilometers, contains extensive ancient mineral workings
and smelters. From ancient inscriptions in the area, it is believed that
mining activities went on sporadically from 1000 B.C. to 700 A.D. The ancients
are believed to have extracted mainly gold, silver and copper. The discussion
of the Al Masane project set forth under Item 1. Business is incorporated
herein by reference.
Other Saudi Arabian Areas. In 1971, the government of Saudi Arabia
awarded the Company and National Mining exclusive mineral exploration licenses
to explore and develop the Wadi Qatan area in southwestern Saudi Arabia. The
companies were subsequently awarded an additional license in August of 1977
covering an area to the north of Wadi Qatan at Jebel Harr. The licenses have
expired by their terms, and although the Company has received verbal assurance
from Saudi Arabian government officials that the licenses will be extended as
long as exploratory work is being carried out on the areas which they cover,
formal extensions from the government have not been obtained.
The Company has applied for a license covering an area surrounding the
Al Masane mining lease area, which is referred to as the Greater Al Masane
area. The Company and National Mining had previously made a joint application
for a license for this area. If the exploration license for the Greater Al
Masane area is granted, it will be owned solely by the Company. Although a
license has not been formally granted for the Greater Al Masane area, the
Company was authorized in writing by the Saudi Arabian government to carry out
exploration work on the area. Exploration work has been carried on and paid
for exclusively by the Company.
When financing for the Al Masane project is completed, the Company
plans to make an application for an expanded exploration license for an area of
approximately 2,800 square kilometers which includes the original Greater Al
Masane area plus the Wadi Qatan and Jebel Harr areas. If granted, the
exploration license will be owned solely by the Company.
Reference is made to the map on page 12 of this Report for information
concerning the location of the foregoing areas.
The absence of current formal exploration licenses covering the areas
on which the Company has conducted, and is continuing to conduct, exploration
and development work in Saudi Arabia creates uncertainty concerning the
Company's rights and obligations concerning those areas. However, the Company
believes that it has satisfied the government's requirements concerning the
license areas and that the government should honor the Company's claims to
those areas.
In the event of the establishment of commercially exploitable
minerals, exploration licenses granted by the Saudi Arabian government may be
converted into mining leases upon application to the Saudi Arabian Ministry of
Petroleum and Mineral Resources. The Company is a party to an agreement with
Petromin, the official mining and petroleum company of the Saudi Arabian
government, which governs the rights of the parties if an exploration license
granted to the Company is converted into a mining lease. Reference is made to
the discussion concerning the agreement under Item 1. Business.
Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in
southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are
approximately 30 kilometers east of the Al Masane area. These areas consist of
40 square kilometers, plus a northern extension of an additional 13 square
kilometers. Geological and geophysical work by the Company and limited core
drilling disclose the existence of massive sulfides containing nickel.
Preliminary core drilling to shallow depths disclosed the existence of massive
sulfides containing an average of 1.2% nickel. Reserves for these areas have
not been classified and more
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<PAGE> 16
drilling is needed to classify them as proven or probable. Initial
metallurgical studies by consultants to the Company in 1976 indicated
difficulty in concentrating the nickel minerals. However, in 1983 the ore was
examined by a metallurgical consulting company and it was demonstrated that the
ore can be treated to produce ferronickel and iron which can be used to produce
steel. The proposed method could be commercially viable if enough ore is
proven. Further metallurgical work by another consulting company in 1985
indicated that the ore can be treated by hydrometallurgical methods. An
exploration license which includes the Wadi Qatan and Jebel Harr areas will
enable the Company to continue its drilling program to prove enough ore for a
viable mining operation. Although the indications are encouraging there is no
assurance that a viable mining operation could be established.
Greater Al Masane. An application has been made and verbally approved
for an exploration license covering approximately 1,100 square kilometers
around Al Masane, sometimes referred to as Greater Al Masane, which includes an
ancient gold mining prospect at Jubal Guyan, about six miles east of the
original Al Masane prospect and seven miles west of Wadi Qatan. The Saudi
Arabian government has given the Company written authorization to conduct
exploration work on the area, although the license has not been formally
granted. Core samples indicate an average grade of 7 grams of gold per tonne.
Additional sampling is being conducted at Jubal Guyan, and after the results of
the sampling are obtained, an evaluation will be made as to future drilling
locations. Geological, geochemical and geophysical work on the Greater Al
Masane area has disclosed mineralization similar to that discovered at Al
Masane.
Refining Operations
South Hampton owns and operates a special products refinery near
Silsbee, Texas. Gulf State owns and operates three pipelines which connect the
South Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The properties owned by South Hampton and Gulf State are more fully described
in Item 1. Business.
Nevada Mining Properties
There are 48 patented and 84 unpatented claims totaling approximately
3,700 acres in the Pioche properties. All the claims are located in the Pioche
District, Lincoln County, in southeastern Nevada. There are prospects and
mines on these claims which formerly produced silver, gold, lead, zinc and
copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and
replacement deposits in carbonate rocks (limestone and dolomites). The Company
intends to conduct limited exploration when funds are available.
There is a 300-ton-a-day processing mill on property owned by Pioche.
The mill is not currently in use and a significant expenditure would be
required in order to put the mill into continuous operation. A lease of the
Wide Awake mine property terminated on December 31, 1996.
Colorado Coal Properties
The Coal Company had a net operating loss carryforward of
approximately $5.9 million at December 31, 1996 which is limited to any future
net income. The Company has had negotiations with several companies toward the
possible use of the Coal Company's carryforward amount, but no agreements have
been reached.
Offices
The Company has a year-to-year lease on space in an office building in
Jeddah, Saudi Arabia, used for office occupancy. The Company also leases a
house in Jeddah which is used as a technical office and for staff housing. The
Company continues to lease office space in an office building in the northern
part of Dallas, Texas on a month-to-month basis. It also has a base camp and
accompanying facilities and equipment at its license areas in Saudi Arabia.
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<PAGE> 17
Item 3. 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. South Hampton also asserted
claims against National Union for breach of contract, negligence, breach of the
duty of good faith and fair dealing and certain violations of the Texas
Insurance Code. This case was removed to the United States District Court on
August 22, 1994. The court ordered that it would first consider South
Hampton's contractual coverage claims under the Uniform Declaratory Judgment
Act and abated all of the other claims pending the outcome of the contractual
coverage claims. Any proceeds received by South Hampton from this cause of
action would be payable by South Hampton to Cajun Energy, Inc. and E-Z Mart
Stores pursuant to the terms of a judgment entered against South Hampton in
1994. The court ruled in favor of National Union on July 29, 1996. No further
action is planned by South Hampton in this matter.
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 of 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. South Hampton intends to
vigorously defend against the remaining lawsuit.
In mid-1993, while remediating a small spill area, the Texas Natural
Resources Conservation Commission ("TNRCC") requested South Hampton to drill a
well to check the groundwater under the spill area. The well disclosed a pool
of hydrocarbons on top of the groundwater under the truck loading rack area.
An analysis of the material indicated that the hydrocarbons were produced more
than fifteen years ago when the refinery was in the business of processing
crude oil. Consulting engineers were hired to determine the size and location
of the pool. Monitoring wells were drilled around the perimeter of the
refinery property and it was determined that there was no migration of
hydrocarbons off the refinery's property. Two large pools of hydrocarbons were
located, one under South Hampton's historic refinery site and the other under a
neighboring property which was purchased from an independent gas producer in
1981. The acquired property had previously been the site of a natural gas
processing plant. The TNRCC has been cooperating in the investigation and
cleanup. Due to the apparent age of the material, no fine or enforcement
action is expected. A site assessment plan was completed and approved in
November 1995. The costs through 1996 for this problem totaled approximately
$153,500. Estimated costs of $60,000 were accrued as of December 31, 1996 to
cover the recovery and remediation activity expected to take place in 1997.
In November 1996, South Hampton agreed to a proposed settlement with
the TNRCC's Air Permit Section for various alleged violations identified during
the 1991 through 1994 inspections. An agreed fine of $50,000 will be paid over
a period of ten months, $15,000 of which was paid in 1996 and the balance of
which was accrued as of December 31, 1996. South Hampton vigorously denied
many of the allegations in the settlement document, but determined that further
protest of the TRNCC's interpretation and application of the rules would result
in higher expenses.
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<PAGE> 18
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. The Company's Washington, D.C.
attorneys opined that, because the PSA of Hunt is still ongoing, and under its
auspices, payments and receipts occur daily, the DOJ still has 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 further supported its allegations. The Company's Washington,
D.C. attorneys opined also 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. A letter from the DOJ dated
October 1, 1996 stated that the documents presented did not suggest any
criminal events occurred within the statute of limitations, and that, at that
time, the DOJ did not intend to pursue the 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 Yemen Hunt for conspiracy to violate the FCPA. The Company's legal
counsel met with the Fraud Section of the DOJ on December 13, 1996 and were
told that the DOJ would take a more aggressive stance if more information of
evidentiary quality were presented to the DOJ. 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 its 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
This information is set forth under the caption "Market for the
Company's Common Stock and Related Stockholder Matters" of the Company's 1996
Annual Report to Stockholders filed herein as Exhibit 13, which portion of such
Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data.
This information is set forth under the caption "Selected Financial
Data" for each of the five years in the period ended December 31, 1996, of the
Company's 1996 Annual Report to Stockholders filed herein as Exhibit 13, which
portion of such Annual Report is incorporated herein by reference.
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<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This information is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
the Company's 1996 Annual Report to Stockholders filed herein as Exhibit 13,
which portion of such Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company including the independent
auditor's report thereon of the Company's 1996 Annual Report to Stockholders
filed herein as Exhibit 13, are incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
On May 6, 1996, Price Waterhouse LLP resigned as the independent
accountants of the Company. The resignation of Price Waterhouse LLP was
previously reported in a Current Report on Form 8-K dated May 6, 1996.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
This information is set forth under the captions "Nominees for
Election as Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for the
Company's Annual Meeting of Stockholders.
Item 11. Executive Compensation.
This information is set forth under the caption "Executive
Compensation" of the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is set forth under the caption "Outstanding Capital
Stock" of the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions.
This information is set forth under the caption "Other Matters" of the
Company's Proxy Statement for the Company's Annual Meeting of Stockholders.
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<PAGE> 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) 1. The following financial statements are
incorporated by reference from the Company's 1996
Annual Report to Stockholders filed herein as
Exhibit 13:
Reports of Independent Accountants.
Consolidated Balance Sheets dated December 31,
1996 and 1995.
Consolidated Statement of Operations for the three
years ended December 31, 1996.
Consolidated Statement of Stockholders' Equity for
the three years ended December 31, 1996.
Consolidated Statement of Cash Flows for the three
years ended December 31, 1996.
Notes to Consolidated Financial Statements.
2. The following financial statement schedules are
filed with this Report:
Schedule II - Valuation and Qualifying Accounts
for the three years ended December 31, 1996.
3. The following documents are filed or incorporated
by reference as exhibits to this Report:
3(a) Certificate of Incorporation of the
Company as amended through the Certificate
of Amendment filed with the Delaware
Secretary of State on January 29, 1993
(incorporated by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).
3(b) Bylaws of the Company, as amended through
July 6, 1994 (incorporated by reference to
Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No.
0-6247)).
10(a) Contract dated July 29, 1971 between the
Company, National Mining Company and
Petromin (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No.
0-6247)).
10(b) Loan Agreement dated January 24, 1979
between the Company, National Mining
Company and the Government of Saudi Arabia
(incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
-19-
<PAGE> 22
10(c) Mining Lease Agreement effective May 22, 1993 by
and between the Ministry of Petroleum and Mineral
Resources and the Company, together with English
translation thereof (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).
10(d) Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).
10(e) 1987 Non-Employee Director Stock Plan
(incorporated by reference to Exhibit 10(f) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).
10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II,
Inc. (incorporated by reference to Exhibit 10(g)
to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File
No. 0-6247)).
10(g) Agreement dated March 10, 1988 between Chevron
Research Company and South Hampton Refining
Company, together with related form of proposed
Contract of Sale by and between Chevron Chemical
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(o) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).
10(h) Addendum to the Agreement Relating to AROMAX(R)
Process - Second Commercial Demonstration dated
June 13, 1989 by and between Chevron Research
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).
10(i) Vehicle Lease Service Agreement dated September
28, 1989 by and between Silsbee Trading and
Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit
10(q) to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).
10(j) Letter Agreement dated May 3, 1991 between Sheikh
Kamal Adham and the Company (incorporated by
reference to Exhibit 10(t) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
10(k) Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company (incorporated by
reference to Exhibit 10(u) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
10(l) Letter Agreement dated August 15, 1995 between
Hatem El-Khalidi and the Company (incorporated by
reference to Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1995 (File No. 0-6247)).
10(m) Letter Agreement dated August 24, 1995 between
Sheikh Kamal Adham and the Company. (incorporated
by reference to Exhibit 10(w) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 0-6247)).
-20-
<PAGE> 23
10(n) Letter Agreement dated October 23, 1995 between
Sheikh Fahad Al-Athel and the Company
(incorporated by reference to Exhibit 10(x) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).
10(o) Letter Agreement dated December 6, 1995 between
Ibrahim Khalidi and the Company (incorporated by
reference to Exhibit 10(y) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1995 (File No. 0-6247)).
10(aa) Amended and Restated Credit Agreement dated
October 15, 1996 between South Hampton Refining
Company and Den norske Bank ASA, together with
related Promissory Note, Ratification of Security
Agreement, Ratification of Pledge Agreement,
Ratification of Assignment of Insurance,
Subordination Agreement, Termination Agreement,
Ratification of Subordination Agreement, Renewal,
Extension and Modification Agreement, Second Lien
Promissory Note and Third Lien Promissory Note of
even date therewith.
10(bb) Letter Agreement dated November 30, 1996 between
Sheikh Fahad Al-Althel and the Company.
10(cc) Financial and Legal Services and Advice Agreement
dated May 20, 1996 by and among Nasir Ali Kadasah,
Dar Al Khaleej and the Company, as amended by
Letter Agreement dated March 3, 1997.
13 1996 Annual Report to Stockholders.
With the exception of the information incorporated
by reference into Items 5, 6, 7, 8 and 14 of this
Form 10-K, the 1996 Annual Report to Stockholders
is not to be deemed filed as part of this Report.
21 Subsidiaries (incorporated by reference to Exhibit
21 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).
27 Financial Data Schedule.
(b) The following report on Form 8-K was filed during the last
quarter of the period covered by this Report:
Current Report on Form 8-K dated December 24, 1996.
-21-
<PAGE> 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Arabian Shield Development
Company, a Delaware corporation, and the undersigned directors and officers of
Arabian Shield Development Company, hereby constitutes and appoints John A.
Crichton its or his true and lawful attorney-in-fact and agent, for it or him
and in its or his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this Report, and to file
each such amendment to the Report, with all exhibits thereto, and any and all
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney-in-fact and agent full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as it
or he might or could do in person, hereby ratifying and confirming all that
said attorney-in- fact and agent may lawfully do or cause to be done by virtue
hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARABIAN SHIELD DEVELOPMENT COMPANY
By: /s/ HATEM EL-KHALIDI
-----------------------------
Hatem El-Khalidi, President
and Chief Executive Officer
Dated: March 28, 1997
-22-
<PAGE> 25
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company in the capacities indicated on March 28, 1997.
Signature Title
- --------- -----
/s/ HATEM EL-KHALIDI President, Chief Executive
- ----------------------------------- Officer and Director
Hatem El-Khalidi (principal executive officer)
/s/ DREW WILSON, JR. Secretary and Treasurer
- ----------------------------------- (principal financial and
Drew Wilson, Jr. accounting officer)
/s/ JOHN A. CRICHTON Chairman of the Board
- ----------------------------------- and Director
John A. Crichton
/s/ OLIVER W. HAMMONDS Director
- -----------------------------------
Oliver W. Hammonds
Director
- -----------------------------------
Harb S. Al Zuhair
/s/ MOHAMMED O. AL-OMAIR Director
- -----------------------------------
Mohammed O. Al-Omair
/s/ GHAZI SULTAN Director
- -----------------------------------
Ghazi Sultan
-23-
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Arabian Shield Development Company
In connection with our audit of the consolidated financial statements of
Arabian Shield Development Company and Subsidiaries referred to in our report
dated March 14, 1997, which is included in the annual report to stockholders in
Part II of this Form 10-K, we have also audited Schedule II at December 31,
1996 and for the year then ended. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein. Our report on the financial statements referred to above includes an
explanatory paragraph which discusses that there is substantial doubt about the
Company's ability to continue as a going concern.
/s/ GRANT THORNTON LLP
- -----------------------------
Dallas, Texas
March 14, 1997
<PAGE> 27
SCHEDULE II
Arabian Shield Development Company and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 1996
<TABLE>
<CAPTION>
Description Charged (credited) Ending
Beginning to earnings Deductions balance
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS - (a)
December 31, 1994 $ 231,603 $ 12,551 $ -- $ 244,154
December 31, 1995 244,154 16,092 -- 260,246
December 31, 1996 260,246 27,774 -- 283,020
ALLOWANCE FOR DEFERRED
TAX ASSET
December 31, 1994 11,239,774 (1,450,467) -- 9,789,307
December 31, 1995 9,789,307 2,014,440 -- 11,803,747
December 31, 1996 11,803,747 179,553 (403,182)(b) 11,553,118
</TABLE>
(a) Valuation account deducted in the balance sheet from trade accounts
receivable and other assets.
(b) Expiration of carryforwards
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3(a) Certificate of Incorporation of the Company as amended through
the Certificate of Amendment filed with the Delaware Secretary
of State on January 29, 1993 (incorporated by reference to
Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No. 0-6247)).
3(b) Bylaws of the Company, as amended through July 6, 1994
(incorporated by reference to Exhibit 3(b) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0- 6247)).
10(a) Contract dated July 29, 1971 between the Company, National
Mining Company and Petromin (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No. 0-6247)).
10(b) Loan Agreement dated January 24, 1979 between the Company,
National Mining Company and the Government of Saudi Arabia
(incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
10(c) Mining Lease Agreement effective May 22, 1993 by and between
the Ministry of Petroleum and Mineral Resources and the
Company, together with English translation thereof
(incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
10(d) Stock Option Plan of the Company, as amended (incorporated by
reference to Exhibit 10(e) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File
No. 0-6247)).
10(e) 1987 Non-Employee Director Stock Plan (incorporated by
reference to Exhibit 10(f) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File
No. 0-6247)).
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(g) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0- 6247)).
10(g) Agreement dated March 10, 1988 between Chevron Research
Company and South Hampton Refining Company, together with
related form of proposed Contract of Sale by and between
Chevron Chemical Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(o) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
10(h) Addendum to the Agreement Relating to AROMAX(R) Process
-Second Commercial Demonstration dated June 13, 1989 by and
between Chevron Research Company and South Hampton Refining
Company (incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
10(i) Vehicle Lease Service Agreement dated September 28, 1989 by
and between Silsbee Trading and Transportation Corp. and South
Hampton Refining Company (incorporated by reference to Exhibit
10(q) to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0- 6247)).
10(j) Letter Agreement dated May 3, 1991 between Sheikh Kamal Adham
and the Company (incorporated by reference to Exhibit 10(t) to
the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
10(k) Promissory Note dated February 17, 1994 from Hatem El-Khalidi
to the Company (incorporated by reference to Exhibit 10(u) to
the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
10(l) Letter Agreement dated August 15, 1995 between Hatem
El-Khalidi and the Company (incorporated by reference to
Exhibit 10(v) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 0-6247)).
10(m) Letter Agreement dated August 24, 1995 between Sheikh Kamal
Adham and the Company. (incorporated by reference to Exhibit
10(w) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
10(n) Letter Agreement dated October 23, 1995 between Sheikh Fahad
Al-Athel and the Company (incorporated by reference to Exhibit
10(x) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).
10(o) Letter Agreement dated December 6, 1995 between Ibrahim
Khalidi and the Company (incorporated by reference to Exhibit
10(y) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).
10(aa) Amended and Restated Credit Agreement dated October 15, 1996
between South Hampton Refining Company and Den norske Bank
ASA, together with related Promissory Note, Ratification
of Security Agreement, Ratification of Pledge Agreement,
Ratification of Assignment of Insurance, Subordination
Agreement, Termination Agreement, Ratification of Subordination
Agreement, Renewal, Extension and Modification Agreement,
Second Lien Promissory Note and Third Lien Promissory Note of
even date therewith.
10(bb) Letter Agreement dated November 30, 1996 between Sheikh Fahad
Al-Althel and the Company.
10(cc) Financial and Legal Services and Advice Agreement dated May
20, 1996 by and among Nasir Ali Kadasah, Dar Al Khaleej and
the Company, as amended by Letter Agreement dated March 3,
1997.
13 1996 Annual Report to Stockholders.
With the exception of the information incorporated by
reference into Items 5, 6, 7, 8 and 14 of this Form 10-K, the
1996 Annual Report to Stockholders is not to be deemed filed
as part of this Report.
21 Subsidiaries (incorporated by reference to Exhibit 21 to the
Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10(aa)
AMENDED AND RESTATED
CREDIT AGREEMENT
for an amount of
up to
USD 1,965,000.00
to
SOUTH HAMPTON REFINING COMPANY
provided by
DEN NORSKE BANK ASA
<PAGE> 2
I N D E X
<TABLE>
<S> <C> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. AMOUNT AND PURPOSE . . . . . . . . . . . . . . . . . . . . . . 7
3. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 7
4. EXTENSION RENEWAL AND AVAILABILITY . . . . . . . . . . . . . . 10
5. INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6. REPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7. PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8. SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. REPRESENTATIONS AND COVENANTS . . . . . . . . . . . . . . . . 12
10. CHANGES IN CIRCUMSTANCES . . . . . . . . . . . . . . . . . . . 17
11. FEES, COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . 18
12. PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13. CALCULATION . . . . . . . . . . . . . . . . . . . . . . . . . 19
14. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 19
15. NOTICES AND CORRESPONDENCE . . . . . . . . . . . . . . . . . . 21
16. GOVERNING LAW AND JURISDICTION . . . . . . . . . . . . . . . . 22
17. FINAL AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 22
18. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
Exhibit A - Form of Promissory Note
Exhibit B - Form of Borrowing Base Certificate
Exhibit C-1 - Form of Administrative Distribution Report
Exhibit C-2 - Form of Interest Distribution Report
Exhibit C-3 - Form of Excess Distribution Report
i
<PAGE> 3
Amended and Restated Credit Agreement dated October 15, 1996 (the
"Restated Agreement") between South Hampton Refining Company, a Texas
corporation (the "Borrower") and Den norske Bank ASA, New York Branch, a
Norwegian bank (the "Bank").
WHEREAS, the Borrower and the Bank entered into the Credit Agreement
dated March 3, 1988 as amended and restated from time to time (as so amended
and restated, the "Credit Agreement"); and
WHEREAS, the Credit Agreement was entered into for the purpose of
financing, renewing and extending the Old Loan as defined in the Credit
Agreement; and
WHEREAS, the Borrower and the Bank wish to amend and restate the
Credit Agreement to modify certain provisions of the Credit Agreement and to
embody all of the amendments made to the Credit Agreement in one document.
NOW, THEREFORE, in consideration of the above recitals and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to amend and restate the Credit
Agreement to read in its entirety as follows:
1. DEFINITIONS
"USD" means the lawful currency of the United States of
America.
"Administrative means a distribution by the Borrower to a Parent
Distribution" Company in respect of legal, auditing and
accounting fees of the Parent Companies
attributable to the operations of Borrower.
"Advance" means the loans by the Bank to the Borrower
pursuant to Section 2 hereof.
"American Shield" means American Shield Refining Company, a
Delaware corporation.
"Arabian Shield" means Arabian Shield Development Company, a
Delaware corporation.
"Banking Day" means a day upon which banks are open for
business in such places contemplated for the
transactions required by this Restated Agreement.
<PAGE> 4
"Borrowing Base" means the aggregate of (i) 90% of cash of the
Borrower held in the Cash Collateral Accounts,
(ii) 80% of Eligible Accounts Receivable and
(iii) 60% of Inventory.
"Borrowing Base means a certificate in the form of Exhibit B
Certificate" attached hereto.
"Cash Collateral means the accounts at Silsbee State Bank
Accounts" providing for the payment of all the Borrower's
receivables to a designated account or accounts
under the joint control of the Borrower and the
Bank.
"Closing Date" means October 15, 1996.
"Commitment" means an amount up to USD 1,965,000.00 on the
Closing Date, reducing (i) on the last day of
each fiscal quarter of the Borrower commencing
December 31, 1996 by the sum of USD 75,000 and
(ii) by the amount of any Distribution Reduction
on the date the corresponding Distribution is
made.
"Credit Facility" means the revolving credit facility, the terms
and conditions of which are set out in Section 2
of this Restated Agreement.
"Current Ratio" means the ratio of the current assets of the
Borrower to its current liabilities (excluding
indebtedness to the Bank in excess of USD
300,000) as each would be classified as current
assets or liabilities in accordance with
generally accepted accounting principles in the
U.S., of a corporation conducting a business the
same as or similar to the business of the
Borrower, but excluding receivables from or
payables to any subsidiary, parent or affiliate
of the Borrower.
2
<PAGE> 5
"Distribution means an amount equal to (i) 2 times any Excess
Reduction" Distribution if the shareholders' equity of TOCCO
II is negative or (ii) any Excess Distribution if
the shareholders' equity of TOCCO II is positive.
"Eligible Accounts means all accounts receivable which have been
Receivable" created in the ordinary course of Borrower's
business and for which Borrower's right to
receive payment is absolute and not contingent
upon the fulfillment of any condition whatsoever,
and shall not include (a) any invoice of a
customer which remains unpaid more than 90 days
from its invoice date, (b) any account for which
there exists a right of set off, counterclaim,
dispute, objection, complaint, defense or
discount, (c)any account which arises from the
sale or lease to or performance of services for,
or represents an obligation of, an employee,
affiliate, partner, parent or subsidiary of
Borrower, (d) that portion of any account from a
customer of Borrower which represents the amount
by which Borrower's total accounts from such
customer exceeds 25% of Borrower's total
accounts, (e) any account arising from a sale or
lease to a non-United States or non-Canadian
customer, and (f) any account designated to
Borrower by the Bank in which the Bank is not or
does not continue to be, in the Bank's reasonable
judgment, satisfied with the credit standing of
the customer of Borrower in relation to the
amount of credit extended.
"Excess Distribution" means a distribution by Borrower to a Parent
Company that is not an Administrative
Distribution, an Interest Distribution, a
dividend or a return of capital.
3
<PAGE> 6
"Fixed Charge Coverage means the ratio of (a) the earnings of the
Ratio" Borrower excepting extraordinary items of gain or
loss, but without deduction for interest, taxes,
depreciation and amortization to (b) the
aggregate of scheduled payments of principal of
all debt of the Borrower and interest thereon.
"Hazardous Substance" means any hazardous, dangerous or toxic waste,
substance or material as defined in the
Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C.
Sec. 9601, et seq. (hereinafter, "CERCLA"); the
-- ---
Resource Conservation and Recovery Act, 42 U.S.C.
Sec. 6901, et seq. (hereinafter, "RCRA"); the
-- ---
Hazardous Materials Transportation Act, 49 U.S.C.
Sec. 1801, et seq.; the Texas Solid Waste
-- ---
Disposal Act, Tex. Rev. Civ. Stat. Ann. Art.
4777-7 Sec. 13(g)(7); or any other federal, state
or local statute, law, ordinance, code or
regulation relating to or imposing liability or
standards of conduct concerning the use,
production, generation or disposal of any
hazardous, toxic or otherwise dangerous waste,
substance, or material, currently or at any time
hereafter, in effect.
"Interest Distribution" means a payment by Borrower to a Parent Company
in respect of accrued interest on any debt owed
by Borrower to Saudi Fal or Arabian Shield.
4
<PAGE> 7
"Inventory" means any and all of Borrower's right, title and
interest in and to inventory, wherever located,
and in which the Bank has a perfected security
interest, including without limitation, any and
all goods held for sale or lease or being
processed for sale or lease in Borrower's
business, as now or hereafter conducted,
including without limitation, all feed stock,
materials, goods, and work-in-progress, finished
goods, and other tangible property held for sale
or lease or furnished or to be furnished under
the contracts of service or used or consumed in
Borrower's business, along with all documents
(including documents of title) covering
inventory, all cash and non-cash proceeds from
the sale of inventory including proceeds from
insurance and including such property the sale or
other disposition of which has given rise to
accounts and which has not been returned to or
repossessed or stopped in transit by Borrower,
but specifically excluding obsolete or slow
moving inventory.
"Margin" means 1% (one percent).
"Maturity Date" means December 31, 1998 or as extended in the
sole discretion of the Bank.
