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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR QUARTER ENDING MARCH 31, 1996
COMMISSION FILE NUMBER 0-6247
ARABIAN SHIELD DEVELOPMENT COMPANY
State of Delaware 75-1256622
10830 North Central Expressway, Suite 175
Dallas, Texas 75231
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 twelve 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 ninety days.
Yes X No
Number of shares of the Registrant's Common Stock par value $0.10 per share,
outstanding at March 31, 1996: 19,928,494.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31,1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and Cash Equivalents in U.S. $ 27,556 $ 302,039
Short-term Investments 303,093 294,610
Accounts Receivable (Net) 2,346,718 1,791,821
Inventories 786,009 430,732
-------------- ---------------
Total Current Assets 3,463,376 2,819,202
CASH IN SAUDI ARABIA 217,103 396,809
PLANT, PIPELINE & EQUIPMENT (AT COST)
Refinery Plant, Pipeline & Equip. 5,577,811 5,563,776
Less: Accumulated Depreciation (2,638,853) (2,557,454)
-------------- ---------------
Net Equipment 2,938,958 3,006,322
AL MASANE PROJECT 31,019,473 30,897,883
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
INVESTMENT IN AND ADVANCES TO
PIOCHE-ELY VALLEY MINES, INC. 238,419 239,032
GOODWILL 323,302 397,902
OTHER ASSETS (NET) 566,550 617,019
-------------- ---------------
TOTAL ASSETS $ 41,198,429 $ 40,805,417
============== ===============
LIABILITIES
- -----------
CURRENT LIABILITIES:
Accounts Payable $ 1,071,490 $ 674,641
Accrued Liabilities 613,596 617,995
Accrued Liabilities in Saudi Arabia 1,011,980 1,011,980
Notes Payable 15,061,657 15,086,191
Current Portion of Long-Term Debt 86,268 78,090
Current Portion of Long-Term
Obligations 20,694 20,285
-------------- ---------------
Total Current Liabilities 17,865,685 17,489,182
LONG-TERM DEBT 679,765 708,534
LONG-TERM OBLIGATIONS 180,547 185,875
ACCRUED LIABILITIES IN SAUDI ARABIA 649,447 636,047
DEFERRED REVENUE 141,313 145,189
STOCKHOLDERS' EQUITY
- --------------------
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 20,206,494
shares issued and outstanding 2,020,649 2,020,649
ADDITIONAL PAID-IN CAPITAL 33,210,750 33,210,750
RECEIVABLES FROM STOCKHOLDERS (126,000) (126,000)
ACCUMULATED DEFICIT (13,423,727) (13,464,809)
-------------- ---------------
Total Stockholders' Equity 21,681,672 21,640,590
-------------- ---------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 41,198,429 $ 40,805,417
============== ===============
See notes to consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
REVENUES:
Refined Product Sales $ 4,712,505 $ 4,461,593
Processing Fees 197,142 85,978
------------- ------------
4,909,647 4,547,571
OPERATING COSTS AND EXPENSES:
Cost of Refined Product
Sales and Processing 4,154,163 3,724,470
General and Administrative 480,111 570,754
Depreciation and Amortization 205,569 166,711
------------- ------------
4,839,843 4,461,935
------------- ------------
OPERATING INCOME (LOSS) 69,804 85,636
OTHER INCOME (EXPENSES):
Interest Income 8,111 11,832
Interest Expense (88,270) (97,032)
Equity in Losses
of Affiliate (1,094) (1,350)
Miscellaneous Income 54,220 67,293
------------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES 42,771 66,379
Income Tax Expense (1,689) (2,511)
-------------- ------------
NET INCOME (LOSS) $ 41,082 $ 63,868
============= ============
PER COMMON SHARE:
NET INCOME (LOSS) $ .01 $ .01
============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,206,494 20,028,494
============= ============
See notes to consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
COMMON STOCK
----------------------- ADDITIONAL RECEIVABLES
PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
---------- ---------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1995 20,206,494 $2,020,649 $33,210,750 $(126,000) $(13,464,809) $21,640,590
Net Income (Loss) 41,082 41,082
---------- ---------- ----------- --------- ------------ -----------
BALANCE, MARCH 31, 1996 20,206,494 $2,020,649 $33,210,750 $(126,000) $(13,423,727) $21,681,672
========== ========== =========== ========= ============ ===========
