<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
FOR QUARTER ENDING JUNE 30, 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 June 30, 1999: 22,019,494.
<PAGE> 2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,351,715 $ 1,907,242
Short-Term Investments 42,396 30,636
Trade Receivables 3,525,672 2,779,964
Inventories 408,602 178,714
------------ ------------
Total Current Assets 5,328,385 4,896,556
REFINERY PLANT, PIPELINE AND EQUIPMENT 9,179,819 7,151,134
Less: Accumulated Depreciation (3,921,083) (3,651,626)
------------ ------------
Net Plant, Pipeline and Equipment 5,258,736 3,499,508
AL MASANE PROJECT 34,395,515 34,121,501
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,282,855 1,280,656
OTHER ASSETS 374,423 453,854
------------ ------------
TOTAL ASSETS $ 49,071,162 $ 46,683,323
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable-Trade $ 719,281 $ 668,683
Accrued Liabilities 1,153,441 1,027,809
Accrued Liabilities in Saudi Arabia 1,444,156 1,444,156
Notes Payable 11,375,780 11,375,780
Current Portion of Long-Term Debt 498,000 498,000
------------ ------------
Total Current Liabilities 15,190,658 15,014,428
LONG-TERM DEBT 1,250,000 1,250,000
ACCRUED LIABILITIES IN SAUDI ARABIA, NET 721,376 703,214
DEFERRED REVENUE 127,659 98,677
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 906,840 909,600
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
ACCUMULATED DEFICIT (7,428,470) (9,595,695)
------------ ------------
Total Shareholders' Equity 30,874,629 28,707,404
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,071,162 $ 46,683,323
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30,1999 June 30,1998 June 30,1999 June 30,1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Refined Product Sales $ 5,958,736 $ 6,428,314 $ 11,386,733 $ 12,180,852
Processing Fees 354,445 141,249 467,562 405,351
------------- ------------- ------------- ------------
6,313,181 6,556,563 11,854,295 12,586,203
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 4,326,443 4,764,785 7,879,622 9,606,131
General and Administrative 702,089 688,057 1,403,917 1,296,820
Depreciation and Amortization 178,627 103,966 292,257 207,188
------------- ------------- ------------- ------------
5,207,159 5,556,808 9,575,796 11,110,139
------------- ------------- ------------- ------------
OPERATING INCOME 1,106,022 1,012,755 2,278,499 1,476,064
OTHER INCOME (EXPENSE)
Interest Income 14,040 27,565 34,984 50,113
Interest Expense (39,909) (117,789) (79,430) (210,232)
Minority Interest 1,321 3,635 2,760 3,828
Miscellaneous Income 70,021 42,929 146,165 74,358
------------- ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 1,151,495 969,095 2,382,978 1,394,131
INCOME TAX EXPENSE 152,342 -- 215,753 --
------------- ------------- ------------- ------------
NET INCOME $ 999,153 $ 969,095 $ 2,167,225 $ 1,394,131
============= ============= ============= ============
NET INCOME PER COMMON SHARE:
Basic $ .05 $ .04 $ .10 $ .06
============= ============= ============= ============
Diluted $ .04 $ .04 $ .09 $ .06
============= ============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 22,019,494 21,946,806 22,019,494 21,957,119
============= ============= ============= ============
Diluted 24,767,042 22,814,918 24,959,705 22,854,675
============= ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1999 22,019,494 $2,201,949 $36,101,150 $(9,595,695) $28,707,404
Net Income -- -- -- 2,167,225 2,167,225
---------- ---------- ----------- ----------- -----------
JUNE 30, 1999 22,019,494 $2,201,949 $36,101,150 $(7,428,470) $30,874,629
========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,167,225 $ 1,394,131
Adjustments for Non-Cash Transactions:
Income Tax Provision 140,339 --
Depreciation and Amortization 292,257 207,188
Increase (Decrease)in Deferred Revenue 28,982 (7,752)
Effects of Changes in Operating Assets and Liabilities:
Decrease (Increase) in Trade Receivables (745,708) (339,199)
Decrease (Increase) in Inventories (229,888) 222,742
Decrease (Increase) in Other Assets 79,431 80,821
(Decrease) Increase in Accounts
Payable and Accrued Liabilities 63,016 (51,045)
Other (52,685) (9,595)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,742,969 1,497,291
----------- -----------
INVESTING ACTIVITIES:
Additions to Short-Term Investments -- 339,447
Proceeds from Sale of Short-Term Investments (11,760) --
Additions to Al Masane Project (274,014) (377,819)
Additions to Refinery Plant, Pipeline & Equipment (2,028,685) (189,223)
Additions to Mineral Properties in the U. S (2,199) (365)
Increase in Accrued Liabilities in Saudi Arabia 18,162 187,176
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,298,496) (40,784)
----------- -----------
FINANCING ACTIVITIES:
Common Stock Sold -- 241,000
Reduction of Notes Payable and Long-Term Obligations -- (782,091)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES -- (541,091)
----------- -----------
NET INCREASE (DECREASE) IN CASH (555,527) 915,416
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,907,242 534,086
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,351,715 $ 1,449,502
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The 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' 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.
