<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------
FOR QUARTER ENDING SEPTEMBER 30, 1998
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
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at September 30, 1998: 22,019,494.
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<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,029,569 $ 534,086
Short-Term Investments 86,428 407,542
Trade Receivables 3,632,551 3,047,311
Inventories 205,313 548,320
------------ ------------
Total Current Assets 5,953,861 4,537,259
REFINERY PLANT, PIPELINE & EQUIP 6,335,541 5,926,188
Less: Accumulated Depreciation (3,542,975) (3,238,623)
------------ ------------
Net Equipment 2,792,566 2,687,565
AL MASANE PROJECT 34,006,163 33,522,427
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,417,295 1,411,190
OTHER ASSETS 408,530 463,230
------------ ------------
TOTAL ASSETS $ 47,009,663 $ 45,052,919
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable-Trade $ 1,038,141 $ 790,759
Accrued Liabilities 813,758 673,511
Accrued Liabilities in Saudi Arabia 1,444,156 1,283,401
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 498,000 598,000
Current Portion of Long-Term
Obligations -- 37,915
------------ ------------
Total Current Liabilities 15,169,835 14,759,366
LONG-TERM DEBT 2,210,773 3,435,773
LONG-TERM OBLIGATIONS -- 21,205
ACCRUED LIABILITIES IN SAUDI ARABIA 816,271 779,149
DEFERRED REVENUE 102,553 114,181
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,037,249 1,044,487
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 22,019,494
shares issued and outstanding 2,201,949 2,186,149
ADDITIONAL PAID-IN CAPITAL 36,101,150 35,875,950
RECEIVABLE FROM STOCKHOLDER (126,000) (126,000)
ACCUMULATED DEFICIT (10,504,117) (13,037,341)
------------ ------------
Total Stockholders' Equity 27,672,982 24,898,758
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 47,009,663 $ 45,052,919
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept.30,1998 Sept.30,1997 Sept.30,1998 Sept.30,1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Refined Product Sales $ 6,632,986 $ 6,459,566 $ 18,813,838 $ 18,849,743
Processing Fees 165,647 146,505 570,998 397,235
------------ ------------ ------------ ------------
6,798,633 6,606,071 19,384,836 19,246,978
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 4,704,962 5,470,319 14,311,093 16,566,461
General and Administrative 775,452 618,999 2,072,272 1,734,621
Depreciation and Amortization 105,806 100,380 312,994 425,993
------------ ------------ ------------ ------------
5,586,220 6,189,698 16,696,359 18,727,075
------------ ------------ ------------ ------------
OPERATING INCOME 1,212,413 416,373 2,688,477 519,903
OTHER INCOME (EXPENSE)
Interest Income 28,419 20,043 78,532 31,414
Interest Expense (75,010) (103,614) (285,242) (317,942)
Minority Interest 3,410 6,788 7,238 25,578
Miscellaneous Income 38,361 44,802 112,719 157,015
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,207,593 384,392 2,601,724 415,968
INCOME TAX EXPENSE (46,800) -- (68,500) --
------------ ------------ ------------ ------------
NET INCOME $ 1,160,793 $ 384,392 $ 2,533,224 $ 415,968
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ .05 $ .02 $ .12 $ .02
============ ============ ============ ============
Diluted $ .05 $ .02 $ .11 $ .02
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 21,987,815 21,456,494 21,960,476 21,205,945
============ ============ ============ ============
Diluted 22,916,524 22,041,282 22,915,453 21,819,402
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLE
----------------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 21,861,494 $ 2,186,149 $ 35,875,950 $ (126,000) $(13,037,341) $ 24,898,758
Common Stock Sold 100,000 10,000 140,000 150,000
Stock Options Exercised 58,000 5,800 85,200 91,000
Net Income 2,533,224 2,533,224
------------ ------------ ------------ ------------ ------------ ------------
SEPTEMBER 30, 1998 22,019,494 $ 2,201,949 $ 36,101,150 $ (126,000) $(10,504,117) $ 27,672,982
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,533,224 $ 415,968
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 312,994 425,993
