<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1999
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, 1999: 22,019,494.
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<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,022,812 $ 1,907,242
Trade Receivables 2,706,508 2,779,964
Inventories and Other Current Assets 230,291 209,350
------------ ------------
Total Current Assets 4,959,611 4,896,556
REFINERY PLANT, PIPELINE AND EQUIPMENT 8,570,289 7,151,134
Less: Accumulated Depreciation (3,742,793) (3,651,626)
------------ ------------
Net Plant, Pipeline and Equipment 4,827,496 3,499,508
AL MASANE PROJECT 34,238,056 34,121,501
OTHER MINERAL INTERESTS AND PROPERTIES AND OTHER ASSETS 4,114,933 4,165,758
------------ ------------
TOTAL ASSETS $ 48,140,096 $ 46,683,323
============ ============
LIABILITIES
-----------
CURRENT LIABILITIES:
Accounts Payable - trade $ 801,609 $ 668,683
Accrued Liabilities 2,568,172 2,471,965
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 498,000 498,000
------------ ------------
Total Current Liabilities 15,243,561 15,014,428
LONG-TERM OBLIGATIONS AND DEFERRED CREDITS 2,097,147 2,051,891
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 908,160 909,600
SHAREHOLDERS' EQUITY
--------------------
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 22,019,494
shares issued and outstanding 2,201,949 2,201,949
ADDITIONAL PAID-IN CAPITAL 36,101,150 36,101,150
DEFICIT
(8,411,871) (9,595,695)
------------ ------------
Total Shareholders' Equity 29,891,228 28,707,404
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,140,096 $ 46,683,323
============ ============
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31,1999 March 31,1998
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<S> <C> <C>
REVENUES
Refined Product Sales $ 5,427,997 $ 5,752,538
Processing Fees 113,117 264,102
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5,541,114 6,016,640
OPERATING COSTS AND EXPENSES
Cost of Refined Product Sales and Processing 3,553,179 4,841,346
General and Administrative 749,487 608,763
Depreciation and Amortization 113,630 103,222
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4,416,296 5,553,331
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OPERATING INCOME 1,124,818 463,309
OTHER INCOME (EXPENSE), NET 59,006 (38,273)
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INCOME BEFORE INCOME TAXES 1,183,824 425,036
INCOME TAX EXPENSE -- --
NET INCOME $ 1,183,824 $ 425,036
============= =============
NET INCOME PER COMMON SHARE:
Basic $ .05 $ .02
============= =============
Diluted $ .05 $ .02
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 22,019,494 21,936,494
============= =============
Diluted 25,112,925 22,975,161
============= =============
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
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<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,615,490 $ 442,647
INVESTING ACTIVITIES:
Additions to Plant, Pipeline and Equipment (1,419,155) (123,137)
Other, net (80,765) (195,958)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,499,920) (319,095)
FINANCING ACTIVITIES:
Common Stock Sold -- 177,500
Reduction of Notes Payable and Long-Term Obligations -- (104,884)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- 72,616
----------- -----------
NET INCREASE IN CASH 115,570 196,168
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,907,242 534,086
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,022,812 $ 730,254
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
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<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION
The condensed consolidated financial statements reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of Arabian
Shield Development Company and Subsidiaries' (the "Company's")
financial position and operating results for the interim period.
Interim period results are not necessarily indicative of the results
for the calendar year. Please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations for
additional information.
2. INVENTORIES
Inventories at March 31, 1999 and December 31, 1998 were $225,485 and
$178,714, respectively, and consisted entirely of finished goods.
3. REVOLVING BANK CREDIT LINE
The Company has a $2.25 million revolving credit facility with the U.S.
office of a multinational bank that is collateralized by a first
security interest in substantially all of its domestic assets. Interest
(at the bank's prime rate plus 1%) is payable monthly. The bank's loan
commitment is to be reduced by at least $105,000 per calendar quarter
beginning March 31, 1999. In addition, the agreement for this credit
facility contains various restrictive covenants including the
maintenance of various financial ratios, net worth and parent company
distribution limitations. The credit facility expires December 31,
2000.