See notes to consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
OPERATING ACTIVITIES:
Net Income (Loss) $ 41,082 $ 63,868
Adjustments for Non-Cash Transactions:
Depreciation and Amortization 205,569 166,711
Equity in (Income) Losses of Affiliate 1,094 1,350
Effect of Changes in:
Decrease (Increase) in Accounts
Receivable (554,897) (418,132)
Decrease (Increase) in Inventories (355,277) (161,384)
Decrease (Increase) in Other Assets 50,469 38,228
(Decrease) Increase in Accounts
Payable and Accrued Liabilities (392,450) (183,006)
(Decrease) Increase in Deferred Revenue (3,876) (3,876)
Other (50,051) (9,026)
--------- ----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (273,437) (505,267)
--------- ----------
INVESTING ACTIVITIES:
Additions to Al Masane Project (121,590) (110,329)
Additions to Other Interests
in Saudi Arabia -- --
Additions to Plant, Pipeline & Equipment (14,035) (13,599)
(Increase) Decrease in Cash in
Saudi Arabia 179,706 173,820
Increase (Decrease) in Accrued
Liabilities in Saudi Arabia 13,400 5,648
--------- ----------
NET CASH USED FOR INVESTING ACTIVITIES 57,481 55,540
--------- ----------
FINANCING ACTIVITIES:
Common Stock Issued for Cash -- --
Decrease in Receivables from
Stockholders -- 50,000
Additions to Notes Payable and
Long-Term Obligations -- --
Reductions of Notes Payable and
Long-Term Obligations 50,044) (222,013)
-------- ---------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (50,044) (172,013)
--------- ----------
NET INCREASE (DECREASE) IN CASH (266,000) (621,740)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 596,649 1,326,119
--------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 330,649 $ 704,379
========= ==========
See notes to consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. REPORTING POLICIES
The consolidated 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
accounts of the Refining Company include its wholly owned subsidiary,
Texas Oil and Chemical Company II, Inc. ("TOCCO") and TOCCO's accounts
include its wholly owned subsidiaries, South Hampton Refining Company
("South Hampton") and Gulf State Pipe Line Company, Inc. ("Gulf
State"). The Company also beneficially owns approximately 55%, and
directly owns approximately 46%, of the capital stock of an inactive
Nevada mining company. Pioche-Ely Valley Mines, Inc. ("Pioche"). The
Company accounts for its 46% ownership interest in Pioche by the
equity method.
2. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company's current
primary source of revenue is attributable to South Hampton and is
fully dedicated to the repayment of debt and funding refining
operations. The Company is not generating cash flow from any of its
other activities.
Management of the Company plans to fund its future operations through
sales of its common stock, borrowings, and from the anticipated
profits of its mining operations in Saudi Arabia. Assuming financing
can be obtained, the results of the 1994 feasibility study contemplate
that construction of an ore treatment plant and all infrastructure for
a mining facility at Al Masane is estimated to take 18 months to
complete. The 1994 feasibility study estimated the total cost of the
mining facility to be $81.3 million.
In the event the Company is unable to finance the Al Masane mining
project or realize cash flow from its refining operations, or from the
future sale of stock, or reach a final agreement on the repayment of
the $11,000,000 loan from the Saudi government, there will then be
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. AL MASANE PROJECT
The Company and National Mining Company ("NMC"), a Saudi Arabian
Company, entered into an agreement in 1971 to explore and develop
certain areas in Saudi Arabia. The Company and NMC jointly entered
into an interest-free loan agreement for $11,000,000 in January 1979,
with the Saudi Arabian Ministry of Finance and National Economy, the
proceeds of which loan were required to be used for the underground
development program at Al Masane. Repayment of the loan was to begin
December 31, 1984, in ten equal annual installments. None of the
scheduled payments have been made.
