UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-Q ------------------------------------ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------ FOR QUARTER ENDING MARCH 31, 1998 COMMISSION FILE NUMBER 0-6247 ARABIAN SHIELD DEVELOPMENT COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-1256622 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231 DALLAS, TEXAS (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 692-7872 Former name, former address and former fiscal year, if changed since last report. NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of the Registrant's Common Stock (par value $0.10 per share), outstanding at March 31, 1998: 21,981,494. ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, (UNAUDITED) 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 730,254 $ 534,086 Short-term Investments 495,466 407,542 Trade Receivables 3,299,501 3,047,311 Inventories 337,268 548,320 ------------ ------------ Total Current Assets 4,862,489 4,537,259 REFINERY PLANT, PIPELINE & EQUIP 6,049,325 5,926,188 Less: Accumulated Depreciation (3,338,962) (3,238,623) ------------ ------------ Net Equipment 2,710,363 2,687,565 AL MASANE PROJECT 33,681,084 33,522,427 OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248 MINERAL PROPERTIES IN THE UNITED STATES 1,413,589 1,411,190 OTHER ASSETS 484,258 463,230 ------------ ------------ TOTAL ASSETS $ 45,583,031 $ 45,052,919 ============ ============ LIABILITIES CURRENT LIABILITIES: Accounts Payable-Trade $ 852,392 $ 790,759 Accrued Liabilities 595,385 673,511 Accrued Liabilities in Saudi Arabia 1,326,822 1,283,401 Notes Payable 11,375,780 11,375,780 Current Portion of Long-Term Debt 798,000 598,000 Current Portion of Long-Term Obligations 8,031 37,915 ------------ ------------ Total Current Liabilities 14,956,410 14,759,366 LONG-TERM DEBT 3,160,773 3,435,773 LONG-TERM OBLIGATIONS 21,205 21,205 ACCRUED LIABILITIES IN SAUDI ARABIA 788,750 779,149 DEFERRED REVENUE 110,305 114,181 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,044,294 1,044,487 STOCKHOLDERS' EQUITY COMMON STOCK-authorized 40,000,000 shares of $.10 par value; 21,981,494 shares issued and outstanding 2,198,149 2,186,149 ADDITIONAL PAID-IN CAPITAL 36,041,450 35,875,950 RECEIVABLE FROM STOCKHOLDER (126,000) (126,000) ACCUMULATED DEFICIT (12,612,305) (13,037,341) ------------ ------------ Total Stockholders' Equity 25,501,294 24,898,758 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 45,583,031 $ 45,052,919 ============ ============
See notes to consolidated financial statements. -1- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 1998 MARCH 31, 1997 -------------- -------------- REVENUES Refined Product Sales $ 5,752,538 $ 5,892,422 Processing Fees 264,102 108,142 ------------ ------------ 6,016,640 6,000,564 OPERATING COSTS AND EXPENSES Cost of Refined Product Sales and Processing 4,841,346 5,699,704 General and Administrative 608,763 543,978 Depreciation and Amortization 103,222 174,948 ------------ ------------ 5,553,331 6,418,630 ------------ ------------ OPERATING INCOME (LOSS) 463,309 (418,066) OTHER INCOME (EXPENSE) Interest Income 22,548 4,956 Interest Expense (92,443) (107,099) Minority Interest 193 17,432 Miscellaneous Income 31,429 54,432 ------------ ------------ INCOME (LOSS) $ 425,036 $ (448,345) ============ ============ NET INCOME (LOSS) PER COMMON SHARE: Basic $ 0.02 $ (0.02) ============ ============ Diluted $ 0.02 $ (0.02) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON EQUIVALENT SHARES OUTSTANDING: Basic 21,936,494 20,956,494 ============ ============ Diluted 22,975,161 20,956,494 ============ ============
See notes to consolidated financial statements. -2- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 - --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL RECEIVABLE ------------ PAID-IN FROM ACCUMULATED SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL ---------- ---------- ----------- ----------- ------------ ----------- BALANCE, DECEMBER 31, 1997 21,861,494 $2,186,149 $35,875,950 $(126,000) $(13,037,341) $24,898,758 Common Stock Sold 100,000 10,000 140,000 150,000 Stock Options Exercised 20,000 2,000 25,500 27,500 Net Income 425,036 425,036 ---------- ---------- ----------- --------- ------------ ----------- BALANCE, MARCH 31, 1998 21,981,494 $2,198,149 $36,041,450 $(126,000) $(12,612,305) $25,501,294 ========== ========== =========== ========= ============ ===========