4. LEGAL PROCEEDINGS
South Hampton, together with over twenty-five other companies, was a
defendant in two lawsuits brought in different Jefferson County, Texas
District Courts. The suits were filed in July 1993 and 1994 by the same
Beaumont, Texas law firm on behalf of two former employees of the
Goodyear Tire & Rubber Company plant located in Beaumont, Texas. Each
suit claimed illness and diseases resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during their
employment with Goodyear. Each plaintiff claimed the defendant
companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjected each and all
of them to liability for unspecified actual and punitive damages. South
Hampton entered into settlement agreements with the two plaintiffs in
March 1997 and January 1998, respectively, by agreeing to pay each
plaintiff the amount of $25,000 in full and final settlement of all
claims by each such plaintiff against South Hampton. Another similar
lawsuit, filed by the same law firm on behalf of another former
Goodyear employee, was filed in a Jefferson County District Court in
December 1997 containing the same allegations and seeking unspecified
actual and punitive damages. South Hampton intends to vigorously defend
itself against this lawsuit.
In August 1997, the TNRCC's Executive Director filed a preliminary
report and petition with the TNRCC alleging that South Hampton violated
various TNRCC rules, TNRCC permits issued to South Hampton, a TNRCC
order issued to South Hampton, the Texas Water Code, the Texas Clean
Air Act and the Texas Solid Waste Disposal Act. The violations
generally relate to the management of volatile organic compounds in a
manner that allegedly violates the TNRCC's air quality rules and the
storage, processing and disposal of hazardous waste in a manner that
allegedly violates the TNRCC's industrial and hazardous waste rules.
The TNRCC's Executive Director recommends the TNRCC enter an order
assessing administrative penalties against South Hampton in the amount
of $709,408 and order South Hampton to undertake such actions as are
necessary to bring its operations at its
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4. LEGAL PROCEEDINGS, CONTINUED
refinery and its bulk terminal into compliance with Texas Water Code,
the Texas Health and Safety Code, TNRCC rules, permits and orders.
South Hampton is, and intends to continue to, vigorously defending
itself against this proceeding. Appropriate modifications were made by
South Hampton where it appeared there were legitimate concerns. A
preliminary hearing was held in November 1997, but no further action
has been taken.
In May 1991, the Company filed a complaint with the U.S. Department of
Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"). The
Company's complaint alleged various violations of the Foreign Corrupt
Practices Act ("FCPA") by Hunt, at the Company's detriment, in
obtaining its 1981 Petroleum Production Sharing Agreement ("PSA") in
Yemen. The DOJ requested additional documentation regarding the
Company's allegations in 1995 that the Company provided in early 1996.
In late 1996, the DOJ advised the Company that the documents presented
did not provide sufficient evidence of any criminal activity and that
the DOJ did not intend to pursue the investigation. In December 1996,
after providing the DOJ with additional legal analyses, the Company's
representatives were told that the DOJ would take a more aggressive
stance if additional legal evidence was presented to the DOJ. In an
effort to comply with the DOJ's request, in 1997 the Company requested
certain documents from the Central Intelligence Agency ("CIA") under
the Freedom of Information Act ("FOIA"). The Company believes the
requested documents may contain the evidentiary information that the
DOJ needs to properly and sufficiently evaluate the Company's compliant
against Hunt. The CIA refused to either confirm or deny the existence
of the requested information. After exhausting its administrative
appeals, the Company filed suit against the CIA in early 1998 in the
U.S. District Court for the Northern District of Texas seeking a
judicial determination of the Company's FOIA request. The Company
argued the FOIA specifically prohibits any agency from using the FOIA
to conceal criminal activity, in this instance Hunt's violation of the
FCPA. Following a February 1999 hearing, the Court rejected the
Company's arguments and issued a summary judgement in favor of the
United States and its agency, the CIA. The Company believes the Court
erred in its interruption of the FOIA and, since it believes this could
be a landmark case, it has filed an appropriate appeal with the U.S.