"Monthly Cash Flow" means a certificate in the form of Certificate
Exhibit D attached hereto and made a part of this
Restated Agreement for all purposes which
indicates the monthly cash flow of the Borrower
and the additional commitment reduction amount
referred to in Section 6(ii) of this Restated
Agreement.
"Parent Company" means Saudi Fal, American Shield Refining
Company, Arabian Shield Development Company and
Texas Oil & Chemical Co. II, or any combination
thereof.
5
<PAGE> 8
"Payment Date" means the last day of each month during the term
of this Restated Agreement.
"Permitted shall have the meaning set forth in Section 9(d)
Distribution" hereof.
"Prime Rate" shall mean the rate announced from time to time
by the Bank as its prime lending rate in effect
in its New York, New York office, automatically
fluctuating upward and downward with and at the
time of each such announcement without special
notice to Borrower or any other Person. The
Bank's prime rate may be one of several interest
rates, may serve only as reference rate and may
not be the Bank's lowest rate.
"Saudi Fal" means Saudi Fal, a limited liability company.
"Security Documents" means all or any documents pursuant to Section 8
hereof, as have been or may be entered into as
security for all or any of the obligations of the
Borrower hereunder.
"Tax" means all or any levies, imposts, duties,
charges, fees, deductions and withholdings levied
or imposed by any national or local governmental
or public body or authority (except for United
States federal, state and local income taxes
levied on the Bank's gross income or receipts or
United States federal, state and local gross
receipts or franchise taxes levied in lieu of
income taxes) and any restrictions or conditions
resulting in a charge.
"TOCCO II" means Texas Oil & Chemical Co. II, Inc., a Texas
corporation.
Where the context of this Agreement so allows, words importing the singular
include the plural and vice versa.
6
<PAGE> 9
2. AMOUNT AND PURPOSE
(a) The Bank shall make available the Commitment as follows:
USD 1,965,000.00 which shall be used by the Borrower for the purpose
of refinancing, renewing and extending the loan evidenced by its
Promissory Note dated December 30, 1990, as amended or restated from
time to time (the "Old Note"); and
(b) The Commitment shall be drawn down by the Borrower in the form
of Advances for a term which shall not extend beyond the Maturity Date. The
total amount of Advances outstanding under the Credit Facility shall not exceed
at any time the lesser of the Commitment and the Borrowing Base. Within such
limit, the Borrower may borrow, prepay pursuant to Section 7 of this Restated
Agreement and reborrow under this Section 2(b). Each borrowing by the Borrower
shall be in an aggregate principal amount of at least USD 50,000.
(c) The Commitment shall be evidenced by the promissory note of
the Borrower in the form of Exhibit A attached hereto (the "Note").
(d) Notwithstanding anything else in this Restated Agreement, at
no time shall there be outstanding Advances in an amount in the aggregate
greater than the lesser of the Commitment and the Borrowing Base.
3. CONDITIONS PRECEDENT
3.1 The Borrower shall give the Bank at least one Banking Day
irrevocable prior written notice of its desire to have an Advance made.
3.2 The obligation of the Bank to make the first Advance under
this Restated Agreement shall be subject to the Bank or its legal counsel
having received in form and content satisfactory to the Bank:
(a) The counterparts of this Restated Agreement duly executed by
the Borrower's authorized representative or representatives.
(b) The Security Documents.
(c) Copies certified by the Secretary of the Borrower of:
(i) the By-Laws of the Borrower,
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<PAGE> 10
(ii) The resolutions of the Board of Directors of the
Borrower approving the execution, delivery and
performance by the Borrower of this Restated
Agreement, the Note, the Security Documents and
specifying the persons authorized to sign the above
mentioned documents on its behalf.
(d) Any consents necessary from governmental or other authorities
for the execution, delivery and performance by the Borrower of this Restated
Agreement.
(e) A copy certified as of a recent date by the Secretary of State
of Texas of the Articles of Incorporation of the Borrower with all amendments
thereto.
(f) Evidence from the Secretary of State and the Comptroller of
Public Accounts of the State of Texas as to the continued existence and good
standing of the Borrower.
(g) An opinion of counsel to the Borrower acceptable to the Bank
as to:
(i) the valid existence and good standing of the Borrower
under the laws of the State of Texas.
(ii) the due authorization, execution and delivery by the
Borrower of this Restated Agreement, the Note and the
Security Documents to which it is a party.
(iii) this Restated Agreement, the Note and the Security
Documents to which the Borrower is a party
constituting the legally valid and binding
obligations of the Borrower in accordance with their
terms.
(iv) the execution, delivery and performance of this
Restated Agreement, the Note and the Security
Documents to which the Borrower is a party, by the
Borrower not resulting in a breach of any terms or
conditions of, or resulting in the imposition of any
lien, charge or encumbrance upon any properties of
the Borrower or constituting a default under any
indenture, agreement, order, judgment or other
instrument under which the Borrower or its property
may be bound or constituting a violation of the
Articles of Incorporation or By-Laws of the Borrower
or violating any provision of applicable law.
(v) the execution, delivery and performance of this
Agreement, the Note and the Security Documents to
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<PAGE> 11
which the Borrower is a party by the Borrower not
requiring the consent or approval of, the giving of
notice to, the registration with or the taking of any
action by any governmental authority of the United
States or the State of Texas.
(vi) such other matters as the Bank may request.
(h) the Note.
(i) Uniform Commercial Code financing statements covering the
security interests granted by the Security Documents shall have been duly
executed by the Borrower as debtor, and duly filed in all places as are, in the
opinion of the Bank, necessary or desirable to perfect said security interest.
(j) Evidence of the insurance required by Section 9(b)(vii)
hereof.
(k) An agreement pursuant to which Saudi Fal subordinates all
amounts owed to it by TOCCO II and the Borrower to all amounts outstanding
under this Restated Agreement and agrees that no payments of principal or
interest shall be made under such loans until such time as all amounts due
under this Restated Agreement have been paid, except for Permitted
Distributions under Section 9(d) hereof.
(l) An acknowledgment by American Shield Refining Company and
Arabian Shield Development Company of the continuing effectiveness of the
subordination agreement with terms similar to those set forth in subsection (k)
above.
(m) Evidence of cancellation of the Intercreditor Agreement
between the Bank and Saudi Fal.
3.4 The obligations of the Bank to make each subsequent Advance
shall be subject to the further condition precedent that the Bank shall have
received a certificate dated the date of such Advance of the Borrower
certifying that:
(a) the representations and warranties contained in Section 9 are
true and correct on and as of the date of such Advance as
though made on and as of such date; and
(b) no event has occurred and is continuing, or would result from
such Advance, which constitutes an Event of Default or with
the passing of time or the giving of notice would constitute
an Event of Default.
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3.5 All of the conditions precedent contained in this Section 3
are for the sole benefit of the Bank and the Bank may waive any of them in its
absolute discretion.
4. EXTENSION RENEWAL AND AVAILABILITY
Subject to the provisions of Sections 10 and 11 hereof and:
(a) The Bank's prior satisfaction that the relevant conditions set
out in Section 3 above have been complied with,
(b) No Event of Default as defined in Section 15 herein has
occurred or is continuing,
the indebtedness evidenced by the Old Note shall be refinanced, extended,
renewed and restructured and the new credit facility of Facility B shall be
made available to the Borrower all in accordance with the terms and provisions
of this Restated Agreement.
5. INTEREST
(a) Interest Rate
The Borrower shall pay interest on the Advances drawn and
outstanding under this Restated Agreement at the annual rate
which is conclusively certified by the Bank to be the
aggregate of the Margin and the Prime Rate.
(b) Interest Payment
(i) Interest shall be payable monthly in arrears on the
last day of each month and on the Maturity Date and
calculated in accordance with Section 14 hereof.
(ii) If any interest would be payable on a non-Banking
Day, it shall be paid on the next succeeding Banking
Day.
(c) Computation of Interest
Notwithstanding any provision of this Restated Agreement or the Note
to the contrary, in no event shall the aggregate amount of consideration which
constitutes interest under any applicable law which is contracted for, charged
or received hereunder or under the Note ("Interest") exceed the maximum amount
of nonusurious interest allowed by law, and any excess shall be credited on
this Restated Agreement or the Note (or if all obligations under this Restated
Agreement or the Note shall have been paid in full, refunded to the Borrower).
For purposes of the foregoing, the maximum amount of
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<PAGE> 13
interest allowed by law shall be calculated by determining the amount of
interest that could be contracted for, charged or received during the term
hereof at the maximum rate of nonusurious interest allowed from time to time by
applicable law as is now or, to the extent allowed by law, as may hereafter be
in effect (the "maximum nonusurious interest rate") and, if at any time the
rate of Interest to accrue would exceed the maximum nonusurious interest rate,
the rate of Interest to accrue under this Restated Agreement or the Note shall
be limited to the maximum nonusurious interest rate, but any subsequent
reductions in LIBOR shall not reduce the rate of Interest to accrue under this
Restated Agreement or the Note below the maximum nonusurious interest rate
until the total amount of Interest accrued and paid under this Restated
Agreement or the Note equals the amount of Interest which would have accrued if
a rate per annum equal to the Prime Rate plus the Margin had at all times been
in effect.
6. REPAYMENT
The Borrower shall repay all principal amounts outstanding plus any
other outstanding amounts hereunder in a single installment on the Maturity
Date. Subject to the terms hereof, the Borrower may reborrow amounts repaid or
prepaid prior to the Maturity Date, upon one (1) day prior written notice to
the Bank.
7. PREPAYMENT
The Borrower shall make an immediate prepayment in an amount by which
the principal amount outstanding hereunder exceeds the Commitment or the
Borrowing Base, if ever.
8. SECURITY
The Facility is secured by:
(a) The Deed of Trust dated September 10, 1985 from Texas Oil &
Chemical Co. ("Chemical") to Michael E. Niebruegge as Trustee.
(b) The Deed of Trust dated January 10, 1985 from Gulf State Pipe
Line Company, Inc. ("Gulf State") to Michael E. Niebruegge as Trustee.
(c) The Deed of Trust dated January 20, 1985 from the Borrower to
Michael E. Niebruegge as Trustee.
(d) The Deed of Trust dated April 8, 1986 from Texas Oil &
Chemical Terminal, Inc. ("Terminal") to Michael E. Niebruegge as Trustee.
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<PAGE> 14
(e) The Security Agreement and Financing Statement from the
Borrower to the Bank dated as of January 14, 1985, duly ratified by the
Borrower.
(f) The Cash Collateral Accounts.
(g) An Assignment of Insurances dated March 3, 1988 from the
Borrower, Gulf State and Texas Oil & Chemical Co. II, Inc., duly ratified by
the parties thereto.
(h) A pledge by American Shield Refining Company of all of the
issued and outstanding shares of Texas Oil & Chemical Co. II, Inc. in form and
substance satisfactory to the Bank, duly ratified by the parties thereto.
9. REPRESENTATIONS AND COVENANTS
(a) The Borrower represents to and agrees with the Bank that:
(i) this Restated Agreement and the Security Documents to which it
is a party constitute valid, binding and enforceable
obligations of the Borrower according to the terms and
conditions hereof and thereof and the execution and
performance of this Restated Agreement and such Security
Documents do not and will not contravene any applicable law,
order, regulation or restriction of any kind binding on the
Borrower.
(ii) the Borrower is a duly formed and validly existing corporation
under the laws of the State of Texas, has full power to enter
into this Restated Agreement and the Security Documents to
which it is party, to make borrowings hereunder and to service
and repay the Commitment.
(iii) the chief executive office of the Borrower is located at
Highway 418, Silsbee, Texas.
(iv) it is currently in possession of permits authorizing all
activities now or formerly conducted on the properties
securing this indebtedness from the Texas Water Commission,
the Texas Air Quality Control Board, the U.S. Environmental
Protection Agency, the U.S. Army Corps of Engineers and the
Texas Railroad Commission. Furthermore, the Borrower agrees
that it maintains no Hazardous Substances on the properties
securing this indebtedness without possession of the
appropriate permits.
(v) no Event of Default has occurred and is continuing.
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<PAGE> 15
(b) Affirmative Covenants. The Borrower undertakes to the Bank
that so long as any amount is owing hereunder it will:
(i) promptly inform the Bank of any occurrence of which it becomes
aware which is, or with the passage of time or the giving of
notice would constitute, an Event of Default hereunder or
under any of the Security Documents to which it is a party or
which in its reasonable opinion might adversely affect its
ability fully to perform its obligations under this Restated
Agreement or any of the Security Documents to which it is a
party.
(ii) deliver to the Bank by the 105th day of the end of the each
fiscal year, consolidated annual audited financial statements,
including consolidating financial statements of the Borrower,
and by the 30th day after the end of each month, profit and
loss and balance sheet statements.
(iii) deliver to the Bank by the 30th day following the end of each
quarter, statements showing the source and use of funds of the
Borrower for the preceding quarter.
(iv) deliver to the Bank within 3 Banking Days of the last day of
each calendar month and the 15th day of each calendar month a
Borrowing Base Certificate as of such days as well as a
certificate signed by the President or the Chief Financial
Officer of the Company as to the inventory and accounts
receivable (status and aging) of the Borrower.
(v) deliver to the Bank within 30 Banking days of the last day of
each fiscal quarter, compliance statements signed by the
President or Chief Financial Officer of the Borrower
certifying that the Borrower is in compliance with all of the
representations and covenants hereof as if made on the date of
such certificate, and that no default has occurred hereunder,
together with a calculation of all financial ratios set forth
in Section 9(c)(ix), (x) and (xi) hereof.
(vi) deliver to the Bank no later than December 1 of each year the
business plan, income and expense projections, projected
balance sheet and projected sources and uses of funds
statement of the Borrower for the subsequent calendar year.
(vii) deliver to the Bank within 30 Banking days of the end of each
calendar month a written status report of the Borrower's
operations, financial performance and out-
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<PAGE> 16
standing accounts payable for the previous calendar month and
such other financial information as the Bank may from time to
time reasonably request; permit the Bank or its representative
at any reasonable time or times to inspect the properties of
the Borrower and to inspect, audit and examine the books or
records of the Borrower and to take extracts therefrom. The
Bank shall further have the right to order an audit of
Borrower's books and records, no more than twice annually.
The costs of such audit shall be borne by the Borrower.
(viii) deliver to the Bank, as soon as available, weekly receipt and
disbursement reports.
(ix) maintain insurance acceptable to the Bank including, but not
limited to, casualty insurance with responsible and reputable
insurance companies or associations in such amounts and
covering such risks as is usually carried by companies engaged
in similar businesses and owning similar properties in the
same general areas in which the Borrower operates. The
Borrower shall furnish the Bank with evidence of all such
insurance policies currently in force and with evidence of
payment of the premiums on such policies.
(x) execute and deliver to the Bank any instruments, documents or
certificates which in the Bank's judgment are necessary to
amend, modify, extend or supplement any of the Security
Documents to better evidence, reflect and secure the Note.
(xi) perform and maintain, or cause to be performed or maintained,
all permits, licenses, consents and agreements concerning its
assets or operations.
(xii) notify the Bank, within five (5) days, should it ever come
into possession of knowledge or have a claim or complaint
asserted against it because the Borrower or any other person
or entity caused or permitted any Hazardous Substances to be
stored, located, held or disposed of on, under or at any of
the properties securing Facility A or Facility B in a manner
not in compliance with all applicable laws, regulations and
permits regarding such storage, holding or disposal.
(xiii) give the Bank, within five (5) days, written notice in the
event the Borrower receives notice of (1) the happening of any
spill or cleanup of Hazardous Substances affecting the
properties securing the Credit Facility, or
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<PAGE> 17
any other property owned by the Borrower that would require
the Borrower to notify any environmental agency, of any
federal, state or local government of such spill or cleanup;
or (2) any complaint, violation, notice or citation regarding
any permit controlling the environmental health or safety
violation of the Borrower, including health or safety
violation of the Borrower, including without limitation, any
notice from the Environmental Protection Agency.
(xiv) indemnify and hold the Bank harmless from and against any and
all claims, losses, liability, damages and injuries of any
kind whatsoever incurred or suffered by or asserted against
the Bank with respect to or as a direct result of the
presence, escape, seepage, spillage, leaking, discharge or
migration from any of the properties securing the Credit
Facility of any Hazardous Substance, including without
limitation, any claims asserted or arising under CERCLA, RCRA
or the Texas Solid Waste Disposal Act, regardless of whether
or not caused by or within the control of the Borrower.
(xv) cause each agreement between the Borrower and the holder of
any debt subordinated to the Loan to provide that such holder
may not accelerate the payment of such subordinated debt until
all amounts outstanding hereunder, now or in the future, are
repaid or prepaid in full.
(xvi) maintain its Inventory and other properties in good and safe
working order. The Bank shall have the right to perform an
inspection of Borrower's Inventory and properties four (4)
times per year upon at least two (2) days' prior notice to the
Borrower. The costs of such inspections shall be borne by the
Borrower.
(xvii) deliver to the Bank an Administrative Distribution Report,
Interest Distribution Report, or Excess Distribution Report,
as the case may be, three (3) days prior to any distribution
by the Borrower of the kind described in Section 9(d) hereof,
each in form substantially similar to Exhibit C-1, C-2 or C- 3
attached hereto, as appropriate.
(c) Negative Covenants. The Borrower undertakes to the Bank that
so long as any amount is owing hereunder it will not without the prior written
consent of the Bank:
(i) create or permit to subsist, without the prior written consent
of the Bank, any mortgage, pledge, lien or other
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<PAGE> 18
security interest on any or all of its present or future
revenues, properties or assets except liens in favor of Saudi
Fal and Arabian Shield duly subordinated to any liens in favor
of the Bank and liens permitted by the Security Documents or
with the prior written consent of the Bank or as disclosed to
the Bank in writing and accepted by the Bank on the Closing
Date;
(ii) borrow any money, enter into any lease or other financial
obligation or enter into any guarantee for the obligations or
the indebtedness of any third party without the prior written
consent of the Bank except (1) loans or leases entered into in
connection with the acquisition of equipment in the ordinary
course of business, which loans or leases shall not exceed
$100,000 in the aggregate at any time and (2) one or more
letters of credit issued by Silsbee State Bank, naming Vastar
Resources, Inc. as beneficiary, the aggregate face amount of
which shall not exceed USD 110,000;
(iii) merge with any other entity or change its present line of
business. For the purposes of this Restated Agreement, the
Borrower's line of business shall be the owning, acquisition,
production, refining, transportation and sale of hydrocarbon
products;
(iv) make any investments or lend money to any party without the
prior written consent of the Bank except for short-term
employee loans not exceeding $40,000 in the aggregate;
(v) except for Permitted Distributions, make any payment of
interest on or principal of any debt subordinated to the Loan
or any dividend payments or distributions to its shareholders
without the prior written consent of the Bank;
(vi) make capital expenditures in any fiscal year of more than
$200,000;
(vii) make any change in the address of its chief executive office
without the prior written consent of the Bank, which consent
shall not be unreasonably withheld;
(viii) sell or assign the accounts, contract rights or receivables
pertaining to its business or sell, lease, abandon or
otherwise dispose of, directly or indirectly, its assets
except in ordinary course of business;
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(ix) allow its Current Ratio to be less than 2.10:1.0;
(x) allow its Fixed Charge Coverage Ratio to be less than 1.40:1.0
on a quarterly basis; provided, that the Fixed Charge Coverage
Ratio shall not be less than 1.55:1.0 in any two (2)
consecutive quarters;
(xi) allow its Fixed Charge Coverage Ratio to be less than 1.65:1.0
on a rolling four-quarter basis; or
(xii) allow the interest rate on the Borrower's indebtedness to
Saudi Fal or Arabian Shield to be greater than the interest
rate hereunder at any time.
(d) Distributions. For purposes of Section 9(c) hereof,
"Permitted Distribution" shall mean an Administrative Distribution, Interest
Distribution, or Excess Distribution, subject to the following conditions:
(i) An Administrative Distribution shall be a Permitted
Distribution only if (1) no Event of Default has occurred and
is continuing, or will be caused by such distribution, (2) the
Commitment does not exceed the Borrowing Base, (3) the
expenses related to such distribution are properly documented
and such documentation is provided to the Bank prior to such
distribution, and (4) the aggregate annual amount of such
distributions does not exceed USD 60,000.
(ii) Subject to the additional conditions in Subsection (iv) below,
an Interest Distribution shall be a Permitted Distribution
provided that such distributions shall not exceed USD 17,500
per month and represents interest actually owed to Saudi Fal
and Arabian Shield.
(iii) Subject to the additional conditions in Subsection (iv) below,
an Excess Distribution shall be a Permitted Distribution only
if such distribution is applied to the principal of any debt
outstanding by the Borrower to Saudi Fal or Arabian Shield.
(iv) Notwithstanding the provisions of Subsections (ii) and (iii)
above, no Excess Distribution or Interest Distribution shall
be a Permitted Distribution unless the following conditions
are met:
(1) the aggregate of all such distributions in any fiscal
quarter may not exceed 25% of Borrower's net
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income from the immediately preceding fiscal quarters;
(2) the aggregate of such distributions for any four
quarter period may not exceed 25% of Borrower's
income for the four quarter period ending with the
quarter immediately preceding the quarter in which
the distribution is made;
(3) the Borrower's Current Ratio for the quarter
immediately preceding such distribution is not less
than 2.25:1.0;
(4) the Borrower's Fixed Charge Coverage Ratio for the
quarter immediately preceding such distribution is
not less than 1.55:1.0;
(5) the Borrower's Fixed Charge Coverage Ratio for the
immediately preceding four quarters is not less than
1.80:1.0; and
(6) no Event of Default has occurred and is continuing or
will be caused by such distribution.
10. CHANGES IN CIRCUMSTANCES
(a) In the event that any applicable law or regulation shall
subject the Bank to any Taxes or impose any reserve deposit or other
requirements against any assets or liabilities of the Bank, the result of which
is to increase the cost to the Bank of making or maintaining the Credit
Facility or to reduce the amount of principal or interest received by the Bank,
then the Borrower shall be required to compensate the Bank for such additional
cost or reduction.
(b) In the event that any applicable law or regulation shall make
it unlawful for the Bank to make or maintain the Credit Facility, then the
Bank's obligations hereunder shall terminate, and all amounts owing by the
Borrower to the Bank shall become due and repayable forthwith.
(c) If the circumstances contemplated by subclause (a) or(b) above
should occur and the Bank intends to invoke the conditions contained therein,
then the Bank shall promptly advise the Borrower thereof.
(d) Should the conditions of subsection (a) above be invoked and
the Borrower find the resultant additional cost to be unaccept-
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able, then the Borrower shall prepay any amounts outstanding hereunder on the
next Payment Date.
(e) If the Borrower prepays any amounts outstanding hereunder in
accordance with subsection (d) above, then it shall nonetheless compensate the
Bank for additional costs defined under subsection (a) above up to and
including the date of prepayment.
11. FEES, COSTS AND EXPENSES
(a) The Borrower shall pay to the Bank upon demand, all reasonable
costs, charges and expenses (including legal fees) incurred by the Bank in
connection with the preparation, execution, amendment and enforcement of this
Restated Agreement and the Security Documents and the preservation of the
Bank's rights hereunder and thereunder.
(b) The Borrower shall pay to the Bank within ninety (90) of the
Closing Date a facility fee of USD 25,000.
(c) The Borrower shall pay a commitment fee to the Bank on the
unused portion of the Credit Facility at the rate of 1/2 of 1% per annum on
such unused portion, payable quarterly in arrears on the last day of each such
quarter and commencing September 30, 1996.
(d) The obligations of the Borrower under this Section 12 shall
survive the repayment of all amounts outstanding hereunder and all interest due
thereon.
12. PAYMENTS
(a) All payments hereunder shall be made to the following account:
Unibank New York
For the account of Den norske Bank, New York Branch
Account No. 28764999
Ref. South Hampton Refining Company
(b) In the event of any payments hereunder not being received on
the due date therefor, interest will be charged by the Bank from the due date
until the date that payment is received at a rate corresponding to the
aggregate of the Margin plus 2% (two percent) and the Prime Rate as defined in
Section 5(a)(i) hereof. Subject to the provisions of Section 5(c) hereof,
interest charged under this subsection (b) shall be added to the defaulted
amount on each Payment Date until the defaulted amount is repaid in full.
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(c) All payments to be made by the Borrower hereunder shall be
made without set-off or counterclaim and free and clear or and without
deduction for or on account of any present or future Taxes of any nature now or
hereafter imposed unless the Borrower is compelled by law to make payment
subject to any such Tax. In that event the Borrower shall pay to the Bank such
additional amounts as may be necessary to insure that the Bank receives a net
amount which the Bank would have received had payment not been made subject to
such Tax.
(d) If the Credit Facility or any part thereof is, for any reason
whatsoever, prepaid or repaid on a day other than a Payment Date, the Borrower
shall pay to the Bank on request such amount or amounts as may be necessary to
compensate the Bank for any loss or premium or penalty incurred by it in
respect of the liquidation or reemployment of funds borrowed for the purpose of
maintaining such Facility.
13. CALCULATION
All interest, commission and any other payments hereunder of an annual
nature shall accrue from day to day and be calculated on the actual number of
days elapsed and on the basis of a 365 or 366 day year, as appropriate.
14. EVENTS OF DEFAULT
Upon notice from the Bank to the Borrower, the obligations of the Bank
hereunder shall terminate forthwith and any amounts outstanding under this
Restated Agreement and the Note (including interest accrued thereon) shall
become immediately repayable (together with any compensatory amounts necessary)
if any of the following events of default ("Events of Default") has occurred
under this Restated Agreement:
(a) If the Borrower fails to pay any sum due hereunder on the due
date.
(b) If the Borrower defaults in the due performance and observance
of any of the terms, covenants, undertakings and conditions on its part
contained herein or in the Security Documents and such default continues
unremedied for a period of 10 days.
(c) If any representation made by the Borrower in this Restated
Agreement or any notice, certificate, or statement delivered or made pursuant
hereto or under the Security Documents proves to be incorrect, inaccurate or
misleading in any material manner when made.
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(d) If a default is declared under any of the Security Documents.
(e) If a distress or other execution is levied upon, or against
any substantial part of the property of the Borrower and is not discharged
within 15 days.
(f) If the Borrower is unable to or admits in writing its
inability to pay their debts as they mature, or makes a general assignment for
the benefit of its creditors.
(g) If any proceedings are commenced in, or any order or judgment
is given by, any competent court for the liquidation, winding up or
reorganization of the Borrower or any order shall be made by any competent
court or resolution passed by the Borrower for the appointment of a receiver or
a similar functionary for all or a substantial part of its assets, save for the
purpose of amalgamation, reorganization or merger not involving insolvency the
terms of which shall have received the prior written approval or the Bank, and
as otherwise permitted herein.
(h) If the Borrower ceases or threatens to cease to carry on its
business or disposes or threatens to dispose of a substantial part of its
business, properties, or assets or the same are seized or appropriated for any
reason and not released within 30 days.
(i) If any license, consent, permission or approval required in
connection with this Restated Agreement or any Security Document is revoked,
terminated or modified in a manner which would materially restrict or limit the
operation of any property owned or operated by the Borrower.
(j) Default by the Borrower under any other agreement or indenture
for the borrowing of money or the guarantee of a third party's obligations.
(k) If Nicholas N. Carter shall cease to be President of the
Borrower.
Provided, however, that notwithstanding anything to the contrary in
this Restated Agreement, in the event the Borrower has cured any Event of
Default prior to the Bank having given notice of acceleration of the amounts
owed under this Restated Agreement with respect to such Event of Default, then
such Event of Default shall be deemed not to have occurred and the Bank shall
not be entitled to accelerate the Borrower's payment obligations hereunder.
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15. NOTICES AND CORRESPONDENCE
(a) Except as otherwise provided in this Section 16, all notices,
requests, consents, demands and other communications provided for or permitted
hereunder shall be effective when duly deposited in the mails, certified,
return receipt requested, or delivered to Federal Express or similar courier
company or transmitted by telex or telefax, addressed to the respective party
at the address set forth below, except that notices to the Bank shall not be
effective until received.
Bank: Den norske Bank ASA, Representative Office
333 Clay Street, Suite 4890
Houston, Texas 77002
Telefax No. (713) 757-1167
Attention: Byron Cooley
with a copy to
Den norske Bank ASA, New York Branch
200 Park Avenue, 31st Floor
New York, New York 10166-0396
Telefax No. (212) 681-4123
Attention: Customer Service
Borrower: South Hampton Refining Company
Highway 418
Silsbee, Texas 77656
Telefax No.: (409) 385-2453
Attention: President
(b) Either of the parties hereto may change its respective address
by notice in writing given to the other party to this Restated Agreement.