On April 13, 1992, the Company and NMC signed an agreement whereby NMC
transferred to the Company all of its rights and interests in the Al
Masane Area in return for the Company assuming sole responsibility for
the repayment of the $11 million loan obtained from the Saudi Arabian
government in 1979. NMC also
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has orally advised the Company that it has relinquished its rights in
all other areas in Saudi Arabia and assigned them to the Company. The
loan is to be rescheduled so that repayment would be made from the
profits of mining after the mining lease is issued. On April 30, 1992,
the Minister of Petroleum and Mineral Resources was informed by the
Company about the agreement with NMC and that the Company would not
ask for the loan which was approved by the Saudi Arabian government in
1984. On October 4, 1992, the Company and the Minister of Petroleum
and Mineral Resources initialed approval of a new mining lease which
was submitted to the Council of Ministers for approval.
On April 26, 1993, the Council of Ministers passed the resolution
granting the Company the mining lease, and on May 22, 1993, a Royal
Decree was issued by the King. The initial period of the mining lease
is 30 years, which can be renewed for another period or periods, not
to exceed 20 years. The lease area is 44 square kilometers in size.
The lease agreement stipulates that the Company is to pay the Saudi
government a surface rental of approximately $117,000 a year. The
Company made the first year's surface rental payment in August 1993.
All subsequent payments are being deferred to be paid by a Saudi
limited liability company which will be 50% owned by the Company with
the other 50% owned by Saudi shareholders of the Company. This new
company will be formed to initially operate the Project in a joint
venture with the Company when approval is received for the loan from
the Saudi Industrial Development Fund ("SIDF"), which was applied for
on September 30, 1995. The lease agreement also stipulates that, after
two years of profitable mine operations, a Saudi public stock company
will be formed in which the Company will contribute its interest in
the Al Masane Project in return for 50% of the stock. The Petroleum
and Mineral Organization ("PETROMIN"), a company wholly-owned by the
Saudi government, has an option to acquire up to 25% of the stock with
the remaining 25% interest to be put out for public subscription to
Saudi citizens.
In the Al Masane Lease area, proven and probable reserves of the ore
of copper, zinc, silver and gold, which the Company discovered and
developed, are estimated to be 7.2 million tonnes, and the exploration
potential to increase these reserves at the mine site and in the area
remain excellent, as reported by the Company's geological and
engineering consultant. A 1994 report on the Al Masane Project by the
consulting firm, Watts, Griffis and McOuat, which was begun in 1993
subsequent to the granting of the mining lease was completed in July
1994. The purpose of this report is to provide a feasibility study for
the Project to be used in obtaining financing, as well as an
implementation plan for the Project. The report projects production of
the proven and probable ore reserves of 7.2 million tonnes over a ten
year period. The total capital cost of the Project is estimated to be
$81.3 million. The cash flow projection was made based on the
assumption that 50% of the financing of the Project's cost will come
from loans from the Saudi Industrial Development Fund, 25% from bank
loans, and 25% from equity financing. This financing is anticipated to
be completed in 1996. Revenues were estimated utilizing projected
mineral prices from a third party pricing expert. Since positive net
cash flows are indicated in the report, the consultants have
recommended that the mine be brought into production.
In March 1995, the Company entered into an agreement with Carlyle SEAG
("Carlyle"), of Washington, D.C. and Saudi Arabia, whereby Carlyle was
retained as the Company's financial advisor in connection with the Al
Masane mining project. In February 1996, the agreement with Carlyle
was effectively terminated by mutual consent. An agreement with a
Saudi Arabian financial advisor is currently being negotiated.