Court of Appeals for the Fifth Circuit. In addition, the Company
intends to request additional documents from both the CIA and DOJ under
appropriate provisions of the FOIA and may seek judicial review in the
event its requests are denied. In the event the Company is able to
provide the DOJ with appropriate legal evidence and the DOJ prevails in
any FCPA action against Hunt regarding the PSA, the Company would then
institute an appropriate action against Hunt in accordance with the
provisions of the Victim Restitution Act.
In late 1994, two prominent Yemen newspapers published articles that
accused Yemen Hunt Oil company ("Yemen Hunt"), a wholly owned
subsidiary of Hunt, of obtaining its PSA by corrupting certain
government officials in Yemen. Specifically, each article alleged that
Yemen Hunt engaged in corrupt practices in order to exclude
consideration of the company's application from consideration for the
PSA that was subsequently awarded to Hunt and its subsidiary, Yemen
Hunt. The executive vice president of Yemen Hunt sent a letter to the
editor of one of these newspapers. This letter, which was published on
December 7, 1994, stated, after explicitly mentioning the Company and
its then partner, Dorchester Gas Company, 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 criminal libel
complaint with Yemen's Attorney General for Publications in Sana'a,
Yemen against Yemen Hunt. Its complaint alleged that Yemen Hunt, in
its published letter, criminally libeled the company, which if not
addressed, could seriously affect the Company's and its employees'
business and reputation in the Middle East. In October 1996, the
Deputy Attorney General for Publications in Yemen issued its official
decision to the company. This decision, which was released after the
Attorney General's office had taken statements from the Company's
president and the chief of Yemen's Hunt legal department, stated it
was evident that the above mentioned letter was libelous to the
Company. However, Yemen Hunt could not be prosecuted for criminal
libel since the company. However, Yemen Hunt could not be
prosecuted for criminal libel since the fourth-month statute of
limitations period for criminal libel had run. The Company had been
vigorously pursuing evidence regarding Hunt, the PSA and related
matters in Yemen. However, in 1997 the Company was strongly advised
that it would be extremely dangerous for any of its officers,
representatives or consultants to go to Yemen and pursue further
evidence against Hunt. The Company plans to abide by that advice for
the foreseeable future.
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<PAGE> 7
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
Historically, the Company's cash flows from operating activities have
been insufficient to meet its operating needs, planned capital expenditures and
debt service requirements. The Company has continually sought additional debt
and equity financing in order to fund its mineral development and other
investing activities and experienced serious difficulties obtaining additional
financing. While the Company presently needs additional financing in order to
fund its planned mineral development activities, management believes its ability
to remain a going concern is no longer dependent on obtaining outside financing.
Consequently, management intends to focus additional time and resources on
improving its specialty petrochemical refining operations and reducing the cost
of any required outside financing.
Statements in Part 1, Item 2 as well as elsewhere in, or incorporated
by reference in, this Quarterly Report on Form 10-Q regarding the Company's
financial position, business strategy and plans and objectives of the Company's
management for future operations and other statements that are not historical
facts, are "forward-looking statements" as that term is defined under applicable
Federal securities laws. In some case, "forward-looking statements" can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Quarterly Report on Form 10-Q, all of which
are difficult to predict and many of which are beyond the Company's control.
Liquidity and Capital Resources
The Company operates in two business segments, specialty petrochemicals
and mining. Its corporate overhead needs are minimal. A discussion of each
segment's liquidity and capital resources follows.
SPECIALTY PETROCHEMICALS SEGMENT. This segment contributes
substantially all of the Company's internally generated cash flows from
operating activities. In order to supplement its cash flows from operating
activities, this business segment has a $2.25 million credit facility with Den
norske Bank ASA (the "Bank"). The terms and conditions of this credit facility
are discussed in Note 3 to the Company's Condensed Consolidated Financial
Statements. This segment's cash flows from operating activities, along with its
available credit facility, are expected to be adequate to finance its planned
capital expenditures and debt service requirements. In the event this segment
were to undertake a major capital expenditure, such as construction of a new
facility, financing for this activity would most likely come from some
combination of internal resources, a debt placement with a financial institution
or a joint venture partner. Any major capital expenditure requires the Bank's
advance review and approval.