(c) All information required to be provided by the Borrower to the
Bank pursuant to Section 9(b) above shall be sent to the Bank at the above
Houston address by first class U.S. mail and to the Oslo address by first class
air mail.
(d) Time is of the essence of this Restated Agreement but no
failure or delay on the part of the Bank to exercise any power or right under
this Restated Agreement shall operate as a waiver thereof or preclude the
exercise of any other power or right. The remedies provided herein are
cumulative, and are not exclusive of any remedies provided by law.
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16. GOVERNING LAW AND JURISDICTION
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK AND THE BORROWER HEREBY IRREVOCABLE SUBMITS
TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL
COURTS LOCATED IN NEW YORK.
17. FINAL AGREEMENT
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES, COMPLETELY REPLACES CREDIT AGREEMENT REFERRED TO HEREIN, AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE
PARTIES.
18. COUNTERPARTS
The Agreement shall be executed in any number of counterparts each of
which, when so executed, shall be deemed an original, but all such counterparts
shall constitute but one and the same instrument.
IN WITNESS whereof the parties hereto have caused this Agreement to be
duly executed by their duly authorized representatives.
SOUTH HAMPTON REFINING COMPANY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
DEN NORSKE BANK ASA
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
23
<PAGE> 26
EXHIBIT A TO AMENDED AND
RESTATED CREDIT AGREEMENT
SOUTH HAMPTON REFINING COMPANY
PROMISSORY NOTE
October 15, 1996 USD 1,965,000.00
FOR VALUE RECEIVED, SOUTH HAMPTON REFINING COMPANY (herein called the
"Undersigned") hereby promises to pay to Den norske Bank ASA, or order, on or
before December 31, 1998 on demand, ONE MILLION NINE HUNDRED SIXTY-FIVE
THOUSAND AND NO/100 DOLLARS OF THE UNITED STATES OF AMERICA (USD 1,965,000.00)
and to pay interest on the unpaid portion of said principal sum outstanding
from time to time, as hereinafter provided.
Principal and Interest
1.1 (a) Interest on this Note shall be payable at the times and the
rates as provided in Section 5 of the Amended and Restated Credit Agreement
(the "Restated Credit Agreement") dated October 15, 1996, between the
Undersigned and the payee hereof.
(b) In case any payment of principal or interest is not paid when
due, additional interest at the rate determined as provided in Section 13(b) of
the Restated Credit Agreement shall be payable on all overdue principal and, to
the extent that the same may be lawful, on all overdue interest. 1.2
Interest shall be calculated on the outstanding principal amounts and on the
basis of the actual number of days and a year of 365 or 366 days, as
appropriate.
<PAGE> 27
1.3 The principal of this Note shall be payable as provided in Section 6
of the Restated Credit Agreement.
SECURITY
2.1 This Note is issued under and pursuant to the Restated Credit
Agreement and is, in part, a renewal, restructure and rearrangement of the
indebtedness evidenced by the promissory note dated March 3, 1988 from the
Undersigned to the payee of this Note. Reference is hereby made to the Restated
Credit Agreement for a description of the security of this Note, the nature and
extent of the security afforded thereby and the rights of the Undersigned and
the holder hereof with respect to such security. Payment of this Note may be
demanded by the holder hereof prior to the maturity of this Note under certain
circumstances and conditions, in the manner, and with the effect, provided in
the Restated Credit Agreement and the Security Documents described therein.
MISCELLANEOUS
3.1 All parties hereto, including endorsers hereof, hereby waive
presentment for payment, demand, protest and notice of protest and non-payment
hereof and hereby consent that any and all securities or other property, if
any, held by the holders hereof at any time as security for this Note may be
exchanged, released or surrendered and that the time of payment of this Note
may be extended, all in the sole discretion of the holder hereof and without
notice and
2
<PAGE> 28
without affecting in any manner the liability of the parties hereto.
3.2 No course of dealing between the Undersigned and the holder hereof in
exercising any rights hereunder shall operate as a waiver of any right of any
holders except to the extent expressly waived in writing by such holder.
3.3 Whenever any payment to be made hereunder shall be due on a Saturday,
Sunday or public holiday under the laws of the place where payment is to be
made pursuant to the Restated Credit Agreement or other day on which banking
institutions at such place are not open for business, such payments shall be
made on the next day on which such banking institutions are open for business
after such holiday.
3.4 Any notice to be given pursuant to this Note shall be given in
accordance with Section 16 of the Restated Credit Agreement.
IN WITNESS WHEREOF, the Undersigned has caused this Note to be duly executed
the day and year first above written.
SOUTH HAMPTON
REFINING COMPANY
By:
-----------------------
Name:
---------------------
Title:
--------------------
3
<PAGE> 29
EXHIBIT B TO AMENDED AND
RESTATED CREDIT AGREEMENT
BORROWING BASE CERTIFICATE
1. Cash in Cash Collateral Accounts USD_____________________
90% USD_____________________
2. Eligible Accounts Receivable* USD_____________________
80% USD______________________
3. Inventory (at market price)*
Raw materials USD______________________
Finished products USD______________________
60% USD______________________
5. Total 1, 2 and 3 USD______________________
6. Outstanding to DnB USD______________________
Certified as true and correct:
SOUTH HAMPTON REFINING COMPANY
By:
----------------------------
Title:
-------------------------
Date: 199
----------------------, ---
* Detailed listing attached
<PAGE> 30
RATIFICATION OF SECURITY AGREEMENT
This Ratification of Security Agreement ("Ratification") is made and
entered into as of the ____ day of ________, 1996 by and between South Hampton
Refining Company, a Delaware corporation ("Borrower") and DEN NORSKE BANK ASA,
a Norwegian bank ("Bank" or "Secured Party"). For and in consideration of the
mutual covenants and agreements herein contained, Borrower and Secured Party
hereby ratify as of the date of this Ratification that certain Security
Agreement (the "Security Agreement") between Borrower and Secured Party dated
as of the 14th day of January, 1985, relating to the loan by the Bank to the
Borrower as more fully described herein.
WHEREAS, Borrower and Bank entered into that certain Credit Agreement
dated March 3, 1988 (as amended from time to time, the "1988 Credit
Agreement");
WHEREAS, Borrower and Bank executed the Amended and Restated Credit
Agreement of even date herewith (the "Restated Credit Agreement"), amending and
restating the 1988 Credit Agreement, to, among other things, provide for a
revolving loan facility in an aggregate principal amount not to exceed ONE
MILLION NINE HUNDRED SIXTY-FIVE THOUSAND AND NO/100 DOLLARS ($1,965,000.00)
(the "Loan") and Secured Party has required execution of this Ratification to
confirm the continued application of the Security Agreement to the Loan made
pursuant to the Restated Credit Agreement.
NOW THEREFORE, Borrower and Secured Party agree as follows:
The Security Agreement shall remain unchanged and the terms,
conditions, representations, warranties, and covenants of said
Security Agreement are true as of the date hereof, are ratified and
confirmed in all respects and shall be continuing and binding upon
Borrower and
<PAGE> 31
shall be fully applicable to all loans made pursuant to the Restated
Credit Agreement, including, without limitation, the Loan.
This Ratification shall be deemed to be a contract under and subject
to, and shall be construed for all purposes in accordance with the laws of the
State of Texas.
IN WITNESS WHEREOF, the parties have caused this Ratification to be
executed by their duly authorized officers as of the ____ day of
__________, 1996.
SOUTH HAMPTON REFINING COMPANY
By:
-----------------------------
Name:
Title: President
DEN NORSKE BANK ASA
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 32
RATIFICATION OF PLEDGE AGREEMENT
This Ratification of Pledge Agreement ("Ratification") is made and
entered into as of the ____ day of ________, 1996 by and between American
Shield Refining Company, a Delaware corporation ("Pledgor") and DEN NORSKE BANK
ASA, a Norwegian bank ("Bank" or "Pledgee"). For and in consideration of the
mutual covenants and agreements herein contained, Pledgor and Pledgee hereby
ratify as of the date of this Ratification that certain Pledge Agreement and
Irrevocable Proxy ("Pledge") between Pledgor and Pledgee dated as of the 13th
day of December, 1990, relating to the loan in an amount of up to $1,965,000.00
to South Hampton Refining Company, a Texas corporation ("Borrower").
WHEREAS, Borrower and Bank entered into that certain Credit Agreement
dated March 3, 1988 (as amended from time to time, the "1988 Credit
Agreement");
WHEREAS, Borrower and Bank executed the Amended and Restated Credit
Agreement of even date herewith (the "Restated Credit Agreement"), amending and
restating the 1988 Credit Agreement, to, among other things, provide for a
revolving loan facility in an aggregate principal amount not to exceed ONE
MILLION NINE HUNDRED SIXTY-FIVE THOUSAND AND NO/100 DOLLARS ($1,965,000.00)
(the "Loan") and Pledgee has required execution of this Ratification to confirm
the
<PAGE> 33
continued application of the Pledge Agreement to the Loan made pursuant to the
Restated Credit Agreement.
NOW THEREFORE, Pledgor and Pledgee agree as follows:
The Pledge Agreement shall remain unchanged and the terms,
conditions, representations, warranties, and covenants of said Pledge
Agreement are true as of the date hereof, are ratified and confirmed
in all respects and shall be continuing and binding upon Pledgor and
shall be fully applicable to all loans made pursuant to the Restated
Credit Agreement, including, without limitation, the Loan.
This Ratification shall be deemed to be a contract under and subject
to, and shall be construed for all purposes in accordance with the laws of the
State of Texas.
IN WITNESS WHEREOF, the parties have caused this Ratification to be
executed by their duly authorized officers as of the ____ day of __________,
1996.
AMERICAN SHIELD REFINING COMPANY
By:
-----------------------------
Name:
Title: President
DEN NORSKE BANK ASA
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
2
<PAGE> 34
RATIFICATION OF ASSIGNMENT OF INSURANCES
This Ratification of Assignment of Insurances ("Ratification") is made
and entered into as of the ____ day of ________, 1996 by and among South
Hampton Refining Company, a Delaware corporation ("Borrower"), Gulf State Pipe
Line Company, Inc. ("Gulf State") and DEN NORSKE BANK ASA, a Norwegian bank
("Bank" or "Assignee"). For and in consideration of the mutual covenants and
agreements herein contained, Borrower, Gulf State and Assignee hereby ratify as
of the date of this Ratification that certain Assignment of Insurances (the
"Assignment") among Borrower, Gulf State and Assignee dated as of the 3rd day
of March, 1988, relating to the loan by the Bank to the Borrower as more fully
described herein.
WHEREAS, Borrower and Bank entered into that certain Credit Agreement
dated March 3, 1988 (as amended from time to time, the "1988 Credit
Agreement");
WHEREAS, Borrower and Bank executed the Amended and Restated Credit
Agreement of even date herewith (the "Restated Credit Agreement"), amending and
restating the 1988 Credit Agreement, to, among other things, provide for a
revolving loan facility in an aggregate principal amount not to exceed ONE
MILLION NINE HUNDRED SIXTY-FIVE THOUSAND AND NO/100 DOLLARS ($1,965,000.00)
(the "Loan") and Assignee has required execution of this Ratification to
confirm the continued application of the Security Agreement to the Loan made
pursuant to the Restated Credit Agreement.
<PAGE> 35
NOW THEREFORE, Borrower, Gulf State and Assignee agree as follows:
The Assignment shall remain unchanged and the terms,
conditions, representations, warranties, and covenants of said
Assignment are true as of the date hereof, are ratified and confirmed
in all respects and shall be continuing and binding upon Borrower and
Gulf State and shall be fully applicable to all loans made pursuant to
the Restated Credit Agreement, including, without limitation, the
Loan.
This Ratification shall be deemed to be a contract under and subject
to, and shall be construed for all purposes in accordance with the laws of the
State of Texas.
IN WITNESS WHEREOF, the parties have caused this Ratification to be
executed by their duly authorized officers as of the ____ day of __________,
1996.
SOUTH HAMPTON REFINING COMPANY
By:
--------------------------------
Name:
Title: President
GULF STATE PIPE LINE COMPANY, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
DEN NORSKE BANK ASA
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 36
SUBORDINATION AGREEMENT
This SUBORDINATION AGREEMENT, dated this 15th day of October, 1996,
among Saudi Fal, a limited liability company incorporated under the laws of the
Kingdom of Saudi Arabia ("Saudi Fal"), South Hampton Refining Company, a
company organized and existing under the laws of the State of Texas (the
"Borrower"), Texas Oil & Chemical Co. II, Inc., a company organized and
existing under the laws of the State of Texas ("TOCCO"), Arabian Shield
Development Company ("ASDC"), a company organized and existing under laws of
the State of Delaware, American Shield Refining Company ("ASRC"), a company
organized and existing under the laws of the State of Delaware, Gulf State
Pipeline Company ("Gulf State"), a company organized and existing under the
laws of the State of Texas and Den Norske Bank, ASA, a Norwegian bank ("DnB").
RECITALS
A. Saudi Fal is the owner and holder of certain indebtedness
executed by the Borrower and payable to Saudi Fal as more further evidenced by
a Second Lien Promissory Note dated the 15th day of October, 1996, attached
hereto as Exhibit A and made a part hereof for all purposes (the "Saudi Fal
Note");
B. TOCCO is the owner of all of the issued and outstanding common
stock of Borrower;
C. Pursuant to the Amended and Restated Credit Agreement for an
amount up to $1,965,000 executed by and between DnB and Borrower (the "Restated
Credit Agreement"), DnB has agreed to refinance, renew, extend and restructure
its existing loan to Borrower;
D. In order to induce DnB to enter into the Restated Credit
Agreement, Saudi Fal, Borrower, TOCCO, ASDC, ASRC and Gulf State have agreed to
enter into this Subordination Agreement;
E. Pursuant to 3.2k of the Restated Credit Agreement, DnB has
provided that as a condition precedent to the execution of the Amended Credit
Agreement and the extension restructuring of its existing loan to Borrower that
Saudi Fal, Borrower, TOCCO, ASDC, ASRC and Gulf State execute this
Subordination Agreement;
F. Saudi Fal shall subordinate all amounts owed by Borrower or
TOCCO to all amounts due to DnB under the Restated Credit Agreement, and Saudi
Fal acknowledges and agrees that payments under the Saudi Fal Note shall be
limited to the Permitted Distributions as defined in Section 9(d) of the
Restated Credit Agreement;
G. Saudi Fal further agrees that notwithstanding the terms of the
Saudi Fal Note, the Saudi Fal Note shall not be considered in default even if
payments principal or interest
1
<PAGE> 37
are not made as required under the Saudi Fal Note if limited by the Permitted
Distributions as set forth in the Restated Credit Agreement; and
H. Saudi Fal acknowledges that it is to its benefit for Bank
refinance, renew, extend and restructure the DnB Loan to Borrower.
NOW, THEREFORE, in consideration of the DnB refinancing, renewing,
extending and restructuring the DnB Loan to Borrower and in further
consideration of the recitals set forth above which are made a part of this
Subordination Agreement as if fully set forth below, the parties hereto agree
as follows:
1. Subordination. (a) Saudi Fal agrees that no payments of principal
or interest shall be made to Saudi Fal under the Saudi Fal Note or by Borrower
or TOCCO to Saudi Fal under any separate indebtedness unless all payments of
any amounts including principal and interest that are due under the Restated
Credit Agreement have been paid by Borrower to DnB. Saudi Fal subordinates all
amounts owed by it by the Borrower or TOCCO to all amounts outstanding under
the Restated Credit Agreement. As stated above, Saudi Fal agrees that
notwithstanding the terms of the Saudi Fal Note, the Saudi Fal Note shall not
be in default even if payments of principal or interest are not paid as
required under Saudi Fal Note if limited by the Permitted Distributions set
forth in the Restated Credit Agreement.
2. Representations and Warranties. Saudi Fal and TOCCO hereby
represents and warrants as follows:
(a) That each is a corporation duly organized, validly existing
and in good standing under the laws of the state, nation or
kingdom of its incorporation and are authorized to do business
in the jurisdictions in which its ownership of property or
conduct of business legally requires such authorization, and
each has full power, authority and legal right to own its
properties and assets and to conduct its business as presently
conducted or proposed to be conducted.
(b) It has full power, authority and legal right to execute
deliver, and to perform and observe the provisions of this
Agreement.
(c) The execution, delivery and performance by each of this
Agreement has been duly authorized by all necessary corporate
or company action. This Agreement constitutes the legal,
valid and binding obligation of each, and is enforceable
against each in accordance with its terms.
3. Negative Covenants. So long as any part of the DnB Loan shall
remain unpaid:
(a) Saudi Fal will subordinate any security interest, pledge, deed
of trust, indenture or assignment that it may have as to any
assets of Borrower to the security interests of DnB identified
in the Restated Credit Agreement.
2
<PAGE> 38
(b) TOCCO will not sell or otherwise dispose of, or grant any
option with respect to or pledge or create or permit to exist
any lien, security interest, or other charge or encumbrance
upon or with respect to any of the shares of capital stock of
Borrower owned by TOCCO except for the creation of the pledge
of capital stock that may be required by or as evidenced in
the Restated Credit Agreement in favor of DnB.
(c) No funds from either the Borrower or TOCCO shall be
transferred to Saudi Fal or from the Borrower to TOCCO at any
time prior to the execution of this Agreement or hereafter in
violation of the terms of the Restated Credit Agreement.
(d) No funds of the Borrower will be transferred to Saudi Fal or
to TOCCO other than to pay ordinary and necessary
administrative expenses directly related to the operation of
the Borrower's refinery in Silsbee, Hardin County, Texas.
4. Consent by DnB to Subordinated Security Interest. DnB consents to
lending by Saudi Fal to Borrower of funds up to the face amount of the Saudi
Fal Note. DnB also consents to the execution of the Saudi Fal Note. Although
no financing statements, security agreements or deed of trusts covering the
physical assets of Borrower and Gulf State has yet been executed or recorded,
DnB consents to the execution and recording of such financing statements,
security agreements or deed of trusts to secure the Saudi Fal Note, provided,
however, that any such financing statements, security agreements and deeds of
trust executed to cover any such physical assets shall be subordinate to the
liens securing the indebtedness of Borrower to DnB which is subject to the
Restated Credit Agreement, and that no foreclosure proceedings shall be
instituted by the holder of the Saudi Fal Note against any part of the physical
assets of Borrower or Gulf State so long as the indebtedness to DnB is
outstanding, without the prior written consent of DnB. The limitation herein
against foreclosure proceedings without the consent of DnB shall not limit any
right the holder of the Saudi Fal Note may have under the terms of the Saudi
Fal Note an applicable law to seek a judgment on the Saudi Fal Note and, in
accordance with law, to abstract and enforce the collection of any judgment
obtained on the Saudi Fal Note, except, that, prior to five (5) years after the
date of final maturity of the Saudi Fal Note, no writ of execution or
garnishment or other judgment collection process shall be directed against any
property, real or personal, against or in which DnB has a lien or security
interest. DnB agrees that if it commences a judicial or non-judicial
proceeding to enforce its security interest, Saudi Fal shall have the right to
either join such an action or commence its own action to protect its right.
5. Restated Credit Agreement. Saudi Fal and TOCCO acknowledge
receipt of a copy of the Restated Credit Agreement, in execution form and
hereby consent and agree to the terms and conditions of the Restated Credit
Agreement.
3
<PAGE> 39
6. Amendments of Agreement. No amendment or waiver of this Agreement
nor consent to any departure by Saudi Fal or TOCCO here from shall in any event
be effective unless the same are written amendments signed by the duly
authorized representative DnB, and then such waiver or consent shall be
effective only as to the specific incidence or the specific purpose for which a
written amendment has been given.
7. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telegraphic or
telefacsimile communication), and if to the parties as set forth below:
Den Norske TOCCO Saudi Fal
333 Clay Street P.O. Box 1636 Fal Holdings Arabia Co., Ltd.
Suite 4890 Silsbee, TX 77656 Al Aruba Road
Houston, TX 77002 P.O. Box 4900
Riyadh, 11412 Saudi Arabia
or as to any of the above-named parties at such other address as may be
designated by such party in a written notice to the all other parties to this
Agreement. All such notices and other communications shall, when mailed,
telexed or telefacsimilied, be effective, when deposited in the mails or sent
by telex or telefacsimile, addressed as herein stated.
8. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Texas.
EXECUTED BY EACH OF THE PARTIES TO THIS AGREEMENT AS NAMED ABOVE ON
SEPARATE ORIGINAL SIGNATURE PAGES WHICH THE PARTIES AGREE SHALL BE AFFIXED TO
AND DEEMED TO BE AN ORIGINAL OF THIS MODIFICATION AGREEMENT.
SOUTH HAMPTON REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______day of______,
1996, by ____________________.
--------------------------------------
Notary Public, State of Texas
4
<PAGE> 40
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
ARABIAN SHIELD DEVELOPMENT COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the ______ day of______,
1996, by ________________________.
--------------------------------------
Notary Public, State of Texas
5
<PAGE> 41
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
AMERICAN SHIELD REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the _______day of______,
1996, by _________________________.
--------------------------------------
Notary Public, State of Texas
6
<PAGE> 42
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
TEXAS OIL & CHEMICAL CO. II, INC.
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ________day of_____,
1996, by ________________________.
------------------------------------
Notary Public, State of Texas
7
<PAGE> 43
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
GULF STATE PIPELINE COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ________day
of______, 1996, by ________________________.
--------------------------------------
Notary Public, State of Texas
8
<PAGE> 44
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
SAUDI FAL
By:
------------------------------------
Its:
------------------------------------
9
<PAGE> 45
EXECUTION PAGE TO
SUBORDINATION AGREEMENT
DEN NORSKE BANK, ASA
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF
-----------------------
This instrument was acknowledged before me on the _______day of______,
1996, by _______________________.
-------------------------------
Notary Public, State of Texas
10
<PAGE> 46
TERMINATION AGREEMENT
This Termination Agreement ("Agreement") is made as of ____________,
1996, by and among Den norske Bank ASA ("DnB") and Saudi Fal,
a Saudi Arabian company ("Saudi Fal").
WHEREAS, DnB and Saudi Fal entered into an Intercreditor Agreement
dated ______________ (together with any prior agreements, or amendments,
modifications or extensions thereof, the "Intercreditor Agreement"); and
WHEREAS, DnB, Saudi Fal and American Shield Refining Company have
agreed to the terms of a new intercreditor agreement respecting the relative
rights of the parties relating to debts owed them by South Hampton Refining
Company (the "New Intercreditor Agreement"); and
WHEREAS, DnB and Saudi Fal desire to terminate their respective rights
and obligations under the Intercreditor Agreement.
NOW THEREFORE, for and in consideration of the mutual promises set
forth herein, the receipt and legal sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. By their execution of this Agreement, the parties hereto agree
to terminate the Intercreditor Agreement, and the Intercreditor Agreement, and
all rights and obligations thereunder, are hereby terminated. Upon execution
of this Agreement by both parties, DnB shall execute and deliver to Saudi Fal,
and Saudi Fal shall execute and deliver to DnB, the New Intercreditor
Agreement.
2. The parties hereby release each other from all claims, causes
of action, debts, liabilities and obligations with respect to the Intercreditor
Agreement and the relationship created thereunder except as specifically
otherwise provided by this Agreement; it being understood that this Agreement
constitutes a complete termination of the Intercreditor Agreement and shall in
no way be construed as an amendment, modification, extension or novation
thereof.
3. Each party shall indemnify and hold harmless the other from
any and all obligations, claims, demands or liabilities now existing or
hereafter arising out of the acts or omissions of that party, its agents and
employees with respect to the Intercreditor Agreement.
4. This Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and except as herein provided there
are no other oral or written understandings
<PAGE> 47
or agreements between the parties hereto relating to the subject matter hereof.
5. This Agreement shall be binding upon the parties and their
respective agents, representatives, employees, successors and assigns.
6. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Texas.
IN WITNESS WHEREOF, the parties have duly executed this Termination
Agreement as of the date stated above.
SAUDI FAL
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
DEN NORSKE BANK ASA
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
<PAGE> 48
RATIFICATION OF SUBORDINATION AGREEMENT
This Ratification of Subordination Agreement (the "Ratification")
dated this 15th day of October, 1996, is executed by and among Arabian Shield
Development Company ("ASDC"), a company organized and existing under laws of
the State of Delaware, American Shield Refining Company ("ASRC"), a company
organized and existing under the laws of the State of Delaware, South Hampton
Refining Company, a company organized and existing under the laws of the State
of Texas (the "Borrower"), Texas Oil & Chemical Co. II, Inc., a company
organized and existing under the laws of the State of Texas ("TOCCO"), Gulf
State Pipeline Company ("Gulf State"), a company organized and existing under
the laws of the State of Texas and Den Norske Bank, ASA, a Norwegian bank
("DnB").
RECITALS
A. DnB has agreed to refinance, renew, extend and restructure a loan
of $1,965,000 to Borrower as evidenced by that certain Amended and Restated
Credit Agreement executed by DnB and Borrower dated the 15th day of October,
1996 (the "Restated Credit Agreement").
B. DnB has agreed to refinance, renew, extend and restructure the DnB
Loan in consideration for the ratification by ASDC, ASRC, Borrower, TOCCO and
Gulf State of their obligations and agreements as set forth in that certain
Subordination Agreement dated among the parties hereto as of July 28, 1989, and
attached hereto as Exhibit A and made a part hereof for all purposes (the
"Subordination Agreement").
C. DnB has further agreed to refinance, renew, extend and restructure
the DnB Loan and has acknowledged the indebtedness of Borrower to ASRC as more
fully set forth in that certain renewal, extension and modification agreement
between Borrower and ASRC dated the 15th day of October, 1996 (the "ASRC
Modification Agreement").
D. DnB has further agreed to refinance, renew, extend and restructure
the DnB Loan and has acknowledged the execution by Borrower of a certain
indebtedness to Saudi Fal, a limited liability company organized and existing
under the laws of the Kingdom of Saudi Arabia ("Saudi Fal") in the amount of
$1,945,773.49 as evidenced by that certain Second Lien Promissory Note executed
by Borrower to Saudi Fal dated the 15th day of October, 1996, and secured by a
Subordinated Lien on assets of Borrower.
NOW, THEREFORE, in consideration of DnB refinancing, renewing
extending and restructuring the DnB Loan to Borrower and in further
consideration of the recital set forth above which are made a part of this
Ratification of Subordination Agreement as if fully set forth below, the
parties hereto agree as follows:
1. Ratification of Subordination Agreement. ASDC, ASRC, Borrower,
TOCCO and Gulf State hereby ratify and confirm the terms and conditions of the
Subordination
1
<PAGE> 49
Agreement while acknowledging the indebtedness of Borrower to ASRC is now
evidenced by a Third Lien Promissory Note dated the 15th day of October, 1996.
2. Saudi Fal Indebtedness. ASDC, ASRC, Borrower, TOCCO and Gulf
State hereby acknowledge the indebtedness of Borrower to Saudi Fal as now
evidenced by a certain Second Lien Promissory Note dated the 15th day of
October, 1996, secured by the assets of the Corporation, but subordinated to
the security interest of DnB.
3. Limitation Permitted Distribution. ASDC, ASRC, Borrower, TOCCO
and Gulf State acknowledge and agree that payments under the ASRC Note shall be
limited to the Permitted Distributions as specified in Section 9(d) of the
Restated Credit Agreement. ASRC agrees that notwithstanding the terms of the
ASRC Note, the ASRC Note will not be in default even if payments of principal
or interest are not made under the ASRC Note as limited by the Permitted
Distributions set forth in the Restated Credit Agreement.
4. Amendment. No amendment of this Ratification or of the
Subordination Agreement shall be effective except and until executed in writing
by all the parties hereto and such amendment shall become effective only in the
specific instance for any specific purpose that such may be given.
5. Counterparts. This Modification Agreement shall be executed
in multiple counterparts, all of which shall be considered a single document.
Each of the parties to this Agreement named above shall execute this
Modification Agreement on separate original signature pages, which parties
agree shall be affixed to and deemed to be an original.
Executed by the parties hereto and delivered as of the date first
above written.
SOUTH HAMPTON REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
2
<PAGE> 50
EXECUTION PAGE TO
RATIFICATION OF SUBORDINATION AGREEMENT
ARABIAN SHIELD DEVELOPMENT COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
3
<PAGE> 51
EXECUTION PAGE TO
RATIFICATION OF SUBORDINATION AGREEMENT
AMERICAN SHIELD REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
4
<PAGE> 52
EXECUTION PAGE TO
RATIFICATION OF SUBORDINATION AGREEMENT
TEXAS OIL & CHEMICAL CO. II, INC.