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4. OTHER PROJECTS IN SAUDI ARABIA
The Company has held exploration licenses for the Wadi Qatan, Jebel
Harr and Greater Al Masane areas in Saudi Arabia. Although the
licenses have expired, the Saudi Arabian government has orally advised
the Company that they will be extended as long as mineral exploration
is being carried out on the areas which they cover. The Company is
planning to apply for formal extensions of these licenses in 1996. The
Company has had positive results from its exploration work at these
sites; however, it has directed limited amounts of time and resources
on them in recent years while it negotiated with the Saudi government
for the Al Masane lease. The Company does not intend to abandon these
sites.
In December 1993, the Company commissioned Sherritt Ltd, of Fort
Saskatchewan, Canada, to prepare a conceptual engineering design for a
proposed zinc refinery based on Sherritt's two stage pressure leach
process, to be built by the Company and Saudi partners at the Red Sea
port of Yanbu, Saudi Arabia. The refinery would have the capacity to
produce 100,000 tonnes of slab zinc per year, with elemental sulfur as
a by-product. Sherritt Ltd. completed the study in May 1994, which
contains a proposed flow sheet that has been commercialized and
designed for a state of the art zinc refinery. Sherritt's zinc
pressure leach technology provides significant advantages over other
existing zinc production processes, including having the reputation as
the most favored technology for environmental considerations. In its
study Sherritt concluded that, after considering all of the presently
identifiable elements, they offer a strong potential for the project
and enhance the concept. Sherritt encouraged the Company to carry out
further studies toward the implementation of the project.
In May 1993, the Company had discussions with Chevron Chemical Company
regarding the Company's proposal to purchase 5,000 barrels per day of
mixed pentanes from an Aromax petrochemical project to be built in
Jubail, Saudi Arabia by Chevron Chemical in a joint venture with the
Saudi Venture Capital Group (SVCS). The Company and some Saudi joint
venture partners, all of whom are directors and/or stockholders of the
Company, contemplate building a processing plant located next to the
Chevron Aromax plant in Saudi Arabia. Chevron Chemical advised the
Company by letter on July 6, 1993, that Chevron Chemical and SVCS have
jointly agreed to commit to supply the joint venture's proposed
pentane project with up to 5,000 barrels per day of mixed pentane
feedstock. As proposed, the Company would have a 25% interest in the
joint venture. Engineering and marketing studies of the project have
been made by outside consultants which reflect positive results.
Planning has begun toward the construction and operation of the Aromax
plant and the joint venture's processing plant, but was delayed during
1995 because of the absence of a firm commitment for the feedstock
supply to the Aromax plant. The Company will begin applying to the
Saudi government for a license for the project when the Aromax project
receives final approval from the Saudi government.
5. MINERAL EXPLORATION AND DEVELOPMENT PROJECTS IN THE UNITED STATES
The Company's United States operations include the ownership and
operation of a petroleum refinery and the leasing of mineral
properties.
The Company owns all of the capital stock of the Coal Company which
does not own or hold any mineral interest and is presently inactive.
The Coal Company has tax loss carryforwards of approximately $5.9
million which are limited to its net income. The Coal Company has been
negotiating with several companies toward the possible use of this
amount, although there can be no assurance that any agreement relating
thereto will be reached.
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The principal assets of Pioche are an undivided interest in 48
patented and 84 unpatented mining claims and a 300 ton-per-day mill
located on the aforementioned properties in southeastern Nevada. The
properties held by Pioche have not been commercially operated for
approximately 35 years. During 1994, Pioche attempted to drill a core
hole on this property. The core hole was intended to go down to 1,500
feet but encountered formation problems at 700 feet and further
drilling had to be abandoned. A new site will be selected and
management expects a second core hold to be drilled when financing
becomes available.
In August 1993, Pioche entered into a lease of the Wide Awake mine
property. This new agreement stipulates a 6% royalty on net smelter
returns with no annual rental required. The lease commenced on October
1, 1993, for a primary term of twenty-seven months (to December 31,
1995). In August 1995, it was agreed by all parties concerned that the
lease would be extended for one year to December 31, 1996, under the
same terms, and will continue as long as minerals are produced in
commercial quantities or unless terminated by the parties. No
royalties have been earned to date. A core hole is planned to be
drilled on the Wide Awake property in 1996. In 1995, the Company
received an extension of its option to buy 720,000 shares of Pioche
common stock at $.20 per share. The option expires on June 1, 1997.