See notes to consolidated financial statements. -3- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 1998 MARCH 31, 1997 -------------- -------------- OPERATING ACTIVITIES: Net Income $ 425,036 $(448,345) Adjustments for Non-Cash Transactions: Depreciation and Amortization 103,222 174,948 Recognition of Deferred Revenue (3,876) (3,876) Effect of Changes in: Decrease (Increase) in Trade Receivables (252,190) (144,746) Decrease (Increase) in Inventories 211,052 (165,950) Decrease (Increase) in Other Assets (21,028) 53,297 (Decrease) Increase in Accounts Payable and Accrued Liabilities (16,493) 532,651 Other (3,076) (24,218) --------- --------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 442,647 (26,239) --------- --------- INVESTING ACTIVITIES: Additions to Short-Term Investments (87,924) (5) Additions to Al Masane Project (158,657) (154,721) Additions to Plant, Pipeline & Equipment (123,137) (23,549) (Additions) Reductions to Mineral Properties in U.S. (2,399) 33,257 Increase in Accrued Liabilities in Saudi Arabia 53,022 15,376 --------- --------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (319,095) (129,642) --------- --------- FINANCING ACTIVITIES: Common Stock Sold 177,500 350,000 Additions to Notes Payable & Long-Term Obligations -- 50,000 Reductions of Notes Payable & Long-Term Obligations (104,884) (103,199) --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 72,616 296,801 --------- --------- NET INCREASE (DECREASE) IN CASH 196,168 140,920 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 534,086 385,290 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 730,254 $ 526,210 ========= =========
See notes to consolidated financial statements. -4- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. These financial statements have not been examined by independent certified public accountants, but in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated results of operations, consolidated financial position and consolidated cash flows at the dates and for the periods indicated, have been included. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. These financial statements include the accounts of Arabian Shield Development Company (the "Company") and its wholly-owned subsidiaries, American Shield Refining Company (the "Refining Company") and American Shield Coal Company (the "Coal Company"). The Refining Company owns all of the outstanding common stock of Texas Oil and Chemical Company II, Inc. ("TOCCO"). South Hampton Refining Company ("South Hampton")is a wholly-owned subsidiary of TOCCO, and Gulf State Pipe Line Company, Inc. ("Gulf State")is a wholly-owned subsidiary of South Hampton. The Company also has voting rights to approximately 52%, and directly owns approximately 44%, of the capital stock of Pioche-Ely Valley Mines, Inc. ("Pioche"), which owns mining properties in Nevada. Pioche has been consolidated for financial statement purposes since January 1, 1996. 2. GOING CONCERN These financial statements have been prepared assuming the Company will continue as a going concern. The Company's sources of cash flow in 1997 and the first three months of 1998 were the operations of South Hampton's refinery and the proceeds from stock sales and loans. The Company is not currently generating cash flow from any other activities. As the cash flow attributable to the refinery is fully dedicated to repayment of debt and funding of refinery operations, the cash flow attributable to the refinery currently is not adequate to support the Company's operations. The Company is liable to the Saudi Arabian government for an $11,000,000 loan. The Company does not currently have the financial resources to pay this obligation. Management plans to fund future operations through sales of its common stock and borrowings. It is expected that the operations and obligations of the Company will be eventually funded from operations of the Al Masane mine. However, because of uncertainties with respect to future sales of common stock, obtaining suitable financing, and reaching an agreement on the repayment of the loan to the Saudi Arabian government, there is -5- substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of these uncertainties. 3. LEGAL PROCEEDINGS South Hampton was a defendant in two lawsuits in two district courts in Jefferson County, Texas brought in 1993 and 1994 by two former employees of the Goodyear Tire & Rubber Company who were seeking unspecified actual and punitive damages for certain alleged illness and diseases resulting from alleged exposure to certain chemicals during their employment with Goodyear. One of these lawsuits was settled in March 1997 and the other in January 1998. The cost to the Company was not significant. A new lawsuit by another former Goodyear employee was filed in a Jefferson County District Court on December 16, 1997 for unspecified actual damages for the same reasons as the other two. The outcome of this lawsuit is not expected to have a material effect on the Company's financial position, results of operations or liquidity. In August 1997, the Texas Natural Resource Conservation Commission ("TNRCC") notified South Hampton that it had violated various rules and procedures and proposed administrative penalties totaling $709,408 and recommended that South Hampton undertake certain actions necessary to bring its operations at the refinery into compliance. The violations generally relate to various air and water quality issues. South Hampton feels the penalty is greatly overstated and intends to vigorously defend against it. A preliminary hearing was held in November 1997 and a subsequent meeting is being scheduled. On May 15, 1991, the Company filed a complaint with the U. S. Department of Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"), alleging violations of