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
5
<PAGE> 53
EXECUTION PAGE TO
RATIFICATION OF SUBORDINATION AGREEMENT
GULF STATE PIPELINE COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
6
<PAGE> 54
EXECUTION PAGE TO
RATIFICATION OF SUBORDINATION AGREEMENT
DEN NORSKE BANK, ASA
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF _____________
This instrument was acknowledged before me on the ______day of_______,
1996, by ________________________________.
-------------------------------------
Notary Public, State of Texas
7
<PAGE> 55
SOUTH HAMPTON REFINING COMPANY
CERTIFICATE OF SECRETARY
I, ________________________________________, Secretary of South
Hampton Refining Company (the "Borrower") do hereby certify as follows:
1) At the meeting of the Board of Directors of the Borrower duly
and legally called and held on the ______ day of
_______________________, 19________ at which meeting in quorum
with the President voting throughout, the Resolutions attached
hereto as Exhibit A were duly adopted, and such Resolutions
are now in full force and effect and have not been amended,
modified, or revoked.
2) Attached hereto as Exhibit B is a true, correct and complete
copy of the Bylaws of Borrower as in effect at all times since
the date of the Resolution set forth in Exhibit A attached
hereto and from and after such date to the dates hereof.
IN WITNESS HEREOF, I have set my hand this ____ day of _________1996.
---------------------------
SECRETARY
I, _____________________________________, President of Borrower do
hereby certify that _________________________ is the duly elected and
qualified Secretary of the Borrower and that the signature above is his
genuine signature.
IN WITNESS HEREOF, I have set my hand this ____ day of
___________________, 1996.
----------------------------
PRESIDENT
1
<PAGE> 56
SOUTH HAMPTON REFINING COMPANY
CERTIFICATE OF SECRETARY
I, Scott Young, Secretary of South Hampton Refining Company (the
"Borrower"), do hereby certify as follows:
1. Attached hereto as Exhibit $ is a true, correct and complete copy of
the Bylaws of the Borrower as in effect at all times since June 9, 1987 to and
including the date hereof.
2. At a meeting of the Board of Directors of the Borrower, duly and
legally called and held on the 29th day of February, 1988, at which meeting a
quorum was present and voting throughout, the Resolutions attached hereto as
Exhibit A were duly adopted, and such Resolutions are now in full force and
effect and have not been amended, modified or revoked.
IN WITNESS WHEREOF. I have hereunto set my hand this
day of February, 1988.
Scott Young, Secretary
I, the under signed President of the Company , do hereby certify that
Scott Young is the duly elected and qualified Secretary of the Company and that
the signature above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto set my hand this day of March, 1988.
Nicholas Carter
1
<PAGE> 57
EXHIBIT A
WHEREAS, the Board of Directors deems it advisable and in the be s t
interest of the Corporation to enter into a Credit Agreement by and among the
Corporation and Den norske Creditbank (the "Bank");
NOW THEREFORE, BE IT RESOLVED, that the Corporation enter into the Credit
Agreement with the Bank as lender to loan up to $5,156,694.43 to Corporation;
RESOLVED, that such borrowing be evidenced by the Promissory Note to be
executed by the Corporation as maker, to be delivered pursuant to a Credit
Agreement dated as of February 29, 1988, between the Corporation and the Bank
(the "Credit Agreement"), and the form of Credit Agreement (and all exhibits
thereto) presented to and reviewed by the Board of Directors be and it hereby
is, authorized and approved in all respects, and the President, Secretary or
any other officer of the Corporation hereby is authorized to execute and
deliver the aforesaid Credit Agreement on behalf of the Corporation, with
such Changes, additions, amendments and deletions as any such officer shall
deem appropriate, the authorization of the same by the Corporation to be
conclusively evidenced by such execution and delivery.
RESOLVED, that pursuant to the terms of the Credit Agreement, the
President, Secretary or any officer of the Corporation be, and hereby is,
authorized and empowered to execute and deliver to the Bank on the
Corporation's behalf all of the Security Documents, as such term is defined in
the Credit Agreement, with such additions, deletions and modifications to the
Security Documents as any such officer shall deem appropriate, the
authorization and approval of the same by the Corporation to be conclusively
evidenced by such execution and delivery.
RESOLVED, that the President, Secretary or any other officer of the
Corporation be, and hereby is, authorized and empowered, in the name and on
behalf of the Corporation, to take or cause to be taken now or in the future,
all such action, and to sign, execute, verify, acknowledge, certify to, file
and deliver all such instruments, financing statements and documents, as shall
in
2
<PAGE> 58
the judgment of the President, .Secretary or any other officer of the
Corporation be necessary, desirable or appropriate in order to perform the
obligations of the Corporation under the Credit Agreement and the Security
Documents, to effect the aforesaid borrowing, and otherwise to effectuate the
purposes of the
foregoing resolutions.
3
<PAGE> 59
RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
This Renewal, Extension and Modification Agreement (the "Modification
Agreement") is entered into and effective as of this 15th day of October, 1996,
by and between Arabian Shield Development Company ("ASDC"), a company organized
and existing under laws of the State of Delaware, American Shield Refining
Company ("ASRC"), a company organized and existing under the laws of the State
of Delaware, South Hampton Refining Company, a company organized and existing
under the laws of the State of Texas (the "South Hampton"), Texas Oil &
Chemical Co. II, Inc., a company organized and existing under the laws of the
State of Texas ("TOCCO") and Gulf State Pipeline Company ("Gulf State"), a
company organized and existing under the laws of the State of Texas.
RECITALS
A. ASDC is the owner of all the issued and outstanding common stock
of ASRC.
B. ASRC is the owner of all the issued and outstanding common stock
of TOCCO.
C. TOCCO is the owner of all the issued and outstanding common stock
of South Hampton.
D. South Hampton is the owner of all the issued and outstanding
common stock of Gulf State.
E. South Hampton is a party to an Amended and Restated Credit
Agreement dated the 15th day of October, 1996, (the "Restated Credit
Agreement") for an amount of up to $1,965,000 provided to South Hampton by Den
Norske Bank, ASA ("DnB").
F. ASRC is the owner and holder of that certain Second Lien
Promissory Note dated July 28, 1989, in the original principal sum of $510,000
(the "ASRC Note").
G. The ASRC Note is a second lien promissory note secured by a second
lien, inferior only to the first lien of DnB, covering all physical assets of
South Hampton and Gulf State which second lien is evidenced by financing
statements, security agreements and deeds of trust covering all of such
physical assets of South Hampton and Gulf State, but with all foreclosure
rights under such security agreements and deeds of trust being expressly
subject to a Subordination Agreement entered into by the parties hereto and DnB
dated July 28, 1989 (the "Subordination Agreement") the terms and conditions of
which have been ratified by those parties by a Ratification of Subordination
Agreement dated as of the 15th day of October, 1996 (the "Ratification").
1
<PAGE> 60
H. South Hampton is indebted to Saudi Fal, a limited liability
company organized and existing under the laws of the Kingdom of Saudi Arabia
("Saudi Fal") in the amount of $1,945,773.49 (the "Saudi Fal Indebtedness").
I. The Saudi Fal Indebtedness is to be evidenced by a certain Second
Lien Promissory Note dated October 15, 1996, and to be secured by second lien
inferior only to the first lien of DnB covering all the physical assets of
South Hampton and Gulf State and which will be evidenced by one or more
financing statements, security agreements and deeds of trust covering all of
such physical assets, but with all foreclosure rights under such security
agreements and deeds of trust being made expressly subject to a Subordination
Agreement of even date herewith entered into by and among ASDC, ASRC, TOCCO,
South Hampton, Gulf State, Saudi Fal and DnB (the "Subordination Agreement").
J. In order to induce DnB to amend its Restated Credit Agreement with
South Hampton as more fully set forth in the Amended and Restated Credit
Agreement and in order to induce Saudi Fal to renew and extend the Saudi Fal
Note to South Hampton, ASRC has agreement to subordinate the repayment of its
indebtedness to both the DnB Note and the Saudi Fal Note.
K. The ASRC indebtedness now shall be evidenced by a Third Lien
Promissory Note dated the 15th day of October, 1996 (the "ASRC Note").
NOW, THEREFORE, IN CONSIDERATION Of DnB Refinancing, renewing,
extending and restructuring the DnB Loan to South Hampton, in consideration of
the renewal and extension by Saudi Fal of the Saudi Fal Note to South Hampton
and in further consideration of the recitals set forth above which are made a
part of this Modification Agreement as if fully set forth below, the parties
hereto agree as follows:
1. Renewal and Extension of Loan. ASRC and South Hampton hereby
covenant, contract and agree that the time for payment of the ASRC Note is
hereby extended to and shall hereafter be renewed and shall be due and payable
on or before December 31, 1998.
2. Modification in Loan Amount. ASRC and South Hampton covenant,
contract and agree that the outstanding principal balance of the ASRC Loan
shall be modified and increased to $1,694,605.08.
3. Security for ASRC Note. ASRC acknowledges and South Hampton
covenant, contract and agree that the ASRC Note will be secured by a third
lien, inferior to (i) the first lien of DnB as set forth in the Restated Credit
Agreement and (ii) the second lien of Saudi Fal as specified in the
Subordination Agreement, covering all physical assets of South Hampton and Gulf
State, but with all foreclosure rights under such security agreements and deeds
of trust made expressly subject to the Subordination Agreement of even date
herewith entered into among ASDC, ASRC, South Hampton, TOCCO, Gulf State and
DnB.
2
<PAGE> 61
4. Security for ASRC Note. The following security previously shown
as a subordinated second lien shall now be given to secure the ASRC Note and
shall be a third lien security interest against the assets of South Hampton and
said third lien security interest now acknowledge and as set forth in the
following:
a) Deed of trust given by Gulf State for the benefit of ASRC
recorded in Volume 740, Page 042 of the official public
records of real property of Hardin County, Texas.
b) Deed of trust given by Gulf State to ASRC recorded in Volume
221, Page 778 of the official public records of real property
of Hardin County, Texas.
c) Deed of trust given by South Hampton to ASRC recorded in
Volume 221, Page 791 of the official public records of real
property of Hardin County, Texas.
d) Deed of trust given by Gulf State to ASRC recorded in Volume
167, Page 432 of the official public records of real property
of Hardin County, Texas.
e) Certain security agreement executed by Gulf State to ASRC
granting a security interest in goods, inventory, equipment
and fixtures as referenced in Exhibit A attached thereto and
incorporated in for all purposes.
5. Limitation as to Permitted Distributions. ASRC acknowledges and
agrees that payments under the ASRC Note shall be limited to the Permitted
Distributions as defined in Section 9(d) of the Restated Credit Agreement.
ASRC agrees that notwithstanding the terms of the ASRC Note, the ASRC Note
shall not be in default even if payments of principal or interest are not made
as required under the ASRC Note if limited by the Permitted Distributions set
forth in the Restated Credit Agreement.
6. Acknowledgement of South Hampton. Except as amended as to the
maturity date of the ASRC Note and as to the outstanding principal balance of
the ASRC Note and subject to the change in the security interest hereby
evidenced, South Hampton covenants, contracts and agrees that all the terms and
conditions of the ASRC Note as renewed, extended and rearranged are hereby
ratified and confirmed and shall remain in full force and effect. South
Hampton acknowledges and agrees that the outstanding liens, security interest
and assignments created by the financing statements, security agreements and
deeds of trust hereinafter identified and securing the ASRC Note shall
hereafter be valid and subsisting third liens, security interest and
assignments.
7. Governing Law. The terms and provisions of this Modification
Agreement shall be governed by and construed in accordance with the laws of the
State of Texas, except to the extent preempted by the federal law.
3
<PAGE> 62
8. Counterparts. This Modification Agreement shall be executed
in multiple counterparts, all of which shall be considered a single document.
Each of the parties to this Agreement named above shall execute this
Modification Agreement on separate original signature pages, which parties
agree shall be affixed to and deemed to be an original.
SOUTH HAMPTON REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______ day of______,
1996, by _____________________________.
--------------------------------------
Notary Public, State of Texas
4
<PAGE> 63
EXECUTION PAGE TO
RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
ARABIAN SHIELD DEVELOPMENT COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the ______ day of______,
1996, by _____________________________.
--------------------------------------
Notary Public, State of Texas
5
<PAGE> 64
EXECUTION PAGE TO
RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
AMERICAN SHIELD REFINING COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF DALLAS
This instrument was acknowledged before me on the ______ day of______,
1996, by _____________________________.
--------------------------------------
Notary Public, State of Texas
6
<PAGE> 65
EXECUTION PAGE TO
RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
TEXAS OIL & CHEMICAL CO. II, INC.
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______ day of______,
1996, by _____________________________.
--------------------------------------
Notary Public, State of Texas
7
<PAGE> 66
EXECUTION PAGE TO
RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
GULF STATE PIPELINE COMPANY
By:
------------------------------------
Its:
-----------------------------------
STATE OF TEXAS
COUNTY OF HARDIN
This instrument was acknowledged before me on the ______ day of______,
1996, by _____________________________.
--------------------------------------
Notary Public, State of Texas
8
<PAGE> 67
SECOND LIEN PROMISSORY NOTE
$1,945,773.49 Silsbee, Texas October 15, 1996
FOR VALUE RECEIVED, the undersigned, South Hampton Refining
Company, a Texas corporation (the "Maker"), promises and agrees to pay to Saudi
Fal, a limited liability company incorporated under the laws of the Kingdom of
Saudi Arabia (the "Payee"), the principal sum of $1,945,773.49 in legal and
lawful money of the United States of America payable at its offices of Fal
Holdings Arabia Co., Ltd., Al Aruba Road, P.O. Box 4900, Riyadh, 11412 Saudi
Arabia or such other place or places as the holder hereof shall from time to
time designate in written notice to Maker. In addition to the principal sum
referred to above, Maker agrees to pay interest hereon from the date hereof
until maturity at a fluctuating rate per annum which shall from day to day be
equal to the lesser of (a) the Maximum Rate (as such term is hereinafter
defined), or (b) a rate (the "Contract Rate"), calculated on the basis of the
actual days elapsed but computed as if each year consisted of 365 days equal to
the sum of (i) the rate announced from time to time by Den Norske Bank, ASA, a
Norwegian Bank (the "Bank") as its prime lending rate in effect in its New
York, New York office, automatically fluxuating upward and downward with and at
the time of each such announcement without special notice to Maker or any other
persons plus (ii) one percent (1.00%). Notwithstanding the foregoing, interest
on this Note shall on no event exceed the Maximum Rate of nonuserious interest
allowed by law (as such term is hereinafter defined). If the Contract Rate at
any time shall exceed the Maximum Rate, the interest hereon, during the period
of time that the Contract Rate exceeds the Maximum Rate, the rate of interest
charged under this Note shall be the Maximum Rate.
The term "Maximum Rate" as used herein shall mean at the particular
time in question the maximum rate of interest which, under applicable law, may
then be charged on this Note. If such maximum rate of interest changes after
the date hereof and this Note provides for a fluctuating rate of interest, the
Maximum Rate shall be automatically increased or decreased, as the case may be,
without notice to Maker from time to time as of the effective date of each
change in such maximum rate. If applicable law ceases to provide for such a
maximum rate of interest, the Maximum Rate shall be equal to eighteen percent
(18.00%) per annum.
Interest only on this Note shall be due and payable in monthly
installments with the first of such monthly installments of interest being due
and payable on the 25th day of November, 1996, with the like installment being
due and payable on the 25th day of each calendar month thereafter, until the
31st day of December, 1998, at which time the entire unpaid balance of this
Note, both principal and accrued and unpaid interest, shall be due and payable,
if not sooner paid.
This Note may be prepaid, in whole or in part, without notice or
penalty. Any such prepayment shall be applied first toward accrued interest,
and the balance, if any, toward principal, but interest shall immediately cease
upon amounts of principal prepaid.
1
<PAGE> 68
It is expressly provided that upon default in the punctual payment of
this Note or any part thereof, principal or interest, as the same shall become
due and payable, and at the option of the holder, the entire indebtedness shall
be matured. In the event default is made in the prompt payment of this Note
when due or declared due, and the same is placed in the hands of an attorney
for collection, or suit is brought on same, or the same is collected through
probate, bankruptcy or other judicial proceedings, then the Maker agrees and
promises to pay reasonable attorneys' fees, court costs, deposition and
investigation charges, and all expenses of collection, payment and liquidation
thereof.
If the Maker shall become insolvent (however such insolvency may be
evidence) or if a receiver shall be appointed for or take possession of the
assets of Maker, or if a writ or order of attachment of garnishment shall be
made or issued against the assets of Maker, or if the Maker shall be dissolved,
wound up, liquidated or otherwise terminated or become a party to any merger or
consolidation without the written consent of the holder of this Note, or if,
after the first lien indebtedness to Den Norske Bank, ASA is paid, Note Maker
shall sell substantially all or an integral portion of its assets without the
written consent of the holder hereof, or if a default occurs under any
instrument now or hereafter executed in connection with or as security for this
Note, or if Den Norske Bank, ASA should accelerate the maturity of such
indebtedness, file suit against Maker or institute any foreclosure proceedings
against any of the assets of Maker, thereupon is the option of the holder of
this Note, this Note and any and all other indebtedness of Maker to the holder
hereof shall become due and payable.
Except as provided herein, each maker and endorser of this Note
expressly waives all notices, demands for payment, presentations for payment,
notices of intention to accelerate the maturity, protest and notice of protest,
as to this Note and as to each, every and all installments hereof, and consents
to and waives notice of any and all renewals, extensions and rearrangements
hereof and without affecting the liability and obligations of any party which
is not expressly released in writing. It is further agreed that the exercise
of any right or remedy conferred upon any holder hereof shall be wholly
discretionary with such holder, and such exercise of, or failure to exercise,
any such right or remedy shall not in any manner affect, impair or diminish the
obligations and liabilities of any party liable hereon or herefore, or be
deemed a waiver of any such right or remedy.
Notwithstanding any other provisions to the contrary in this Note or
elsewhere, upon any event of default by Maker, Payee agrees to give Maker
written notice of such event of default prior to the acceleration of this Note
or exercise of any other remedies in connection therewith and Maker shall have
a period of thirty (30) days after receipt of such written notice in which to
cure any monetary default, and sixty (60) days after receipt of such written
notice within which to cure any non-monetary default; provided however, that
if any non-monetary default cannot reasonably be cured within said sixty (60)
day period, Maker shall have a reasonable period of time following receipt of
such written notice within which to cure such default if Maker commences within
said initial sixty (60) day period action reasonably calculated to cure such
default and thereafter proceeds with reasonable diligence to attempt to cure
same.
2
<PAGE> 69
It is the intention of Maker and Payee to conform strictly to
applicable usury laws. Accordingly, no provision of this Note or any agreement
entered into in connection with or as security for this Note shall permit Payee
to charge, receive, take, or reserve interest in excess of lawful amounts. If
any excess occurs, Payee shall, at its option, apply such excess as a credit
against principal or otherwise refund such excess to Maker and the effective
rate of interest shall automatically be reduced to the maximum rate allowed by
applicable law (including the laws of the State of New York and the United
States of America). This paragraph shall govern over all provisions of this
Note and any agreement entered into in connection with this Note.
The Note and any liens created to secure the Note shall be subordinate
to the payment of that certain Promissory Note dated the 15th day of October,
1996, executed by Maker in favor of Den Norske Bank, ASA and being the renewal,
extension, modification of indebtedness of Maker to Den Norske Bank, ASA as
more fully set forth in that certain Amended and Restated Credit Agreement for
an amount up to $1,965,000 provided by Den Norske Bank ASA to Maker, and this
Note is subject and subordinate to the rights of payment and the rights of
prior payment in full of all indebtedness of Maker to Bank pursuant to that
certain Amended and Restated Credit Agreement executed by Maker to Den Norske
Bank, ASA dated the 15th day of October, 1996.
This Note is made under and shall be construed in accordance with and
governed by the laws of the State of Texas, and by the laws of the United
States of America as applicable.
EXECUTED this 15th day of October, 1996.
SOUTH HAMPTON REFINING COMPANY
By
---------------------------------
Its
--------------------------------
3
<PAGE> 70
THIRD LIEN PROMISSORY NOTE
$1,694,605.08 Silsbee, Texas October 15, 1996
FOR VALUE RECEIVED, the undersigned, South Hampton Refining
Company, a Texas corporation (the "Maker"), promises and agrees to pay to
American Shield Refining Company, a Delaware corporation (the "Payee"), the
principal sum of $1,694,605.08 in legal and lawful money of the United States
of America payable at its offices of American Shield Refining Company, 10830 N.
Central Expressway, Suite 175, Dallas, Texas 75231, or such other place or
places as the holder hereof shall from time to time designate in written notice
to Maker. In addition to the principal sum referred to above, Maker agrees to
pay interest hereon from the date hereof until maturity at a fluctuating rate
per annum which shall from day to days be equal to the lesser of (a) the
Maximum Rate (as such term is hereinafter defined), or (b) a rate (the
"Contract Rate"), calculated on the basis of the actual days elapsed but
computed as if each year consisted of 365 days equal to the sum of (i) the rate
announced from time to time by Den Norske Bank, ASA, a Norwegian Bank (the
"Bank") as its prime lending rate in effect in its New York, New York office,
automatically fluxuating upward and downward with and at the time of each such
announcement without special notice to Maker or any other persons plus (ii)
one percent (1.00%). Notwithstanding the foregoing, interest on this Note
shall on no event exceed the Maximum Rate of nonuserious interest allowed by
law (as such term is hereinafter defined). If the Contract Rate at any time
shall exceed the Maximum Rate, the interest hereon, during the period of time
that the Contract Rate exceeds the Maximum Rate, the rate of interest charged
under this Note shall be the Maximum Rate.
The term "Maximum Rate" as used herein shall mean at the particular
time in question the maximum rate of interest which, under applicable law, may
then be charged on this Note. If such maximum rate of interest changes after
the date hereof and this Note provides for a fluctuating rate of interest, the
Maximum Rate shall be automatically increased or decreased, as the case may be,
without notice to Maker from time to time as of the effective date of each
change in such maximum rate. If applicable law ceases to provide for such a
maximum rate of interest, the Maximum Rate shall be equal to eighteen percent
(18.00%) per annum.
Interest only on this Note shall be due and payable in monthly
installments with the first of such monthly installments of interest being due
and payable on the 25th day of November, 1996, with the like installment being
due and payable on the 25th day of each calendar month thereafter, until the
31st day of December, 1998, at which time the entire unpaid balance of this
Note, both principal and accrued and unpaid interest, shall be due and payable,
if not sooner paid.
This Note may be prepaid, in whole or in part, without notice or
penalty. Any such prepayment shall be applied first toward accrued interest,
and the balance, if any, toward principal, but interest shall immediately cease
upon amounts of principal prepaid.
It is expressly provided that upon default in the punctual payment of
this Note or any part thereof, principal or interest, as the same shall become
due and payable, and at the option of the holder, the entire indebtedness shall
be matured. In the event default is made in the prompt
<PAGE> 71
payment of this Note when due or declared due, and the same is placed in the
hands of an attorney for collection, or suit is brought on same, or the same is
collected through probate, bankruptcy or other judicial proceedings, then the
Maker agrees and promises to pay reasonable attorneys' fees, court costs,
deposition and investigation charges, and all expenses of collection, payment
and liquidation thereof.
If the Maker shall become insolvent (however such insolvency may be
evidence) or if a receiver shall be appointed for or take possession of the
assets of Maker, or if a writ or order of attachment of garnishment shall be
made or issued against the assets of Maker, or if the Maker shall be dissolved,
wound up, liquidated or otherwise terminated or become a party to any merger or
consolidation without the written consent of the holder of this Note, or if,
after the first lien indebtedness to Den Norske Bank, ASA is paid, Note Maker
shall sell substantially all or an integral portion of its assets without the
written consent of the holder hereof, or if a default occurs under any
instrument now or hereafter executed in connection with or as security for this
Note, or if Den Norske Bank, ASA should accelerate the maturity of such
indebtedness, file suit against Maker or institute any foreclosure proceedings
against any of the assets of Maker, thereupon is the option of the holder of
this Note, this Note and any and all other indebtedness of Maker to the holder
hereof shall become due and payable.
Except as provided herein, each maker and endorser of this Note
expressly waives all notices, demands for payment, presentations for payment,
notices of intention to accelerate the maturity, protest and notice of protest,
as to this Note and as to each, every and all installments hereof, and consents
to and waives notice of any and all renewals, extensions and rearrangements
hereof and without affecting the liability and obligations of any party which
is not expressly released in writing. It is further agreed that the exercise
of any right or remedy conferred upon any holder hereof shall be wholly
discretionary with such holder, and such exercise of, or failure to exercise,
any such right or remedy shall not in any manner affect, impair or diminish the
obligations and liabilities of any party liable hereon or herefore, or be
deemed a waiver of any such right or remedy.
Notwithstanding any other provisions to the contrary in this Note or
elsewhere, upon any event of default by Maker, Payee agrees to give Maker
written notice of such event of default prior to the acceleration of this Note
or exercise of any other remedies in connection therewith and Maker shall have
a period of thirty (30) days after receipt of such written notice in which to
cure any monetary default, and sixty (60) days after receipt of such written
notice within which to cure any non-monetary default; provided however, that
if any non-monetary default cannot reasonably be cured within said sixty (60)
day period, Maker shall have a reasonable period of time following receipt of
such written notice within which to cure such default if Maker commences within
said initial sixty (60) day period action reasonably calculated to cure such
default and thereafter proceeds with reasonable diligence to attempt to cure
same.
It is the intention of Maker and Payee to conform strictly to
applicable usury laws. Accordingly, no provision of this Note or any agreement
entered into in connection with or as security for this Note shall permit Payee
to charge, receive, take, or reserve interest in excess of lawful amounts. If
any excess occurs, Payee shall, at its option, apply such excess as a credit
against principal or otherwise refund such excess to Maker and the effective
rate of interest shall
<PAGE> 72
automatically be reduced to the maximum rate allowed by applicable law
(including the laws of the State of New York and the United States of America).
This paragraph shall govern over all provisions of this Note and any agreement
entered into in connection with this Note.
The Note and any liens created to secure the Note shall be subordinate
to the payment of that certain Promissory Note dated the 15th day of October,
1996, executed by Maker in favor of Den Norske Bank, ASA and being the renewal,
extension, modification of indebtedness of Maker to Den Norske Bank, ASA as
more fully set forth in that certain Amended and Restated Credit Agreement for
an amount up to $1,965,000 provided by Den Norske Bank ASA to Maker, and this
Note is subject and subordinate to the rights of payment and the rights of
prior payment in full of all indebtedness of Maker to Bank pursuant to that
certain Amended and Restated Credit Agreement executed by Maker to Den Norske
Bank, ASA dated the 15th day of October, 1996.
The Note and any liens created to secure the Note shall be subordinate
(i) to the payment of that certain Promissory Note dated the 15th day of
October, 1996, executed by Maker in favor of Den Norske Bank, ASA (the "Bank")
and being the renewal, extension, modification of indebtedness of Maker to Bank
as more fully set forth in that certain Amended and Restated Credit Agreement
dated October 15, 1996 for an amount up to $1,965,000 provided by Bank to
Maker; (ii) to the payment of that certain Second Lien Promissory Note of Maker
to Saudi Fal, a limited liability company incorporated under the laws of the
Kingdom of Saudi Arabia in the amount of $1,945,773.49 dated October 15, 1996.
This Note is made under and shall be construed in accordance with and
governed by the laws of the State of Texas, and by the laws of the United
States of America as applicable.
EXECUTED this 15th day of October, 1996.
SOUTH HAMPTON REFINING COMPANY
By
------------------------------
Its
-----------------------------
<PAGE> 1
EXHIBIT 10(bb)
ARABIAN SHIELD DEVELOPMENT COMPANY
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
(214) 692-7872
November 15, 1996
Sheikh Fahad Al-Athel
P.O. Box 4900
Riyadh 11412
Saudi Arabia
Dear Sheikh Fahad Al-Athel:
Arabian Shield Development Company, a Delaware Corporation, agrees to
sell you Four Hundred Fifty Thousand Shares (450,000) of its authorized and
unissued common stock, par value $.10 per share, and you agree to purchase such
shares at the price of 1.00 Dollar (one) per share. Payment for these shares
shall be made on the following schedule:
$100,000 to be paid on the date of your signing; and
$100,000 monthly thereafter.
These shares have not been registered under the United States
Securities Act of 1933 (the "Act"), as amended, and are being sold to you in
reliance upon one or more exemptions from the registration requirements of the
Act, including but not limited to, the exemptions set forth in Regulation S
relating to offers and sales made outside the United States of America.