6. REFINERY OPERATIONS
The principal assets of the Refining Company are a special products
refinery located near Beaumont, Texas, and 50 miles of pipelines to
the Gulf of Mexico. South Hampton, the Company's only revenue
producing asset, sells its products primarily to companies in the
chemical and plastics industries. Downturns in these industries could
negatively impact refinery operations in the future. South Hampton's
largest customer accounted for 16% of total sales in the first three
months of 1996 and 25% and 13% in 1995 and 1994, respectively.
7. LEGAL PROCEEDINGS
South Hampton fled suit on July 18, 1994 in the 88th Judicial District
Court in Hardin County, Texas against National Union Fire Insurance
Company arising from the claim of South Hampton under the Uniform
Declaratory Judgment Act for a ruling as to the construction of an
insurance contract issued by National Union insuring South Hampton.
South Hampton also asserted claims against National Union for breach
of contract, negligence, breach of the duty of good faith and fair
dealing and certain violations of the Texas Insurance Code. The case
was removed to the United States District Court on August 22, 1994.
The court ordered that it will first consider South Hampton's
contractual coverage claims under the Uniform Declaratory Judgment Act
and abated all of the other claims pending the outcome of the
contractual coverage claims. Any proceeds received by South Hampton
from this cause of action would be payable by South Hampton to Cajun
Energy, Inc. and E-Z Mart Stores pursuant to the terms of a judgment
entered against South Hampton in 1994.
South Hampton, together with over twenty-five other companies, is a
defendant in two proceedings pending in the 60th Judicial District
Court in Jefferson County, Texas, and in the 136th Judicial District
Court in Jefferson County, Texas, respectively, brought on July 21,
1993 and July 18, 1994, respectively, by two former employees of the
Goodyear Tire & Rubber Company plant located in Beaumont, Texas,
claiming illness and diseases resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during their
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employment with Goodyear. Plaintiffs claim that the defendant
companies engaged in the business of manufacturing, selling and/or
distributing these chemicals in a manner which subjects each and all
of them to liability for unspecified actual and punitive damages.
South Hampton intends to vigorously defend against these lawsuits.
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 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
believes will further support its allegations and is awaiting a
response by the DOJ. 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 Foreign Corrupt Practices Act.
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 Oil Company ("Yemen Hunt"), alleging that Yemen
Hunt, in a published letter to a prominent Yemen newspaper, accused
the Company of engaging in political activities for the purposes of
undermining the economic interests of Yemen. The Company believes that
this is a malicious libel which could seriously affect the business
and reputation of the Company and its employees in the Middle East.
The Company intends to vigorously pursue the complaint.
8. INVENTORIES
Inventories include the following:
MARCH 31, 1996 DEC. 31, 1995
-------------- -------------
Refinery feedstock $26,444 $59,358
Refined products 759,565 371,374
-------- --------
Total inventories $786,009 $430,732
======== ========
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, 1996 and December 31, 1995, the market value of the
inventory exceeded the LIFO value by approximately $71,000 and
$150,000, respectively.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " and Statement No. 123,
"Accounting for Stock-Based Compensation." Both Statements must be
adopted in 1996.
Statement No. 121 requires the review for impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets whenever circumstances indicate that the carrying amount of the
asset may not be
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recoverable. An impairment loss is to be recognized if the sum of the
expected future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset. The amount of the
impairment loss would be measured as the difference between the
carrying amount of the asset and its estimated fair value. The Company
has determined that the adoption of Statement No. 121 in 1996 may
result in an impairment loss of $2,431,248 on the Other Interests in
Saudi Arabia. The Company is currently analyzing the impact which
Statement No. 121 may have on its financial statements. An impairment
loss to conform to Statement No. 121 would not represent the
abandonment of this exploration effort. The Company is in the process
of applying for an exploration license from the Saudi Arabian
government covering these interests and fully intends to develop them
in the future.