Decrease in Deferred Revenue (11,628) (11,628)
Effect of Changes in:
Decrease (Increase) in Trade
Receivables (585,240) (346,290)
Decrease (Increase) in Inventories 343,007 12,402
Decrease (Increase) in Other Assets 54,700 115,153
(Decrease) Increase in Accounts
Payable and Accrued Liabilities 387,629 (94,516)
Other (15,880) (44,701)
--------------- ---------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 3,018,806 472,381
--------------- ---------------
INVESTING ACTIVITIES:
Decrease (Increase)in Short-Term Investments 321,114 (58,380)
Additions to Al Masane Project (483,736) (410,760)
Additions to Plant, Pipeline & Equipment (409,353) (164,030)
Decrease (Increase)in Mineral Properties in U.S. (6,105) 33,257
Increase in Accrued Liabilities in Saudi Arabia 197,877 41,313
--------------- ---------------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (380,203) (558,600)
--------------- ---------------
FINANCING ACTIVITIES:
Common Stock Sold 241,000 500,000
Additions to Notes Payable &
Long-Term Obligations -- --
Reductions of Notes Payable &
Long-Term Obligations (1,384,120) (412,621)
--------------- ---------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (1,143,120) 87,379
--------------- ---------------
NET INCREASE (DECREASE) IN CASH 1,495,483 1,160
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 534,086 385,290
--------------- ---------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,029,569 $ 386,450
=============== ===============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 6
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q. These financial statements have not been examined by independent
certified public accountants, but in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of consolidated results of operations, consolidated
financial position and consolidated cash flows at the dates and for the
periods indicated, have been included.
These financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the nine month
period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. 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, 1997.
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 52%, and directly owns
approximately 44%, of the capital stock of Pioche-Ely Valley Mines,
Inc. ("Pioche"), which owns mining properties in Nevada. Pioche has
been consolidated for financial statement purposes since January 1,
1996.
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 1997
and the first nine months of 1998 were the operations of South
Hampton's refinery and the proceeds from stock sales and loans. 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 common stock, obtaining suitable financing, and
reaching an agreement on the repayment of the loan to the Saudi Arabian
government, there is
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<PAGE> 7
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 was a defendant in two lawsuits in two district courts in
Jefferson County, Texas brought in 1993 and 1994 by two former
employees of the Goodyear Tire & Rubber Company who were 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 and the other in January 1998. The cost to the Company was
not significant. A new lawsuit by another former Goodyear employee was
filed in a Jefferson County District Court on December 16, 1997 for
unspecified actual damages for the same reasons as the other two. The
outcome of this lawsuit is not expected to have a material effect on
the Company's financial position, results of operations or liquidity.
In August 1997, the Texas Natural Resource Conservation Commission
("TNRCC") notified South Hampton that it had violated various rules and
procedures and proposed administrative penalties totaling $709,408 and
recommended that South Hampton undertake certain actions necessary to
bring its operations at the refinery into compliance. The violations
generally relate to various air and water quality issues. South Hampton
feels the penalty is greatly overstated and intends to vigorously
defend against it. A preliminary hearing was held in November 1997 and
a subsequent meeting is to be scheduled.
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.