By your execution of this letter agreement, you represent to the
Company as follows:
1. You are not a citizen or resident of the United States of America;
2. You are purchasing the shares for your own account for investment and
not with a view to the resale or distribution of the shares within, or
to citizens or residents of, the United States of America;
3. You are not purchasing the shares for the account or benefit or a
citizen or resident of the United States of America or any partnership
or corporation organized or incorporated under the laws of any
jurisdiction in the United States of America;
<PAGE> 2
Sheikh Fahad Al-Athel
Page 2
November 15, 1996
4. At the time you are executing this letter agreement, you are outside
the United States of America;
5. You have received or have had access to all information you consider
necessary or advisable in order to enable you to make an informed
decision concerning your purchase of the shares; and
6. You have such knowledge and experience in business and financial
matters that you are capable of evaluating the merits and risks or
investing in the shares, and you are able to bear the economic risk of
investing in the shares.
You further agree that the shares may not be offered for sale, sold,
or otherwise disposed of within or to United States citizens or residents
unless the shares are subsequntly registered under the Act or an exemption from
registration is available. The certificate representing the shares will
contain a restrictive legend with respect to the foregoing. In the event that
by reason of your acquisition of the shares you are required to make any
filings pursuant to the United States Securities Exchange Act of 1934, as
amended, the certificate representing the shares will not be issued to you
until all applicable filing requirements have been satisfied.
Very truly yours,
ARABIAN SHIELD DEVELOPMENT COMPANY
By: /s/ Hatem El-Khalidi
---------------------------------
AGREED TO:
By: /s/ Sheikh Fahad Al-Athel
-------------------------------
Date: November 30, 1996
----------------------------
<PAGE> 1
EXHIBIT 10(cc)
FINANCIAL AND LEGAL SERVICES AND ADVICE AGREEMENT
This Agreement is made this day May 20, 1996 by and between:
1. Arabian Shield Development Co., an American Company having its
registered office at the State of Delaware and a branch in Jeddah City
registered under the No: 4030097805 dated 8/3/1414 H represented in
this Agreement by its President, Hatem Hussein El-Khalidi hereinafter
referred to as the "First Party".
2. Legal Advisor Nasir Ali Kadasah and Dar Al Khaleej for Researches and
Economic Advisors represented by Mr. Tawfiq Abdulaziz Al-Sowailim,
hereinafter referred to as the "Second Party".
Whereas the First Party has got a mining lease to exploit Al Masane area
located in the Southern Kingdom of Saudi Arabia under the Royal Decree No. M/17
dated 1/12/1413H for a term of Thirty (30) years according to the Mining Lease
Agreement attached with the said Royal Decree.
Whereas the First Party desires to participate with "The Saudi Company For
Mining Industry" a Saudi limited liability company "under formation" which
shall purchase fifty percent (50%) of the First Party's share in the mining
lease and to mutually apply to obtain an industrial license and finance the
project, and, to apply to the Minister of Petroleum and Mineral Resources to
transfer the mining lease to the First Party and the Saudi Company jointly and
severally.
And, whereas the Second Party is able to do the necessary services for this
purpose as follows:-
1. Formation of the said Saudi Company with a capital sufficient to
purchase Fifty percent (50%) of the First Party's contribution in the
mining lease, and to pay its share needed in equity for the Al Masane
mining project.
2. To finalize the required procedures towards issuance of the Industrial
License from the Ministry of Industry and Electricity to bring the ore
out of the mine and manufacture the same in Plant to be established in
the said area near the mine.
3. To finalize the necessary procedures to obtain the loan requested from
the Industrial Development Fund.
4. To apply for and receive loans from commercial banks necessary to
finance the project.
5. To apply and obtain the Ministerial resolution of the Minister of
Petroleum and Mineral Resources approving transference of the mining
lease to the First Party and the above mentioned Saudi Company jointly
and severally.
Therefore, the Two Parties agree as follows:-
<PAGE> 2
FIRST:
The abovementioned recitals shall be considered as an integral part of this
Agreement and constructor of the same.
SECOND:
The Parties shall fulfill the duties hereunder and draw a workplan from time to
time to distribute the responsibilities and functions of each party to achieve
the aim of this agreement.
THIRD:
Each Party shall keep the other one informed with all of his actions and
contacts to avoid inconsistency and insure harmony between the Parties.
FOURTH:
The First Party acknowledges that upon execution of this Agreement the Second
Party shall be the sole responsible and authorized person to perform
abovementioned duties and that the First Party shall no longer be obligated by
any similar to or contradictory with the above duties.
FIFTH: FEES
The First Party shall pay the fees to the Second Party divided as follows:-
TO THE LEGAL ADVISOR: NASIR ALI KADASAH
1. To Mr. Nasir Ali Kadasah the sum of US$ 10,000/- (US Dollar Ten
Thousand Only) upon issuance of the Industrial License of the project
from the Ministry of Industry and Electricity.
2. To Mr. Nasir Ali Kadasah the sum of US$ 10,000/- (US Dollar Ten
Thousand Only) upon approval of the Industrial Development Fund to
grant the requested loan to the Project.
3. The First Party shall grant Mr. Nasir Ali Kadasah with 1,025,000 (One
Million Twenty Five Thousand) shares of its authorized unissued common
stock without consideration plus the option to purchase 1,425,000 (One
Million Four Hundred and Twenty Five Thousand) shares of its
authorized unissued common stock for One Dollar per share and this
right shall remain valid for Five (5) years from the date of
registration of the Saudi Company. Such rights shall be apportioned
as follows:-
a) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon issuance of Industrial
License, i.e. a grant of 153,750 (One Hundred and Fifty Three
Thousand Seven Hundred and Fifty) shares without consideration
and the right to purchase 213,750 (Two Hundred and Thirteen
Thousand Seven Hundred and Fifty) shares for one dollar per
share.
<PAGE> 3
b) The right to be granted and to purchase 25% (Twenty Five
percent) of all abovementioned shares upon approval of the
Industrial Development Fund to grant the requested loan; i.e.
a grant of 256,250 (Two Hundred and Fifty Six Thousand Two
Hundred and Fifty) shares without consideration and the right
to purchase 356,250 (Three Hundred and Fifty Six Thousand Two
Hundred and Fifty) shares for one dollar per share.
c) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon approval of the Commercial
Banks of the requested loan; i.e. a grant of 153,750 (One
Hundred and Fifty Three Thousand Seven Hundred and Fifty)
shares without consideration and the right to purchase 213,750
(Two Hundred and Thirteen Thousand Seven Hundred and Fifty)
shares for one dollar per share.
d) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon registration of the Saudi
Company and payment - by its shareholders - of an amount US$
10,625,000 (US Dollar Ten Million Six Hundred and Twenty Five
Thousand) to the First Party as a price of 50% (Fifty percent)
of the First Party's share in the mining lease and payment of
another amount of US$ 13,000,000 (US Dollar Thirteen Million)
as their contribution in the required capital of the project,
i.e. a grant of 153,750 (One Hundred and Fifty Three Thousand
Seven Hundred and Fifty) shares without consideration and the
right to purchase 213,750 (Two Hundred and Thirteen Thousand
Seven Hundred and Fifty) shares for one dollar per share.
e) The right to be granted and to purchase 30% (Thirty percent)
of all abovementioned shares upon issuance of the Ministerial
resolution from the Minister of Petroleum and Mineral
Resources permitting the transference of ownership of the
license to the First Party.
And the Saudi Company jointly and severally, i.e. a grant of
307,500 (Three Hundred and Seven Thousand Five Hundred) shares
without consideration and 427,500 (Four Hundred and Twenty
Seven Thousand Five Hundred) shares for one dollar against
each share.
<PAGE> 4
TO THE ECONOMIC ADVISOR: DAR AL KHALEEJ FOR RESEARCH AND ECONOMIC ADVICE
1) Dar Al Khaleej for Research and Economic Advice shall be paid the sum
of US$ 10,000/- (US Dollar Ten Thousand) upon issuance of the
Industrial License from the Ministry of Industry and Electricity to
the project.
2) The First Party shall grant Mr. Tawfiq Abdulaziz Al-Sowailim 975,000
(Nine Hundred and Seventy Five Thousand) shares of the First Party's
authorized unissued common stock without consideration as well as a
right to purchase 875,000 (Eight Hundred and Seventy Five Thousand)
shares from the First Party's authorized unissued common stock for One
Dollar per share and such right shall continue valid for a term of
Five (5) years from the date of formation of the Saudi Company.
The above rights shall be apportioned only as follows:-
a) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon issuance of the Industrial
License, i.e. to grant 146,250 (One Hundred and Forty Six
Thousand Two Hundred and Fifty) shares without consideration
and the right to purchase 131,250 (One Hundred and Thirty One
Thousand Two Hundred and Fifty) shares for one dollar per
share.
b) The right to be granted and to purchase 25% (Twenty Five
percent) of all abovementioned shares upon approval of the
Industrial Development Fund to grant the requested loan; i.e.
to grant 243,750 (Two Hundred and Forty Three Thousand Seven
Hundred and Fifty) shares without consideration and the right
to purchase 218,750 (Two Hundred and Eighteen Thousand Seven
Hundred and Fifty) shares for one dollar per share.
c) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon approval of the Commercial
Banks to grant the requested loan; i.e. 146,250 (One Hundred
and Forty Six Thousand Two Hundred and Fifty) shares without
consideration and the right to purchase 131,250 (One Hundred
and Thirty One Thousand Two Hundred and Fifty) shares for one
dollar per share.
d) The right to be granted and to purchase 15% (Fifteen percent)
of all abovementioned shares upon registration of the Saudi
Company and payment - by its Shareholders - an amount of US$
10,625,000 (US Dollar Ten Million Six Hundred and Twenty Five
Thousand) to the First Party as the price of 50% (Fifty
percent) of the First Party's share in the mining lease and
payment of another amount of US$ 13,000,000 (US Dollar
Thirteen Million) as their contribution in the required
capital of the project, i.e. to grant 146,250 (One Hundred and
Forty Six Thousand Two Hundred and Fifty) shares without
consideration and the right to purchase 131,250 (One Hundred
and Thirty One Thousand Two Hundred and Fifty) shares for one
dollar per share.
<PAGE> 5
e) The right to be granted and to purchase 30% (Thirty percent)
of all abovementioned shares upon issuance of the Ministerial
resolution of the Minister of Petroleum and Mineral Resources
permitting transference of the ownership of the mining lease
to the First Party and the Saudi Company jointly and
severally, i.e. to grant 292,500 (Two Hundred and Ninety Two
Thousand Five Hundred) shares without consideration and the
right to purchase 262,500 (Two Hundred and Sixty Two Thousand
Five Hundred) shares for one dollar per share.
SIXTH:
Sale and grant of abovementioned shares shall be subject to the Rules of sale
of such shares to non-Americans promulgated by Securities and Exchange
Commission (Rule 144).
SEVENTH:
Duties of the First Party hereunder shall be subject to the approval of the
Board of Directors of Arabian Shield Development Company and the First Party
will provide the Second Party with a copy of the approval, within two weeks, if
issued. In case such approval is not issued, then, this Agreement shall,
automatically, be cancelled and the Second Party shall have no right to ask for
any compensation.
EIGHTH:
The term of this Agreement shall be Twelve (12) months from the date of the
Second Party's receipt of Arabian Shield Development Company's approval and
receipt of all required documents to perform the duties of the Second Party -
unless the delay caused by the First Party or agreement is reached by in
writing by both parties to renew or extend this agreement.
NINTH:
If any dispute arise between the parties in relation to understanding or
performance of this Agreement it shall be solved amicably. If this is not
achieved then the dispute shall be referred to Arbitration according to Saudi
Arbitration law.
<PAGE> 6
The Second Party acknowledges that it shall not be entitled to any fees or
compensation against his mentioned duties beyond the scope of the stages
mentioned in this Agreement.
FIRST PARTY SECOND PARTY
For: Arabian Shield Development Co. 1. Nasir Ali Kadasah
/s/ Hatem Hussein El-Khalidi /s/ Nasir Ali Kadasah
by: Hatem Hussein El-Khalidi 2. Dar Al Khaleej for Research and
Economic Advisors
by Tawfiq Abdulaziz Al-Sowailim
/s/ Tawfiq Abdulaziz Al-Sowailim
<PAGE> 7
ARABIAN SHIELD DEVELOPMENT COMPANY
10830 North Central Expressway
Suite 175
Dallas, Texas 75231 U.S.A.
P.O. Box 1516, Jeddah 21441
Saudi Arabia
C.R. 4030097605 o C.C.J.45522
Administration Tel. { 642 6529
{ 643 5410
Technical Office Tel. { 667 3534
{ 669 0641
Fax: { 643 3410
{ 669 0641
3 March, 1997
Mr. Nasir Ali Kadasah
Dar Ali Khaleej for Research and Economic Advisors
Riyadh
Saudi Arabia
Gentlemen:
Reference is made to the "Financial And Legal Services And Advise
Agreement", dated May 20, 1996. It is requested that certain texts in the
Agreement be changed to the following, to confirm with our present
understanding:
Page 1, (4th Paragraph)
Whereas the First Party desires to participate with "The Saudi Company For
Mining Industries" a Saudi Limited Liability Company "under formation", in
which First Party shall own 50% of the stock of the said Company, while the
other 50% shall be owned by Saudi Shareholders.
This Company shall apply to obtain an industrial license and finance the
project, and shall apply to the Minister of Petroleum and Mineral Resources to
transfer the mining Lease, now held by First Party to the "Saudi Company For
Mining Industries"
Page 3 (fifth paragraph)
e) The right to be granted and to purchase 30% (thirty percent) of all above
mentioned shares upon issuance of the Ministerial resolution from the Minister
of Petroleum and Mineral Resources permitting the transference of the ownership
of the mining lease to the Saudi Company For Mining Industries", i.e, a grant
of 307,500 (three hundred and seven thousand five hundred) shares without
consideration and the option to purchase 427,500 (Four hundred and twenty seven
thousand five hundred) shares for one (1) dollar per share.
Page 5 (first paragraph)
a) the right to be granted and to purchase 30% (thirty percent) of all above
mentioned shares upon issuance of the Ministerial Resolution of the Minister of
Petroleum and Mineral Resources permitting transference of the ownership of the
mining lease to the "Saudi Company For Mining Industries" i.e. a grant of
292,500 (two hundred and ninety two
<PAGE> 8
ARABIAN SHIELD DEVELOPMENT COMPANY
10830 North Central Expressway
Suite 175
Dallas, Texas 75231 U.S.A.
P.O. Box 1516, Jeddah 21441
Saudi Arabia
C.R. 4030097605 o C.C.J.45522
Administration Tel. { 642 6529
{ 643 5410
Technical Office Tel. { 667 3534
{ 669 0641
Fax: { 643 3410
{ 669 0641
Date: 3 March, 1997
- 2 -
thousand five hundred) shares without consideration and the option to purchase
262,500 (two hundred sixty two thousand five hundred) shares for one dollar per
share.
Very truly yours
Arabian Shield Development Company
/s/ Hatem El-Khalidi
by: Hatem El-Khalidi, President
Agreed to:
Nasir Ali Kadasah
by:
/s/ Nasir Ali Kadasah
--------------------------------------
date:
15/3/97
--------------------------------------
Dar Al Khaleej For Research and Economic Advisors
by: /s/ Tawfiq Abdulaziz Al-Sowailim
--------------------------------------
date:
March 16th, 97
--------------------------------------
<PAGE> 1
ARABIAN SHIELD
DEVELOPMENT COMPANY
ANNUAL REPORT TO STOCKHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE> 2
TO OUR STOCKHOLDERS:
The Company obtained the mining lease to the Al Masane area in Saudi Arabia on
May 22, 1993, and thereafter commissioned Watts, Griffis & McOuat of Toronto,
Canada ("WGM") to update the feasibility study for that area, which was
subsequently updated in 1996. The mining lease has an initial thirty (30) year
term, with the Company having the option to renew or extend the term of the
lease for additional periods not to exceed twenty (20) years. The Company will
pay the Saudi Arabian government income taxes in accordance with the income tax
law then in force, in accordance with Article 45 of the Mining Code (the current
tax is now 45% of net income). However, in accordance with Article 46 of the
Mining Code, such income tax will not be due in respect to mining operations
during the period of five years starting from the date of the first sale of
products or five years from the beginning of the fourth year after the issue of
the mining lease, whichever occurs first.
Under the mining lease agreement, the Company is obligated, when actual profits
are realized from its commercial mining operations in the Al Masane area, to
form a Saudi public stock company in which the Company will own 50% of the
shares, the Petroleum and Mineral Organization ("Petromin"), a company wholly
owned by the Saudi Arabian government, will have the option to acquire up to 25%
of the shares, and the remaining shares will be offered for public subscription
to Saudi Arabian citizens. In the 1996 update to the 1994 full bank feasibility
study of the Al Masane lease area, the independent mining consultants estimated
the total capital costs of the Al Masane project to be $88.6 million. The
Company and its Saudi Arabian advisors are in the process of forming a Saudi
limited liability company to own and operate the project, 50% of which will be
owned by the Company and the remaining 50% of which will be owned by the Saudi
Arabian investors. The Saudi Arabian investors will contribute 25% of the
capital cost of the project. The Company believes that another 25% of the
capital cost of the project may be obtained through loans from commercial banks,
and that the remaining 50% of the capital cost of the project would come from an
interest-free loan from the Saudi Industrial Development Fund ("SIDF"). To be
eligible for an interest-free loan from the SIDF to fund 50% of the capital cost
of the project, the Company together with its Saudi Arabian advisors obtained an
industrial license from The Ministry of Industry and Electricity on December 3,
1996. The Company owns 50% of the license and the Saudi Arabian advisors the
remaining 50%. When actual profits are realized from commercial mining
operations of the project, the Saudi limited liability company will be
transformed into a Saudi public stock company, 50% of the shares of which will
be owned by the Company and the remaining shares of which will be owned by
Petromin, up to 25%, and Saudi Arabian investors.
Pursuant to the terms of the mining lease agreement, the Company undertakes to
repay the $11 million loan provided to the Company and National Mining Company
in 1979 by the Ministry of Finance and National Economy, in accordance with the
terms of an agreement to be reached between the Company and the Ministry of
Finance and National Economy. In a memorandum to His Majesty the King in 1986,
the Minister of Petroleum and Mineral Resources and the Minister of Finance and
National Economy recommended that the $11 million loan be rescheduled with the
terms of rescheduling to be agreed upon after the mining lease is granted. The
Company will instigate negotiations on that basis with the Ministry of Finance
and National Economy.
Under the terms of the mining lease agreement, the Company agreed to pay in
advance rental to the Ministry of Petroleum and Mineral Resources of 10,000
Saudi Riyals (approximately $2,667 at current exchange rate) per square
kilometer per year (approximately $117,300 annually) during the period of the
lease for the total lease area of 44 square kilometers. The Company made rental
payments for the first year of the lease. As of December 31, 1996, the Company
has not paid for rentals of approximately $309,000. It is contemplated that the
Saudi limited liability company will assume responsibility for the rental
payments and all arrearages.
Following the granting of the mining lease to the Al Masane area, the Company
commissioned WGM to prepare a new fully bankable feasibility study for
presentation to financial institutions in connection with obtaining financing
for the project. The feasibility study includes more metallurgical work
incorporating advances in grinding of the ore; incorporation of the latest
advances in technology and reagents
1
<PAGE> 3
developed during the past ten years; incorporation of new mill designs and the
latest water recycling methods; investigation into the shipping and marketing of
zinc and copper concentrates; and an economic analysis of the project. The
feasibility study contains specific recommendations to insure that the
construction of the project is accomplished as expeditiously and economically as
possible. Engineering design and costing of the project was done by Davy
International of Toronto, Canada. The feasibility study cost the Company
approximately $1 million and was presented to the Company on July 22, 1994. The
feasibility study was updated in July 1996.
The Al Masane ore is located in three mineralized zones known as Saadah, Al
Houra and Moyeath. The diluted minable, proven and probable ore reserves at the
Al Masane project were estimated to be 7.2 million tonnes, including mining
dilution. Mining dilution is the amount of wallrock adjacent to the ore body
which is included in the ore extraction process. The average grade of the proven
and probable diluted ore reserves was estimated to be 1.42% copper, 5.31% zinc,
1.19 grams of gold per tonne and 40.20 grams of silver per tonne. For purposes
of calculating the proven and probable reserves, a dilution of 5% at zero grade
on the Saadah zone and 15% at zero grade on the Al Houra and Moyeath zones was
assumed. A mining recovery of 80% has been used for the Saadah Zone and 88% for
the Al Houra and Moyeath Zones.
A review by WGM of the equipment and process flowsheet contained in the 1982
feasibility study prepared by WGM indicated that new technology developed during
the past ten years could be used to reduce the capital cost and improve the
metallurgical recoveries. In particular, the use of semi-autogenous grinding to
reduce the capital cost of the grinding section and developments in reagents
were believed to hold the greatest potential for improving the economies of the
project. A detailed metallurgical testwork program was undertaken by Lakefield
Research in 1994 to address potential improvements and provide detailed design
criteria for the concentrator design. Results from this testwork program showed
that copper recovery could be improved by 5.7% and zinc recoveries improved by
13% compared to the 1982 results.
The metallurgical studies conducted on the ore samples taken from the zones
indicated that 87.7% of the copper and 82.6% of the zinc could be recovered in
copper and zinc concentrates. Overall, gold and silver recovery from the ore was
estimated to be 77.3% and 81.3%, respectively, partly into copper concentrate
and partly as bullion through cyanide processing of zinc concentrates and mine
tailings.
A test program to evaluate the economies of the cyanidation of the zinc
concentrate and tailings in order to improve gold and silver recoveries found
gold and silver recoveries to range from 50% to 77%. To recover gold and silver
from the zinc concentrate and tailings, WGM recommended that a cyanidation plant
be included in the process flowsheet. Dore bullion would be produced. WGM
concluded that the inclusion of a cyanidation plant would make a positive
contribution to the economies of the project under the base conditions.
The mining and milling operation recommended by WGM for Al Masane would involve
the production of 2,000 tonnes of ore per day (700,000 tonnes per year), with a
mine life of over ten years. Annual production is estimated to be 34,900 tonnes
of copper concentrate (25% copper per tonne) containing precious metal and
58,000 tonnes of zinc concentrate (54% zinc per tonne). Total output per year of
gold and silver is estimated to be 22,000 ounces of gold and 800,000 ounces of
silver from the copper concentrate and bullion produced. The construction of
mining, milling and infrastructure facilities is estimated to take 18 months to
complete. Construction necessary to bring the Al Masane project into production
includes the construction of a 2,000 tonne per day concentrator, infrastructure
with a 300 man housing facility and the installation of a cyanidation plant to
increase the recovery of precious metals from the deposit. Project power
requirements will be met by diesel generated power.
WGM recommended that the Al Masane reserves be mined by underground methods
using trackless mining equipment. Once the raw ore is mined, it would be
subjected to a grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc concentrate,
copper concentrate and dore bullion. The copper concentrate will contain
valuable amounts
2
<PAGE> 4
of gold and silver. These concentrates are estimated to be 22,000 ounces of gold
and 800,000 ounces of silver and will be sold to copper and zinc custom smelters
and refineries worldwide.
In the feasibility study, WGM states that there is potential to find more
reserves within the lease area, as the ore zones are all open at depth. Further
diamond drilling, which will be undertaken by the Company, is required to
quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.
WGM prepared an economic analysis of the project utilizing cash flow projections
in the 1996 update of the feasibility study. A base case was prepared that
included those project elements which are most likely to be achieved. WGM
believed that a majority of the base case assumptions used in the 1994
feasibility study remained valid, including the ore reserves, mill feed grade,
production rate, metal recoveries and concentrate grade and smelter returns.
Metal prices, capital costs, operating costs and the corporate structure were
adjusted to reflect more current information. Capital and operating costs were
adjusted in conformity with the updated estimates prepared by Davy
International.
The base case assumes the corporate structure of the entity to be formed to
operate the project, currently planned to be a Saudi limited liability company,
will be owned 50% by the Company and 50% by Saudi Arabian investors and that the
owners of this entity would contribute an aggregate of $21.2 million to the cost
of the project. The base case further assumes financing for the project from
commercial loans in the aggregate amount of $21.2 million bearing interest at
the rate of 8% per year and a loan in the amount of $43.8 million from the SIDF
repayable in equal annual installments over the initial life of the mine. The
remainder of the project financing would be contributed by cash generated by the
operation of the project. The base case assumes that the $11 million loan
outstanding to the Saudi Arabian government will be paid by the Company in
accordance with a repayment schedule to be agreed upon with the Saudi Arabian
government. Based on these assumptions, and assuming the average prices of metal
over the life of the mine to be $1.05 per pound for copper, $.60 per pound for
zinc, $400 per ounce of gold and $6.00 per ounce of silver, WGM's economic
analysis of the base case shows the project will realize an internal rate of
return of 13.1%, the Company's and the Saudi Arabian investors' internal rates
of return would be 27.3% and 12.1%, respectively, and projected net cash flow
from the project of $95.1 million. The 1994 feasibility study base case showed
the project would realize a 14.05% internal rate of return. Cash flow under the
base case is exclusive of income tax as the base case assumes that any such tax
would be paid by individual investors and not by the project. Assuming a 10%
discount rate, the net present value of the project as shown in the update is
$12.16 million compared to the $15.5 million net present value of the project
shown in the 1994 feasibility study. Based on the update, WGM believes that the
economic analysis shows that the project remains viable.
The Company retained Carlyle SEAG ("Carlyle"), of Washington, D.C. and Saudi
Arabia, on March 27, 1995 as the Company's financial advisor in connection with
the Al Masane mining project. On March 13, 1996, the agreement with Carlyle was
effectively terminated by mutual consent. A new financial and legal services was
signed on May 20, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On September 30, 1995, the Company made a formal application to the SIDF for an
interest-free loan to fund 50% of the capital cost of the Al Masane project. The
1994 feasibility study was submitted to the SIDF together with the application.
The SIDF informed the Company that in order to be eligible for a loan, the
Company and its Saudi Arabian advisors had to obtain an industrial license for
the project from The Ministry of Industry and Electricity. An industrial license
was issued on December 3, 1996. The industrial license and the 1996 update to
the feasibility study were presented to the SIDF on December 23, 1996. As
required by the SIDF, the Company is preparing, through its engineering
consultants, bid documents to be given to three bidders who have been qualified
to construct the plants and infrastructure of the
3
<PAGE> 5
project. The Company anticipates that these bid documents will be completed
before April 15, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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. The Company's Washington, D.C. attorneys opined that,
because the PSA of Hunt is still ongoing, and under its auspices, payments and
receipts occur daily, the DOJ still has 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
further supported its allegations. The Company's Washington, D.C. attorneys
opined also 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. A letter from the DOJ dated October 1, 1996 stated
that the documents presented did not suggest any criminal events occurred within
the statute of limitations, and that, at that time, the DOJ did not intend to
pursue the 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 Yemen Hunt for
conspiracy to violate the FCPA. The Company's legal counsel met with the Fraud
Section of the DOJ on December 13, 1996 and were told that the DOJ would take a
more aggressive stance if more information of evidentiary quality were presented
to the DOJ. 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 its 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.
The Company owns, through a wholly owned subsidiary, South Hampton Refining
Company, of Silsbee, Texas which owns and operates a special products refinery
which produces pure pentanes and hexanes and other specialty chemicals for the
plastics industry. Total gross revenues for 1996 for the refinery were
approximately $21.4 million and the cash flow realized was approximately
$655,000. It is significant that the plant sells about 40% of all pentanes
consumed in the United States.
4
<PAGE> 6
The Company directly owns approximately 46% and beneficially owns approximately
55% of the outstanding capital stock of Pioche-Ely Valley Mines, Inc.
("Pioche"), an inactive mining company. Pioche's principal assets are a 300 ton
per day mill, and 48 patented and 84 unpatented federal lode mining claims in
the Pioche Mining District in southeastern Nevada, on which is located the Ely
Valley Mine which, between 1941 and 1952, produced 675,207 tons of ore with an
average grade of 9.09% zinc. The Company intends to conduct limited exploration
of the Pioche properties when funds are available.
Respectfully submitted,
John A. Crichton
Chairman of the Board
Hatem El-Khalidi
President and Chief Executive
Officer
March 28, 1997
5
<PAGE> 7
THE COMPANY.
Arabian Shield Development Company (the "Company") was organized as a Delaware
corporation in 1967 and is principally engaged in the business of developing its
undeveloped mineral properties. None of the undeveloped mineral properties are
currently producing and significant capital expenditures will be necessary
before any commercial operations are commenced. The Company has operations in
both the United States and Saudi Arabia. The Company is primarily engaged in the
exploration and development of minerals in Saudi Arabia.
