<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------
FOR QUARTER ENDING JUNE 30, 1997
COMMISSION FILE NUMBER 0-6247
ARABIAN SHIELD DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former
fiscal year, if changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at June 30, 1997: 20,656,494.
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents in U.S. $ 304,597 $ 209,251
Short-term Investments 323,019 298,726
Accounts Receivable (Net) 3,040,646 2,643,691
Inventories 678,667 565,346
------------ ------------
Total Current Assets 4,346,929 3,717,014
CASH IN SAUDI ARABIA 223,867 176,039
REFINERY PLANT, PIPELINE & EQUIPMENT (AT COST)
Refinery Plant, Pipeline & Equip 5,803,016 5,758,852
Less: Accumulated Depreciation (3,100,913) (2,911,823)
------------ ------------
Net Equipment 2,702,103 2,847,029
AL MASANE PROJECT 33,195,409 32,882,838
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE U.S. 1,385,358 1,418,615
GOODWILL -- 117,598
OTHER ASSETS 312,673 505,566
------------ ------------
TOTAL ASSETS $ 44,597,587 $ 44,095,947
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable $ 1,593,425 $ 1,408,677
Accrued Liabilities 605,001 520,445
Accrued Liabilities in Saudi Arabia 1,174,229 1,174,229
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 898,000 992,729
Current Portion of Long-Term
Obligations 121,819 150,904
------------ ------------
Total Current Liabilities 15,768,254 15,622,764
LONG-TERM DEBT 3,385,773 3,544,112
LONG-TERM OBLIGATIONS 21,199 35,009
ACCRUED LIABILITIES IN SAUDI ARABIA 738,807 714,143
DEFERRED REVENUE 121,933 129,685
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 983,401 1,003,590
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 21,456,494
shares issued and outstanding 2,145,649 2,095,649
ADDITIONAL PAID-IN CAPITAL 35,382,700 34,932,700
RECEIVABLES FROM STOCKHOLDERS (126,000) (126,000)
ACCUMULATED DEFICIT (13,824,129) (13,855,705)
------------ ------------
Total Stockholders' Equity 23,578,220 23,046,644
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 44,597,587 $ 44,095,947
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30,1997 June 30,1996 June 30,1997 June 30, 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Refined Product Sales $ 6,497,755 $ 5,113,671 $ 12,390,177 $ 9,826,176
Processing Fees 142,588 146,291 250,730 343,433
------------ ------------ ------------ ------------
6,640,343 5,259,962 12,640,907 10,169,609
OPERATING COSTS AND EXPENSES:
Cost of Refined Product
Sales and Processing 5,396,438 4,552,198 11,096,142 8,706,361
General and Administrative 571,644 563,871 1,115,622 1,046,058
Depreciation and Amortization 150,665 138,779 325,613 344,348
------------ ------------ ------------ ------------
6,118,747 5,254,848 12,537,377 10,096,767
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 521,596 5,114 103,530 72,842
OTHER INCOME (EXPENSES):
Interest Income 6,415 6,342 11,371 14,453
Interest Expense (107,229) (83,700) (214,328) (172,273)
Minority Interest 1,358 2,943 18,790 4,228
Miscellaneous Income 57,781 48,107 112,213 102,327
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES 479,921 (21,194) 31,576 21,577
Income Tax Expense -- 1,689 -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 479,921 $ (19,505) $ 31,576 $ 21,577
============ ============ ============ ============
PER COMMON SHARE:
NET INCOME (LOSS) $ .02 $ (.01) $ .01 $ .01
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,389,827 20,206,494 21,239,827 20,206,494
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE, 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLES
------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 20,956,494 $ 2,095,649 $ 34,932,700 $ (126,000) $(13,855,705) $ 23,046,644
Common Stock and Common
Stock Subscriptions Sold 500,000 50,000 450,000 500,000
Net Income (Loss) 31,576 31,576
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1997 21,456,494 $ 2,145,649 $ 35,382,700 $ (126,000) $(13,824,129) $ 23,578,220
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) $ 31,576 $ 21,577
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 325,613 344,348
Recognition of Deferred Revenue (7,752) (7,752)
Effect of Changes in:
Decrease (Increase) in Accounts
Receivable (396,955) (1,024,125)
Decrease (Increase) in Inventories (113,321) (240,499)
Decrease (Increase) in Other Assets 192,893 34,214
(Decrease) Increase in Accounts
Payable and Accrued Liabilities 269,304 703,587
Other (39,114) (39,074)
------------ ------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 262,244 (192,220)
------------ ------------
INVESTING ACTIVITIES:
Additions to Short-Term Investments (24,293) --
Additions to Al Masane Project (312,571) (222,336)
Additions to Plant, Pipeline & Equipment (44,164) (36,741)
Reduction in Mineral Properties in U.S. 33,257 --
(Increase) Decrease in Cash in
Saudi Arabia (47,828) 319,514
Increase (Decrease) in Accrued
Liabilities in Saudi Arabia 24,664 30,375
------------ ------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (370,935) 90,812
------------ ------------
FINANCING ACTIVITIES:
Common Stock Issued for Cash 500,000 --
Additions to Notes Payable &
Long-Term Obligations -- --
Reductions of Notes Payable &
Long-Term Obligations (295,963) (181,551)
------------ ------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 204,037 (181,551)
------------ ------------
NET INCREASE (DECREASE) IN CASH 95,346 (282,959)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 209,251 596,649
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 304,597 $ 313,690
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q. These financial statements have not been examined by independent
certified public accountants, but in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of consolidated results of operations, consolidated
financial position and consolidated cash flows at the dates and for
the periods indicated, have been included.
These financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the six month
period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For
further information, refer to the Consolidated Financial Statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
These financial statements include the accounts of Arabian Shield
Development Company (the "Company") and its wholly-owned subsidiaries,
American Shield Refining Company (the "Refining Company") and American
Shield Coal Company (the "Coal Company"). The Refining Company owns
all of the outstanding common stock of Texas Oil and Chemical Company
II, Inc. ("TOCCO"). South Hampton Refining Company ("South Hampton")is
a wholly-owned subsidiary of TOCCO, and Gulf State Pipe Line Company,
Inc. ("Gulf State")is a wholly-owned subsidiary of South Hampton. The
Company also has voting rights to approximately 55%, and directly owns
approximately 46%, of the capital stock of an inactive Nevada mining
company, Pioche-Ely Valley Mines, Inc. ("Pioche"). At December 31,
1996, the Company concluded that its voting control of Pioche was no
longer temporary and consolidated the accounts of Pioche in its
financial statements for 1996. Previously, the investment in Pioche
was accounted for on the equity method.
2. GOING CONCERN
These financial statements have been prepared assuming the Company
will continue as a going concern. The Company's sources of cash flow
in 1996 and the first six months of 1997 were the operations of South
Hampton's refinery and the proceeds from stock sales to Saudi Arabian
investors. The Company is not currently generating cash flow from any
other activities. As the cash flow attributable to the refinery is
fully dedicated to repayment of debt and funding of refinery
operations, the cash flow attributable to the refinery currently is
not adequate to support the Company's operations. The Company is
liable to the Saudi Arabian government for an $11,000,000 loan. The
Company does not currently have the financial resources to pay this
obligation.
Management plans to fund future operations through sales of its common
stock and borrowings. It is expected that the operations and
obligations of the Company will be eventually funded from operations
of the Al Masane mine. However, because of uncertainties with respect
to future sales of
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<PAGE> 7
common stock, obtaining suitable financing, and reaching an agreement
on the repayment of the loan to the Saudi Arabian government, there is
substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
3. LEGAL PROCEEDINGS
South Hampton, together with over twenty-five other companies, is a
defendant in two proceedings pending in the 60th Judicial District
Court in Jefferson County, Texas, and in the 136th Judicial District
Court in Jefferson County, Texas, respectively, brought on July 21,
1993 and July 18, 1994, respectively, by two former employees of the
Goodyear Tire & Rubber Company plant located in Beaumont, Texas,
claiming illness and diseases resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during their
employment with Goodyear. Plaintiffs claim that the defendant
companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjects each and all
of them to liability for unspecified actual and punitive damages.
South Hampton 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 is currently in
negotiations on the remaining lawsuit and expects it to be settled for
a similar nominal amount.
On May 15, 1991, the Company filed a complaint with the U. S.
