<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 MARCH 31, 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 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 March 31, 1998: 21,981,494.
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 730,254 $ 534,086
Short-term Investments 495,466 407,542
Trade Receivables 3,299,501 3,047,311
Inventories 337,268 548,320
------------ ------------
Total Current Assets 4,862,489 4,537,259
REFINERY PLANT, PIPELINE & EQUIP 6,049,325 5,926,188
Less: Accumulated Depreciation (3,338,962) (3,238,623)
------------ ------------
Net Equipment 2,710,363 2,687,565
AL MASANE PROJECT 33,681,084 33,522,427
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,413,589 1,411,190
OTHER ASSETS 484,258 463,230
------------ ------------
TOTAL ASSETS $ 45,583,031 $ 45,052,919
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable-Trade $ 852,392 $ 790,759
Accrued Liabilities 595,385 673,511
Accrued Liabilities in Saudi Arabia 1,326,822 1,283,401
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 798,000 598,000
Current Portion of Long-Term
Obligations 8,031 37,915
------------ ------------
Total Current Liabilities 14,956,410 14,759,366
LONG-TERM DEBT 3,160,773 3,435,773
LONG-TERM OBLIGATIONS 21,205 21,205
ACCRUED LIABILITIES IN SAUDI ARABIA 788,750 779,149
DEFERRED REVENUE 110,305 114,181
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,044,294 1,044,487
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 21,981,494
shares issued and outstanding 2,198,149 2,186,149
ADDITIONAL PAID-IN CAPITAL 36,041,450 35,875,950
RECEIVABLE FROM STOCKHOLDER (126,000) (126,000)
ACCUMULATED DEFICIT (12,612,305) (13,037,341)
------------ ------------
Total Stockholders' Equity 25,501,294 24,898,758
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 45,583,031 $ 45,052,919
============ ============
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
REVENUES
Refined Product Sales $ 5,752,538 $ 5,892,422
Processing Fees 264,102 108,142
------------ ------------
6,016,640 6,000,564
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 4,841,346 5,699,704
General and Administrative 608,763 543,978
Depreciation and Amortization 103,222 174,948
------------ ------------
5,553,331 6,418,630
------------ ------------
OPERATING INCOME (LOSS) 463,309 (418,066)
OTHER INCOME (EXPENSE)
Interest Income 22,548 4,956
Interest Expense (92,443) (107,099)
Minority Interest 193 17,432
Miscellaneous Income 31,429 54,432
------------ ------------
INCOME (LOSS) $ 425,036 $ (448,345)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.02 $ (0.02)
============ ============
Diluted $ 0.02 $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 21,936,494 20,956,494
============ ============
Diluted 22,975,161 20,956,494
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLE
------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL
---------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, 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 20,000 2,000 25,500 27,500
Net Income 425,036 425,036
---------- ---------- ----------- --------- ------------ -----------
BALANCE, MARCH 31, 1998 21,981,494 $2,198,149 $36,041,450 $(126,000) $(12,612,305) $25,501,294
========== ========== =========== ========= ============ ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 425,036 $(448,345)
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 103,222 174,948
Recognition of Deferred Revenue (3,876) (3,876)
Effect of Changes in:
Decrease (Increase) in Trade
Receivables (252,190) (144,746)
Decrease (Increase) in Inventories 211,052 (165,950)
Decrease (Increase) in Other Assets (21,028) 53,297
(Decrease) Increase in Accounts
Payable and Accrued Liabilities (16,493) 532,651
Other (3,076) (24,218)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 442,647 (26,239)
--------- ---------
INVESTING ACTIVITIES:
Additions to Short-Term Investments (87,924) (5)
Additions to Al Masane Project (158,657) (154,721)
Additions to Plant, Pipeline & Equipment (123,137) (23,549)
(Additions) Reductions to Mineral Properties in U.S. (2,399) 33,257
Increase in Accrued Liabilities in Saudi Arabia 53,022 15,376
--------- ---------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (319,095) (129,642)
--------- ---------
FINANCING ACTIVITIES:
Common Stock Sold 177,500 350,000
Additions to Notes Payable &
Long-Term Obligations -- 50,000
Reductions of Notes Payable &
Long-Term Obligations (104,884) (103,199)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 72,616 296,801
--------- ---------
NET INCREASE (DECREASE) IN CASH 196,168 140,920
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 534,086 385,290
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 730,254 $ 526,210
========= =========
</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 three month
period ended March 31, 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 three 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
-5-
<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 being 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>
MAR. 31, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
Refinery feedstock $ -- $ 86,591
Refined products 337,268 461,729
-------- --------
Total inventories $337,268 $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 March
31, 1998, because LIFO value exceeded market, inventories were written
down by approximately $108,000. At December 31, 1997, LIFO value
approximated current cost.