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 owns approximately 51% of the capital stock of Pioche-Ely Valley Mines,
Inc. ("Pioche"), which owns mining properties in Nevada. The Refining
Company and its subsidiaries constitute the Company's Specialty
Petrochemicals Segment. The Coal Company, Pioche and the Company's mineral
properties in Saudi Arabia constitute its Mining Segment.
2. INVENTORIES
Inventories at June 30, 1999 and December 31, 1998 were $408,602 and
$178,714, respectively, and consisted entirely of finished goods.
3. 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 six months
ended June 30, 1999, and 1998, respectively.
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------
1999 1998
------- -------
<S> <C> <C>
Net Income $ 2,167 $ 1,394
======= =======
Weighted average shares outstanding (basic) 22,019 21,957
Effect of dilutive stock options 2,941 898
------- -------
Weighted average shares outstanding (diluted) 24,960 22,855
======= =======
Earnings per share:
Basic $ .10 $ .06
======= =======
Diluted $ .09 $ .06
======= =======
</TABLE>
In the six months ended June 30, 1999 and 1998, the effect of assumed debt
conversions was anti-dilutive.
4. 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.
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<PAGE> 7
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.
5. SEGMENT INFORMATION
As discussed in Note 1, the Company has two business segments. The Company
measures segment profit or loss as operating income (loss) which represents
income (loss) before interest, miscellaneous income and minority interest.
Information on the segments is as follows:
<TABLE>
<CAPTION>
Three Months ended June 30, 1999 Refinery Mining Total
-------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Revenue from external customers $ 6,313,181 $ -- $ 6,313,181
Operating income (loss) 1,182,282 (76,260) 1,106,022
Total assets $10,889,124 $ 38,182,038 $49,071,162
</TABLE>
<TABLE>
<CAPTION>
Three Months ended June 30, 1998 Refinery Mining Total
-------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Revenue from external customers $ 6,556,563 $ -- $ 6,556,563
Operating income (loss) 1,114,566 (101,811) 1,012,755
Total assets $ 8,368,915 $ 37,661,595 $46,030,510
</TABLE>
<TABLE>
<CAPTION>
Six Months ended June 30, 1999 Refinery Mining Total
-------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Revenue from external customers $11,854,295 $ -- $11,854,295
Operating income (loss) 2,496,645 (218,146) 2,278,499
Total assets $10,889,124 $ 38,182,038 $49,071,162
</TABLE>
<TABLE>
<CAPTION>
Six Months ended June 30, 1998 Refinery Mining Total
-------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
Revenue from external customers $12,586,203 $ -- $12,586,203
Operating income (loss) 1,711,803 (235,739) 1,476,064
Total assets $ 8,368,915 $ 37,661,595 $46,030,510
</TABLE>
6. LEGAL PROCEEDINGS
South Hampton is a defendant in a lawsuit filed in a Jefferson County, Texas
District Court in December 1997 by a former employee of the Goodyear Tire &
Rubber Company plant located in Beaumont, Texas. The suit claims an illness
and disease resulting from alleged exposure to chemicals, including benzene,
butadiene and/or isoprene, during his employment with Goodyear. The
plaintiff claims that South Hampton engaged in the business of
manufacturing, selling and/or distributing these chemicals in a manner which
subjected him to liability for unspecified actual and punitive damages.
South Hampton intends to vigorously defend itself against this lawsuit. To
date, no further action has been taken.
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
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<PAGE> 8
necessary to bring its operations at its 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 filed an appropriate appeal with the U.S. Court
of Appeals for the Fifth Circuit on February 26, 1999. A supporting brief
was filed on June 4, 1999 in which the Company requested an oral argument
because it believes the facts of the case create unique applications of the
FOIA, FCPA, the National Security Act, the CIA Act, and Executive Order No.
12958. 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> 9
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 and
its primary source of revenue is the specialty products refinery owned and
operated by South Hampton near Silsbee, Texas. 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 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. 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
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<PAGE> 10
development should be deferred at this time. 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.Therefore, the proposed joint venture company, Arabian Shield
Company for Industrial Mining ("Arabian"), which was formed in August 1998, has
been dissolved and the proposed joint venture partner's capital contribution has
been returned. 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.
The Company on June 22, 1999 submitted a formal application for a five-year
exclusive mineral exploration license for the Greater Al Masane Area of 2,850
square kilometers which surrounds the Wadi Qatan and Jabal Harr exploration
license areas, and the Al Masane thirty-year mining lease area of 44 square
kilometers which the Company was granted in 1993. The Company has previously
worked in the Greater Al Masane Area after obtaining written permission from the
Saudi Ministry of Petroleum and Mineral Resources, and has spent over $3 million
in exploration work there, which included geophysical, geochemical work and
diamond core drilling. That work outlined a nickel deposit in the Wadi
Qatan-Jabal Harr areas, and zinc-copper-silver-gold deposits similar to those
developed in the Al Masane area, where the Company has spent over $30 million in
mine development through 45,000 meters of core drilling, 3.2 miles of
underground work, and a fully updated feasibility study. When the Company is
granted the exploration license to the Greater Al Masane Area, a detailed
exploration program will be developed.