Department of Justice ("DOJ") against Hunt Oil Company of Dallas,
Texas ("Hunt"), alleging violations of the Foreign Corrupt Practices
Act ("FCPA")by Hunt in obtaining its Petroleum Production Sharing
Agreement ("PSA") in Yemen in 1981, subsequent to the Company
presenting a bid to the Yemen government for the same area before Hunt
made its application. On May 5, 1995, Company's attorneys in
Washington, D.C. informed the Company that, because the PSA of Hunt is
still ongoing, and under its auspices, payments and receipts occur
daily, the DOJ still has ample jurisdiction to continue its
investigation. A letter from the DOJ on December 19, 1995 stated its
interest in receiving additional documentation regarding the Company's
allegations. On February 28, 1996, the Company sent more documents to
the DOJ which it believed would further support its allegations. The
Company's attorneys in Washington, D.C. believe that the Victim
Restitution Act provides for restitution to the Company of monies lost
as a result of the alleged wrongdoing by Hunt, if Hunt is convicted
under the FCPA. On October 1, 1996, the DOJ wrote that the documents
presented did not suggest that any criminal events happened within the
statute of limitations, and that, at that time, the DOJ did not intend
to pursue its investigation. On November 18, 1996, legal counsel
retained by the Company, after studying the facts of the case, sent
the DOJ an analysis concluding that, while the statute of limitations
of FCPA may have lapsed, the statute of limitations for conspiracy to
violate the FCPA had not lapsed, and that, as a consequence, the DOJ
could criminally prosecute Hunt for conspiracy to violate the FCPA.
The legal counsel met with the Fraud Section of the DOJ on December
13, 1996 and was told that the DOJ would take a more aggressive stance
if more information of evidentiary quality were presented to them. The
Company intends to vigorously pursue obtaining such further
information in the United States and in Yemen.
Late in 1994, articles were published in two prominent Yemen
newspapers in which Yemen Hunt Oil Company, a wholly-owned subsidiary
of Hunt Oil Company of Dallas, Texas ("Yemen Hunt"), was accused of
obtaining a
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<PAGE> 8
petroleum production sharing agreement in Yemen in 1981 through the
corruption of Yemen officials in order to exclude the application of
the Company and it then partner, Dorchester Gas Company, from
consideration for the same area. A letter to the editor of one of
these newspapers, published on December 7, 1994 and signed by the
executive vice president of Yemen Hunt, after explicitly mentioning
the Company and Dorchester Gas Company, stated that "(Yemen Hunt)
knows well those suspicious companies who are mainly engaged in
political activities for the purpose of undermining the economic
interest of Yemen..." On December 26, 1995, the Company filed a
complaint of criminal libel with the Yemen Attorney General for
Publications in Sana'a, Yemen against Yemen Hunt, alleging that Yemen
Hunt, in its published letter to the prominent Yemen newspaper, had
criminally libeled the Company, which, if not addressed, could
seriously affect the business and reputation of the Company and its
employees in the Middle East. In October 1996, the Company received
the official decision from the Deputy Attorney General for
Publications of Yemen which stated that, after taking the statement of
the President of the Company and the statement of the chief of the
legal department of Yemen Hunt, it was evident that the letter from
Yemen Hunt published in the Yemen newspaper on December 7, 1994 was
libelous to the Company. However, since the four month statute of
limitations period under Yemen criminal law had run, Yemen Hunt could
not be prosecuted for criminal libel. The Company intends to
vigorously pursue the matter under the civil libel laws of Yemen.
4. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
Refinery feedstock $177,703 $ --
Refined products 500,964 565,346
-------- --------
Total inventories $678,667 $565,346
======== ========
</TABLE>
Refined products and feedstock are recorded at the lower of cost,
determined on the last-in, first-out method (LIFO), or market. At June
30, 1997 LIFO value exceeded current cost by approximately $23,000 and
at December 31, 1996, current cost exceeded LIFO value by
approximately $163,000.
5. NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which is
effective for financial statements issued after December 15, 1997.
Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of
this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
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<PAGE> 9
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company had net income of $31,576 for the six months ending June
30, 1997, compared to net income of $21,577 for the same period in
1996, resulting in a net income increase of $9,999 in 1997.
For the first six months ending June 30, 1997 and 1996, the refinery
had operating income of $428,701 and $400,986, respectively and net
income of $283,279 and $339,259, respectively, a net income decrease
in 1997 of $55,980 compared to the same prior year period. The
refinery had positive cash flow from operations of $674,799 for the
second quarter of 1997, which was in contrast to the positive
comparable figure of $240,899 in 1996. Sales volume was higher in 1997
by 23% to 7,169,062 total gallons and the average selling price per
gallon was higher than that for the second quarter of 1996 by $.03 per
gallon. Feedstock prices were lower by almost $.02 per gallon average
than the prices for the same period in 1996. Sales for the second
quarter in 1997 continued the trend set in the first quarter and
stayed at record volume levels for the premium pentane products. The
rapidly rising feed costs for the last two months of the fourth
quarter 1996 and the first two months of the first quarter of 1997,
started the year off poorly, however, the refinery's strong results
since March have made up for the early deficit. Pricing commitments
and competitive pressures prevent raising product prices instantly as
feed prices go up, therefore the gross margin is always squeezed for a
time during periods of rapidly rising prices which affected January
and February results. The reverse is true in times of falling prices.