-6-
<PAGE> 8
Late in 1994, articles were published in two prominent Yemen newspapers
in which Yemen Hunt Oil Company, a wholly-owned subsidiary of Hunt Oil
Company of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a
petroleum production sharing agreement in Yemen in 1981 through the
corruption of Yemen officials in order to exclude the application of
the Company and it then partner, Dorchester Gas Company, from
consideration for the same area. A letter to the editor of one of these
newspapers, published on December 7, 1994 and signed by the executive
vice president of Yemen Hunt, after explicitly mentioning the Company
and Dorchester Gas Company, stated that "(Yemen Hunt) knows well those
suspicious companies who are mainly engaged in political activities for
the purpose of undermining the economic interest of Yemen..." On
December 26, 1995, the Company filed a complaint of criminal libel with
the Yemen Attorney General for Publications in Sana'a, Yemen against
Yemen Hunt, alleging that Yemen Hunt, in its published letter to the
prominent Yemen newspaper, had criminally libeled the Company, which,
if not addressed, could seriously affect the business and reputation of
the Company and its employees in the Middle East. In October 1996, the
Company received the official decision from the Deputy Attorney General
for Publications of Yemen which stated that, after taking the statement
of the President of the Company and the statement of the chief of the
legal department of Yemen Hunt, it was evident that the letter from
Yemen Hunt published in the Yemen newspaper on December 7, 1994 was
libelous to the Company. However, since the four month statute of
limitations period under Yemen criminal law had run, Yemen Hunt could
not be prosecuted for criminal libel. The Company intends to vigorously
pursue the matter under the civil libel laws of Yemen.
4. INVENTORIES
Inventories include the following:
<TABLE>
<CAPTION>
SEPT. 30, 1998 DEC. 31, 1997
-------------- --------------
<S> <C> <C>
Refinery feedstock $ -- $ 86,591
Refined products 205,313 461,729
-------------- --------------
Total inventories $ 205,313 $ 548,320
============== ==============
</TABLE>
Refined products and feedstock are recorded at the lower of cost,
determined on the last-in, first-out method (LIFO), or market. At
September 30, 1998, because LIFO value exceeded market, inventories
were written down by approximately $82,500. At December 31, 1997, LIFO
value approximated current cost.
-7-
<PAGE> 9
5. EARNINGS PER COMMON SHARE
The following table (in thousands, except per share amounts) sets forth
the computation of basic and diluted earnings per share for the nine
months ended September 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Income $ 2,533 $ 416
============ ============
Weighted average shares outstanding (basic) 21,960 21,206
Effect of dilutive stock options 955 613
------------ ------------
Weighted average shares outstanding (diluted) 22,915 21,819
============ ============
Earnings per share
Basic $ .12 $ .02
============ ============
Diluted $ .11 $ .02
============ ============
</TABLE>
In the nine months ended September 30, 1998 and 1997, the effect of
assumed debt conversions was anti-dilutive.
-8-
<PAGE> 10
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 $2,533,224 for the nine months ending
September 30, 1998, compared to net income of $415,968 for the same
period in 1997, resulting in a net income increase of $2,117,256 in
1998.
For the first nine months ending September 30, 1998 and 1997, the
refinery had operating income of $3,003,802 in 1998 and operating
income of $902,735 in 1997, and net income of $2,799,456 in 1998 and
net income of $690,256 in 1997, a net income increase in 1998 of
$2,109,200. The refinery had positive cash flow from operations of
$1,330,881 for the third quarter of 1998, which was in contrast to the
comparable figure of $606,717 in 1997. Sales volume was comparable in
1998 and 1997 at a level of 7.4 and 7.5 million gallons, respectively,
and the average selling price per gallon in 1998 was slightly higher
than that of the third quarter of 1997 by $.01 per gallon. Feedstock
prices were lower by almost 30% from the price for the same period in
1997. Sales for the third quarter in 1998 continued the trend set
throughout 1997 and stayed at record volume levels for the premium
pentane products. The lower feedstock costs in 1998 were the primary
reason for the much improved performance from the same period in 1997.
Pricing commitments and competitive pressures prevent raising product
prices instantly as feed prices go up while the reverse is true during
periods of falling prices. Margins are generally larger for a time
until competitive pricing pressures force product prices down. In this
economic cycle, demand has been strong enough to support current
product pricing levels and the downward pressure has been avoided to
some degree. Feedstock prices began falling in February 1997 and have
held at unusual lows in 1998. The current low prices have held longer
than most parties in the petroleum industry have expected.