MINING SEGMENT. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As previously
disclosed, management has attempted to finance commercial development of the Al
Masane mining project through a proposed joint venture in Saudi Arabia. Due to
the continuing depressed market prices of zinc, copper, gold and silver (which
comprise the Al Masane mining project's proved reserves), the Company and its
proposed joint venture partner have concluded that proceeding with the mining
project's financing and development is prohibitive at this time.
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<PAGE> 8
Accordingly, the Company has decided to delay commercial development of the Al
Masane project until a sustained rise in the market price of zinc, copper, gold
and silver becomes evident. Most reputable predictions indicate that metals
prices (except for gold) will not increase to the average prices seen during
the 1988 through 1997 period until 2001. In addition, the proposed joint
venture company, Arabian Shield Company for Industrial Mining ("Arabian"),
which was formed in August 1998, will be dissolved and the proposed joint
venture partner's capital contribution will be withdrawn. The proposed joint
venture company may be reestablished once the Company decides to proceed with
the commercial development of the Al Masane mining project. The Company has
advised the Saudi Ministry of Petroleum and Mineral Resources and the Saudi
Industrial Development Fund of these decisions. The Al Masane mining lease will
remain in the Company's name. The Company also anticipates that it will keep
Arabian's previously issued Industrial License since it was issued jointly to
the Company and Arabian. The Company remains fully committed to the eventual
commercial development of the Al Masane mining project as well as the Company's
other mineral interests in Saudi Arabia. These assets contain substantial and
valuable quantities of proved and probable mineral reserves. However, as a
result of these developments management is actively reviewing and evaluating
its options regarding what, if any, additional near term investment will be
required in the Al Masane mining project. This process may force the Company to
attempt to obtain additional outside financing.
Management also continues to address two other significant financing
issues within this segment. These issues are the $11.0 million note payable due
the Saudi Arabian government and accrued salaries and termination benefits of
approximately $840,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed approximately $714,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. While the Company has not made any repayments,
it has not received any payment demands or other communications regarding the
note payable from the Saudi government. This despite the fact the Company
remains active in Saudi Arabia and received the Al Masane mineral lease at a
time when it had not made any of the agreed upon repayment installments. Based
on its experience to date, management believes that as long as the Company
diligently attempts to explore and develop the Al Masane project no repayment
demand will be made. The Company recently communicated to the Saudi government
that its delay in repaying the note is a direct result of the government's
lengthy delay in granting the Al Masane lease. Based on its interpretation of
the Al Masane Mining Lease and other documents, management believes the
government is likely to agree to link repayment of this note to the operating
cash flows generated by the commercial development of the Al Masane project and
to a long-term installment repayment schedule. In the event the Saudi government
were to demand immediate repayment of this obligation, which management
considers unlikely, the Company would be unable to pay the entire amount due.
Management would then seek to enter into immediate negotiations with the
government in an effort to reach a mutually acceptable payment rescheduling
agreement. If a satisfactory rescheduling agreement could be reached, and there
are no assurances that one could be, the Company believes it could obtain the
necessary resources to meet the rescheduled installment payments by making
certain changes at its Specialty Petrochemicals Segment.
With respect to the accrued salaries and termination benefits due
employees working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.
At this time, the Company has no definitive plans for the development
of its domestic mining assets. It periodically receives proposals from outside
parties who are interested in possibly developing or using certain assets.
Management will continue to review these proposals as they are received, but at
this time does not anticipate making any significant domestic mining capital
expenditures or receiving any significant proceeds from the sale or use of these
assets.
If the Company seeks additional outside financing, there is no
assurance that sufficient funds can be obtained. It is also possible that the
terms of any additional financing that the Company would be able to obtain would
be unfavorable to the Company and its existing shareholders.