Margins are larger for a period of time until product prices start
easing down. Feedstock prices began falling in late February and have
continued to be soft through June, so the second quarter reflected
good earnings which are expected to continue on into the third
quarter.
Expenses at the refinery for the second quarter in 1997 were higher
than a year ago. In addition to rapid feedstock cost rises early in
the year, the price of natural gas used to fuel the refinery processes
rose rapidly for the same four month period and have continued to be
higher than a year ago. Natural gas prices rose to a peak of $3.85 per
MMBTU for the month of January 1997 before starting to fall off in
February. While prices have dropped from the high winter months, they
still remain in a range which is higher than was experienced in the
early to mid 1990s. Contributing to the higher operating expenses is
the effort the refinery is making toward clean up of the operating
area and the efficient management of the higher production rates. The
additional expenses stem mainly from increased maintenance personnel,
increased environmental testing and analysis and increased
preventative maintenance efforts.
Processing fees reflected a small decrease and were $162,088 for the
second quarter, which is a decrease of about 2% from the same period
in 1996. One unit used for toll processing remains idle at this time
and another is running at the contract minimum. The fees should
improve when a new customer is found for the idle unit. The refinery
has found that in this period of "right-sizing", which many of the
major oil and chemical companies are experiencing, there are many
opportunities for a smaller company to provide processing services on
streams which the larger companies no longer want to handle themselves.
-8-
<PAGE> 10
The outlook for the industry is good from the perspective of increased
opportunities for toll processing. The refinery is currently operating
processes for three different entities and, while the contracts are
being renewed on a year-to-year basis, the outlook on all the
contracts is that they will be longer term operations. Sales of the
refinery's prime products remain stable and expanded marketing efforts
have kept the plant at capacity through the winter and early spring
months which are historically the weakest.
Maintenance and capital items are on schedule in accordance with the
refinery's budget plan for the year. The maintenance program to
install secondary seals on the tank roofs was completed during the
second quarter. The design of a new control room is complete and the
building will be completed in the third quarter. Refinery personnel
are doing much of the work to keep the costs to a minimum. The
modifications of the Chevron sponsored Aromax unit were completed in
the second quarter and the unit is operating as planned.
General and Administrative Expenses for the first six months in 1997
were $69,564 higher than for the same period in 1996, a slight
increase of 7%. Interest Expense in 1997 and 1996 was practically all
attributable to the debt of the refinery and increased by $42,055 in
1997 due to a larger amount of interest-bearing debt, which was a
result of a major debt restructuring in October 1996 when accrued
interest was rolled over into principal and the new interest rates
were higher.
In 1996, the Company concluded that its voting control of Pioche was
no longer temporary and, therefore, the accounts of Pioche have been
consolidated into the Company's financial statements. The Minority
Interest amount in the first six months of 1997 and 1996 of $18,790
and $4,228, respectively, represents the Pioche minority shareholders
portion of Pioche's losses. There has been no activity in several
years on the Pioche properties primarily due to the lack of financing
for claims to be explored and developed. The losses in Pioche are
attributable to the costs of maintaining the Nevada mining properties.
A charge for Amortization of Goodwill of $69,285 per quarter during
the first quarter of 1997 and the first six quarters of 1996 relates
to the goodwill recognized on the purchase of the refinery in 1987. In
the second quarter of 1997, the amount was only $46,162, since the
goodwill amortization over the ten year period has ended. Interest
Income in both periods was primarily from a short-term investment by
the refinery and from the investment of temporary excess cash in time
deposits in Saudi Arabia. Miscellaneous Income in both periods
primarily includes income from tank rentals, building rentals,
commission income and occasional small asset sale proceeds at the
refinery. Miscellaneous Income in June 1997 includes a profit amount
of approximately $48,000 applicable to the down payment portion
received from the installment sale of an office building at the
refinery. The sale price will be received in annual note installment
payments over a ten year period with each installment payment
including a portion of the total profit amount of approximately
$387,000. The current portion of the discounted installment note
receivable at June 30, 1997 was approximately $20,000 and the
non-current portion (reflected in "Other Assets") was approximately
$253,000. Offsetting this profit in June was a charge of approximately
$34,000 for the write down of the value of a pipeline which had never
been used by the refinery.