the Foreign Corrupt Practices Act ("FCPA")by Hunt in obtaining its Petroleum Production Sharing Agreement ("PSA") in Yemen in 1981, subsequent to the Company presenting a bid to the Yemen government for the same area before Hunt made its application. On May 5, 1995, Company's attorneys in Washington, D.C. informed the Company that, because the PSA of Hunt is still ongoing, and under its auspices, payments and receipts occur daily, the DOJ still has ample jurisdiction to continue its investigation. A letter from the DOJ on December 19, 1995 stated its interest in receiving additional documentation regarding the Company's allegations. On February 28, 1996, the Company sent more documents to the DOJ which it believed would further support its allegations. The Company's attorneys in Washington, D.C. believe that the Victim Restitution Act provides for restitution to the Company of monies lost as a result of the alleged wrongdoing by Hunt, if Hunt is convicted under the FCPA. On October 1, 1996, the DOJ wrote that the documents presented did not suggest that any criminal events happened within the statute of limitations, and that, at that time, the DOJ did not intend to pursue its investigation. On November 18, 1996, legal counsel retained by the Company, after studying the facts of the case, sent the DOJ an analysis concluding that, while the statute of limitations of FCPA may have lapsed, the statute of limitations for conspiracy to violate the FCPA had not lapsed, and that, as a consequence, the DOJ could criminally prosecute Hunt for conspiracy to violate the FCPA. The legal counsel met with the Fraud Section of the DOJ on December 13, 1996 and was told that the DOJ would take a more aggressive stance if more information of evidentiary quality were presented to them. The Company intends to vigorously pursue obtaining such further information in the United States and in Yemen. -6- Late in 1994, articles were published in two prominent Yemen newspapers in which Yemen Hunt Oil Company, a wholly-owned subsidiary of Hunt Oil Company of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a petroleum production sharing agreement in Yemen in 1981 through the corruption of Yemen officials in order to exclude the application of the Company and it then partner, Dorchester Gas Company, from consideration for the same area. A letter to the editor of one of these newspapers, published on December 7, 1994 and signed by the executive vice president of Yemen Hunt, after explicitly mentioning the Company and Dorchester Gas Company, stated that "(Yemen Hunt) knows well those suspicious companies who are mainly engaged in political activities for the purpose of undermining the economic interest of Yemen..." On December 26, 1995, the Company filed a complaint of criminal libel with the Yemen Attorney General for Publications in Sana'a, Yemen against Yemen Hunt, alleging that Yemen Hunt, in its published letter to the prominent Yemen newspaper, had criminally libeled the Company, which, if not addressed, could seriously affect the business and reputation of the Company and its employees in the Middle East. In October 1996, the Company received the official decision from the Deputy Attorney General for Publications of Yemen which stated that, after taking the statement of the President of the Company and the statement of the chief of the legal department of Yemen Hunt, it was evident that the letter from Yemen Hunt published in the Yemen newspaper on December 7, 1994 was libelous to the Company. However, since the four month statute of limitations period under Yemen criminal law had run, Yemen Hunt could not be prosecuted for criminal libel. The Company intends to vigorously pursue the matter under the civil libel laws of Yemen. 4. INVENTORIES Inventories include the following:
MAR. 31, 1998 DEC. 31, 1997 ------------- ------------- Refinery feedstock $ -- $ 86,591 Refined products 337,268 461,729 -------- -------- Total inventories $337,268 $548,320 ======== ========
Refined products and feedstock are recorded at the lower of cost, determined on the last-in, first-out method (LIFO), or market. At March 31, 1998, because LIFO value exceeded market, inventories were written down by approximately $108,000. At December 31, 1997, LIFO value approximated current cost. 5. NET INCOME (LOSS) PER COMMON SHARE Net income per share for the three months ended March 31, 1998 has been calculated as follows:
Weighted average Net shares Per Income outstanding share ------ ----------- ----- Basic income per share................. $425,036 21,936,494 $.02 Dilutive effect of stock options....... -- 1,038,667 -- -------- ---------- ---- Diluted income per share............... $425,036 22,975,161 $.02 ======== ========== ====