SAUDI ARABIAN ACTIVITIES. The Company holds a mining lease covering a 44 square
kilometer area in the Al Masane area in southwestern Saudi Arabia. The lease was
granted to the Company by Royal Decree in May 1993. The lease has an initial
thirty (30)-year term and is renewable for additional periods not to exceed
twenty (20) years. The Al Masane area has proven and probable ore reserves of
copper, zinc, gold and silver (7.2 million tonnes of ore containing 1.42%
copper, 5.31% zinc, 1.19 grams per tonne of gold and 40.20 grams per tonne of
silver). The results of the 1996 update to the 1994 bankable feasibility study
conducted by an independent mineral consulting firm indicate that the proposed
Al Masane mining operation is economically viable.
National Mining Company, a private Saudi company ("National Mining"), which
previously had a 50% interest in the joint venture formed to explore and develop
the Al Masane area, relinquished its rights to the mining lease and assigned
them to the Company. The Company was granted exploration licenses for the Wadi
Qatan and Jebel Harr areas in southwestern Saudi Arabia, approximately 30
kilometers east of the Al Masane area, in 1971 and 1977, respectively. The
exploration licenses by their terms have expired. The Company has been orally
advised by Saudi Arabian government officials that the licenses will be extended
as long as mineral exploration is being conducted on the areas which they cover,
although there can be no assurance that the Company's license rights will be
honored. Although the expired exploration licenses for Wadi Qatan and Jebel Harr
were awarded jointly to the Company and National Mining, the exploration work on
the licensed areas has been carried on exclusively by the Company. Pursuant to
an agreement among the Company, National Mining and the Petroleum and Mineral
Organization ("Petromin"), the official mining and petroleum company of the
Saudi Arabian government, which governed the rights of the parties if an
exploration license was converted into a mining lease, National Mining's rights
in these jointly held expired exploration licenses entailed responsibilities of
joint exploration expenditures which National Mining did not want to assume. For
this reason, National Mining has orally advised the Company that it has
relinquished its rights in all other areas in Saudi Arabia and assigned them to
the Company. No consideration was paid by the Company to National Mining for the
relinquishment of National Mining's rights in all other areas of Saudi Arabia.
The Company remains a party to the agreement with Petromin notwithstanding
National Mining's relinquishment of its rights. When financing for the Al Masane
project is completed, the Company plans to make an application for an expanded
exploration license for an area of approximately 2,800 square kilometers which
includes the original Greater Al Masane area and the Wadi Qatan and Jebel Harr
areas.
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(R) petrochemical project to be built in Jubail, Saudi Arabia by
Chevron Chemical in a joint venture with Saudi Venture Capital Group (SVCS). The
Company and some Saudi partners, all of whom are directors and/or stockholders
of the Company, plan to form a Saudi limited liability company which will build
and manage a processing plant located next to the Aromax(R) plant in Saudi
Arabia. The Company would have a 25% interest in the limited liability company
and would manage the plant. The plant will be similar to the South Hampton
refinery in producing purified pentanes from a feedstock of mixed pentanes
obtained from the Aromax(R) plant. Chevron Chemical advised the Company by
letter in July 1993 that Chevron Chemical and SVCS have jointly agreed to commit
to supply the proposed pentane project with up to 5,000 barrels per day of mixed
pentane feedstock. Engineering and marketing studies of the project made in 1994
by outside consultants reflected positive results. Planning then began toward
the construction and operation of the Aromax(R) plant and the processing plant
but was delayed during 1995 because of the absence of a firm commitment for the
feedstock supply to the Aromax(R) plant. The Aromax(R) plant received final
approval
6
<PAGE> 8
from the Saudi Arabian government in March 1996 and the Company and its Saudi
partners, following the confirmation of their agreement with Chevron Chemical,
are preparing an application for an industrial license from the Ministry of
Industry to build the processing plant. The application will be submitted in the
near future.
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, after considering all of the
presently identifiable elements, that 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. There has been a
recent inquiry about this project from a zinc smelting and refining company in
Asia.
UNITED STATES ACTIVITIES. The Company's United States operations include the
ownership and operation of a special products refinery and the leasing of
mineral properties.
An indirect wholly owned subsidiary of the Company owns and operates a special
products refinery near Silsbee, Texas which sells its products primarily to
companies in the chemical and plastics industry. The refinery is presently
devoted to specialized processing activities. Another indirect wholly owned
subsidiary owns and operates three pipelines connected to the refinery.
The Company owns all of the capital stock of a coal company which does not
presently own or hold any mineral interests and is presently inactive. The coal
company had a net operating loss carryforward of approximately $5.9 million at
December 31, 1996. The Company has had negotiations with several companies
toward the possible use of the Coal Company's carryforward amount, but no
agreements have been reached.
The Company beneficially owns approximately 55% and directly owns approximately
46% of the outstanding capital stock of a company which leases mineral
properties containing 132 inactive mining claims totalling approximately 3,700
acres in southeastern Nevada. There are prospects and mines on these claims
which formerly produced silver, gold, lead, zinc and copper.
The Company leases office space in Jeddah, Saudi Arabia and in Dallas, Texas. It
also has a base camp with a capacity to accommodate 60 people in its Al Masane
mining lease area. The Company owns heavy mining equipment at the lease area,
which will be used for future mining operations. The Company also has an
exploration and drilling camp in the Wadi Qatan area in Saudi Arabia.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock traded on The NASDAQ Stock Market under the symbol:
ARSD. The following table sets forth the high and low closing sale prices for
each quarter of 1996 and 1995, respectively, as reported by NASDAQ.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 3 3/4 3 3/8 2 5/8 2 3/32 2 3/8 2 3/8 1 7/8 1 1/4
Low 1/4 1 1/2 1 1/2 1 5/8 1 3/4 1 5/8 5/8 5/8
</TABLE>
At March 17, 1997, there were 900 record holders of the Company's Common Stock.
The Company has not paid a dividend since its inception.
7
<PAGE> 9
SELECTED FINANCIAL DATA.
The following is a five-year summary of selected financial data of the Company
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues................................. $22,014 $18,359 $17,765 $15,267 $13,468
Net Income (Loss)........................ $ (391) $ (369) $ 2,852 $(1,338) $(2,196)
Net Income (Loss) Per Share.............. $ (.02) $ (.02) $ .14 $ (.08) $ (.14)
Total Assets (at December 31)............ $44,096 $40,805 $41,057 $41,090 $38,729
Notes Payable (at December 31)........... $11,376 $15,086 $15,945 $18,044 $18,571
Total Long-Term Obligations
(at December 31)....................... $ 4,423 $ 1,676 $ 1,148 $ 908 $ 889
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
With the exception of revenues generated by the operations of the refinery, the
Company has been without any significant operating revenues since 1972.
Accordingly, it has financed its development activities and its general and
administrative costs through the sale of shares of its Common Stock and loans.
The Company experienced serious difficulties during prior years in obtaining
additional financing, and is currently in need of additional funds to meet its
obligations and continue development activities. The Company is exploring
various alternatives for obtaining additional operating funds, including
additional debt or equity financing, but there is no assurance that sufficient
funds can be obtained. It is also possible that the terms of any additional
financing that the Company is able to obtain will be unfavorable to the Company
and its existing stockholders. For example, additional equity financing could
result in a significant dilution of the interests of existing stockholders.
Management of the Company expects to be devoting a significant amount of its
attention in the near future to addressing the Company's immediate and longer
term needs for the funds that are required in order to continue its business and
maintain and develop its properties.
During 1996, the Company took certain actions designed to generate additional
equity capital and improve its financial condition, including: (i) the
negotiation by South Hampton Refining Company, an indirect wholly owned
subsidiary of the Company ("South Hampton"), of an Amended and Restated Credit
Agreement with Den norske Bank ASA, amending and restating the then outstanding
credit agreement to provide for a revolving credit facility in an aggregate
principal amount of up to $1,965,000; (ii) the restructuring of certain
indebtedness of South Hampton owed to Saudi Fal Co., Ltd., a limited liability
company owned by a stockholder of the Company ("Saudi Fal"), and American Shield
Refining Company, a wholly owned subsidiary of the Company (the "Refining
Company"), pursuant to promissory notes in the original principal amounts of
$1,945,773.49 and $1,694,605.08, respectively, which promissory notes are
subordinated to the Amended and Restated Credit Agreement with Den norske Bank
ASA; (iii) approval by the Company's Board of Directors in June 1996 of the sale
of up to 1 million shares of the Company's Common Stock through private
placements at a price no less than $1.00 per share; (iv) the sale of 450,000
shares of the Company's Common Stock at $1.00 per share to a Saudi Arabian
investor who is a stockholder of the Company and approval of the sale of an
additional 450,000 shares of the Company's Common Stock at $1.00 per share to
the same investor, the purchase price for such additional shares being payable
in monthly installments of $100,000; and (v) approval of the sale of 50,000
shares of the Company's Common Stock to a Saudi Arabian investor.
The exploration licenses held by the Company for the Wadi Qatan and Jebel Harr
areas in Saudi Arabia, by their terms, have expired, although officials of the
Saudi Arabian government have provided verbal assurance to the Company that the
licenses will be extended as long as exploratory work is being carried out on
the areas which they cover. None of the related projects at Al Masane or the
other interests in Saudi Arabia were being developed at December 31, 1996 and
significant additional expenditures will be necessary before commercial
operations are commenced. A substantial portion of the Company's total assets is
comprised of the mineral acquisition, exploration and development costs in Saudi
Arabia. The
8
<PAGE> 10
ultimate recoverability of these deferred costs cannot be determined at the
present time. The Company holds the mining lease for the Al Masane area
exclusively.
The 1996 update to the 1994 feasibility study shows the estimated total capital
cost to bring the Al Masane project into production to be $88.6 million. At the
present time, the Company does not have sufficient funds to bring the project
into production.
To assist the Company in obtaining financing for the project, on March 27, 1995,
the Company retained Carlyle SEAG of Washington, D.C. ("Carlyle") as the
Company's financial advisor. On March 13, 1996, the agreement with Carlyle was
terminated by mutual consent after Carlyle informed the Company that it had to
withdraw as the Company's financial advisor because of a conflict of interest
since the Carlyle Group, which owns Carlyle, advises the Saudi Arabian
government on its offset program.
After the agreement with Carlyle was terminated, on May 20, 1996, the Company
entered into a Financial and Legal Services and Advice Agreement with Nasir Ali
Kadasah, for legal advice, and Dar Al Khaleej, a Saudi Arabian consulting
company, for research and economic advice. The purpose of this agreement is for
the two Saudi Arabian advisors to assist the Company in obtaining financing for
the Al Masane project. To this end, the agreement contemplates that the Saudi
Arabian advisors will perform the following:
1. The formation of a Saudi limited liability company, "The Saudi Company
for Mining Industries," 50% of which would be owned by the Company and the
remaining 50% of which would be owned by Saudi Arabian investors who will
contribute 25% of the capital cost of the project.
2. Obtain an industrial license for the project from the Ministry of
Industry and Electricity. This license is a necessary prerequisite for
obtaining an interest-free loan from the Saudi Industrial Development Fund
("SIDF") to fund 50% of the capital cost of the project.
3. Finalize the necessary procedures to obtain such loan from the SIDF, the
application for which was submitted on September 30, 1995.
4. Apply for and receive loans from commercial banks necessary to finance
the project.
5. Apply for and obtain the Ministerial Resolution from the Minister of
Petroleum and Mineral Resources approving the transfer of the mining lease
to the Saudi limited liability company.
The agreement provides that the Saudi Arabian advisors are solely responsible
for the performance of the foregoing obligations and that the Company has no
obligation therefor.
As consideration for performing these obligations, the Company has agreed to pay
Mr. Kadasah and Dar Al Khaleej $10,000 each upon the issuance of the industrial
license and Mr. Kadasah $10,000 upon approval of the loan by the SIDF. The
Company has also agreed to issue to Mr. Kadasah and Mr. Tawfiq Abdulaziz
Al-Sowailim, as agent for Dar Al Khaleej, up to 1,025,000 and 975,000 shares of
the Company's Common Stock, respectively, and to grant Mr. Kadasah and Mr.
Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, options to purchase
up to 1,425,000 and 875,000 shares of the Company's Common Stock, respectively.
The Company is obligated to issue such shares and grant such options in
designated amounts upon completion of each of the foregoing obligations. The
issuance of the shares would be for consideration consisting solely of services
rendered to the Company. The options are immediately exercisable on the date of
grant, have a five-year term commencing on the date of formation of the Saudi
limited liability company and an exercise price of $1.00 per share.
The SIDF makes interest-free loans to industrial projects in Saudi Arabia and
charges a 2.5% service fee. The Company believes that it may also be able to
finance the remaining cost of the project through arrangements with suppliers
and equipment manufacturers, custom smelters and additional debt or equity
financing secured by the Company, however, there can be no assurances to that
effect.
Pursuant to the mining lease agreement, when the profitability of the project is
established, the Company is obligated to form a Saudi public stock company with
Petromin. The Company will own 50% of the shares of the Saudi public stock
company and Petromin no more than 25% of the shares. The remaining shares will
be offered for sale in Saudi Arabia pursuant to a public subscription. Title to
the mining lease
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<PAGE> 11
and the other obligations specified in the mining lease will be transferred to
the Saudi public stock company. Responsibility for the repayment of the $11
million loan from the Saudi Arabian government will remain with the Company. In
December 1994, the Company received instructions from the office of the Minister
of Petroleum and Mineral Resources stating that it is possible for the Company
to form a Saudi company without Petromin but that the sale of stock to the Saudi
public could occur only after two years of profits from commercial operations of
the mine. The instructions added that Petromin will still have the right to
purchase shares in the Saudi public stock company any time it desires.
On October 15, 1996, South Hampton entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with Den norske Bank ASA (the "Bank"),
amending and restating the then outstanding credit agreement to provide for a
revolving loan facility in an aggregate principal amount of up to $1,965,000.
The Bank's commitment to make funds available under the credit facility will be
reduced by (i) $75,000 on the last day of each fiscal quarter commencing
December 31, 1996 and (ii) the amount of any distribution by South Hampton to
Saudi Fal, the Company, the Refining Company or Texas Oil and Chemical Co. II, a
wholly owned subsidiary of the Refining Company ("TOCCO"), in excess of amounts
permitted under the Credit Agreement. Advances under the Credit Agreement may
not at any time exceed the lesser of the commitment or a borrowing base
calculated based upon the cash collateral account, eligible accounts receivable
and inventory. Interest is payable monthly in arrears on all outstanding
advances under the credit facility at the Bank's prime lending rate, as in
effect from time to time, plus 1%. Principal and accrued and unpaid interest are
payable on December 31, 1998. Subject to certain conditions and South Hampton
maintaining various financial covenants and ratios, the Credit Agreement permits
South Hampton to make distributions to (i) Saudi Fal, the Company, the Refining
Company and TOCCO for legal, auditing and accounting fees attributable to the
operations of South Hampton in an annual aggregate amount not in excess of
$60,000, (ii) Saudi Fal and the Company in respect of accrued interest on any
debt owned by South Hampton to Saudi Fal or the Company in an amount not in
excess of $17,500 per month and (iii) Saudi Fal and the Company in respect of
principal on any debt owed by South Hampton to Saudi Fal or the Company. The
Credit Agreement is secured by all of the assets of South Hampton and Gulf State
Pipe Line Company, Inc., a wholly owned subsidiary of South Hampton ("Gulf
State"), and all of the issued and outstanding shares of TOCCO, South Hampton
and Gulf State. South Hampton is required to collect all receivables through a
cash collateral account at a local bank. South Hampton was not in compliance
with a certain financial covenant as of December 31, 1996, which noncompliance
has been waived by the Bank.
In connection with South Hampton's entry into the Credit Agreement with the
Bank, South Hampton issued a Second Lien Promissory Note to Saudi Fal and a
Third Lien Promissory Note to the Refining Company in the original principal
amounts of $1,945,773.49 and $1,694,605.08, respectively, evidencing certain
indebtedness of South Hampton owed to such parties. The promissory notes bear
interest at the Bank's prime lending rate, as in effect from time to time, plus
1%. Interest only is due and payable monthly on the promissory notes, and the
entire unpaid balance of principal and accrued and unpaid interest is due on
December 31, 1998. The promissory notes are secured by all of the assets of
South Hampton and Gulf State. The promissory notes and related liens are
subordinated to the Credit Agreement. The promissory note issued to the Refining
Company and related liens are subordinate to the promissory note issued to Saudi
Fal.
The Clean Air Act Amendments of 1990 have had a positive effect on the
refinery's business as plastics manufacturers are searching for ways to use more
environmentally acceptable solvents in their processes. Plastics manufacturers
have historically used C6 hydrocarbons (hexanes) as coolants and catalyst
carrying agents. There is a current trend among plastics manufacturers toward
the use of lighter and more recoverable C5 hydrocarbons (pentanes) which are a
large part of the refinery's product line. Management believes that the
refinery's ability to manufacture high quality solvents in the C5 hydrocarbon
market will provide the basis for growth over the next few years; however, there
can be no assurance that such growth will occur. While the refinery continues to
manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The Aromax(R) unit, which was jointly developed by the refinery and Chevron
Research, has the ability to convert C6 hydrocarbons into benzene and other more
valuable
10
<PAGE> 12
aromatic compounds, which was part of the reason the refinery participated in
the Aromax(R) development project initially.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's current primary source of cash
flow is attributable to the refinery which is fully dedicated to the repayment
of debt and the funding of refinery operations. The Company is not presently
generating any cash flow from any of its other activities. Management plans to
fund future operations initially 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 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. The Company's financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1996 TO 1995
During the fiscal year ended December 31, 1996, the Company had a net loss of
$390,896 compared to a net loss of $369,232 for the fiscal year ended December
31, 1995.
The gross refined product sales in 1996 of $21,367,438 was an increase of
$3,625,576 from 1995 while the cost of sales in 1996 of $19,357,737 was an
increase of $3,782,683 from 1995, resulting in a net margin decrease in 1996 of
$157,107. After processing fee income, general and administrative expenses and
depreciation and amortization, the operating loss of the Company in 1996 of
$321,124 was $54,888 more than the operating loss in 1995 of $266,236. The net
income for the refinery in 1996 of $134,391 was $225,210 less than the net
income in 1995 of $359,601.
The refinery's net income in 1996 was not indicative of its performance for the
year. The volume of refined products sold increased 18% to 24.5 million gallons
versus 20.8 million gallons sold in 1995. The strong volume of sales reflected
increased sales to existing customers and an increased marketing effort which
resulted in new customers. The plastics industry continued to experience a
steady demand which resulted in the continued growth in the volume of refined
products sold. However for much of 1996 and particularly in the last two months
of the year, gross and operating margins were weaker than the refinery had
experienced in recent years. During the fourth quarter and particularly in
November and December of 1996, feedstock prices and natural gas fuel prices
increased to unusual high levels eroding the refinery's steady performance over
the first ten months of the year. Sales commitments and competitive pressures
did not allow the refinery to pass through the higher costs immediately,
although by the first quarter of 1997 selling prices had been raised. The
refinery's focus on producing products in the higher priced solvents markets
allowed it to raise selling prices during the year although not enough to offset
the total spike in feed costs at year end.
The primary feedstock of the refinery, natural gasoline, is the heavier liquid
produced by natural gas processing plants and by LPG fractionators. Feedstock
prices in 1996 were 10% higher than in 1995 resulting in reduced gross margins
on sales. The chemical industry, particularly the ethylene crackers, continued
to be the big user of natural gasoline in 1996 which contributed to the higher
feedstock prices. Feedstock prices, which peaked during the period from November
1996 through February of 1997, have returned to their former levels and are
expected to remain there for most of 1997.
The refinery has experienced a healthy growth in its toll processing business
over the last three years and expects the opportunities to continue to develop,
although there can be no assurances to that effect. Toll processing and tank
rental fees were $297,757, $694,797 and $724,849 in 1994, 1995 and 1996,
respectively. The increase in the toll processing business is indicative of the
direction of the refining and petrochemical industries in the U.S. Many larger
companies are "right sizing" and outsourcing smaller jobs and processes which
have been formerly managed within their own facilities. The refinery has been
11
<PAGE> 13
in the toll processing business for over 30 years and has a good reputation in
the industry for this type of work. Management intends to expand the refinery's
involvement in this area as opportunities arise.
General and administrative expenses decreased by $88,261 to $2,284,422 in 1996
from $2,372,683 in 1995. This decrease was mostly attributable to a stock option
expenses of $151,431 in 1995. Interest expense, which was practically all
attributable to the debt of the refinery, decreased slightly by $32,567 from
$369,546 in 1995 to $336,979 in 1996. This decrease was primarily due to a
reduced amount of debt at the refinery in 1996.
The equity in losses of affiliate in 1995 and 1994 was attributable to the cost
of maintaining the Nevada mining properties of Pioche Ely Valley Mines, Inc.
("Pioche"). In 1996, the Company concluded that its voting control of Pioche was
no longer temporary and, therefore, the asset and liability amounts of Pioche
have been consolidated into its financial statements. The minority interest in
1996 of $13,072 represents the Pioche minority shareholders portion of Pioche's
1996 loss. 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.
Interest income in 1996 and 1995 was from the investment of temporary excess
cash in time deposits in Saudi Arabia and a short-term investment by the
refinery. In 1996 and 1995, there was no operating activity on any of the Saudi
Arabia mining properties. Assuming financing can be obtained, the results of the
1996 update to the 1994 feasibility study 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 at an estimated cost of $88.6 million,
an increase of $7.3 million over the 1994 study estimate.
Miscellaneous income represents various items of other income which individually
are not significant enough to warrant being separately disclosed. These items
primarily include income from tank rentals, building rentals, commission income
and occasional small asset sale proceeds. In 1996 and 1995, the refinery
received $101,640 each year from the leasing of an office building. Tank rentals
accounted for $78,000 in each year.
Primarily as a result of the Company's write-off of its total investment in the
coal leases in 1988, the Company had net operating loss carryforwards of
approximately $33.3 million at December 31, 1996, 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 the refinery.
These carryforwards expire during the years 1997 through 2010. The Company has
had negotiations with several companies toward the possible use of the coal
company's carryforward amount, but no agreements have been reached.
At December 31, 1996, a total of approximately $1,490,000 in salaries and
termination benefits accrued since 1971 was due to Company employees in Saudi
Arabia in accordance with Saudi Arabian employment laws, which includes
approximately $714,000 due to Hatem El-Khalidi, the Company's President and
Chief Executive Officer. Accrued salaries and termination benefits to Company
employees in Saudi Arabia and to Mr. El-Khalidi at December 31, 1995 were
approximately $1,373,000 and $636,000, respectively. The payment of these
amounts has been deferred until the Company's working capital position improves.
COMPARISON OF THE YEARS 1995 TO 1994
During the fiscal year ended December 31, 1995, the Company had a net loss of
$369,232 compared to net income of $2,852,306 for the fiscal year ended December
31, 1994.
The gross refined product sales in 1995 of $17,741,862 was an increase of
$177,636 from 1994 while the cost of sales in 1995 of $15,575,054 was an
increase of $1,824,304 from 1994, resulting in a net margin decrease in 1995 of
$1,646,668. After processing fee income, general and administrative expenses and
depreciation and amortization, the operating loss of the Company in 1995 of
$266,236 was $2,571,862 less than the operating income in 1994 of $2,305,626.
The net income for the refinery in 1995 of $359,605 was $3,154,593 less than the
net income in 1994 of $3,514,194. Two refining company items contributed to the
higher income in 1994: (i) operating income included $975,000 relating to the
reversal of a charge in 1992 for potential expenses relating to litigation that
was settled in
12
<PAGE> 14
1994; and (ii) an extraordinary income item of $578,150 attributable to the
settlement of an indebtedness owed to a vendor.
The refinery's net income in 1995 reflected the steady demand which the plastics
industry experienced toward the end of 1994 and throughout 1995. Most of 1994
could be characterized as a period of rising prices, pent-up demand and high
operating utilization rates with strong gross margins on feedstock costs. In
comparison, the refinery's 1995 results reflect a 3% decrease in sales volume,
from 21,430,000 gallons in 1994 to 20,798,000 gallons in 1995, and a 43%
reduction in gross margins. The refinery's sales continued to be solid with the
majority of its products continuing to be placed into the higher priced
specialty markets. Several new customers were added during 1995 and product
sales attained a reasonable level of performance. The ability of the refinery to
produce the highest quality products available in its field has enabled it to
remain competitive even during the periods of low demand or high feedstock
prices.
The primary feedstock of the refinery, natural gasoline, is the heavier liquid
produced by natural gas processing plants and by LPG fractionators. Feedstock
prices in 1995 were approximately 23% higher than in 1994 resulting in reduced
gross margins. The chemical industry, primarily the ethylene crackers, continued
to be a big user of natural gasoline in 1995 which contributed to the higher
feedstock prices. Feedstock prices are expected to sustain 1995 levels
throughout most of 1996.
The refinery has experienced a healthy growth in its toll processing business
over the last three years and expects the opportunities to continue to develop,
although there can be no assurances to that effect. Toll processing fees were
$163,977, $200,757 and $616,796 in 1993, 1994 and 1995, respectively. The
increase in the toll processing business is indicative of the direction of the
refining and petrochemical industries in the U.S. Many larger companies are
"rightsizing" and outsourcing smaller jobs and processes which might have been
formerly managed in their own facilities. The refinery has been in the toll
processing business for over 30 years and has a good reputation in the industry
for this type of work. Management intends to expand the refinery's involvement
in this area as opportunities arise.
General and administrative expenses increased by $336,213 to $2,372,683 in 1995
from $2,036,470 in 1994. This increase was mostly attributable to higher
payroll, franchise tax, insurance and regulatory expenses at the refinery and
stock option expense incurred in 1995 by the Company. The expenses of regulatory
compliance and reporting continued to increase. Interest expense, which was
practically all attributable to the debt of the refinery, increased slightly by
$22,182 from $347,364 in 1994 to $369,546 in 1995. This increase was primarily
due to higher interest rates in 1995.
The equity losses of affiliate in 1995 of $24,112 represented a decrease of
$120,348 from 1994 and was applicable to the cost of maintaining the Nevada
mining properties of Pioche. The 1994 loss was higher than usual due to an
increased loss experienced by Pioche on the write-off of several unpatented
claims that were considered to have no future value. There was no activity in
1995 and 1994 on the Pioche properties primarily due to the lack of financing
for claims to be explored and developed. Interest income in 1995 and 1994 was
from the investment of excess cash in time deposits in Saudi Arabia and a short-
term investment by South Hampton. In 1995 and 1994, there was no operating
activity on any of the Saudi Arabia mining properties. Assuming financing can be
obtained, the results of the 1994 feasibility study 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 1994
feasibility study estimated the cost of the mining facility to be $81.3 million.
Miscellaneous income represents various items of other income which individually
are not significant enough to warrant being separately disclosed. Miscellaneous
income in 1994 included $172,737 relating to the write-off of a contingent
liability established in 1992 to provide for possible future expenses relating
to certain indebtedness of the coal company which were completely paid in 1994.
Other items included in miscellaneous income are tank rentals, building rentals,
cancellation of debt income, commission income and occasionally small asset sale
proceeds. In 1995 and 1994, the refinery received $101,640 each year from the
leasing of an office building. Tank rentals decreased from $97,000 in 1994 to
$78,000 in 1995 due to a change in lessees and a decrease in the rental rate.
13
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Arabian Shield Development Company
We have audited the accompanying consolidated balance sheet of Arabian Shield
Development Company and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Arabian Shield
Development Company and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company's sources of cash flow in 1996 were the operations of
its refinery and the proceeds from the sale of common stock. Cash flow from the
refinery is dedicated to repaying debt and funding refinery operations. As
discussed in Notes 5 and 7 to the financial statements, the majority of the
Company's assets consist of costs related to the acquisition, exploration, and
development of mineral interests in Saudi Arabia. The ability of the Company to
develop these properties is dependent upon obtaining additional financing. As
discussed in Note 9, the Company is obligated to the Saudi Arabian government
for a loan in the amount of $11,000,000. The Company does not currently have
the financial resources to pay this obligation and is attempting to reschedule
the payment. Management's plans with regard to these matters are discussed in
Note 2. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3, the Company adopted the consolidation method of
accounting for its investment in Pioche-Ely Valley Mines, Inc. in 1996.
GRANT THORNTON LLP
Dallas, Texas
March 14, 1997
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors
of Arabian Shield Development Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Arabian Shield Development Company and its subsidiaries at December 31, 1995
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to
the financial statements, the Company's primary source of cash flow is fully
dedicated to repayment of debt and funding of refinery operations.