Expenses at the refinery for the third quarter of 1998 were higher than
a year ago. To meet competitive pressures and retain its experienced
and trained personnel, the refinery raised the pay rates substantially
for both hourly and salaried personnel during the second quarter. The
refinery is near the Beaumont/Port Arthur area which is a world
renowned oil refining and petrochemical producing region. As the larger
companies in the area seek out qualified individuals for jobs during
times of expansion, the personnel from the refinery, because of their
varied experience and high level of training, are very desirable
recruits. Personnel costs are the only area in which the refinery has
seen inflationary pressure during this economic cycle. Many of the
other major expenses, such as insurance, have actually decreased from
1997 levels.
Contributing to the higher operating expenses is the effort the
refinery is making toward the 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. Approximately $150,000 was spent or accrued for
this type of work in the first nine months of 1998. Administrative
expenses increased slightly compared to prior periods. Interest expense
was down in 1998 since the refinery has prepaid most of its bank debt.
Under terms of the bank Credit Agreement, the prepayment is available
to be redrawn if necessary.
-9-
<PAGE> 11
Processing fees for the third quarter of 1998 were $165,647, which was
comparable to the $146,505 recorded for the same period in 1997. The
refinery has found that there are many opportunities for a smaller
company to provide processing services on streams which the larger
companies no longer want to handle themselves. The refinery is in the
process of erecting four distillation towers to increase the capacity
and capabilities of the toll processing side of the business. In August
1998, the refinery signed a contract with a major customer to make use
of this equipment, which should boost processing revenues to over three
million dollars annually starting in the second quarter of 1999,
however, there is no assurance that this level of revenues can be
achieved.
The outlook for the industry is good from the perspective of increased
opportunities for toll processing. The refinery is currently operating
processes for four different entities and, while the contracts are
being renewed on a year-to-year basis, the outlook on all the contracts
is that they will be longer term operations. Sales of the refinery's
prime products remain stable and expanded marketing efforts have kept
the refinery near capacity since the third quarter of 1997.
Maintenance and capital items are on schedule in accordance with the
refinery's budget plan for the year. The refinery is now planning for
the construction of two new spherical storage tanks to make maximum use
of the available PenHex Unit capacity and should allow the expansion of
sales capacity by approximately 20%. Capital expenditures for the
project will be approximately $800,000 and the tanks are expected to be
completed in the second quarter of 1999. The outlook for the fourth
quarter is good. Sales remain firm and there is no immediate outlook
for higher feed prices. The refinery has bought feedstock ahead for the
next three months to hedge against any spikes in prices and the natural
gas hedging program should control any sudden rises in the refinery's
single largest expense. In June 1997, the refinery resumed the hedging
program to help decrease the volatility of the price of fuel gas.
Commodity based derivative futures contracts are periodically
purchased. Gains and losses are recognized when the contracts expire. A
net loss of approximately $15,000 was included in the cost of refined
product sales and processing for the first nine months in 1998.
General and Administrative Expenses for the first nine months in 1998
were $337,651 higher than for the same period in 1997, an increase of
19%. Interest Expense in 1998 and 1997 was practically all attributable
to the debt of the refinery and decreased by $32,700 in 1998 due to the
periodic payment of existing debt. The Minority Interest amount in the
first nine months of 1998 and 1997 of $7,238 and $25,578, respectively,
represents the Pioche minority shareholders' portion of Pioche's
losses. The losses in Pioche are primarily attributable to the costs of
maintaining the Nevada mining properties.
Interest Income in the first nine months of 1998 increased over the
same period in 1997 due primarily from interest received on a note
resulting from the installment sale of an office building by the
refinery in June 1997. Other interest income is from short-term
investments by the refinery and from the investment of temporary excess
cash in time deposits in Saudi Arabia. Miscellaneous Income includes
income from tank rentals, commission income and occasional small asset
sale proceeds at the refinery, and until June 1997, it also included
income from the rental of the office building.