In the three months ended March 31, 1997, the effect of stock options and convertible debt was anti-dilutive. Accordingly, loss per share is calculated by dividing the net loss by the weighted average shares outstanding. In the three months ended March 31, 1998, the effect of assumed debt conversions is anti-dilutive. -7- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The Company had net income of $425,036 for the three months ending March 31, 1998, compared to a net loss of $448,345 for the same period in 1997, resulting in a net income increase of $873,381 in 1998. For the first three months ending March 31, 1998 and 1997, the refinery had operating income of $576,786 in 1998 and an operating loss of $212,704 in 1997, and net income of $503,593 in 1998 and a net loss of $287,877 in 1997, a net income increase in 1998 of $791,470. The refinery had positive cash flow from operations of $603,861 for the first quarter of 1998, which was in contrast to the comparable figure of $(183,080) in 1997. Sales volume was slightly higher in 1998 by 3.4% to 6,363,619 total gallons and the average selling price per gallon was higher than that for the first quarter of 1997 by $.015 per gallon. Feedstock prices were lower by almost $.042 per gallon average than the prices for the same period in 1997. Sales for the first quarter in 1998 continued the trend set throughout 1997 and stayed at record volume levels for the premium pentane products. The lower feedstock costs of 1998 were almost the entire reason for the much improved performance of 1998 from the same period in 1997. Pricing commitments and competitive pressures prevent raising product prices instantly as feed prices go up, therefore the gross margin is always squeezed for a time during periods of rapidly rising prices which affected January and February 1997 results. The reverse is true in times of falling prices. Margins are larger for a period of time until product prices start easing down. Feedstock prices began falling in February 1997 have reached unusual lows in the early part of 1998.The current low prices are expected to be temporary and should return to more normal levels in the second quarter of 1998. Expenses at the refinery for the first quarter in 1998 were lower than a year ago. In addition to rapid feedstock cost rises early in 1997, the price of natural gas used to fuel the refinery processes rose rapidly for the same period and started falling in late February 1997. Natural gas prices rose to a peak of $3.85 per MMBTU for the month of January 1997 before starting to fall off in February 1997. Throughout the remainder of 1997 and into the first quarter of 1998, natural gas prices remained low to moderate and helped keep the operating expenses below those in 1997. The refinery paid a cash price of $1.91 for natural gas for the month of January 1998. Contributing to the higher operating expenses is the effort the refinery is making toward the clean up of the operating area and the efficient management of the higher production rates. The additional expenses stem mainly from increased maintenance personnel, increased environmental testing and analysis and increased preventative maintenance efforts. Administrative expenses were flat or decreased slightly compared to prior periods. Processing fees for the first quarter of 1998 were $264,102, which is an increase of 144% over the same period in 1997.All available units were in operation and ran to near capacity in the first quarter, whereas in 1997 one unit was idle and the others were running at minimum capacities. The -8- refinery has found there are many opportunities for a smaller company to provide processing services on streams which the larger companies no longer want to handle themselves. The refinery is in the process of erecting four process towers to increase the capacity and capabilities of the toll processing side of the business. Completion is expected in the second quarter of 1998 with the results on net income to become evident by the end of the third quarter of 1998. The outlook for the industry is good from the perspective of increased opportunities for toll processing. The refinery is currently operating processes for four different entities and, while the contracts are being renewed on a year-to-year basis, the outlook on all the contracts is that they will be longer term operations. Sales of the refinery's prime products remain stable and expanded marketing efforts have kept the plant at capacity through the winter and early spring months which are historically the weakest. Maintenance and capital items are on schedule in accordance with the refinery's budget plan for the year. A new control room was completed and the operations were moved into it during the first quarter. Refinery personnel did much of the work to keep the costs to a minimum. The outlook for the second quarter is good. Sales remain firm and, as of now, there is no immediate outlook for higher feed prices. The refinery has bought feedstock ahead for the next three months to hedge against any spikes in prices and the natural gas hedging program should control any sudden rises in the single largest expense. In June 1997, the refinery resumed a hedging program to help decrease the volatility of the price of fuel gas. Commodity based derivative futures contracts are periodically purchased. Gains and losses are recognized when the contracts expire. A net loss of $7,981 was included in the cost of refined product sales