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<PAGE> 9
Results of Operations
SPECIALTY PETROCHEMICALS SEGMENT. During the three months ended March
31, 1999, total revenues decreased approximately $476,000 or 7.9% while the cost
of sales decreased approximately $1.3 million or 26.6% from the same period last
year. Consequently, 1999's first quarter gross profit margin increased
approximately $813,000 or 69.1%. Sales volume remained substantially the same in
1999 and 1998 at approximately six million gallons. The average selling price,
however, decreased slightly by $.03 per gallon or 4.1% as a result of the
adverse economic conditions affecting the petroleum refining industry during
much of 1998 and the first quarter of 1999. Overall sales demand continues to
remain strong enough to support current pricing levels. As a result of these
changes in sales and cost of sales, the specialty petrochemicals segment
significantly increased its gross profit (and net income) due primarily to lower
operating expenses and reduced feedstock costs. The price of its primary
feedstock, natural gasoline, continued to decrease throughout 1998 and this
decreased price remained in place during the quarter ended March 31, 1999.
Natural gasoline is the heavier liquid produced by natural gas processing plants
and by LPG fractionators. Feedstock prices in the first quarter of 1999 were
almost 30% lower than those experienced in the first quarter of 1998. The
segment's reputation for superior product quality and service reliability in the
petrochemical industry's specialty products segment allowed it to substantially
maintain sales volumes during the first quarter of 1999, thereby permitting
it to continue to take advantage of feedstock's reduced cost. Management expects
its feedstock and natural gas costs for the second quarter of 1999 to remain
near those levels experienced during the first quarter as a result of its
advance purchase and hedging commitments and then to increase somewhat. The
Company also anticipates that average product selling prices will increase
somewhat beginning late in the second quarter or early in the third quarter of
1999.
Construction continued during the first quarter on a toll-processing
unit designed to produce a line of specialty solvents for a major customer on a
multi-year contract. Production began on May 1, 1999 and should add over
$135,000 per month in additional toll-processing revenues. In addition,
completion of two spherical storage tanks (presently scheduled for completion
during the second quarter) will allow management to make maximum use of its
available production capacity and increase product sales capacity by
approximately 20%.
MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's
other operations generate significant operating or other revenues.
The Company periodically reviews and evaluates its mineral exploration
and development projects as well as its other mineral properties and related
assets. The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 1999, for purposes of estimating future cash
flows, the price assumptions contained in the 1996 update to the Al Masane
project's feasibility study, which was prepared by WGM, were used. These price
assumptions are averages over the projected life of the Al Masane mine and are
$1.05 per pound for copper, $.60 per pound for zinc, $400 per ounce for gold,
and $6.00 per ounce for silver. Using these price assumptions, no asset
impairments were evident.
The Company intends to assess the carrying values of its assets on an
ongoing basis. Factors which may affect carrying values include, but are not
limited to, mineral prices, capital cost estimates, the estimated operating
costs of any mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that, particularly in the event of a
prolonged period of depressed mineral prices, the Company will not be required
to take a material write-down of its mineral properties.
Other Matters
Year 2000. The Company, like most companies, is faced with the Year
2000 issue as a result of the use of computer systems that were designed to
process two digits rather than four in order to define a year. For example, some
computer software may interpret a date using the two digit representation "00"
as the year 1900 instead of the year 2000. If not corrected, such
misinterpretations could result in system failures or in miscalculations causing
disruptions in operational or financial processing.
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<PAGE> 10
The Company began significant efforts to address its year 2000
exposures in 1998. A project team assessed, remedied or replaced, and will test
and implement Year 2000 compliant computer systems and applications (which
consist of purchased computer applications, hardware, systems software and
embedded chip systems) so that such systems and related processes will continue
to operate and properly process information dated after December 31, 1999. Most
of this work was performed in conjunction with the implementation of necessary
data processing capacity increases.