Additionally, the Company is not generating cash flow from any of its other
activities. These matters raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As described in Notes 5 and 7 to the financial statements, a substantial
portion of the Company's total assets is comprised of mineral acquisition,
exploration and development costs relating to its interests in Saudi Arabia
which have been deferred at December 31, 1995. None of the related projects
have been developed for commercial operation as of December 31, 1995, and
significant expenditures, for which the Company must obtain financing, will be
necessary before commercial operations, if any, are commenced.
As described in Note 10 to the financial statements, the Company is in default
on repayment of an $11 million loan from the Saudi Arabian government which was
made to the Al Masane Project. The Company is attempting to reschedule payment
of the loan.
As described in Notes 5 and 10 to the financial statements, the Company's
refining subsidiary, South Hampton Refining Company ("South Hampton"), has
short-term notes payable and current portions of long-term obligations totaling
$3.8 million. South Hampton does not have the ability to fully repay these
current obligations from internally generated funds. Arabian Shield Development
Company has not guaranteed the debt obligations of South Hampton. The Company's
financial statements do not include any adjustments that might be necessary
should South Hampton be unable to satisfy its current obligations in an
orderly manner.
PRICE WATERHOUSE LLP
- ---------------------------
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1996
<PAGE> 17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents in United States $ 209,251 $ 302,039
Short-term investments 298,726 294,610
Accounts receivable (net of allowance
for doubtful accounts of $168,484 in
1996 and $145,709 in 1995) 2,643,691 1,791,821
Inventories 565,346 430,732
----------- -----------
Total current assets 3,717,014 2,819,202
CASH IN SAUDI ARABIA 176,039 396,809
REFINERY PLANT, PIPELINE AND EQUIPMENT - AT COST 5,758,852 5,563,776
LESS ACCUMULATED DEPRECIATION 2,911,823 2,557,454
----------- -----------
REFINERY PLANT, PIPELINE AND EQUIPMENT, NET 2,847,029 3,006,322
AL MASANE PROJECT 32,882,838 30,897,883
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,418,615 --
INVESTMENT IN AND ADVANCES TO
PIOCHE-ELY VALLEY MINES, INC -- 239,032
GOODWILL 117,598 397,902
OTHER ASSETS 505,566 617,019
----------- -----------
TOTAL ASSETS $44,095,947 $40,805,417
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 18
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
December 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,408,677 $ 674,641
Accrued liabilities 520,445 617,995
Accrued liabilities in Saudi Arabia 1,174,229 1,011,980
Notes payable 11,375,780 15,086,191
Current portion of long-term debt 992,729 78,090
Current portion of long-term obligations 150,904 20,285
------------ ------------
Total current liabilities 15,622,764 17,489,182
LONG-TERM DEBT 3,544,112 708,534
LONG-TERM OBLIGATIONS 35,009 185,875
ACCRUED LIABILITIES IN SAUDI ARABIA 714,143 636,047
DEFERRED REVENUE 129,685 145,189
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,003,590 --
STOCKHOLDERS' EQUITY
Common stock, authorized 40,000,000 shares of $.10
par value: issued and outstanding, 20,956,494 shares
in 1996 and 20,206,494 shares in 1995 2,095,649 2,020,649
Additional paid-in capital 34,932,700 33,210,750
Receivables from stockholders (126,000) (126,000)
Accumulated deficit (13,855,705) (13,464,809)
------------ ------------
Total stockholders' equity 23,046,644 21,640,590
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,095,947 $ 40,805,417
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 19
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three years ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Refined product sales $ 21,367,438 $ 17,741,862 $ 17,564,226
Processing fees 646,848 616,796 200,757
------------ ------------ ------------
22,014,286 18,358,658 17,764,983
Operating costs and expenses
Cost of refined product sales and processing 19,357,737 15,575,054 13,750,750
General and administrative 2,284,422 2,372,683 2,036,470
Depreciation and amortization 693,251 677,157 647,137
Litigation -- -- (975,000)
------------ ------------ ------------
22,335,410 18,624,894 15,459,357
------------ ------------ ------------
Operating income (loss) (321,124) (266,236) 2,305,626
Other income (expense)
Interest income 25,310 33,395 56,491
Interest expense (336,979) (369,546) (347,364)
Minority interest 13,072 -- --
Equity in losses of affiliate -- (24,112) (114,460)
Miscellaneous income 228,825 257,267 443,836
------------ ------------ ------------
Income (loss) before income taxes and extraordinary item (390,896) (369,232) 2,314,129
Income tax expense -- -- (39,973)
------------ ------------ ------------
Income (loss) before extraordinary item (390,896) (369,232) 2,274,156
Extraordinary item -- -- 578,150
------------ ------------ ------------
Net income (loss) $ (390,896) $ (369,232) $ 2,852,306
============ ============ ============
Per common share
Income (loss) before extraordinary item $ (0.02) $ (0.02) $ 0.11
Extraordinary item -- -- 0.03
------------ ------------ ------------
Net income (loss) $ (0.02) $ (0.02) $ 0.14
============ ============ ============
Weighted average number of common shares outstanding 20,286,208 20,030,434 20,027,881
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 20
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional Receivables
---------------------------- paid-in from Accumulated
Shares Amount capital stockholders deficit Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 20,014,494 $ 2,001,449 $ 32,886,519 $ (326,000) $(15,947,883) $ 18,614,085
Common stock and common
stock subscriptions sold 14,000 1,400 12,600 -- -- 14,000
Payment on stockholder
receivables -- -- -- 50,000 -- 50,000
Net income -- -- -- -- 2,852,306 2,852,306
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1994 20,028,494 2,002,849 32,899,119 (276,000) (13,095,577) 21,530,391
Common stock and common
stock subscriptions sold 278,000 27,800 250,200 -- -- 278,000
Payment on stockholder
receivables -- -- -- 50,000 -- 50,000
Write-off of stockholder
receivable (100,000) (10,000) (90,000) 100,000 -- --
Stock options issued 151,431 151,431
Net loss -- -- -- -- (369,232) (369,232)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1995 20,206,494 2,020,649 33,210,750 (126,000) (13,464,809) 21,640,590
Common stock sold 450,000 45,000 405,000 -- -- 450,000
Common stock issued
for services 300,000 30,000 520,000 -- -- 550,000
Stock options issued -- -- 796,950 -- -- 796,950
Net loss -- -- -- -- (390,896) (390,896)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 1996 20,956,494 $ 2,095,649 $ 34,932,700 $ (126,000) $(13,855,705) $ 23,046,644
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 21
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (390,896) $ (369,232) $ 2,852,306
Adjustments for non-cash transactions
Depreciation and amortization 693,251 677,157 647,137
Equity in losses of affiliate -- 24,112 144,460
Stock options issued -- 151,431 --
Extraordinary item -- -- (578,150)
Effects of changes in
Decrease (increase) in accounts receivable (845,570) (388,839) 101,134
Decrease (increase) in inventories (134,614) 40,342 175,965
Decrease in other assets 135,287 87,016 30,052
(Decrease) increase in accounts payable and
accrued liabilities 454,810 (267,830) (821,334)
Decrease in deferred revenue (15,504) (15,504) (15,504)
Other (70,529) (12,190) (82,078)
----------- ----------- -----------
Net cash provided by (used for) operating
activities (173,765) (73,537) 2,453,988
----------- ----------- -----------
Investing activities
Additions to short-term investments (4,116) (291,915) (243,770)
Proceeds from sale of short-term investments -- 255,787 --
Additions to Al Masane Project (451,110) (785,751) (743,709)
Additions to refinery plant, pipeline and equip (195,076) (153,235) (279,122)
Decrease in cash in Saudi Arabia 220,770 34,167 1,257,042
Increase (decrease) in accrued liabilities in Saudi Arabia 53,450 276,366 (105,276)
----------- ----------- -----------
Net cash used for investing activities (376,082) (664,581) (114,835)
----------- ----------- -----------
Financing activities
Common stock issued for cash 450,000 -- --
Decrease in receivables from stockholders -- 50,000 50,000
Additions to notes payable and long-term obligations 445,773 721,000 --
Reduction of notes payable and long-term obligations (438,714) (809,192) (1,429,632)
----------- ----------- -----------
Net cash provided by (used for) financing
activities 457,059 (38,192) (1,379,632)
----------- ----------- -----------
Net increase (decrease) in cash (92,788) (776,310) 959,521
Cash and cash equivalents at beginning of year 302,039 1,078,349 118,828
----------- ----------- -----------
Cash and cash equivalents at end of year $ 209,251 $ 302,039 $ 1,078,349
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 22
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND OPERATIONS OF THE COMPANY
Since its organization on May 4, 1967, the principal activity of Arabian
Shield Development Company (the "Company") has been the exploration and
development of mineral deposits in Saudi Arabia (Note 7). In February 1986,
the Company purchased all of the issued and outstanding capital stock of
Dorchester Coal Company, which was subsequently renamed American Shield
Coal Company (the "Coal Company") and is currently dormant. The Company,
through its wholly-owned subsidiary American Shield Refining 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 principal assets of TOCCO and its subsidiaries are a
specialty products refinery located outside of Beaumont, Texas, which
currently processes light naphtha feedstock, and 50 miles of natural gas
and product pipelines which connect the refinery to supplies and a marine
terminal on the Gulf of Mexico. The Company also owns 46% of Pioche-Ely
Valley Mines, Inc. ("Pioche") which owns mineral deposits in Nevada (Note
8). Pioche is consolidated for financial statement purposes at December 31,
1996.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's
sources of cash flow in 1996 were the operations of South Hampton and the
proceeds from a stock sale to a Saudi Arabian investor. The Company is not
currently generating cash flow from any other activities. As the cash flow
attributable to South Hampton is fully dedicated to repayment of debt and
funding of refinery operations (described in Note 9), the cash flow
attributable to South Hampton currently is not adequate to support the
Company's operations. As described in Note 9, 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 initially 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 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.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Company consolidates all subsidiaries for
which it has majority ownership or voting control which is other than
temporary. All material intercompany accounts and transactions are
eliminated.
8
<PAGE> 23
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
As discussed in Note 8, the Company owns 46% of Pioche and has had voting
control for a number of years as a result of a loan which is collateralized
by 9% of the outstanding common stock of Pioche. In 1996, the Company
concluded that its voting control of Pioche was no longer temporary.
Therefore, Pioche has been consolidated in 1996. The financial statements
for 1995 and 1994, which account for the investment in Pioche on the equity
method, have not been restated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENT - At December 31, 1996 and 1995, the Company held a
United States treasury bill with an original maturity of less than one
year. The Company intends to hold this investment to maturity.
INVENTORIES - Refined products and feedstock are recorded at the lower of
cost, determined on the last-in, first-out method (LIFO), or market.
MINERAL EXPLORATION AND DEVELOPMENT COSTS - All costs related to the
acquisition, exploration, and development of mineral deposits are
capitalized until such time as (1) the Company commences commercial
exploitation of the related mineral deposits at which time the costs will
be amortized, (2) the related project is abandoned and the capitalized
costs are charged to operations, or (3) when any or all deferred costs are
permanently impaired. At December 31, 1996, none of the projects described
in Notes 7 and 8 had reached the commercial exploitation stage. No indirect
overhead or general and administrative costs have been allocated to any of
the projects. In 1996 the Company adopted Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and has concluded that there was no impairment at December 31,
1996.
REFINERY PLANT, PIPELINE AND EQUIPMENT - Refinery plant, pipeline,
buildings and equipment are being depreciated using the straight-line
method over useful lives of 3 to 15 years. Maintenance and repairs are
charged to expense. Renewals and betterments are capitalized.
OTHER ASSETS - Other assets include catalysts used in refinery operations,
prepaid expenses and certain refinery assets which are being leased to a
third party.
ENVIRONMENTAL LIABILITIES - Remediation costs are accrued based on
estimates of known environmental remediation exposure. Such accruals are
recorded even if uncertainties exist over the ultimate cost of the
remediation. Ongoing environmental compliance costs, including maintenance
and monitoring costs, are expensed as incurred.
DEFERRED REVENUE - Deferred revenue represents funds advanced by a supplier
and customer for equipment purchases and is being amortized over a 15 year
period.
STATEMENTS OF CASH FLOWS - On the statements of cash flows, cash includes
cash held in the United States. Significant noncash changes in financial
position in 1996 include a restructure of debt to include $445,773 of
accrued interest in the loan principal, as well as the issuance of stock
and options for services, valued at
9
<PAGE> 24
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
a total of $1,346,950, which is capitalized as a cost of the Al Masane
Project (Note 7). Transactions of this type in 1995 include the write-off
of a stockholder receivable to purchase 100,000 shares of common stock at
$1.00 per share and the issuance of 278,000 shares of common stock at $1.00
per share for the cancellation of $278,000 of indebtedness (Note 10).
Transactions of this type in 1994 include the issuance of 14,000 shares of
common stock in exchange for the cancellation of $14,000 of indebtedness
(Note 11).
HEDGING PROGRAM - 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 are
recognized when the contracts expire. The natural gas market suffered
severe price declines in the last few months of 1994 and into 1995, which
resulted in net recognized losses of $101,000 in 1995 and $117,000 in 1994.
These losses are included as a cost of refined product sales and processing
in the consolidated statements 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.
PER SHARE DATA - Net income (loss) per share has been computed on the basis
of the weighted average number of shares of common stock outstanding during
the year.
FOREIGN CURRENCY - Assets and liabilities denominated in foreign
currencies, principally Saudi Riyals, are translated at rates in effect at
the time the transaction occurs. There has been no significant change in
the exchange rate for Saudi Riyals to the United States dollar during the
period covered by these financial statements. Due to the stability of the
Saudi Riyal, the Company feels it has no material exposure to foreign
currency risks and does not employ any practices to minimize any such
risks. It is anticipated that its products in Saudi Arabia will be sold in
US dollars.
GOODWILL - Goodwill acquired in connection with the acquisition of TOCCO in
1987 is being amortized over ten years. The amounts reflected in the
balance sheet are net of accumulated amortization of $2,655,925 and
$2,378,785 at December 31, 1996 and 1995, respectively. The Company
periodically reviews goodwill for any permanent impairment in value or
life.
MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
STOCK-BASED COMPENSATION - Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("Statement No. 123") is
effective for 1996. 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 are required to make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. Refer to Note 11.
10
<PAGE> 25
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT
RISK
At December 31, 1996, the Company's financial instruments included cash,
cash equivalents, investments, accounts receivable, current obligations,
and noncurrent liabilities. The fair values of these items approximates
their carrying amounts at December 31, 1996. Accrued liabilities in Saudi
Arabia consist primarily of accrued salary and benefits. Payment of these
items is contingent on the Company's ability to obtain future financing. As
such, a fair value cannot be reasonably estimated.
Financial instruments that are potentially subject to concentrations of
credit risk consist of cash equivalents, short-term investments, and trade
accounts receivable. The Company places its cash equivalents and short-term
investments with high credit quality financial institutions.
South Hampton, the Company's only revenue producing asset, sells its
products primarily to companies in the chemical and plastics industry.
Downturns in these industries could negatively impact refinery operations
in the future. South Hampton does not require collateral on its outstanding
accounts receivable balances. South Hampton's largest customer accounted
for 17%, 25% and 13% of total sales in 1996, 1995 and 1994, respectively.
NOTE 5 - CONTINGENCIES
The operations of the Company in Saudi Arabia have been, and may in the
future be, affected from time to time in varying degree by political
developments and laws and regulations, such as forced divestiture of
assets; restrictions on production, imports and exports; price controls;
tax increases and retroactive tax claims; expropriation of property,
cancellation of contract rights and environmental regulations.
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 the properties described
in Notes 7 and 8, 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.
South Hampton, is a defendant in two lawsuits in two district courts in
Jefferson County, Texas brought on July 21, 1993 and July 18, 1994 by two
former employees of the Goodyear Tire & Rubber Company, seeking unspecified
actual and punitive damages for certain alleged illness and diseases
resulting from alleged exposure to certain chemicals during their
employment with Goodyear. One of these lawsuits was settled in March 1997.
The cost to the Company, net of expected insurance recovery, is not
significant. The outcome of the remaining lawsuit is not expected to have a
material effect on the Company's financial position, results of operations
or liquidity.
11
<PAGE> 26
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - CONTINGENCIES - CONTINUED
South Hampton has been spending an increased amount of time and expense on
environmental and regulatory functions and compliance. It is South
Hampton's policy to accrue costs associated with regulatory compliance when
those costs are reasonably determinable. In 1993, while remediating a small
spill area, The Texas Natural Resources Conservation Commission ("TNRCC")
requested that the refinery drill a well to check for groundwater
contamination under the spill area. The well disclosed a pool of
hydrocarbons on top of the groundwater under a truck loading rack area. An
analysis of the material indicated that the hydrocarbons were produced more
than fifteen years ago when the refinery was in the business of processing
crude oil. Consulting engineers were hired to help evaluate the size and
location of the pool. Monitoring wells were drilled around the perimeter of
the refinery property and it was determined that there was no migration of
hydrocarbons off the Company's property. Two large pools were located, one
under the South Hampton's historic refinery site and one under property
which had been purchased from an independent gas producer in 1981. The west
plant site had previously been the site of a natural gas processing plant
operated by Sinclair, Arco and others. The TNRCC has been cooperating in
the investigation and cleanup. Due to the apparent age of the material, no
fine or enforcement action is expected. A site assessment plan was
completed and approved in November 1995. Cleanup expenditures through 1996
were approximately $153,500, and an additional $60,000 was accrued at
December 31, 1996. The consulting engineers expect approximately 10,000
barrels of recoverable material will be available to South Hampton for use
in their refining process, but no accrued income has been recorded due to
the uncertainties relating to the recovery process.
In November 1996, South Hampton agreed to a proposed settlement with the
TNRCC's Air Permit Section for various alleged violations occurring during
the 1991 though 1994 inspections. An agreed fine of $50,000 will be paid
over a period of ten months and an amount adequate to cover the remaining
amounts to be paid was accrued as of December 31, 1996. South Hampton
vigorously denied many of the allegations in the settlement document, but
determined that to further protest the TNRCC's interpretation and
application of the rules would ultimately result in higher expenses.
12
<PAGE> 27
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - CONTINGENCIES - CONTINUED
In addition to the various Environmental Protection Agency and TNRCC air,
water and solid waste regulations, South Hampton is also subject to the
regulations of the U.S. Department of Transportation, the Occupational,
Health and Safety Administration and the Texas General Land Office, among
others. In response to various regulations from these and other agencies,
South Hampton has developed OPA-90 Emergency Response Plans for the
pipeline and the refinery, and is in the process of voluntarily adopting
the requirements of the OSHA Process Safety Management rules. Approximately
$35,000 and $80,000 was spent in 1996 and 1995, respectively, on
development of this OSHA program. The program is approximately 75%
completed and is expected to be completed in 1997 at an additional cost of
about $25,000. Due to the uncertain timing and scope of the additional
work, no accruals have been provided.
The Company has not made all of the surface rental payments due to the
government of Saudi Arabia under the terms of the Al Masane Project lease.
At December 31, 1996, the past due amount of these rent payments was
approximately $309,000. 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 requirements will
not have any effect on the Company's planned operations in Saudi Arabia.
At December 31, 1996, South Hampton had a $100,000 letter of credit in
support of payment for purchases of natural gas used in the refinery from
its main supplier.
NOTE 6 - INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Refinery feedstock $ -- $ 59,358
Refined products 565,346 371,374
--------- ---------
Total inventories $ 565,346 $ 430,732
========= =========
</TABLE>
In 1994, liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years decreased cost of goods sold and increased net
income by approximately $57,000.
At December 31, 1996, current cost exceeded LIFO value by approximately
$163,000. At December 31, 1995, current cost approximated LIFO value.
13
<PAGE> 28
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
In the accompanying consolidated financial statements, the deferred
development costs have been presented based on the related projects'
geographic location within Saudi Arabia. This includes the "Al Masane
Project"(the "Project") and "Other interests in Saudi Arabia" which
primarily pertains to the costs of rentals, field offices and camps, core
drilling and labor incurred at the Wadi Qatan and Jebel Harr properties.
In 1971, the Saudi Arabian government awarded exploration licenses to the
Company and National Mining Company ("NMC"), a Saudi Arabian company, for
the Al Masane Project, Wadi Qatan and Jebel Harr areas. The Company and NMC
also obtained written authority to explore an area of 1,100 square
kilometers surrounding Al Masane ("Greater Al Masane"). An exploration
license for the Greater Al Masane area has been applied for and verbally
approved by the Saudi Arabian government (unaudited).
In 1992, NMC relinquished its rights to the exploration license and the
mining lease in the Al Masane area, and assigned them to the Company. The
Company accepted the conditions set by the Saudi Arabian government in a
letter dated March 30, 1992. In connection with NMC's assignment of its
interest to the Company, the Company agreed to provide for public
subscription in Saudi Arabia 50% of the capital of the Project at such time
as the Project proves to be profitable. Subsequently, a formal Mining Lease
Agreement assigning the lease solely to the Company was initialed by the
Company and the Ministry on October 4, 1992.
Since NMC assigned its 50% interest in the exploration license and any
resulting mining lease to the Company, the Company is solely responsible
for the repayment of an $11 million interest-free loan from the Saudi
Arabian government, the proceeds of which were used to fund the Project.
The loan was scheduled to be repaid in ten annual installments beginning in
1984. None of the scheduled payments have been made. Pursuant to Article 18
of the Mining Lease Agreement, the Company will repay the loan in
accordance with a repayment schedule to be agreed upon with the Saudi
Arabian government. As noted below, the mining lease was granted in 1993.
However, a rescheduling of the loan payments has not yet been negotiated.
All of the Company's assets in Saudi Arabia are pledged as collateral for
the loan.
The Company has held exploration licenses for the Wadi Qatan and Jebel Harr
areas in Saudi Arabia. Although the licenses have expired, the Saudi
Arabian government has verbally advised the Company that they will be
extended as long as mineral exploration is being carried out on the areas
which they cover. When financing for the Al Masane project is completed,
the Company anticipates applying for an exploration license for an area of
2,800 square kilometers which will include the original Greater Al Masane
area plus the Wadi Qatan and Jebel Harr areas. Although the licenses were
originally awarded jointly to the Company and NMC, the exploration work has
been carried on exclusively by the Company. NMC has verbally advised the
Company that it has relinquished its rights in these areas; therefore, the
Company intends to obtain the license extensions in the name of the Company
only. The Company has had positive results from its exploration work at
these sites; however, it has directed limited amounts of time and resources
to 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.
14
<PAGE> 29
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA -
CONTINUED
On April 26, 1993, the Council of Ministers passed a resolution granting
the Company a mining lease for the Al Masane Project, 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 payment in August 1993. All subsequent payments, which amount
to $309,000 at December 31, 1996, are being deferred until a Saudi limited
liability company is formed and the mining lease is transferred to it. The
Company will own 50% of this new company, which will 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 will be formed in which the
limited liability company will transfer its interest in the Al Masane
Project. The Company will own 50% of the stock in the public stock company.
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
and the remaining interests not owned by the Company or acquired by
PETROMIN are to be put out for public subscription to Saudi citizens.
On March 27, 1995, the board of directors approved a Letter of Agreement
between the Company and Carlyle SEAG ("Carlyle"), whereby Carlyle had been
retained as the Company's financial advisor in connection with the Al
Masane mining project. In March 1996, the agreement with Carlyle was
terminated by mutual consent.
On May 20, 1996, the Company entered into a Financial and Legal Services
and Advice Agreement with two Saudi Arabian advisors to provide the
following services in connection with the Al Masane mining project: (1) the
formation of a Saudi limited liability company with the necessary capital
to purchase the Company's interest in the mining lease and to pay its share
of the project costs, (2) to finalize the required procedures for the
issuance of an industrial license, (3) to finalize the necessary procedures
to obtain the loan from the SIDF, (4) to apply for and receive loans from
commercial banks necessary to finance the project and (5) to apply and
obtain approval for the transfer of the mining lease to the limited
liability company. As consideration for their services, the Company agreed
to pay the two advisors $10,000 each for the issuance of the industrial
license and to pay one of them $10,000 upon approval of the loan by the
SIDF. The Company has also agreed to issue them up to 2,000,000 shares of
the Company's common stock and to grant them options to purchase up to
2,300,000 shares of the Company's common stock. The Company is obligated to
issue such shares and options in designated amounts upon completion of each
of the foregoing services. The options will have a five-year term
commencing on the date of formation of the Saudi limited liability company
with an exercise price of $1.00 per share. On December 3, 1996, the
industrial license was issued to the Company and its Saudi Arabian
advisors, and the Company was obligated at December 31, 1996 for the
payment of $20,000 in cash and the issuance of 300,000 shares of common
stock and stock options for 345,000 shares at $1.00 per share.
15
<PAGE> 30
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA -
CONTINUED
Phase I of the work on the Project (sinking shaft, tunneling and drilling)
was completed in April 1981. Since that time, there have been a series of
project feasibility studies in 1982, 1984, 1989, 1992, and 1994, conducted
by Watts, Griffis and McOuat Limited, consulting geologist, indicating the
commercial viability of the Project. The 1994 report, and an update
prepared in 1996, estimates proven and probable reserves of copper, zinc,
silver and gold of 7.2 million tonnes in the Project with the potential to
increase these reserves with further exploration. The report projects
production of the proven and probable reserves over a twelve-year period.
The cash flow projection was made based on the assumption that 50% of the
financing of the project will come from loans from the Saudi Industrial
Development Fund, 25% from bank loans, and 25% from equity financing of the
new Saudi limited liability company. Revenues were estimated utilizing
projected mineral prices from a third party pricing expert. The report
projected positive net cash flows to the Company of $37 million over the
life of the Project. According to the provisions of Article 46 of the Saudi
Mining Code, no taxes will be payable to the Saudi government during the
first stage of operations on a mining lease, which is the period of five
years starting from the earlier of (a) the date of the first sale of
products or (b) the beginning of the fourth year since the issue of the
lease.
Deferred development costs of the Al Masane Project at December 31, 1996,
1995 and 1994, and the changes in these amounts for each of the three years
then ended are detailed below:
<TABLE>
<CAPTION>
Balance at Balance at Balance at
December 31, Activity December 31, Activity December 31, Activity
1996 for 1996 1995 for 1995 1994 for 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Property and equipment:
Mining equipment $ 2,160,206 $ 2,160,206 $ 2,160,206
Construction costs 3,140,493 3,140,493 3,140,493
----------- ----------- -----------
Total 5,300,699 5,300,699 5,300,699
Other costs:
Labor, consulting
services and project
administration costs 18,582,773 $ 1,942,586 16,640,187 $ 616,912 16,023,275 $ 237,908
Materials and
maintenance 6,167,924 914 6,167,010 5,326 6,161,684 683
Feasibility study 2,831,442 41,455 2,789,987 163,513 2,626,474 505,118
----------- ----------- ----------- ----------- ----------- -----------
Total 27,582,139 1,984,955 25,597,184 785,751 24,811,433 743,709
----------- ----------- ----------- ----------- ----------- -----------
$32,882,838 $ 1,984,955 $30,897,883 $ 785,751 $30,112,132 $ 743,709
=========== =========== =========== =========== =========== ===========
</TABLE>
The deferred development costs of the "Other interests in Saudi Arabia", in
the total amount of approximately $2.4 million, consist of approximately
$1.5 million associated with the Greater Al Masane area and the balance of
approximately $900,000 is associated primarily with the Wadi Qatan and
Jebel Harr areas. These costs have not changed since 1993. In the event an
exploration license for these areas is not granted, the entire amount of
deferred development costs relating thereto would be written off.
16
<PAGE> 31
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA -
CONTINUED
Since cash in Saudi Arabia is generally intended for the support and
development of the Saudi Arabian projects, a long-term asset, such cash and
certain associated liabilities relating to the Saudi Arabian projects have
been classified as noncurrent. Cash in Saudi Arabia includes time deposits
of $0 and $300,735 at December 31, 1996 and 1995, respectively.
NOTE 8 - MINERAL PROPERTIES IN THE UNITED STATES
The Company has voting rights of approximately 55% and directly owns
approximately 46% of the outstanding common stock of Pioche. During 1988,
634,223 shares of Pioche stock were deemed acquired through in-substance
foreclosure on a $114,537 note due from the issuer's estate. The original
date of the note was May 31, 1985, and the note was due on May 31, 1995;
however, management of the Company extended the due date to December 31,
1998 to allow the estate the opportunity to pay off the note. Until the
note is paid, the Company has the voting rights to these shares. At this
time, it is not possible to determine whether the issuer's estate will be
able to repay the note when due. If the note is not repaid, the Company
could take ownership of the shares. At December 31, 1996, the Company
determined the loan was not likely to be repaid, and has consolidated the
accounts of Pioche in the accompanying financial statements for 1996.