Income Tax Expense includes $24,758 for the payment of 1997 federal
income tax in the third quarter of 1998, plus $22,042 and $43,742 for
estimated
-10-
<PAGE> 12
1998 federal income taxes on net income for the three and nine months
ended September 30, 1998, respectively.
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.
Since the granting by Saudi Arabia of the Al Masane mining lease in May
1993, the Company has been 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 Limited of Toronto, Canada, has been appointed as
owner's agent and project manager. The Company also plans to start an
intensive exploration program to increase the reserves at the mine site
and elsewhere in the lease area. In addition, the Company is engaged in
the establishment of a petrochemical plant in Jubail, Saudi Arabia
similar to the one at the refinery. The products to be manufactured
would be solvents for the plastics industry which are anticipated to be
sold in the Middle East, Europe and the Far East. An industrial license
to build the plant has been received and further planning and design
work are underway. There has been a strong interest from a German firm
who would like to participate in the development of the site with
processes of their own.
The principal assets of Pioche are an undivided interest in 48 patented
and 80 unpatented mining claims and a 300 ton-per-day mill located in
southeastern Nevada. Due to the 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. In October 1997, an
"Exploration Agreement and Option to Purchase" was executed between the
two parties. The agreement provided for annual payments to Pioche of
$50,000 for seven years until, or unless, an option was exercised to
purchase an 85% interest in the mining claims for $3,000,000. The
mining company would pay all annual claim taxes and rentals and agreed
to expend at least $50,000 in exploration work each year and to drill
at least one hole during the first year. After almost a year of
exploration work, the mining company in September 1998 gave 60 days
written notice that it was terminating the agreement, effective
November 9, 1998.
In addition to the actions taken in 1997 to generate additional equity
capital and improve its financial condition, which are detailed in the
1997 Form 10-K, the Company has experienced the following activity in
the first nine months of 1998:(1) the sale in January of 100,000 shares
of the Company's Common Stock at $1.50 per share to a Saudi Arabian
investor; (2)the issuance of 58,000 shares of the Company's Common
Stock pursuant to option exercises by officers of the Company for a
total of $91,000; (3) the payment in February of accrued mining lease
rentals for four years on the Al Masane project to the Saudi Arabian
government totaling $469,333; and (4) the extension in March 1998 of
the maturity date of the notes to Den norske and Saudi Fal to December
31, 1999 from December 31, 1998.
At September 30, 1998, the outstanding principal amount under the new
Amended and Restated Credit Agreement with Den norske was $265,000 all
of which is classified as long-term debt since prepayments of
$1,175,000
-11-
<PAGE> 13
were made in the second and third quarter of 1998. The entire balance
under the Amended and Restated Credit Agreement is due on December 31,
1999, pursuant to an extension in March 1998 of the maturity date.
South Hampton has agreed to make minimum quarterly principal payments
of $75,000 plus interest at the Den norske prime lending 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 lending rate, plus
1%. Interest only is due and payable monthly on the note and the entire
unpaid balance of principal and accrued interest is now due on December
31, 1999, pursuant to an extension in March 1998 of the maturity date.
The principal amount at September 30, 1998 remained at $1,945,773.
Interest payments of $202,801 were made in the first nine months of
1998 and the amount of unpaid accrued interest at September 30, 1998
was approximately $46,000. The note is secured by all of the assets of
the refinery and is subordinate to the Den norske note.