and processing for the first three months of 1998. General and Administrative Expenses for the first three months in 1998 were $64,785 higher than for the same period in 1997, a slight increase of 12%. Interest Expense in 1998 and 1997 was practically all attributable to the debt of the refinery and decreased by $14,656 in 1998 due to the periodic payment of existing debt. The Minority Interest amount in the first three months of 1998 and 1997 of $193 and $17,432, respectively, represents the Pioche minority shareholders' portion of Pioche's losses. The losses in Pioche are primarily attributable to the costs of maintaining the Nevada mining properties. Interest Income in the first three months of 1998 increased over the same period in 1997 due primarily from interest received on a note resulting from the installment sale of an office building by the refinery in June 1997. Other interest income is from short-term investments by the refinery and from the investment of temporary excess cash in time deposits in Saudi Arabia. Miscellaneous Income includes income from tank rentals, commission income and occasional small asset sale proceeds at the refinery, and until June 1997, it also included income from the rental of the office building. LIQUIDITY AND CAPITAL RESOURCES Prior to the acquisition in June 1987 of the refinery in Silsbee, Texas, the Company had substantially no significant operating revenues since 1972. Because of the lack of operating revenues, it has been necessary for the Company continually to seek additional debt and equity financing in order to have funds to continue operations. -9- Since the granting by Saudi Arabia of the Al Masane mining lease in May 1993, the Company has been planning for the mobilization program and financing to implement the construction and commissioning of the mining treatment plant and housing facilities for the mine. The firm of Watts, Griffis and McOuat Limited of Toronto, Canada, has been appointed as owner's agent and project manager. The Company also plans to start an intensive exploration program to increase the reserves at the mine site and elsewhere in the lease area. In addition, the Company is engaged in the establishment of a petrochemical plant in Jubail, Saudi Arabia similar to the one at the refinery. The products to be manufactured would be solvents for the plastics industry which are anticipated to be sold in the Middle East, Europe and the Far East. An industrial license to build the plant has been received and further planning and design work are underway. There has been a strong interest from a German firm who would like to participate in the development of the site with processes of their own and a meeting with them will be held in the near future. The principal assets of Pioche are an undivided interest in 48 patented and 81 unpatented mining claims and a 300 ton-per-day mill located in southeastern Nevada. Due to the lack of capital, the properties held by Pioche have not been commercially operated for approximately 35 years. In late 1996, Pioche was extended a proposal from a prominent mining company for the lease of its mining claims. In October 1997, an "Exploration Agreement and Option to Purchase" was executed between the two parties. The agreement provides for annual payments to Pioche of $50,000 for seven years until, or unless, an option is exercised to purchase an 85% interest in the mining claims for $3,000,000. The mining company will pay all annual taxes and claim rentals and has agreed to expend at least $50,000 in exploration work each year and to drill at least one hole during the first year. The agreement can be terminated upon 60 days written notice from the mining company. In addition to the actions taken in 1997 to generate additional equity capital and improve its financial condition, which are detailed in the 1997 Form 10-K, the Company has experienced the following activity in the first three months of 1998:(1) the sale in January of 100,000 shares of the Company's Common Stock at $1.50 per share to a Saudi Arabian investor; (2)the issuance in January and March of 20,000 shares of the Company's Common Stock pursuant to option exercises by two officers of the Company for a total of $27,500; (3) the payment in February of accrued mining lease rentals for four years on the Al Masane project to the Saudi Arabian government totaling $469,333; and (4) the extension in March 1998 of the maturity date of the notes to Den norske and Saudi Fal to December 31, 1999 from December 31, 1998. At March 31, 1998, the outstanding principal amount under the new Amended and Restated Credit Agreement with Den norske was $1,515,000, with $1,215,000 classified as long-term debt. The entire balance under the Amended and Restated Credit Agreement is now due on December 31, 1999, pursuant to an extension in March 1998 of the maturity date. South Hampton has agreed to make minimum quarterly principal payments of $75,000 plus interest at the Den norske prime lending rate, plus 1%, and under certain conditions, can make distributions to Saudi Fal and the Company. The debt is secured by all