Statement No. 123 establishes accounting and reporting standards for
various stock based compensation plans. Statement No. 123 encourages
the adoption of a fair value based method of accounting for employee
stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25
("Opinion 25"), "Accounting for Stock Issued to Employees." Entities
that continue to apply the provisions of Opinion 25 must make pro
forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. The Company will
adopt Statement No. 123 in 1996 and currently expects to continue to
account for its employee stock options in accordance with the
provisions of Opinion 25.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company had net income of $41,082 for the three months ending
March 31, 1996, compared to net income of $63,868 for the same period
in 1995, resulting in a net income decrease of $22,786 in 1996 from
the comparable period in 1995.
For the three months ending March 31, 1996 and 1995, the Refining
Company had operating income of $160,777 and $223,841, respectively
and net income of $143,189 and $202,587, respectively. The Refining
Company cash flow for the same three-month period in each year was
$348,686 and $390,417, respectively, representing a decrease of
approximately 11% in 1996. The cost of product sales in 1996 was
$429,693 higher than in 1995 which amounted to 88% of gross sales in
1996 compared to 84% in 1995. Sales volume was higher in 1996 by 7% to
5,647,000 total gallons, but the average price per gallon was down by
just over $.01 per gallon. The larger difference had to do with
feedstock price which was higher by about $.03 per gallon on the
average in 1996 than the price for the same period in 1995 which was
already $.11 per gallon higher that for the same period in 1994.
Processing fees continued to rise as they have over the past two years
and were $197,142 in 1996, which was an increase of 129% over the
amount of $85,978 for the same period in 1995 and 277% over the amount
of $52,277 for the same period in 1994. The Refining company has found
that, in this period of "right-sizing" which many of the major oil and
chemical companies are experiencing, there are many opportunities for
a smaller company to provide a processing service on streams which the
larger companies no longer want to handle themselves.
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 remains stable but has shown some weakness
when compared to the demand from previous periods. The weakness has
shown up primarily in the delivery schedules which have tended to be
in spurts rather than smooth regular flows. The refinery believes this
peak and valley type of demand indicates that its customers are not
planning ahead, but are processing based upon short term demand and
are trying to minimize inventories. Feedstock prices, while currently
higher than they have been in recent history, are not expected to
remain so as there seems to be a lack of basic fundamentals to support
such higher prices. As inventories of petroleum products nationwide
get rebuilt from the draw-down which occurred over the winter, a
softening of all petroleum prices should occur. The refinery has most
of its major expenditures behind it on the cleanup of the facility
which was initiated in late 1994, and intends to focus on process
efficiency and control of costs for the remainder of 1996.
General and administrative expenses for the first three months in 1996
were $90,643 lower than for the same period in 1995, primarily due to
higher costs in 1995 for insurance, consulting fees and profit-sharing
costs. Interest expense in 1996 and 1995 was practically all
attributable to the debt of the refinery and decreased by $8,762 due
to a reduced amount of debt in 1996.
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The equity in losses of affiliate of $1,094 for the three months in
1996 was attributable to the cost of maintaining the Nevada mining
properties of Pioche. There was no activity in either the current or
prior period on the Pioche properties primarily due to the lack of
financing for claims to be explored and developed. A charge for
amortization of goodwill of $69,285 for the same period in 1996 and
1995 relates to the goodwill recognized on the purchase of the
refinery in 1987. Interest income in both periods was primarily from
time deposits of the refinery operation and from excess cash invested
in Saudi Arabia. Miscellaneous income in both periods primarily
includes income from tank rentals, building rentals, commission income
and occasional small asset sale proceeds at the refinery. The income
tax expense in both periods results from a provision for possible
alternative minimum tax.
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. The
Company has required additional debt or equity financing in order to
continue development activities on its various projects and to fund
its general and administrative costs.