The Company, through its wholly-owned 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 lending rate, plus 1%. This resulted in a new principal amount of
$1,694,605 at that time. In the first nine months of 1998, a total of
$270,000 was paid on the note principal by the refinery, leaving a
principal amount at September 30, 1998 of $1,424,605. The note was
originally due on December 31, 1998, but in March 1998, the maturity
date was extended to December 31, 1999. No interest payments have been
made by the refinery to the Company through September 30, 1998 and the
amount of unpaid accrued interest was approximately $307,000. 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 30, 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 and on
December 17, 1997, conditional approval was received for a $38.08
million loan. The Company plans to finance the remaining cost of the
project with loans from commercial banks and equity funds from Saudi
Arabian investors. The Company and its Saudi Arabian advisors have
recently formed a joint venture which was officially registered as a
Saudi limited liability company on August 23, 1998. The joint venture,
which is equally owned by the Company and Al-Mashreq Mining Investments
Company, has been infused with equity capital of $26.0 million and will
immediately commence operations. Both the Company and the joint venture
have applied to the Saudi Ministry of Petroleum and Mineral Resources
requesting the transfer of the Company's existing Al Masane mining
lease to the joint venture company. Documents have been sent to three
major engineering contractors to solicit bids for the construction and
development of the surface and underground facilities required for the
mining and production of zinc and copper concentrates and silver and
gold bullion from the Al Masane mine ore. Each prospective bidder has
already visited the mine site and has agreed to submit its bid.
Construction and development of the mine by the
-12-
<PAGE> 14
new company will take approximately twenty-one months to complete after
the bids are received and evaluated and the winning bidder is selected.
This is expected to be done by the end of 1998.
At September 30, 1998, a total of approximately $2,260,000 in salaries
and termination benefits was due to Company employees in Saudi Arabia
in accordance with Saudi Arabian employment laws. This amount includes
approximately $816,000 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. At
September 30, 1998, the Company had not yet made the 1998 surface
rental payment of approximately $117,000, which was due in May 1998, to
the Saudi Arabian government under the terms of the Al Masane Project
lease. The unpaid amount of these rental payments at December 31, 1997
was approximately $469,000, but in February 1998 a payment in full was
made. 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.
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.
-13-
<PAGE> 15
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
STOCKHOLDERS' PROPOSALS
Any proposal by a stockholder of the Company intended to be presented
at the 1999 annual meeting of stockholders, which is currently
scheduled for May 14, 1999, must be received by the Company at its
principal executive office no later than December 4, 1998 for inclusion
in the Company's Proxy Statement and form of proxy. Any such proposal
must also comply with the other requirements of the proxy solicitation
rules of the Securities and Exchange Commission. The Company intends to
exercise discretionary voting authority granted under any proxy which
is executed and returned to the Company on any matter that may properly
come before the 1999 annual meeting of stockholders, unless written
notice of the matter is delivered to the Company at its principal
executive office no later than February 18, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the quarter ended September 30,
1998. The report was dated on September 29, 1998 and stated that, on
August 23, 1998, a Saudi limited liability company was officially
registered with the Saudi Ministry of Commerce. The Company has a 50%
interest in the new Saudi company, which will develop and operate the
Al Masane mining project in Saudi Arabia.
------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 10, 1998 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
-14-
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,029,569
<SECURITIES> 86,428
<RECEIVABLES> 3,632,551
<ALLOWANCES> 0
<INVENTORY> 205,313
<CURRENT-ASSETS> 5,953,861
<PP&E> 6,335,541
<DEPRECIATION> 3,542,975
<TOTAL-ASSETS> 47,009,663
<CURRENT-LIABILITIES> 15,169,835
<BONDS> 0
2,201,949
0
<COMMON> 0
<OTHER-SE> 25,471,033
<TOTAL-LIABILITY-AND-EQUITY> 47,009,663
<SALES> 18,813,838
<TOTAL-REVENUES> 19,384,836
<CGS> 14,311,093
<TOTAL-COSTS> 16,696,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285,242
<INCOME-PRETAX> 2,601,724
<INCOME-TAX> 68,500
<INCOME-CONTINUING> 2,533,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,533,224
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