The Company's mineral interests in the United States include its ownership
interests in the Coal Company and Pioche. The Coal Company's sole remaining
asset is its net operating loss carryforward of approximately $5.9 million at
December 31, 1998 and its future, if any, is uncertain. Pioche has been inactive
for many years. Its properties include 48 patented and 80 unpatented claims
totaling approximately 3,500 acres in Lincoln County, Nevada. There are
prospects and mines on these claims that previously produced silver, gold, lead,
zinc and copper.
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 $721,000).
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.
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<PAGE> 11
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.
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. During the six months ended June 30, 1999,
total product sales decreased approximately $794,000 or 6.5% while the cost of
sales decreased approximately $1.7 million or 186% from the same period last
year. Consequently, 1999's first half gross profit margin increased
approximately $932,000 or 36.2%. Sales volume remained substantially the same in
1999 and 1998 at approximately seven million gallons. The average selling price,
decreased slightly by $.015 per gallon as a result of the adverse economic
conditions affecting the petroleum refining industry during much of 1998 and the
first half of 1999. Feedstock prices were lower by almost 25% from the price for
the same period in 1998. Sales for the second quarter of 1999 continued the
trend of the last two years and stayed at near capacity levels for the premium
Pentane products. The lower feedstock costs of 1999 are the primary reason for
the much-improved performance from the same period in 1998. Operating expenses
were higher in the second quarter of 1999 by $156,000 over the same period in
1998. Fuel gas expenses was higher due to higher market prices of natural gas
and increased usage and operating labor costs were higher due to the training
and startup of the new processing units. Administrative expenses have slightly
increased in 1999 due to increased business activity. Interest Expense in 1999
and 1998 was practically all attributable to the debt of the refinery and
decreased by $77,880 and $130,802 in first three and six months of 1999,
respectively, due to the significant payment and settlement of existing debt in
the last half of 1998. Interest Income primarily results from short-term
investments by the refinery . Miscellaneous Income includes income from tank
rentals, commission income and occasional small asset sales proceeds at the
refinery.
Processing fees have increased from 1998. A new toll-processing unit,
designed to produce a line of specialty solvents for a major customer on a
multi-year contract, was constructed in the first quarter of 1999 and production
began on May 1, 1999. This is expected to add a minimum of $135,000 per month in
additional toll-processing revenues. The outlook is good for increased
opportunities for toll processing. The Company is currently operating processes
for four different entities and, while the contracts are being renewed on a
year-to-year basis, the expectations on all the contracts are for longer-term
operations. Sales of the refinery's prime products remains stable and expanded
marketing efforts have kept the refinery at near capacity since the second
quarter of 1997. In addition, the completion in the second quarter of 1999 of
two spherical storage tanks to allow maximum use of the available PenHex Unit
capacity should allow the expansion of sales capacity by approximately 20%.
MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's other
operations generate significant operating or other revenues.
Income Tax Expense includes $75,414 for the payment of 1998 federal income
tax in the second quarter of 1999, in addition to provisions of $22,048 and
$37,800 for estimated federal income taxes for the three and six months ended
June 30, 1999, respectively, and $54,880 and $102,539 for estimated state income
taxes for the three and six months ended June 30, 1999, respectively. The
federal income tax amounts result from the application of the "alternative
minimum tax", since the Company has significant net operating loss
carryforwards.
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
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<PAGE> 12
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.
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 June 30, 1999 it had completed approximately 95% of the activities in
this phase and the remaining tasks should be completed by September 30, 1999.
During October 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 October 31,
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 June 30, 1999, approximately $160,000
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
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<PAGE> 13
necessary. Contingency plans are expected to be completed by September 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> 14
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDER' PROPOSALS
Any proposal by a shareholder of the Company intended to be presented
at the 2000 annual meeting of shareholders, which is tentatively
scheduled 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 June 30,
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: August 11, 1999 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
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<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,351,715
<SECURITIES> 42,396
<RECEIVABLES> 3,525,672
<ALLOWANCES> 0
<INVENTORY> 408,602
<CURRENT-ASSETS> 5,328,385
<PP&E> 9,179,819
<DEPRECIATION> 3,921,083
<TOTAL-ASSETS> 49,071,162
<CURRENT-LIABILITIES> 15,190,658
<BONDS> 0
0
0
<COMMON> 2,201,949
<OTHER-SE> 28,672,680
<TOTAL-LIABILITY-AND-EQUITY> 49,071,162
<SALES> 11,386,733
<TOTAL-REVENUES> 11,854,295
<CGS> 7,879,622
<TOTAL-COSTS> 9,575,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,430
<INCOME-PRETAX> 2,382,978
<INCOME-TAX> 215,753
<INCOME-CONTINUING> 2,167,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,167,225
<EPS-BASIC> .10
<EPS-DILUTED> .09
</TABLE>