5. NET INCOME (LOSS) PER COMMON SHARE
Net income per share for the three months ended March 31, 1998 has been
calculated as follows:
<TABLE>
<CAPTION>
Weighted
average
Net shares Per
Income outstanding share
------ ----------- -----
<S> <C> <C> <C>
Basic income per share................. $425,036 21,936,494 $.02
Dilutive effect of stock options....... -- 1,038,667 --
-------- ---------- ----
Diluted income per share............... $425,036 22,975,161 $.02
======== ========== ====
</TABLE>
In the three months ended March 31, 1997, the effect of stock options
and convertible debt was anti-dilutive. Accordingly, loss per share is
calculated by dividing the net loss by the weighted average shares
outstanding. In the three months ended March 31, 1998, the effect of
assumed debt conversions is anti-dilutive.
-7-
<PAGE> 9
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company had net income of $425,036 for the three months ending
March 31, 1998, compared to a net loss of $448,345 for the same period
in 1997, resulting in a net income increase of $873,381 in 1998.
For the first three months ending March 31, 1998 and 1997, the refinery
had operating income of $576,786 in 1998 and an operating loss of
$212,704 in 1997, and net income of $503,593 in 1998 and a net loss of
$287,877 in 1997, a net income increase in 1998 of $791,470. The
refinery had positive cash flow from operations of $603,861 for the
first quarter of 1998, which was in contrast to the comparable figure
of $(183,080) in 1997. Sales volume was slightly higher in 1998 by 3.4%
to 6,363,619 total gallons and the average selling price per gallon was
higher than that for the first quarter of 1997 by $.015 per gallon.
Feedstock prices were lower by almost $.042 per gallon average than the
prices for the same period in 1997. Sales for the first quarter in 1998
continued the trend set throughout 1997 and stayed at record volume
levels for the premium pentane products. The lower feedstock costs of
1998 were almost the entire reason for the much improved performance of
1998 from the same period in 1997. 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
1997 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 February 1997 have reached unusual
lows in the early part of 1998.The current low prices are expected to
be temporary and should return to more normal levels in the second
quarter of 1998.
Expenses at the refinery for the first quarter in 1998 were lower than
a year ago. In addition to rapid feedstock cost rises early in 1997,
the price of natural gas used to fuel the refinery processes rose
rapidly for the same period and started falling in late February 1997.
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 1997. Throughout
the remainder of 1997 and into the first quarter of 1998, natural gas
prices remained low to moderate and helped keep the operating expenses
below those in 1997. The refinery paid a cash price of $1.91 for
natural gas for the month of January 1998.
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. Administrative expenses were flat or decreased
slightly compared to prior periods.
Processing fees for the first quarter of 1998 were $264,102, which is
an increase of 144% over the same period in 1997.All available units
were in operation and ran to near capacity in the first quarter,
whereas in 1997 one unit was idle and the others were running at
minimum capacities. The
-8-
<PAGE> 10
refinery has found there are many opportunities for a smaller company
to provide processing services on streams which the larger companies no
longer want to handle themselves. The refinery is in the process of
erecting four process towers to increase the capacity and capabilities
of the toll processing side of the business. Completion is expected in
the second quarter of 1998 with the results on net income to become
evident by the end of the third quarter of 1998.