Previously, the investment in Pioche was accounted for on the equity
method. The consolidation of Pioche increased total assets at December 31,
1996 by approximately $1,200,000 and had no effect on the net loss reported
for 1996.
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 the Pioche Mining District in southeastern
Nevada. Due to the lack of capital , 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 hole to be drilled when financing becomes
available. In late 1996, Pioche was extended a proposal from a prominent
mining company for the lease of its mining claims. This proposal is
currently being negotiated.
In August 1993, Pioche entered into a lease of the Wide Awake mine
property. This agreement stipulated 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 be extended for
one year to December 31, 1996, under the same terms. No significant work
took place on the property and no royalties were earned. The lease was not
extended and it has expired. In 1995, the Company received an extension of
its option to buy 720,000 shares (approximately 10% of the outstanding
shares) of Pioche common stock at $0.20 per share. The option expires on
June 1, 1997.
17
<PAGE> 32
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS
Notes payable, long-term debt and long-term obligations at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Notes payable:
Revolving bank note. See (A) $ -- $ 2,222,911
Secured note to Saudi Arabian government. See (B) 11,000,000 11,000,000
Unsecured note to a Saudi company. See (C) -- 1,500,000
Unsecured note to a Saudi investor. See (D) 13,280 13,280
Unsecured note to a Saudi investor. See (E) 350,000 350,000
Other 12,500 --
------------ ------------
Total $ 11,375,780 $ 15,086,191
============ ============
Long-term debt:
Revolving bank note. See (A) $ 1,890,000 $ --
Unsecured note to a Saudi company. See (C) 1,945,773 --
Unsecured notes to foreign investors. See (F) 598,000 598,000
Bank note. See (G) 103,068 188,624
------------ ------------
Total 4,536,841 786,624
Less current portion (992,729) (78,090)
------------ ------------
Total $ 3,544,112 $ 708,534
============ ============
Long-term obligations:
Noninterest-bearing note to a supplier and
customer for capital improvements. See (H) $ 128,683 $ 128,683
Deferred compensation contracts. See (I) 57,230 77,477
------------ ------------
Total 185,913 206,160
Less current portion (150,904) (20,285)
------------ ------------
Total $ 35,009 $ 185,875
============ ============
</TABLE>
(A) In 1990, South Hampton and a bank entered into an Amended and Restated
Credit Agreement ("the Agreement"). Funding under the Agreement was provided
in two facilities: Facility A in the principal amount of $4,400,000, funded
in a lump-sum, and Facility B in the principal amount of up to $1,500,000,
to be used by South Hampton for working capital purposes and support of
feedstock purchases. Facility B was fully drawn down in the form of letters
of credit. In 1992, the bank drew on the letters of credit provided by a
related party of the Company (see (C) below.)
18
<PAGE> 33
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS -
CONTINUED
On October 15, 1996, South Hampton and the bank agreed to amend and
restate the Agreement (the "Restated Agreement"). South Hampton executed
a new Promissory Note in the original principal amount of $1,965,000
having a December 31, 1998 maturity date and bearing interest at the rate
of one percent above the prime lending rate in effect at the bank's New
York office payable monthly in arrears on the last day of each month.
Advances under the Restated Agreement are not to exceed the lesser of
$1,965,000 or the borrowing base, which is calculated as the cash
collateral account and eligible receivables and inventory. Minimum
principal payments of $75,000 are to be made, payable by the last day of
each quarter commencing December 31, 1996. As in the previous Agreement,
South Hampton has agreed to collect all receivables through a cash
collateral account at a local bank. Various restrictions have been placed
on how funds may be spent by South Hampton and periodic reports must be
provided to the bank. Under certain guidelines, the Restated Agreement
permits certain cash distributions to Saudi Fal Co., Ltd. ("Saudi Fal"),
TOCCO, the Refining Company, and the Company. The note is collateralized
by all of the assets of TOCCO and its subsidiaries and a pledge of TOCCO
common stock owned by the Refining Company. The Restated Agreement
contains certain financial covenants, including a minimum current ratio
and fixed charges coverage ratio. At December 31, 1996 South Hampton was
not in compliance with the fixed charges coverage requirement. However,
the noncompliance was waived by the lender.
(B) TheCompany has an interest-free loan of $11,000,000 from the Saudi Arabia
Ministry of Finance and National Economy, the proceeds of which were used
to finance the development phase of the Al Masane Project. The loan was
repayable in ten equal annual installments of $1,100,000, with the
initial installment payable on December 31, 1984. None of the ten
scheduled payments have been made. Pursuant to the mining lease agreement
covering the Al Masane Project, the Company will repay the loan in
accordance with a repayment schedule to be agreed upon with the Saudi
Arabian government. An agreement has not yet been reached regarding the
rescheduling of these payments. The loan is secured by all of the
Company's assets in Saudi Arabia.
(C) In 1990, Saudi Fal, a Saudi company owned by a shareholder of the
Company, agreed to issue a guarantee of $1,500,000 securing a letter of
credit facility to enable South Hampton to buy feedstock. In return for
the guarantee, Saudi Fal was given an option to purchase all of the
outstanding stock of TOCCO. The option was not exercised and has expired.
On March 31, 1992, the $1,500,000 guarantee was not renewed by Saudi Fal.
As a result, the bank drew on the letter of credit provided by Saudi Fal
for its guarantee and applied the $1,500,000 to reduce the principal
amount of the bank note. The note is now owed by South Hampton to Saudi
Fal. On October 15, 1996, South Hampton and Saudi Fal agreed to
restructure the loan terms, whereby the accrued interest to date of
$445,773 was added to principal, the interest rate was set at prime plus
1%, and the maturity date is now December 31, 1998. This new note has a
second lien position behind the bank's position as discussed in (A) above
and is convertible into 1,945,773 shares of common stock.
(D) Represents a noninterest demand loan payable to a Saudi investor. In
September 1995, this investor loaned the Company an additional $123,000.
The loan agreement granted an option to convert the loan into shares of
the Company's common stock at $1 per share. Also in September 1995, the
investor exercised this option and converted the $123,000 loan into
123,000 shares of the Company's common stock (see Note 11). In December
1995, the investor agreed to exchange $155,000 of his debt balance for
155,000 shares of the Company's common stock.
19
<PAGE> 34
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS -
CONTINUED
(E) Represents an unsecured, noninterest bearing advance made by a Saudi
investor in 1984 to the Al Masane Project.
(F) Represents loans payable to a stockholder of the Company for $245,000,
the Company's president for $53,000 and a relative of the Company's
president and stockholder for $300,000. Each loan is due in 1997, with
interest payable at the LIBOR rate plus 2% at maturity. Each loan
provides for an option to convert the loan amount to shares of the
Company's common stock at $1.00 per share anytime within five years from
the date of the loan. See Note 11 for a discussion of the related
options.
(G) This note payable is collateralized by land, an office building, and all
equipment and furniture and fixtures of TOCCO. As described in Note 10,
the building collateralized by this note has been leased to a third
party. The original balance of the note was due and payable on December
31, 1994. This note was refinanced effective December 31, 1994 with
principal and interest payments starting in March 1995 and each month
thereafter until February 1, 1998. The note bears interest of 10% from
the date of the agreement to February 1, 1996, 10.25% from February 1,
1996 to February 1, 1997, and 9.75% thereafter.
(H) Balance represents amount due under a note payable to an unrelated
refining company that provided loans to the refinery to fund certain
refining processes. Repayment is to be made when certain feed rate
criteria and number of days of operations have been reached. As of
December 31, 1996, these criteria have been met.
(I) In connection with the acquisition of TOCCO, deferred compensation
contracts between TOCCO and a certain former employee and one current
employee were restructured, reducing the gross payments due under the
original contracts. Default on payments due under the restructured
agreements would invalidate the negotiated settlement amounts resulting
in TOCCO being liable for the amounts due under the original contracts.
TOCCO has complied with the terms of these contracts through 1996.
However, if TOCCO were to default on these contracts, it would be liable
for an additional amount of $448,300. The recorded liability at December
31, 1996 and 1995 has been determined utilizing a discount rate of 8.0%.
Scheduled maturities of long-term debt and long-term obligations, which
exclude current notes payable balances aggregating $11,375,780, are as
follows:
<TABLE>
<S> <C> <C>
1997 $1,143,633
1998 2,245,773
1999 1,333,348
----------
Total $4,722,754
==========
</TABLE>
Interest of $186,190, $244,828 and $275,561 was paid in 1996, 1995 and 1994,
respectively.
20
<PAGE> 35
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS -
CONTINUED
In May 1994, South Hampton settled a note payable and accrued interest
payable to a vendor for $175,000 cash. An extraordinary gain of $578,150,
for which there was no tax effect after application of operating loss
carryforwards was recorded, representing the amounts forgiven.
NOTE 10 - COMMITMENTS
South Hampton entered into an arrangement in July 1991 with a partnership,
in which Silsbee Trading and Transportation Corp. ("STTC", a company owned
by the president and vice-president of TOCCO) 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 and $103,212
in 1995 and 1994, respectively.
South Hampton leases vehicles and equipment for use in operations for
approximately $29,000 per month plus certain reimbursed costs from STTC
under a lease agreement. The lease agreement expired in September 1994 and
is currently continuing on a month to month basis. South Hampton incurred
costs related to this agreement of approximately $349,000, $316,000 and
$341,000 in 1996, 1995 and 1994, respectively.
The Company incurred rental expenses for office space and certain vehicles
and equipment of approximately $367,000, $302,000 and $302,000 in 1996, 1995
and 1994, respectively.
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, 1996 of
$310,926 which South Hampton does 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 being recorded as an operating lease and the
building is included in other assets. As described in Note 9, the leased
building is pledged as collateral for a note payable. If the leasee
exercises its option to purchase the building, the proceeds will be used to
pay down the note payable . Miscellaneous income includes approximately
$102,000 in 1996, 1995 and 1994 of rental income pursuant to this lease.
A provision of the purchase agreement related to the acquisition of TOCCO by
the Refining Company requires TOCCO to reserve up to 10% of its common stock
to be available for sale to the employees of TOCCO on such terms and
conditions and at such times as determined by TOCCO.
South Hampton has guaranteed a note for $160,000 for a limited partnership
in which South Hampton has a 19% interest.
21
<PAGE> 36
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - COMMON STOCK AND STOCK OPTIONS
At December 31, 1996, Saudi Arabian investors owned approximately 63% of the
Company's outstanding common stock.
COMMON STOCK - The proceeds from common stock sales are used to finance
mineral exploration and development activities in Saudi Arabia and general
and administrative expenses in the United States. Agreements relating to
certain stock sold to investors provide that shares may not be traded in
United States markets unless registered under the United States Securities
Act of 1933 or unless they are sold pursuant to an available exemption from
registration.
Notes receivable from stockholders for the purchase of common stock of
$126,000 at December 31, 1996 and 1995 represents a note from a director and
officer which matures on December 31, 1998. Notes receivable from
stockholders are classified as a reduction of stockholders' equity.
At December 31, 1996, a note payable was convertible into 1,945,773 shares
of common stock (See Note 9).
STOCK OPTIONS - Under the terms of the Company's Employee Stock Option Plan
(the "Employee Plan"), incentive options are granted at the market price of
the stock on the date of grant and nonincentive options are granted at a
price not less than 85% of the market price of the stock on the date of
grant. The Employee Plan was adopted on May 16, 1983 for a term of ten
years. At the Company's annual stockholders meeting on December 29, 1992,
the stockholders approved an extension of the term of the Employee Plan for
another ten years to May 16, 2003 and also approved an increase in the
number of shares reserved for issuance thereunder from 250,000 to 500,000.
On September 26, 1994, the Compensation Committee of the board of directors
approved the granting of options to purchase a total of 75,000 shares of
common stock for $1.75 per share, the market value on the date of the grant,
to four employees of the Company. These options expire in 2004.
To enhance the Company's ability to obtain and retain qualified directors,
it instituted the 1987 Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan") which provides for each non-employee director
to receive an option for 10,000 shares of common stock upon election to the
board of directors with the exercise price equal to the fair market value of
the stock at the date of grant. The number of shares reserved for issuance
under this plan is 100,000. The Non-Employee Director Plan was instituted in
1987 for a duration of ten years and in 1997 it will expire. Then, a new
plan may be instituted at a later date. At December 31, 1996, 40,000 shares
had been granted, 20,000 had been forfeited and none had been exercised.
22
<PAGE> 37
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - COMMON STOCK AND STOCK OPTIONS - CONTINUED
A summary of stock option transactions under the Employee Plan and
Non-Employee Director Plan is as follows:
<TABLE>
<S> <C>
Outstanding December 31, 1993 160,000
Granted ($1.75 per share) 75,000
Expired (20,000)
-------
Outstanding at December 31, 1994, 1995 and 1996 215,000
=======
</TABLE>
Under the above plans, 207,000 options were exercisable at prices ranging
from $1.38 to $3.75 per share and 385,000 shares were reserved for grant at
December 31, 1996. The options for the Employee Plan vest at such times and
in such amounts as is determined by the Compensation Committee of the board
of directors at the date of grant. The options for the Non-Employee Director
Plan vest in cumulative annual installments of 20% beginning one year from
the date of grant. The options for both plans are exercisable for a period
of ten years.
In 1994, a director and officer of the Company exercised an option to
purchase 14,000 shares of common stock at $1.00 per share in exchange for
cancellation of $14,000 of unpaid compensation.
In 1995, the Company wrote off a receivable from a company controlled by a
director of the Company in the amount of $100,000 resulting from the
exercise of stock options.
In 1995, three foreign investors and the president of the Company loaned the
Company $668,000 and $53,000, respectively (See Note 9). The agreements
provide that the lender would have the option, at anytime within five years
from the date of the loan, to convert the debt plus accrued interest into
shares of the Company's common stock at $1.00 per share. In September 1995,
one of the investors exercised his option and converted $123,000 of his loan
to 123,000 shares of common stock outstanding (See (D) in Note 9).
In October 1995, the board of directors approved an option for the president
of the Company to exchange $400,000 of his unpaid salary for shares of the
Company's common stock at $1.00 per share. The options do not expire and
they were exercisable immediately upon grant.
On May 20, 1996, the Company entered into a Financial and Legal Services and
Advice Agreement with two Saudi Arabian advisors who are to assist the
Company with the Al Masane Project (See Note 7). The Agreement provides for
consideration to the advisors of up to 2,000,000 shares of the Company's
common stock and options to purchase up to 2,300,000 shares of common stock
at $1.00 per share. The options are to be granted in designated amounts upon
the completion of various obligations by the advisors. The options are
immediately exercisable upon grant and will have a five year term beginning
on the date of the formation of the Saudi limited liability company. At
December 31, 1996, 300,000 shares of common stock, valued at $550,000, and
options to purchase 345,000 shares, valued at $796,950, had been earned
under the Agreement.
23
<PAGE> 38
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMON STOCK AND STOCK OPTIONS - CONTINUED
For stock options granted to employees and directors at an exercise price
below market price on the date of grant, the Company records an expense
equal to the difference between the exercise price and the market prices on
the date of grant. An expense is also recorded for the difference between
sales price and market price for stock sold to employees and directors, not
pursuant to options, at below market prices.
For the options to purchase 668,000 shares of stock granted to investors
during 1995, the Company recognized an expense of $ 76,500, which is
included in general and administrative expense in the Company's results of
operations for the year ended December 31, 1995. This expense is based on
the fair value of the options as of the grant date. For the options to
purchase 400,000 shares of stock granted to the Company's president in
1995, the Company recorded compensation expense in the amount of $74,900,
which is included in general and administrative expense in the Company's
results of operations for the year ended December 31, 1995. This expense is
based on the difference between the market price of the Company's stock as
of the grant date and the price of the option.
A summary of stock option transactions with individuals is as follows:
<TABLE>
<S> <C>
Outstanding December 31, 1993 14,000
Exercised (14,000)
----------
Outstanding at December 31, 1994 --
Granted ($1.00 per share) 1,121,000
Exercised (123,000)
----------
Outstanding at December 31, 1995 998,000
Granted ($1.00 per share) 345,000
----------
Outstanding at December 31, 1996 1,343,000
==========
</TABLE>
All stock sold to individuals in connection with these options includes a
restriction that it cannot be traded for a three-year period.
The Company has adopted only the disclosure provisions of Statement No.
123, as discussed in Note 3. Therefore, compensation expense for stock
options granted to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock. If the Company recognized
compensation expense based upon the fair value at the grant date for
options granted to employees in 1995 (none were granted in 1996), the
Company's 1995 and 1996 net loss and loss per share would be increased to
the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net loss
As reported $ (390,896) $ (369,232)
Pro forma (390,896) $ (726,332)
Loss per common share
As reported $ (.02) $ (.02)
Pro forma $ (.02) $ (.04)
</TABLE>
24
<PAGE> 39
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - COMMON STOCK AND STOCK OPTIONS - CONTINUED
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 85 percent; risk-free interest rate of
6 percent; no dividend yield; and expected lives of 10 years.
The pro forma amounts presented are not representative of the amounts that
will be disclosed in the future because they do not take into effect pro
forma expenses related to grants before 1995.
Additional information with respect to all options outstanding at December
31, 1996, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
1994
---------------------------
Weighted average
Shares exercise price
-------- ---------------
<S> <C> <C>
Outstanding at beginning of year 174,000 $ 1.74
Granted 75,000 1.75
Forfeited (20,000) 1.38
Exercised (14,000) 1.00
--------
Outstanding at end of year 215,000 $ 1.83
======== =========
Options exercisable at December 31, 1994 161,500 $ 1.74
======== =========
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------
Weighted average
Shares exercise price
---------- ---------------
<S> <C> <C>
Outstanding at beginning of year 215,000 $ 1.83
Granted 1,121,000 1.00
Exercised (123,000) 1.00
----------
Outstanding at end of year 1,213,000 $ 1.15
========== ========
Options exercisable at December 31, 1995 1,163,500 $ 1.12
========== ========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------
Weighted average
Shares exercise price
---------- ---------------
<S> <C> <C>
Outstanding at beginning of year 1,213,000 $ 1.15
Granted 345,000 1.00
----------
Outstanding at end of year 1,558,000 $ 1.11
========== ========
Options exercisable at December 31, 1996 1,550,000 $ 1.10
========== ========
Weighted average fair value per share of
options granted during 1996 $ 2.31
========
</TABLE>
25
<PAGE> 40
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - COMMON STOCK AND STOCK OPTIONS - CONTINUED
Information about stock options outstanding at December 31, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
Options outstanding
-------------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ---------------- --------------
<S> <C> <C> <C>
$0 to 1 1,343,000 8.1 years $1.00
$1 to 2 175,000 8.3 years 1.53
$2 to $3.75 40,000 4.3 years 3.10
---------
1,558,000 $1.11
========= =====
</TABLE>
<TABLE>
<CAPTION>
Options exercisable
----------------------------------
Number Weighted average
Range of exercise prices exercisable exercise price
------------------------ ----------- --------------
<S> <C> <C>
$0 to 1 1,343,000 $1.00
$1 to 2 175,000 1.53
$2 to $3.75 32,000 3.04
---------
1,550,000 $1.10
========= =====
</TABLE>
NOTE 12 - INCOME TAXES
The income (loss) before income taxes and extraordinary item was ($390,896),
($369,232), and $2,314,129 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company's provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal
Current $ -- $ -- $522,938
Deferred -- -- --
Utilization of operating loss carryover -- -- (482,965)
-------- -------- --------
Provision for income taxes $ -- $ -- $ 39,973
======== ======== ========
</TABLE>
26
<PAGE> 41
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - INCOME TAXES - CONTINUED
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994 differs from the amount computed by applying the applicable U.S.
corporate income tax rate of 34% to net income (loss) before income taxes.
The reasons for this difference are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate $(132,905) $(125,539) $ 786,804
Goodwill amortization 94,228 95,303 95,303
Liability reserves -- -- (392,700)
Net operating losses 37,924 25,731 (482,965)
Alternative minimum tax -- -- 39,973
Other items 753 4,505 (6,442)
--------- --------- ---------
Total tax expense $ -- $ -- $ 39,973
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Refinery plant, pipeline and equipment $ (287,845) $ (368,385) $ (379,668)
Deferred tax assets:
Accounts receivable 57,284 49,544 44,070
Mineral interests 196,446 196,446 196,446
Accrued liabilities 32,300 -- --
Net operating loss carryovers (NOLs) 11,333,611 11,274,638 9,277,552
Tax credit carryovers 221,322 651,504 650,907
------------ ------------ ------------
Gross deferred tax assets 11,840,963 12,172,132 10,168,975
Valuation allowance (11,553,118) (11,803,747) (9,789,307)
------------ ------------ ------------
Net deferred tax assets 287,845 368,385 379,668
------------ ------------ ------------
Net deferred taxes $ -- $ -- $ --
============ ============ ============
</TABLE>
27
<PAGE> 42
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - INCOME TAXES - CONTINUED
During 1995, the Company's gross deferred tax asset increased by $2,003,157
to $12,172,132 at December 31, 1995. The primary reason for this increase in
the gross deferred tax asset is due to a restatement of NOLs from prior
years. There was no change in judgment about the Company's ability to
realize its net deferred tax asset; therefore, the valuation allowance was
increased by a corresponding amount. If certain substantial changes in the
Company's ownership should occur, there would be an annual limitation on the
amount of tax carryovers which could be utilized.
At December 31, 1996, the Company had approximately $33,335,000 of net
operating loss carryforwards and approximately $180,000 of general business
credit carryforwards. These carryforwards expire in 1997 through 2010. In
addition, the Company has minimum tax credit carryforwards of approximately
$40,000 that may be carried over indefinitely. Approximately $1,700,000 of
the net operating loss carryforwards and $180,000 of the general business
credit carryforwards are limited to the net income of TOCCO. Approximately
$5,900,000 of the net operating loss carryforwards are limited to the net
income of the Coal Company.
The Company has no Saudi Arabian tax liability.
NOTE 13 - SEGMENT INFORMATION
The Company has operations in two industry segments and geographic regions.
Its refinery operations represent the significant portion of its current
operating results and are exclusively in the United States, whereas its
mining operations, conducted mainly in Saudi Arabia, mostly relate to costs
which have been deferred during the development phase of these operations.
The only mining operations conducted in the United States relate to the
Company's investment in Pioche for which the related investment and equity
income and losses are shown separately on the balance sheet and statement of
operations, respectively. The Company has no significant corporate
activities.
Since a substantial portion of the Company's mineral properties and
interests are located outside of the United States, its business and
properties are subject to foreign laws and foreign conditions, with the
attendant varying risks and advantages. Foreign exchange controls, foreign
legal and political concepts, foreign government instability, international
economics and other factors create risks not necessarily comparable with
those involved in doing business in the United States.
For 1996, 1995 and 1994, essentially all activity on the Company's
consolidated statement of operations relates to the refinery. The 1996,
1995 and 1994 results include $33,944, $54,063 and $74,580, respectively,
of unallocated costs recorded in general and administrative expenses related
to the Saudi Arabian operations. The 1996 and 1995 results include
immaterial amounts of interest expense related to notes payable entered
into in 1995 that relate to the Saudi Arabian mining operations. All items
included in the Company's consolidated balance sheet related to the Saudi
Arabian operations are specifically identified on the face of the
consolidated balance sheet with the exception of notes payable which have
been identified in Note 9.
28
<PAGE> 43
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company shares office facilities and certain expenses with companies
owned by the chairman of the Company. At December 31, 1996 and 1995, these
companies did not owe any amounts to the Company.
Noncurrent accrued liabilities in Saudi Arabia in the consolidated balance
sheet represent amounts payable to the Company's president.
Other significant related party transactions have been addressed in the
related notes to the consolidated financial statements. In particular, see
Notes 9 and 11 for additional information.
29
<PAGE> 44
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents in United States................ $ 209,251 $ 302,039
Short-term investments.................................... 298,726 294,610
Accounts receivable (net of allowance for doubtful
accounts of $168,484 in 1996 and $145,709 in 1995)..... 2,643,691 1,791,821
Inventories............................................... 565,346 430,732
------------ ------------
Total current assets.............................. 3,717,014 2,819,202
Cash in Saudi Arabia........................................ 176,039 396,809
Refinery Plant, Pipeline and Equipment -- at Cost........... 5,758,852 5,563,776
Less Accumulated Depreciation............................... 2,911,823 2,557,454
Refinery Plant, Pipeline and Equipment, Net................. 2,847,029 3,006,322
Al Masane Project........................................... 32,882,838 30,897,883
Other Interests in Saudi Arabia............................. 2,431,248 2,431,248
Mineral Properties in the United States..................... 1,418,615 --
Investment in and Advances to Pioche-Ely Valley Mines,
Inc....................................................... -- 239,032
Goodwill.................................................... 117,598 397,902
Other Assets................................................ 505,566 617,019
------------ ------------
Total Assets...................................... $ 44,095,947 $ 40,805,417
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 1,408,677 $ 674,641
Accrued liabilities....................................... 520,445 617,995
Accrued liabilities in Saudi Arabia....................... 1,174,229 1,011,980
Notes payable............................................. 11,375,780 15,086,191
Current portion of long-term debt......................... 992,729 78,090
Current portion of long-term obligations.................. 150,904 20,285
------------ ------------
Total current liabilities......................... 15,622,764 17,489,182
Long-Term Debt.............................................. 3,544,112 708,534
Long-Term Obligations....................................... 35,009 185,875
Accrued Liabilities in Saudi Arabia......................... 714,143 636,047
Deferred Revenue............................................ 129,685 145,189
Commitments and Contingencies............................... -- --
Minority Interest in Consolidated Subsidiary................ 1,003,590 --
Stockholders' Equity
Common stock, authorized 40,000,000 shares of $.10 par
value: issued and outstanding, 20,956,494 shares in
1996 and 20,206,494 shares in 1995..................... 2,095,649 2,020,649
Additional paid-in capital................................ 34,932,700 33,210,750
Receivables from stockholders............................. (126,000) (126,000)
Accumulated deficit....................................... (13,855,705) (13,464,809)
------------ ------------
Total stockholders' equity........................ 23,046,644 21,640,590
------------ ------------
Total Liabilities and Stockholders' Equity........ $ 44,095,947 $ 40,805,417
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 45
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Refined product sales......................... $21,367,438 $17,741,862 $17,564,226
Processing fees............................... 646,848 616,796 200,757
----------- ----------- -----------
22,014,286 18,358,658 17,764,983
Operating costs and expenses
Cost of refined product sales and
processing................................. 19,357,737 15,575,054 13,750,750
General and administrative.................... 2,284,422 2,372,683 2,036,470
Depreciation and amortization................. 693,251 677,157 647,137
Litigation.................................... -- -- (975,000)
----------- ----------- -----------
22,335,410 18,624,894 15,459,357
----------- ----------- -----------
Operating income (loss)......................... (321,124) (266,236) 2,305,626
Other income (expense) Interest income.......... 25,310 33,395 56,491
Interest expense.............................. (336,979) (369,546) (347,364)
Minority interest............................. 13,072 -- --
Equity in losses of affiliate................. -- (24,112) (114,460)
Miscellaneous income.......................... 228,825 257,267 443,836
----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item............................ (390,896) (369,232) 2,314,129
Income tax expense.............................. -- -- (39,973)
----------- ----------- -----------
Income (loss) before extraordinary item......... (390,896) (369,232) 2,274,156
Extraordinary item.............................. -- -- 578,150
----------- ----------- -----------
Net income (loss)............................... $ (390,896) $ (369,232) $ 2,852,306
=========== =========== ===========
Per common share Income (loss) before
extraordinary item............................ $ (0.02) $ (0.02) $ 0.11
Extraordinary item............................ -- -- 0.03
----------- ----------- -----------
Net income (loss)..................... $ (0.02) $ (0.02) $ 0.14
=========== =========== ===========
Weighted average number of common shares
outstanding................................... 20,286,208 20,030,434 20,027,881
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 209,251
<SECURITIES> 0
<RECEIVABLES> 2,812,175
<ALLOWANCES> 168,484
<INVENTORY> 565,346
<CURRENT-ASSETS> 3,717,014
<PP&E> 5,758,852
<DEPRECIATION> 2,911,823
<TOTAL-ASSETS> 44,095,947
<CURRENT-LIABILITIES> 15,622,764
<BONDS> 0
2,095,649
0
<COMMON> 0
<OTHER-SE> 20,950,995
<TOTAL-LIABILITY-AND-EQUITY> 44,095,947
<SALES> 22,014,286
<TOTAL-REVENUES> 22,014,286
<CGS> 19,357,737
<TOTAL-COSTS> 19,537,737
<OTHER-EXPENSES> 2,977,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336,979
<INCOME-PRETAX> (390,896)
<INCOME-TAX> 0
<INCOME-CONTINUING> (390,896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (390,896)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