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<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition in June 1987 of the refinery in Silsbee,
Texas, the Company had substantially no significant operating revenues
since 1972. Because of the lack of operating revenues, it has been
necessary for the Company continually to seek additional debt and
equity financing in order to have funds to continue operations.
Due to the granting by Saudi Arabia of the Al Masane mining lease in
May 1993, the Company has begun planning for the mobilization program
and financing to implement the construction and commissioning of the
mining treatment plant and housing facilities for the mine. The firm
of Watts, Griffis and McOuat of Toronto, Canada, has been appointed as
owner's agent and project manager. The Company also plans to start an
intensive exploration program to increase the reserves at the mine
site and elsewhere in the lease area. In addition, the Company is
engaged in the establishment of a petrochemical plant in Jubail, Saudi
Arabia similar to the one at the refinery. The products to be
manufactured would be solvents for the plastics industry which are
anticipated to be sold in the Middle East, Europe and the Far East. An
application for an industrial license is currently being prepared for
the plant and planning is underway on the development of the plant.
The principal assets of Pioche are an undivided interest in 48
patented and 81 unpatented mining claims and a 300 ton-per-day mill
located in southeastern Nevada. Due to lack of capital, the properties
held by Pioche have not been commercially operated for approximately
35 years. In late 1996, Pioche was extended a proposal from a
prominent mining company for the lease of its mining claims. This
proposal is currently being negotiated.
During 1996 and the first two quarters of 1997, the Company took
certain actions designed to generate additional equity capital and
improve its financial condition, including: (1) the completion at
October 15, 1996 of negotiations by South Hampton of a restructuring
of its debt to Den norske Bank to provide for a revolving credit
facility in an aggregate principal amount of up to $1,965,000; (2)the
restructuring at October 15, 1996 of the indebtedness of South Hampton
to Saudi Fal Co., Ltd., a Saudi Arabian limited liability company
owned by a stockholder of the Company, and to American Shield Refining
Company, whereby accrued interest to October 15, 1996 was added to
principal, resulting in new promissory notes in the principal amounts
of $1,945,773 and $1,694,605, respectively, which promissory notes are
subordinated to the Den norske note; (3)approval by the Company's
Board of Directors in June 1996 of the sale of up to 1 million shares
of common stock through private placements at a price no less than
$1.00 per share, and the approval in July 1997 by the Board for the
sale of another 1 million shares at no less than $1.00 per share;
(4)the sale of 450,000 shares of common stock at $1.00 per share to a
Saudi Arabian investor who is a stockholder of the Company and
approval of the sale of an additional 450,000 shares of 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,
of which all had been received by June 30, 1997; and (5) approval of
the sale of 50,000 shares of common stock at $1.00 per share to a
Saudi Arabian investor which was received in January 1997.
On June 30, 1997, the outstanding principal amount under the new
Amended and Restated Credit Agreement with Den norske was $1,740,000,
with $1,440,000 classified as long-term debt. The entire balance under
the
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<PAGE> 12
Amended and Restated Credit Agreement is now due on December 31, 1998.
Prior to the restructuring of this debt at October 15, 1996, the
Agreement had been extended on a month-to-month basis pending the
final approval of new terms. South Hampton has now agreed to make
minimum quarterly principal payments of $75,000 plus interest at the
Den norske prime rate plus 1%, and under certain conditions, can make
distributions to Saudi Fal and the Company. The debt is secured by all
of the assets of the refinery and all of the issued and outstanding
shares of the Company's three subsidiaries there.
On October 15, 1996, there was also a restructuring of the loan of
$1,500,000 owed by South Hampton to Saudi Fal, pursuant to Board of
Director approval in October 1995. The loan, plus accrued interest,
was converted into a Second Lien Promissory Note in the principal
amount of $1,945,773 bearing interest at the Den norske prime rate
plus 1%. Interest only is due and payable monthly on the note and the
entire unpaid balance of principal and any accrued interest is due on
December 31, 1998. The principal amount at June 30, 1997 remained at
$1,945,773. No interest payments were made through June 30, 1997 and
the amount of accrued unpaid interest was approximately $129,000. The
note is secured by all of the assets of the refinery and is
subordinate to the Den norske note.