The outlook for the industry is good from the perspective of increased
opportunities for toll processing. The refinery is currently operating
processes for 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 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. A new control room was completed
and the operations were moved into it during the first quarter.
Refinery personnel did much of the work to keep the costs to a minimum.
The outlook for the second quarter is good. Sales remain firm and, as
of now, 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 single largest expense. In June 1997,
the refinery resumed a 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 $7,981 was included in the cost of
refined product sales and processing for the first three months of
1998.
General and Administrative Expenses for the first three months in 1998
were $64,785 higher than for the same period in 1997, a slight increase
of 12%. Interest Expense in 1998 and 1997 was practically all
attributable to the debt of the refinery and decreased by $14,656 in
1998 due to the periodic payment of existing debt. The Minority
Interest amount in the first three months of 1998 and 1997 of $193 and
$17,432, 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 three 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.
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.
-9-
<PAGE> 11
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 and a meeting with them will be held in the near
future.
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 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 provides for annual payments to Pioche of
$50,000 for seven years until, or unless, an option is exercised to
purchase an 85% interest in the mining claims for $3,000,000. The
mining company will pay all annual taxes and claim rentals and has
agreed to expend at least $50,000 in exploration work each year and to
drill at least one hole during the first year. The agreement can be
terminated upon 60 days written notice from the mining company.
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 three 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 in January and March of 20,000 shares
of the Company's Common Stock pursuant to option exercises by two
officers of the Company for a total of $27,500; (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 March 31, 1998, the outstanding principal amount under the new
Amended and Restated Credit Agreement with Den norske was $1,515,000,
with $1,215,000 classified as long-term debt. The entire balance under
the Amended and Restated Credit Agreement is now 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
-10-
<PAGE> 12
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 March 31, 1998 remained at $1,945,773. Interest
payments of $95,238 were made in the first three months of 1998 and the
amount of accrued unpaid interest at March 31, 1998 was approximately
$61,000. 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 three months of 1998, a total of
$40,000 was paid on the note principal by the refinery, leaving a
principal amount at March 31, 1998 of $1,654,605. 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 March 31, 1998 and the
amount of accrued unpaid interest was approximately $232,000. 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 are in
the process of forming a Saudi limited liability company which will be
owned 50% by the Company and 50% by the Al Mashreq Company for Mining
Investments ("Al Mashreq"). After it is formed, title to the mining
lease will be transferred to the new company which will be responsible
for the construction and operation of the mining facilities.
At March 31, 1998, a total of approximately $1,591,000 in salaries and
termination benefits was due to Company employees in Saudi Arabia in
accordance with Saudi Arabian employment laws. This amount includes
approximately $789,000 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
March 31, 1998, the Company had 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 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.
-11-
<PAGE> 13
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.
-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: May 12, 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
-13-
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 730,254
<SECURITIES> 495,466
<RECEIVABLES> 3,299,501
<ALLOWANCES> 0
<INVENTORY> 337,268
<CURRENT-ASSETS> 4,862,489
<PP&E> 6,049,325
<DEPRECIATION> 3,338,962
<TOTAL-ASSETS> 45,583,031
<CURRENT-LIABILITIES> 14,956,410
<BONDS> 0
2,198,149
0
<COMMON> 0
<OTHER-SE> 23,303,145
<TOTAL-LIABILITY-AND-EQUITY> 45,583,031
<SALES> 5,752,538
<TOTAL-REVENUES> 6,016,640
<CGS> 4,841,346
<TOTAL-COSTS> 5,553,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,443
<INCOME-PRETAX> 425,036
<INCOME-TAX> 0
<INCOME-CONTINUING> 425,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,036
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