Due to the granting by Saudi Arabia of the Al Masane mining lease in
May 1993, the Company has begun planning for the mobilization program
and financing to implement the construction and commissioning of the
mining treatment plant and housing facilities for the mine. The firm
of Watts, Griffis and McOuat of Toronto, Canada, has been appointed as
owner's agent and project manager. The Company will also soon start an
intensive exploration program to increase the reserves at the mine
site and elsewhere in the lease area. In addition, the Company is now
actively engaged in studies for the feasibility of the establishment
of a petrochemical plant in Saudi Arabia similar to the one owned by
the Refining Company. 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.
Since the coal leases in Colorado were relinquished in 1988, there is
only a small amount of overhead expenses incurred regarding the Coal
Company. Primarily as a result of the write-off of its total
investment in the coal leases in 1988, the Company has net operating
loss tax carryforwards from prior years of approximately $33.2
million, of which approximately $5.9 million is limited to any future
net income of the Coal Company and approximately $1.7 million of this
amount is limited to any future net income of TOCCO. These
carryforwards expire during the years 1996 through 2009. The Company
has been negotiating with several companies toward the possible use of
the Coal Company's carryforward amount, although there can be no
assurances that any agreement relating thereto will be reached.
The refinery completed an expansion project in early 1990 which
increased the processing capacity from 1,500 to 2,200 barrels a day.
The cost of the total refinery upgrade and expansion was approximately
$2.5 million. The Company advanced funds for some of these
expenditures and put them in the form of a note from the refinery.
This note, in the principal amount of $1,333,355 at March 31, 1996, is
secured by a second lien on the refinery assets, and was approved by
the Den norske Bank AS ("Den norske").
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On March 31, 1996, the outstanding principal amount under the Amended
and Restated Credit Agreement with Den norske was $2,166,951. The
entire balance under the Amended and Restated Credit Agreement
facility, including amounts drawn under the letter of credit facility,
has been extended from December 31, 1995 to June 1, 1996. South
Hampton has agreed to make minimum principal payments of $100,000
during the five month extension period. The extension is designed to
permit Den norske and South Hampton to negotiate a restructuring of
the loan into a two-year revolving credit loan, which has been agreed
to in principle by the parties. No formal agreement has been reached
at the current time.
In July 1994, South Hampton established a hedging program to help
decrease the volatility of the price of fuel gas to the refinery.
South Hampton purchased several commodity based derivative futures
contracts during 1994. Gains and losses related to these contracts
have been recognized when the contracts expire. Losses were
recognized in 1994 and 1995 and were included as a cost of refined
product sales and processing in the consolidated statement of
operations. Since the fuel prices decreased in 1995 and were expected
to soften in the next year or two, the hedging program was
discontinued in June 1995.
During 1995, the Company took certain actions designed to generate
additional equity capital and improve its financial condition,
including: (1) the negotiation by South Hampton of an extension until
June 1, 1996 of the maturity of the Den norske note (2) borrowed
$721,000 in the aggregate from four individuals, including a
stockholder of the Company, the President and Chief Executive Officer
of the Company and a relative of such officer, pursuant to loans
payable on demand two years after their issuance bearing interest at
LIBOR plus 2%, such lenders having the option for a period of five
years from the date of the loan to convert the principal amount of
their loan and all accrued interest into shares of the Company's
Common Stock at the rate of $1.00 per share, (3) received a $50,000
payment on a stockholder receivable from a 1993 sale of shares to a
private Saudi company controlled by a director and (4) granted the
President and Chief Executive Officer of the Company an option to
convert at any time $400,000 of deferred compensation for services
rendered to the Company into shares of the Company's Common Stock at
the rate of $1.00 per share.
In the first three months of 1996, negotiations have been continuing
to restructure the loan of $1,500,000 owed by South Hampton to Saudi
Fal Co. Ltd., a Saudi company owned by a shareholder of the Company,
pursuant to Board of Director approval in October 1995. It is
anticipated that the loan will be converted into a note payable, to be
repaid no later than December 30, 1998 with interest payable monthly
at LIBOR plus 2%. This note would be secured by a second lien on the
assets of South Hampton. The present second lien held by the Company
on loans owed to it by South Hampton would be released and the Company
loans would then be secured by a third lien. The note payable to Saudi
Fal would contain a clause providing for an option until December 31,
1998 to convert the note and any unpaid interest to Company Common
Stock at $1.00 per share. If the loan was still unpaid and the option
was not exercised by December 31, 1998, the loan would be extended to
December 31, 1999.