The Company, through its subsidiary American Shield Refining Company,
advanced funds in 1990 for some of the costs to increase the
processing capacity of the refinery. These advances were in the form
of a note from the refinery. This note was also restructured at
October 15, 1996, whereby accrued interest of $361,250 was added to
principal with the note bearing interest at the Den norske prime rate
plus 1%. This resulted in a new principal amount of $1,694,605 at that
time, which remained the same at June 30, 1997. No interest payments
were made by the refinery to the Company through June 30, 1997 and the
amount of accrued unpaid interest was approximately $112,000. The note
is secured by all of the assets of the refinery and is subordinate to
the promissory note issued to Saudi Fal.
On September 3, 1995, the Company made a formal application to the
Saudi Industrial Development Fund ("SIDF")to obtain 50% of the capital
needed to finance the development of the Al Masane project. Before the
loan could be approved, the Company had to obtain an industrial
license for the project. This license was applied for on February 10,
1996 and was issued on December 23, 1996. The industrial license and
the 1996 update to the Watts Griffis feasibility study were presented
to the SIDF on December 23, 1996. A presentation by Watts Griffis of
additional information requested by the SIDF was made in May 1997, and
representatives of the SIDF have recently visited the Company office
in Jeddah and the mining facility. Negotiations are underway toward
the approval of the loan.
At June 30, 1997, a total of approximately $1,515,000 in salaries and
termination benefits accrued since 1971 was due to Company employees
in Saudi Arabia in accordance with Saudi Arabian employment laws. This
amount includes approximately $739,000 due to Hatem El-Khalidi, the
Company's President and Chief Executive Officer. The payment of these
amounts has been deferred until the Company's working capital position
improves. Also, the Company has not made all of the surface rental
payments due to the Saudi Arabian government under the terms of the Al
Masane Project lease. The unpaid amount of these rental payments at
June 30, 1997 was approximately $426,000. The payments are being
deferred to be paid by the Saudi Arabian limited liability company
after it is formed. In addition, the Company has not complied with
certain statutory reporting requirements
-11-
<PAGE> 13
in Saudi Arabia. Management of the Company believes that the lack of
compliance with these license requirements will not have any effect on
the Company's operations in Saudi Arabia.
The annual meeting of the stockholders of the Company was held on
May 5, 1997 for the purpose of electing six directors to serve until
the next annual meeting. Directors elected at the meeting were Messrs.
John A. Crichton, Hatem El-Khalidi, Harb S. Al Zuhair, Mohammed O.
Al-Omair and Ghazi Sultan. Mr. Oliver W. Hammonds received only 48.7%
of the shares voted and was not elected. The total number of shares
voted by proxy and in person represented approximately 51% of the
total shares owned and outstanding as of the record date of March 17,
1997. In June 1997, Mr. Harb S. Al Zuhair resigned from the Board,
citing personal reasons. No replacements for the two directors have
been made yet.
A major component of the Company's activities relates to the
acquisition, exploration and development of mineral deposits. There
can be no assurance that the Company will successfully develop any of
its properties, and if developed, whether the mineral acquisition,
exploration and development costs incurred will ultimately be
recovered. The recovery of such costs is dependent upon a number of
future events, some of which are beyond the control of the Company.
The ability of the Company to develop any of these properties is
dependent upon obtaining additional financing as may be required and,
ultimately, its financial success depends on its ability to attain
successful operations from one or more of its projects. Company
management is devoting a significant amount of its attention to
addressing the Company's immediate and longer term needs for the funds
required to continue its business, and maintain and develop its
properties.
-12-
<PAGE> 14
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 11, 1997 ARABIAN SHIELD DEVELOPMENT COMPANY
---------------- ---------------------------------------
(Registrant)
/s/ J. A. CRICHTON
---------------------------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON, JR.
---------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
-13-
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 304,597
<SECURITIES> 323,019
<RECEIVABLES> 3,040,646
<ALLOWANCES> 0
<INVENTORY> 678,667
<CURRENT-ASSETS> 4,346,929
<PP&E> 5,803,016
<DEPRECIATION> 3,100,913
<TOTAL-ASSETS> 44,597,587
<CURRENT-LIABILITIES> 15,768,254
<BONDS> 0
0
0
<COMMON> 2,145,649
<OTHER-SE> 21,432,571
<TOTAL-LIABILITY-AND-EQUITY> 44,597,587
<SALES> 12,390,177
<TOTAL-REVENUES> 12,640,907
<CGS> 11,096,142
<TOTAL-COSTS> 12,537,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,328
<INCOME-PRETAX> 31,576
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,576
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