The initial phase of these plans, an inventory and assessment of
potential problem areas for its information technology ("IT") systems and non-IT
systems, such as embedded technology, is complete. The remediation and
replacement phase for its IT and non-IT systems is substantially complete. The
Company estimates that as of March 31, 1999 it had completed approximately 90%
of the activities in this phase and the remaining tasks should be completed by
May 15, 1999. During May 1 through September, 1999, the Company plans to
complete a complete Year 2000 readiness test as well as a full systems
integration test in an environment that simulates processing conditions that
will exist after December 31, 1999. The Company anticipates that all of its
phases will be completed by September 30, 1999, however, there can be no
assurances that this deadline will be met.
Formal communications are being initiated with major customers and
vendors to assess the Company's potential exposure from their failure to
remediate their own Year 2000 issues. A failure by any of these customers and
vendors could become a significant challenge to the Company's ability to operate
its facilities at affected locations. Customers and vendors being contacted
include the specialty petrochemical segment's customers and suppliers. If
needed, the Company may choose to identify and develop alternate customers and
storage facilities as well as alternative providers of products and services.
Although the Company has no means of ensuring the Year 2000 readiness of such
customers and vendors, it will continue to gather information and monitor their
compliance
The Company's total cost of achieving Year 2000 compliant systems is
currently estimated to be approximately $175,000. This amount, which includes
both expense and capital spending, will be funded from the Company's net cash
flows from operating activities. Through March 31, 1999, approximately $150,000
has been spent for the replacement of hardware and software and capitalized.
The failure to correct a material Year 2000 problem or the inability of
any key customer, key supplier or a governmental agency to make the necessary
computer system changes on a timely basis, could result in interruptions to the
Company's operations or business activities. Such interruptions could have a
material adverse impact on the Company's financial condition, operating results
and cash flows. Due to the general uncertainty inherent in the Year 2000 issue,
particularly as it relates to the readiness of the Company's key customers and
suppliers, and of governmental agencies, the Company cannot ascertain at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's financial condition, operating results or cash flows.
The Company is also developing contingency plans regarding the Year
2000 issue that addresses various scenarios and alternatives. Among other
things, these plans will probably include replacing electronic applications with
manual processes, identifying alternative vendors, adjusting staffing
requirements and increasing raw material inventory levels, as considered
necessary. Contingency plans are expected to be completed by June 30, 1999, and
will be updated regularly as current issues develop or as new issues are
identified. However, there can be no assurances that these contingency plans
will be timely completed or implemented.
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<PAGE> 11
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDERS' PROPOSALS
Any proposal by a shareholder of the Company intended to be presented at
the 2000 annual meeting of shareholders, which is tentatively scheduled
for sometime in May 2000, must be received by the Company at its
principal executive office no later than December 3, 1999 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 2000 annual meeting of shareholders, unless written
notice of the matter is delivered to the Company at its principal
executive office no later than February 15, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
-------------------------------
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 14, 1999 ARABIAN SHIELD DEVELOPMENT COMPANY
------------ -----------------------------------------
(Registrant)
/s/ J. A. CRICHTON
-----------------------------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ JONATHAN COCKS
-----------------------------------------
Jonathan Cocks, Vice President (Principal
Financial and Accounting Officer)
-10-
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,022,812
<SECURITIES> 0
<RECEIVABLES> 2,706,508
<ALLOWANCES> 0
<INVENTORY> 230,291
<CURRENT-ASSETS> 4,959,611
<PP&E> 8,570,289
<DEPRECIATION> 3,742,793
<TOTAL-ASSETS> 48,140,096
<CURRENT-LIABILITIES> 15,243,561
<BONDS> 0
0
0
<COMMON> 2,201,949
<OTHER-SE> 29,891,228
<TOTAL-LIABILITY-AND-EQUITY> 48,140,096
<SALES> 5,427,997
<TOTAL-REVENUES> 5,541,114
<CGS> 3,553,179
<TOTAL-COSTS> 4,416,296
<OTHER-EXPENSES> 59,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,183,824
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,183,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,183,824
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