of the assets of the refinery and all of the issued and outstanding shares of the Company's three subsidiaries there. On October 15, 1996, there was also a restructuring of the loan of $1,500,000 owed by South Hampton to Saudi Fal, pursuant to Board of Director approval in October 1995. The loan, plus accrued interest, was -10- converted into a Second Lien Promissory Note in the principal amount of $1,945,773 bearing interest at the Den norske prime lending rate, plus 1%. Interest only is due and payable monthly on the note and the entire unpaid balance of principal and accrued interest is now due on December 31, 1999, pursuant to an extension in March 1998 of the maturity date. The principal amount at March 31, 1998 remained at $1,945,773. Interest payments of $95,238 were made in the first three months of 1998 and the amount of accrued unpaid interest at March 31, 1998 was approximately $61,000. The note is secured by all of the assets of the refinery and is subordinate to the Den norske note. The Company, through its wholly-owned subsidiary American Shield Refining Company, advanced funds in 1990 for some of the costs to increase the processing capacity of the refinery. These advances were in the form of a note from the refinery. This note was also restructured at October 15, 1996, whereby accrued interest of $361,250 was added to principal with the note bearing interest at the Den norske prime lending rate, plus 1%. This resulted in a new principal amount of $1,694,605 at that time. In the first three months of 1998, a total of $40,000 was paid on the note principal by the refinery, leaving a principal amount at March 31, 1998 of $1,654,605. The note was originally due on December 31, 1998, but in March 1998, the maturity date was extended to December 31, 1999. No interest payments have been made by the refinery to the Company through March 31, 1998 and the amount of accrued unpaid interest was approximately $232,000. The note is secured by all of the assets of the refinery and is subordinate to the promissory note issued to Saudi Fal. On September 30, 1995, the Company made a formal application to the Saudi Industrial Development Fund ("SIDF")to obtain 50% of the capital needed to finance the development of the Al Masane project and on December 17, 1997, conditional approval was received for a $38.08 million loan. The Company plans to finance the remaining cost of the project with loans from commercial banks and equity funds from Saudi Arabian investors. The Company and its Saudi Arabian advisors are in the process of forming a Saudi limited liability company which will be owned 50% by the Company and 50% by the Al Mashreq Company for Mining Investments ("Al Mashreq"). After it is formed, title to the mining lease will be transferred to the new company which will be responsible for the construction and operation of the mining facilities. At March 31, 1998, a total of approximately $1,591,000 in salaries and termination benefits was due to Company employees in Saudi Arabia in accordance with Saudi Arabian employment laws. This amount includes approximately $789,000 due to Hatem El-Khalidi, the Company's President and Chief Executive Officer. The payment of these amounts has been deferred until the Company's working capital position improves. At March 31, 1998, the Company had made all of the surface rental payments due to the Saudi Arabian government under the terms of the Al Masane Project lease. The unpaid amount of these rental payments at December 31, 1997 was approximately $469,000, but in February 1998 a payment in full was made. The Company has not complied with certain statutory reporting requirements in Saudi Arabia. Management of the Company believes that the lack of compliance with these requirements will not have any effect on the Company's planned operations in Saudi Arabia. -11- A major component of the Company's activities relates to the acquisition, exploration and development of mineral deposits. There can be no assurance that the Company will successfully develop any of its properties, and if developed, whether the mineral acquisition, exploration and development costs incurred will ultimately be recovered. The recovery of such costs is dependent upon a number of future events, some of which are beyond the control of the Company. The ability of the Company to develop any of these properties is dependent upon obtaining additional financing as may be required and, ultimately, its financial success depends on its ability to attain successful operations from one or more of its projects. -12- ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K None ------------------------------------ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 12, 1998 ARABIAN SHIELD DEVELOPMENT COMPANY ------------- ---------------------------------- (Registrant) /s/ J. A. CRICHTON ------------------------------------ J. A. Crichton, Chairman of the Board of Directors /s/ DREW WILSON, JR. ------------------------------------ Drew Wilson, Jr. Secretary/Treasurer -13- INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 27 Financial Data Schedule