In February 1993, South Hampton entered into an agreement to lease to
a third party a building with a net book value at March 31, 1996 of
$266,698 which South Hampton does not use in its operations. The lease
provides for an option to the lessee to purchase the building after
three or five years. The lease is recorded as an operating lease and
the building cost is included in Other Assets. The leased building is
pledged as collateral for a note payable. If the lessee
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exercises its option to purchase the building, the proceeds will be
used to pay down the note payable. Miscellaneous Income in the first
three months of 1996 and 1995 includes $25,410 of rental income
pursuant to this lease.
South Hampton leases vehicles and equipment for use in operations for
$24,140 per month plus certain reimbursed costs under a lease
agreement with Silsbee Trading and Transportation Corp. ("STTC", a
company owned by the president and vice-president of TOCCO). The lease
agreement expired in September 1994 and is currently continuing on a
month to month basis. South Hampton incurred costs (most of which are
billed to customers) related to this agreement of $87,165 and $72,420
in the first three months of 1996 and 1995, respectively.
South Hampton entered into an arrangement in July 1991 with a
partnership, in which STTC and M.A. Bomer (the former owner of the
refinery) each owned a 50% interest, to facilitate the future purchase
of feedstock. In June 1992, Mr. Bomer withdrew from the partnership
and the feedstock agreement was terminated. On July 1, 1992, South
Hampton entered into a new agreement with STTC whereby STTC financed
the feedstock in the pipeline. As a result, South Hampton had a
liability to STTC for the cost of the 453,600 gallons of capacity of
the pipeline. This amount was $215,460 at December 31, 1994. Also in
connection with this agreement, South Hampton paid a one-half cent per
gallon fee to STTC on each gallon of feedstock transported through the
pipeline. The agreement was operating on a month to month basis and
was terminated in August 1995. The fees paid by South Hampton to STTC
pursuant to this agreement were $76,080 in 1995.
On January 1, 1996, South Hampton entered into a five year supply
contract with a natural gas supplier to purchase natural gas for use
in its refinery. The contract stipulates that South Hampton may
purchase up to 1,500 million Btu per day at an indexed price adjusted
for an agreed discount.
At March 31, 1996, accrued salaries and termination benefits payable
to Company employees in Saudi Arabia, and to the Company's President,
Hatem El-Khalidi, were approximately $722,000 and $649,000,
respectively. These unpaid amounts has been deferred until the
Company's working capital position improves. Also, at March 31, 1996,
the Company has not made all of the surface rental payments due to the
Saudi government under the terms of the Al Masane Project lease. The
past due amount of these rental payments is approximately $191,000. In
addition, 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 license requirements
will not have any effect on the Company's planned operations in Saudi
Arabia.
A major component of the Company's activities relates to the
acquisition, exploration and development of mineral deposits. There
can be no assurance that the Company will successfully develop any of
its properties, and if developed, whether the mineral acquisition,
exploration and development costs incurred will ultimately be
recovered. The recovery of such costs is dependent upon a number of
future events, some of which are beyond the control of the Company.
The ability of the Company to develop any of these properties is
dependent upon obtaining additional financing as may be required and,
ultimately, its financial success depends on its ability to attain
successful operations from one or more of its projects. The Company
management is currently devoting a significant amount of its attention
to addressing the Company's immediate and longer term needs for the
funds required to continue its business, and maintain and develop its
properties.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM III - OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ending March 31, 1996.
--------------------
The information in this report is unaudited, but, in the opinion of Management,
all adjustments for a fair statement of the results for the interim period have
been made.
DATED: 5-14-96 SIGNATURES
ARABIAN SHIELD DEVELOPMENT COMPANY
/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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INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule