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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-6247
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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
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 692-7872
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
(TITLE OF CLASS)
Common Stock, par value $0.10 per share
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Indicate by check mark whether the registrant (l) 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Number of shares of registrant's Common Stock, par value $0.10 per share,
outstanding as of March 16, 2000: 22,269,994.
The aggregate market value on March 16, 2000 of the registrant's voting
securities held by non-affiliates was $15,550,430.
DOCUMENTS INCORPORATED BY REFERENCE
(a) Selected portions of the registrant's definitive Proxy Statement for
the Annual Meeting to be held May 15, 2000. -- Part III
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PART I
ITEM 1. BUSINESS.
GENERAL
Arabian Shield Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products and developing mineral
properties in Saudi Arabia and the United States. All of its mineral properties
are presently undeveloped and require significant capital expenditures before
beginning any commercial operations. The Company's undeveloped mineral interests
are primarily located in Saudi Arabia.
On January 25, 2000, Texas Oil & Chemical Co. II, Inc., an indirect, wholly
owned subsidiary of the Company, acquired 92% of the issued and outstanding
shares of common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin"), a
specialty petrochemical products refining company located in Coatzacoalcos, on
the Yucatan Peninsula near Veracruz, Mexico. The purchase price was
approximately $2.5 million.
United States Activities. The Company's domestic activities are primarily
conducted through a wholly owned subsidiary, American Shield Refining Company
(the "Refining Company"), which owns all of the capital stock of Texas Oil and
Chemical Co. II, Inc. ("TOCCO"). TOCCO owns all of the capital stock of South
Hampton Refining Company ("South Hampton"), and South Hampton owns all of the
capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State"). South
Hampton owns and operates a specialty petrochemical products refinery near
Silsbee, Texas that is one of the largest manufacturers of pentanes consumed
domestically. Gulf State owns and operates three pipelines which connect the
South Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The Company also directly owns all of American Shield Coal Company (the "Coal
Company") and approximately 51% of the capital stock of a Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche"). Neither the Coal Company nor Pioche
conduct any substantial business activities. See Item 2. Properties.
Saudi Arabian Activities. The Company holds a thirty (30) year mining lease
(which commenced on May 22, 1993) covering an approximate 44 square kilometer
area in the Al Masane area in southwestern Saudi Arabia. The Company has the
option to renew or extend the term of the lease for additional periods not to
exceed twenty (20) years. The Company was granted exploration licenses for the
other areas in southwestern Saudi Arabia which have expired.
Mexico Activities. TOCCO acquired 92% of the issued and outstanding shares
of common stock of Coin, a specialty petrochemical products refining company,
from Spechem, S.A. de.C.V. on January 25, 2000 at a purchase price of
approximately $2.5 million. The refinery is located in Coatzacoalcos, on the
Yucatan Peninsula near Veracruz, Mexico. An administrative office is located in
Mexico City.
See Item 2. Properties for additional discussions regarding all of the
Company's properties and financing of the Al Masane project.
Note 12 to the Company's Consolidated Financial Statements contains
information regarding the Company's industry segments for the years ended
December 31, 1999, 1998 and 1997. In addition, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of the Company's liquidity, capital resources and operating results.
FOREIGN OPERATIONS
Since a substantial portion of the Company's mineral properties and related
interests, and its newly acquired petrochemical refinery, are located outside of
the United States, its business and properties are subject to foreign laws and
foreign conditions, with the attendant varying risks and advantages. Foreign
exchange controls, foreign legal and political concepts, foreign government
instability, international economics and other factors create risks not
necessarily comparable with those involved in doing business in the United
States.
1
COMPETITION
The Company competes in both the petrochemical and mining industries.
Accordingly, the Company is subject to intense competition among a large number
of companies, both larger and smaller than the Company, many of which have
financial and other resources (including facilities and personnel) greater than
the Company. In the specialty products and solvents markets, the Refining
Company has one principal and one other competitor. Generally good economic
conditions have meant strong demand for its specialty products and solvents.
Consequently, the Refining Company has not faced any recent significant price
competition in these markets. The acquisition of Coin will strengthen the
Refining Company's position in the market in Mexico and allow it to pursue
increased sales volumes in the United States. All of the Refining Company's raw
materials are purchased on the open market. The cost of these materials is a
function of spot market oil and gas prices, which trended down during 1998,
began rising in mid-1999 and continued to rise dramatically in the first quarter
of 2000. The rise in these feedstock prices has adversely affected the Refining
Company's gross margin.
ENVIRONMENTAL MATTERS
In 1993, while remediating a small spill area, The Texas Natural Resources
Conservation Commission required South Hampton to drill a well to check for
groundwater contamination under the spill area. Two pools of hydrocarbons were
discovered to be floating on the groundwater at a depth of approximately 25
feet. One pool is under the site of a former gas processing plant owned and
operated by Sinclair, Arco and others before its purchase by South Hampton in
1981. The other pool is under the South Hampton facility. Subsequent tests
determined that hydrocarbons are contained on the property and are not moving in
any direction. The recovery process was initiated in June 1998 and approximately
$53,000 was spent setting up the system. The recovery is proceeding as planned
and is expected to continue for several years until the pools are reduced to an
acceptable level. Expenses of recovery and periodic migration testing will be
recorded as normal operating expenses. Expenses for future years recovery are
expected to stabilize and be less per annum than the initial set up cost,
although there can be no assurance of this effect. Consulting engineers estimate
that as much as 20,000 barrels of recoverable material may be available to South
Hampton for use in its refining process, but no reduction has been made in the
accrual for remediation costs due to the uncertainties relating to the recovery
process. Also, see Item 3. Legal Proceedings.
The Clean Air Act Amendments of 1990 have had a positive effect on the
Refining Company's business as plastics manufacturers are searching for ways to
use more environmentally acceptable solvents in their processes. Plastics
manufacturers have historically used C6 hydrocarbons (hexanes) as coolants and
catalyst carrying agents. There is a current trend among plastics manufacturers
toward the use of lighter and more recoverable C5 hydrocarbons (pentanes) which
are a large part of the Refining Company's product line. Management believes its
ability to manufacture high quality solvents in the C5 hydrocarbon market will
provide a basis for growth over the next few years; however, there can be no
assurance that such growth will occur. While the refinery continues to
manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The Aromax(R) unit, which was jointly developed with Chevron Research
Company, has the ability to convert C6 hydrocarbons into benzene and other more
valuable aromatic compounds, which is one of the reasons the Refining Company
initially participated in the Aromax(R) development project. Also, see Item 2.
Properties.
PERSONNEL
The Company's officers who are resident in the United States are Mr. John
A. Crichton, Chairman of the Board, and Mr. Drew Wilson, Jr., Secretary and
Treasurer. Mr. Hatem El-Khalidi, the Company's President and Chief Executive
Officer, supervises the Company's 28 employees in Saudi Arabia, consisting of
the office personnel and field crews who conduct exploration and related
activities. The Refining Company employs 75 persons.
2
ITEM 2. PROPERTIES.
UNITED STATES SPECIALTY PRODUCTS REFINERY
South Hampton owns and operates a specialty products refinery near Silsbee,
Texas. The refinery presently consists of eight operating units which, while
interconnected, make distinct products through differing processes: (i) a
pentane-hexane unit; (ii) a catalytic reformer; (iii) an aromatics fractionation
unit; (iv) a cyclopentane unit; (v) an Aromax(R) unit; (vi) an aromatics
hydrogenation unit; and (vii) two specialty fractionation units. All of these
units are currently in operation.
The pentane-hexane unit's design capacity is approximately 2,500 barrels
per day ("BPD") of feedstock. The unit averaged 2,209 barrels per stream day
during 1999. The unit consists of a series of fractionation towers and
hydrotreaters capable of producing high purity solvents which are sold primarily
to expandable polystyrene and high density polyethylene producers. South Hampton
purchases most of its feedstock for this unit on the spot market.
De-bottlenecking and test runs increased the design capacity by approximately
200 BPD in late 1999.
The catalytic reforming unit is a standard industry design using a
platinum-rhenium catalyst which produces an aromatics concentrate sold as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 800 BPD. The
unit is operated as a source of hydrogen for the pentane-hexane unit and
operates in tandem with the Aromax(R) unit as feedstock balances dictate. The
unit's average production was 480 barrels per stream day in 1999.
The aromatics fractionation unit consists of two towers and has a design
capacity of 750 BPD. The unit processes an aromatic feedstock stream into three
specialized aromatic solvents used in various applications such as pesticides,
paints and coatings and adhesives. This unit is leased to a customer for its own
use pursuant to a contract providing for the payment of a minimum daily charge.
The cyclopentane unit consists of three specialized fractionation towers
designed to produce a consistently high quality product which is used in the
expandable polystyrene industry. The design capacity of the cyclopentane unit is
400 BPD. The unit operates according to the feedstock supplied by the
pentane-hexane unit and averaged 270 barrels of production per stream day during
1999.
The Aromax(R) unit is the world's first commercial unit using a proprietary
process of Chevron Research Company to produce a high benzene content product
which is sold as feedstock to refiners operating benzene extraction units. The
process converts petroleum naphtha into liquid hydrocarbons having a high
aromatic hydrocarbon content. The Aromax(R) unit's design capacity is 400 BPD
and uses a by-product from the pentane-hexane unit as feedstock. The unit's
average production throughput during 1999 was 145 barrels per stream day.
Chevron Research Company has agreed to continue development of the Aromax(R)
process. The unit continues to successfully operate as designed.
The aromatics hydrogenation unit consists of a hydrotreating reactor and a
single fractionation tower which strips excess gas from the product. The design
capacity of this unit is 500 BPD. This unit converts a high purity aromatic
feedstock into a more environmentally acceptable high purity solvent. This unit
is leased to a customer for its own use pursuant to a contract providing for the
payment of a minimum daily charge. This unit will be decommissioned and
converted to another use during the second quarter of 2000.
The specialty fractionation unit consists of a single fractionation tower
and has a design capacity of 500 BPD. This unit is leased to a customer for its
own use pursuant to a contract providing for the payment of a minimum daily
charge.
The specialty solvents fractionation unit, completed in April 1999,
consists of three fractionation towers, two of which operate under vacuum. The
design capacity of this unit is 1,000 BPD. This unit processes a specialized
high purity feedstock into four high purity white oil solvents. This unit is
leased to a customer for its own use pursuant to a contract providing for the
payment of a minimum daily charge.
South Hampton owns approximately 100 storage tanks with a total capacity of
approximately 320,000 barrels. Two spherical storage tanks were constructed
during the second quarter of 1999 and are
3
utilized in the management of pentane inventory. The refinery is situated on 125
acres of land, approximately 70 acres of which are developed. Approximately 25
additional acres were purchased in 1999 and South Hampton has a contract to
purchase an additional eight acres in 2000. South Hampton also owns a truck and
railroad loading terminal consisting of eight storage tanks, a rail spur and
truck and tank car loading facilities.
As a result of various expansion programs and the toll processing
contracts, essentially all of the standing equipment at South Hampton is
operational. South Hampton has surplus equipment in storage on site with which
to assemble additional processing units, such as a hydrocracking unit with a
2,000 BPD capacity.
Gulf State owns and operates three 8 inch pipelines aggregating
approximately 50 miles in length that connect South Hampton's refinery to a
natural gas line, to South Hampton's truck and rail loading terminal and to a
marine terminal owned by an unaffiliated third party. South Hampton leases
storage facilities at the marine terminal.
MEXICO SPECIALTY PRODUCTS REFINERY
The newly acquired refinery in Mexico is a specialty petrochemical plant,
similar to South Hampton's refinery in Silsbee, Texas, which produces high
purity solvents which are used in the expandable polystyrene and polystyrene
foam industries. These solvents are additionally approved and used by developers
of high-density polyethylene manufacturing processes for use in their licensed
units. Coin markets its products in Mexico, Latin America and the United States.
With this acquisition, the Company believes its refining operations are a
significant supplier of high purity solvents in those markets. Coin employs 40
persons.
SAUDI ARABIA MINING PROPERTIES
Al Masane Project
The Al Masane project, consisting of a mining lease area of approximately
44 square kilometers, contains extensive ancient mineral workings and smelters.
From ancient inscriptions in the area, it is believed that mining activities
went on sporadically from 1000 BC to 700 AD. The ancients are believed to have
extracted mainly gold, silver and copper.
Initial Exploration Work and Prior Feasibility Studies. The Saudi Arabian
government granted the Company exploration licenses for the Al Masane and Wadi
Qatan areas in 1971. Subsequently, the Company conducted substantial geological
and geophysical activities in these areas. Core drilling and studies by
independent consulting firms concluded that Al Masane's copper, zinc, gold and
silver prospects could be put in production sooner than the nickel prospect at
Wadi Qatan. Metallurgical tests also showed difficulty in separating the nickel
at Wadi Qatan. During 1977, a pre-feasibility mining study was conducted at Al
Masane by the mining consulting firm of Watts, Griffis and McOuat Limited of
Toronto, Canada ("WGM"). WGM recommended an extensive development program for
the Al Masane prospect.
Phase I of WGM's recommended Al Masane development program was completed in
April 1981. It involved construction of underground tunnels parallel to the ore
bodies totaling 3.9 kilometers in length from which extensive underground core
drilling was done in order to prove the quantity and quality of the ore
reserves. This work was financed primarily with an $11 million interest-free
loan from the Saudi Arabian Ministry of Finance. As a result of this work, WGM
concluded that sufficient ore reserves had been established to justify
completion of a full bank feasibility study to determine the economic potential
of establishing a commercial mining and ore treatment operation at Al Masane.
WGM and SNC/GECO of Montreal, Canada conducted this study in 1982. They
concluded that the Al Masane deposits would support commercial production of
copper, zinc, gold and silver and recommended implementation of Phase II of the
Al Masane development program, which would involve the construction of mining,
ore treatment and support facilities. WGM's September 1984 reevaluation of the
project resulted in no substantial changes of their initial conclusions and
recommendations.
The Company continued its exploration work at Al Masane after 1984.
Consequently, WGM upwardly revised its reserve estimates in 1989 and again
concluded that a proposed mining operation was economically viable as well as
having high potential for the discovery of additional ore zones.
4
Current Feasibility Studies. The Saudi government granted the Company a
mining lease for the Al Masane area on May 22, 1993. The Company subsequently
commissioned WGM to prepare a new fully bankable feasibility study to be used to
obtain financing for commercial development of the project. The study, which was
completed in 1994, contained specific recommendations to insure that project
construction was accomplished expeditiously and economically. The engineering
design and costing portions of the study were performed by Davy International of
Toronto, Canada ("Davy"). WGM and Davy updated this study in 1996. A summary of
the studies' findings are as follows:
The Al Masane ore is located in three mineralized zones known as Saadah, Al
Houra and Moyeath. The following table sets forth a summary of the diluted
minable, proven and probable ore reserves at the Al Masane project, along with
the estimated average grades of these reserves:
RESERVE COPPER ZINC GOLD SILVER
ZONE (TONNES) (%) (%) (G/T) (G/T)
- ---- --------- ------ ---- ----- ------
Saadah....................................... 3,872,400 1.67 4.73 1.00 28.36
Al Houra..................................... 2,465,230 1.22 4.95 1.46 50.06
Moyeath...................................... 874,370 0.88 8.92 1.29 64.85
--------- ---- ---- ---- -----
Total.............................. 7,212,000 1.42 5.31 1.19 40.20
For purposes of calculating, proven and probable reserves, a dilution of 5%
at zero grade on the Saadah zone and 15% at zero grade on the Al Houra and
Moyeath zones was assumed. A mining recovery of 80% has been used for the Saadah
zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the amount
of wallrack adjacent to the ore body that is included in the ore extraction
process.
Proven reserves are those mineral deposits for which quantity is computed
from dimensions revealed in outcrops, trenches, workings or drillholes, and
grade is computed from results of detailed sampling. For ore deposits to be
proven, the sites for inspection, sampling and measurement must be spaced so
closely and the geologic character must be so well defined that the size, shape,
depth and mineral content of reserves are well established. Probable reserves
are those for which quantity and grade are computed from information similar to
that used for proven reserves, but the sites for inspection, sampling and
measurement are farther apart or are otherwise less adequately spaced. However,
the degree of assurance, although lower than that for proven reserves, must be
high enough to assume continuity between points of observation.
The metallurgical studies conducted on the ore samples taken from the zones
indicated that 87.7% of the copper and 82.6% of the zinc could be recovered in
copper and zinc concentrates. Overall, gold and silver recovery from the ore was
estimated to be 77.3% and 81.3%, respectively, partly into copper concentrate
and partly as bullion through cyanide processing of zinc concentrates and mine
tailings. Further studies recommended by consultants may improve those
recoveries and thus the potential profitability of the project, however, there
can be no assurances of this effect.
The mining and milling operation recommended by WGM for Al Masane would
involve the production of 2,000 tonnes of ore per day (700,000 tonnes per year),
with a mine life of over ten years. Annual production is estimated to be 34,900
tonnes of copper concentrate (25% copper per tonne) containing precious metal
and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total output per
year of gold and silver is estimated to be 22,000 ounces of gold and 800,000
ounces of silver from the copper concentrate and bullion produced. The
construction of mining, milling and infrastructure facilities is estimated to
take 21 months to complete. Construction necessary to bring the Al Masane
project into production includes the construction of a 2,000 tonne per day
concentrator, infrastructure with a 300 man housing facility and the
installation of a cyanidation plant to increase the recovery of precious metals
from the deposit. Project power requirements will be met by diesel generated
power.
WGM recommended that the Al Masane reserves be mined by underground methods
using trackless mining equipment. Once the raw ore is mined, it would be
subjected to a grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc concentrate,
copper concentrate and dore bullion. The copper and zinc concentrates also
contain valuable amounts of gold
5
and silver. These concentrates and the dore bullion to be produced from the
cynidization plant are estimated to be 22,000 ounces of gold and 800,000 ounces
of silver and will be sold to copper and zinc custom smelters and refineries
worldwide. After the smelter refining process, the metals could be sold by the
Company or the smelter for the Company's account in the open market.
In the feasibility study, WGM states that there is potential to find more
reserves within the lease area, as the ore zones are all open at depth. Further
diamond drilling, which will be undertaken by the Company, is required to
quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.
The 1996 update shows the estimated capital cost to bring the project into
operation to be $89 million. At a production rate of 700,000 tonnes per year,
the operating cost of the project (excluding concentrate freight, ship loading,
smelter charges, depreciation, interest and taxes) was estimated to be $38.49
per tonne of ore milled.
WGM prepared an economic analysis of the project utilizing cash flow
projections. A base case was prepared that included those project elements which
are most likely to be achieved. WGM believed that a majority of the base case
assumptions used in the 1994 feasibility study remained valid, including the ore
reserves, mill feed grade, production rate, metal recoveries and concentrate
grade and smelter returns. Metal prices, capital costs, operating costs and the
corporate structure were adjusted to reflect more current information. Capital
and operating costs were adjusted in conformity with the updated estimates
prepared by Davy.
The base case assumes the corporate structure of the entity to be formed to
operate the project will be owned 50% by the Company and 50% by Saudi Arabian
investors and that the owners of this entity would contribute an aggregate of
$26 million to the cost of the project. The base case further assumes financing
for the project from commercial loans in the aggregate amount of $25 million
bearing interest at the rate of 8% per year and a loan in the amount of $38
million from the Saudi Industrial Development Fund ("SIDF") repayable in equal
annual installments over the initial life of the mine. Cash generated by the
operation of the project would contribute the remainder of the project
financing. The base case assumes that the $11 million loan outstanding to the
Saudi Arabian government will be paid by the Company in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from the
Company's share of the project's cash flows. Based on these assumptions, and
assuming the average prices of metal over the life of the mine to be $1.05 per
pound for copper, $.60 per pound for zinc, $400 per ounce of gold and $6.00 per
ounce of silver, WGM's economic analysis of the base case shows the project will
realize an internal rate of return of 13.1%, the Company's and the Saudi Arabian
investors' internal rates of return would be 27.3% and 12.1%, respectively, and
projected net cash flow (after debt repayment) from the project of $95.1
million. The 1994 feasibility study base case showed the project would realize a
14.05% internal rate of return. Cash flow under the base case is exclusive of
income tax as the base case assumes that any such tax would be paid by
individual investors and not by the project. Assuming a 10% discount rate, the
net present value of the project as shown in the update is $12.16 million
compared to the $15.5 million net present value of the project shown in the 1994
feasibility study. Based on the update, WGM believes that the economic analysis
shows that the project remains viable.
Mining Lease. As the holder of the Al Masane mining lease, the Company is
solely responsible to the Saudi Arabian government for the rental payments and
other obligations provided for by the mining lease and repayment of the
previously discussed $11 million loan. The Company's interpretation of the
mining lease is that repayment of this loan will be made in accordance with a
repayment schedule to be agreed upon with the Saudi Arabian government from the
Company's share of the project's cash flows. The initial term of the lease is
for a period of thirty (30) years from May 22, 1993, with the Company having the
option to renew or extend the term of the lease for additional periods not to
exceed twenty (20) years. Under the lease, the Company is obligated to pay
advance surface rental in the amount of 10,000 Saudi Riyals (approximately
$2,667 at the
6
current exchange rate) per square kilometer per year (approximately $117,300
annually) during the period of the lease. In addition, the Company must pay
income tax in accordance with the income tax laws of Saudi Arabia then in force
and pay all infrastructure costs. The Saudi Arabian Mining Code provides that
income tax will not be due during the first stage of mining operations, which is
the period of five years starting from the earlier of (i) the date of the first
sale of products or (ii) the beginning of the fourth year since the issue of the
mining lease. The lease gives the Saudi Arabian government priority to purchase
any gold production from the project as well as the right to purchase up to 10%
of the annual production of other minerals on the same terms and conditions then
available to other similar buyers and at current prices then prevailing in the
free market. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.
Reference is made to the map on page 10 of this Report for information
concerning the location of the Al Masane project.
Project Financing. As detailed above, the estimated total capital cost to
bring the Al Masane project into production is $89 million. The Company does not
presently have sufficient funds to bring this project into production. Also, see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations for a further discussion of these matters.
Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company with
the Saudi Arabian Mining Company, a corporation wholly owned by the Saudi
Arabian government ("Ma'aden"), as successor to and assignee of the mining
interests formerly held by the Petroleum Mineral Organization ("Petromin").
Ma'aden is the Saudi Arabian government's official mining company. In 1994, the
Company received instructions from the Saudi Ministry of Petroleum and Mineral
Resources stating that it is possible for the Company to form a Saudi company
without Petromin (now Ma'aden), but the sale of stock to the Saudi public could
not occur until the mine's commercial operations were profitable for at least
two years. The instructions added that Petromin (now Ma'aden) still had the
right to purchase shares in the Saudi public stock company any time it desires.
Title to the mining lease and the other obligations specified in the mining
lease would be transferred to the Saudi public stock company. However, the
Company would remain responsible for the repaying the $11 million loan to the
Saudi Arabian government.
In order to commercially develop the Al Masane project, the Company entered
into a joint venture arrangement with Al Mashreq Company for Mining Investments
("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian
investors (including certain of the Company's shareholders). The partners formed
The Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability
company ("Arabian Mining"), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and
process minerals from the Al Masane lease area. Arabian Mining received
conditional approval for a $38.1 interest-free loan from SIDF.
Due to the severe decline in the open market prices for the minerals to be
produced by the Al Masane project and the financial crisis affecting Eastern
Asia in 1998, SIDF and other potential lenders required additional guarantees
and other financing conditions which were unacceptable to the Company and Al
Mashreq. As a consequence, Al Mashreq withdrew from the joint venture. By letter
dated May 11, 1999, the Company informed the Ministry of Petroleum and Mineral
Resources that the joint venture was dissolved and that implementation of the
project will be delayed until open market prices for the minerals to be produced
by the Al Masane project improve to the average price levels experienced during
the period from 1988 through 1997. At that time, the Company will attempt to
locate a joint venture partner, form a joint venture and, together with the
joint venture partner, attempt to obtain acceptable financing to commercially
develop the project. There can be no assurances that the Company would be able
to locate a joint venture partner, form a joint venture or obtain financing from
SIDF or any other sources. In the meantime, the Company intends to maintain the
Al Masane mining lease through the payment of the annual advance surface rental,
the implementation of a drilling program to attempt to increase proven and
probable reserves and to attempt to
7
improve the metallurgical recovery rates beyond those stated in the feasibility
study, which may improve the commercial viability of the project at lower metal
prices than those assumed in the feasibility study.
Other Exploration Areas in Saudi Arabia
During the course of its exploration and development work in the Al Masane
area, the Company has carried on exploration work in other areas in Saudi Arabia
and plans to apply for an additional exploration license(s) for these areas.
With respect to these other areas, the Company has an agreement with Petromin
(now Ma'aden) that governs the rights of the parties if the exploration licenses
granted to the Company are converted into a mining lease. Under this agreement,
Petromin (now Ma'aden) is granted an option to acquire, at any time, a 25%
interest in any mineral mining project in Saudi Arabia that is the subject of
the exploration licenses.
In 1971, the Saudi Arabian government awarded the Company exclusive mineral
exploration licenses to explore and develop the Wadi Qatan area in southwestern
Saudi Arabia. The Company was subsequently awarded an additional license in 1977
for an area north of Wadi Qatan at Jebel Harr. These licenses have expired.
In 1999, the Company applied for an exploration license covering an area of
approximately 2,850 square kilometers surrounding the Al Masane mining lease
area, which is referred to as the Greater Al Masane area. The Company previously
has been authorized in writing by the Saudi Arabian government to carry out
exploration work on the area. Previous exploration work has been carried on and
paid for by the Company.
Reference is made to the map on page 10 of this Report for information
concerning the location of the foregoing areas.
Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in southwestern
Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30
kilometers east of the Al Masane area. These areas consist of 40 square
kilometers, plus a northern extension of an additional 13 square kilometers. The
Company's geological, geophysical and limited core drilling disclosed the
existence of massive sulfides containing an average of 1.2% nickel. Reserves for
these areas have not yet been classified and additional exploration work is
required. When the Company obtains an exploration license for the Wadi Qatan and
Jebel Harr areas, the Company will continue its exploratory drilling program in
order to prove whether enough ore reserves exist to justify a viable mining
operation. While initial indications are encouraging, there is no assurance that
a viable mining operation could be established.
Greater Al Masane. On June 22, 1999, the Company submitted a formal
application for a five-year exclusive mineral exploration license for the
Greater Al Masane area of approximately 2,850 square kilometers, which surrounds
the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr
areas. The Company previously worked in the Greater Al Masane area after
obtaining written authorization from the Saudi Ministry of Petroleum and Mineral
Resources and has expended over $3 million on exploration work. Geophysical,
geochemical and geophysical work and diamond core drilling on the Greater Al
Masane area has revealed mineralization similar to that discovered at Al Masane.
A detailed exploration program and expenditures budget accompanied the
application. The Company indicated on its application that it would welcome the
participation of Ma'aden in this license. Ma'aden, which has expressed an
interest in the Greater Al Masane area, also was informed by the Company that
its participation as a joint venture partner in the license would be welcomed.
As previously stated, the Company does not possess current formal
exploration licenses for any of the above areas. The absence of such licenses
creates uncertainty regarding the Company's rights and obligations, if any, in
these areas. The Company believes it has satisfied the Saudi Arabian
government's requirements in these areas and that the government should honor
the Company's claims.
8
U.S. MINERAL INTERESTS
The Company's mineral interests in the United States include its ownership
interests in the Coal Company and Pioche. The Coal Company sole remaining asset
is its net operating loss carryforward of approximately $5.9 million at December
31, 1999 and its future, if any, is uncertain. Pioche also has been inactive for
many years.
Nevada Mining Properties. Pioche's properties include 48 patented and 80
unpatented claims totaling approximately 3,500 acres. All the claims are located
in the Pioche Mining District, Lincoln County, Nevada. There are prospects and
mines on these claims that previously produced silver, gold, lead, zinc and
copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and
replacement deposits in carbonate rocks (limestone and dolomites). There is a
300-ton-a-day processing mill on property owned by Pioche. The mill is not
currently in use and a significant expenditure would be required in order to put
the mill into continuous operation, if commercial mining is to be conducted on
the property.
OFFICES
The Company has a year-to-year lease on space in an office building in
Jeddah, Saudi Arabia, used for office occupancy. The Company also leases a house
in Jeddah that is used as a technical office and for staff housing. The Company
continues to lease office space in Dallas, Texas on a month-to-month basis. It
also owns a base camp and accompanying facilities and equipment at the Al Masane
project site.
9
[GRAPH]
10
ITEM 3. LEGAL PROCEEDINGS.
South Hampton, together with several other companies, is a defendant in two
lawsuits brought in Jefferson County, Texas District Court and one lawsuit
brought in the 163rd Judicial District Court of Orange County, Texas. The
lawsuits brought in Jefferson County, Texas were filed in December 1997 and
April 1998 by former employees of the Goodyear Tire & Rubber Company plant
located in Beaumont, Texas. The lawsuit brought in Orange County, Texas was
filed in April 1999 by a former employee of DuPont in Orange, Texas. Each of the
suits claims illnesses and diseases resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during the plaintiffs'
employment with Goodyear or DuPont. The plaintiffs claim the defendant companies
engaged in the business of manufacturing, selling and/or distributing these
chemicals in a manner which subjected each and all of them to liability for
unspecified actual and punitive damages. South Hampton intends to vigorously
defend itself against these lawsuits.
South Hampton, together with several other companies, is a defendant in a
lawsuit brought in Jefferson County, Texas District Court. The lawsuit was filed
in December 1999 by a former electrician claiming illness and disease resulting
from alleged exposure to chemical and products while on certain of the
defendants' properties. The plaintiff claims he was exposed to benzene,
butadiene and products containing these chemicals supplied by certain of the
defendants, including South Hampton. The plaintiff asserts claims of strict
liability, gross negligence and negligence against South Hampton for unspecified
actual and punitive damages. South Hampton intends to vigorously defend itself
against this lawsuit.
In August 1997, the Executive Director of the Texas National Resource
Conservation Commission ("TNRCC") filed a preliminary report and petition with
the TNRCC alleging that South Hampton violated various TNRCC rules, TNRCC
permits issued to South Hampton, a TNRCC order issued to South Hampton, the
Texas Water Code, the Texas Clean Air Act and the Texas Solid Waste Disposal
Act. The violations generally relate to the management of volatile organic
compounds in a manner that allegedly violates the TNRCC's air quality rules and
the storage, processing and disposal of hazardous waste in a manner that
allegedly violates the TNRCC's industrial and hazardous waste rules. The TNRCC's
Executive Director recommends the TNRCC enter an order assessing administrative
penalties against South Hampton in the amount of $709,408 and order South
Hampton to undertake such actions as are necessary to bring its operations at
its 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.
On February 2, 2000, the TNRCC amended its pending administrative
enforcement action against South Hampton to add allegations dating through May
21, 1998 of 35 regulatory violations relating to air quality control and
industrial solid waste requirements. The TNRCC proposes that administrative
penalties be assessed in the amount of approximately $765,000 and that certain
corrective action be taken. South Hampton intends to vigorously defend itself
against these additional allegations, the proposed penalties and proposed
corrective actions.
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 at that
time. 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
11
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 Executive Order 12958, relating to
classification of documents, and 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 CIA. The Company filed an appeal with the U.S. Court of Appeals for the
Fifth Circuit, which on January 28, 2000 rejected the Company's appeal. The
Company believes that this could be a landmark case and that the Court of
Appeals erred in its judgment and, as a consequence, plans to file a writ of
certiorari with the United States Supreme Court. In addition, the Company has
requested and will continue 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. Based on the advice of its counsel, the Company believes that it would be
entitled to restitution of monies lost as a result of the wrongdoing by Hunt, if
Hunt is convicted under the FCPA. The Company further believes, based on such
advice, that the amount of restitution could include all of the profits received
by Hunt from its Yemen operations and also could include proceeds from the sale
of a portion of Hunt's interest in the PSA. However, there can be no assurance
that the DOJ will pursue or obtain a conviction of Hunt regarding the PSA under
the FCPA and no assurance that the Company would receive or be entitled to
receive any restitution as a result of any such conviction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock trades on The Nasdaq National Market under the
symbol: ARSD. The following table sets forth the high and low closing sale
prices for each quarter of 1999 and 1998, respectively, as reported by NASDAQ.
1999 1998
---------------------------- -----------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
---- --- --- --- ---- ---- --- ---
High............................ 1 1/2 1 3/16 1 3/16 1 5/16 3 13/16 2 15/16 2 3/4 2 1/16
Low............................. 15/1 3/ 7/ 3/ 2 1/16 2 1 7/8 1 7/32
At March 16, 2000, there were 780 record holders of the Company's common
stock. The Company has not paid any dividends since its inception and, at this
time, does not have any plans to pay any dividends in the foreseeable future.
On November 15, 1999, the Company issued 500 shares of its common stock to
a long term employee of South Hampton in recognition of his services. In
connection with the acquisition of Coin by TOCCO, on December 23, 1999 the
Company sold 300,000 shares of its common stock to TOCCO at $1.00 per share to
assist TOCCO with the financing of the acquisition. The Company relied upon the
private offering exemption of Section 4(2) of the Securities Act of 1933 in both
of these transactions.
In March 2000, the Company issued 469,000 shares of its common stock,
valued at $1.00 per share, to Al Mashreq for the cancellation of $469,000 of
indebtedness incurred in connection with the payment of advance surface rentals
on the Al Masane project. The Company relied upon the exemption set forth in
Regulation S under the Securities Act of 1933 in this transaction.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following is a five-year summary of selected financial data of the
Company (in thousands, except per share amounts):
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Revenues............................. $27,791 $25,089 $26,174 $22,014 $18,359
Net Income (Loss).................... $ 2,740 $ 3,442 $ 818 $ (391) $ (369)
Net Income (Loss) Per Share.......... $ .12 $ .16 $ .04 $ (.02) $ (.02)
Total Assets (at December 31)........ $52,848 $46,683 $45,053 $44,096 $40,805
Notes Payable (at December 31)....... $11,874 $11,874 $11,376 $11,376 $15,086
Total Long-Term Obligations (at
December 31)....................... $ 4,314 $ 1,953 $ 4,110 $ 4,293 $ 1,676
ITEM 7. 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 Items 7 and 7A, as well as elsewhere in, or incorporated by
reference in, this Annual Report on Form 10-K 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 cases, "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 Annual Report on Form 10-K, 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
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.
Specialty Petrochemicals Segment. This segment contributes substantially
all of the Company's internally generated cash flows from operating activities.
In order to supplement its cash flows from operating activities, this business
segment entered into a $2.25 million credit facility with Southwest Bank of
Texas, N.A., located in Houston, Texas (the "Bank"). The terms and conditions of
this credit facility are discussed in Note 8 to the Company's Consolidated
Financial Statements. As a result of these actions, as well as its recent and
expected near term operating results, this segment's cash flows from operating
activities are
13
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.
In connection with the acquisition of the common stock of Coin, South
Hampton and Gulf State entered into a $3.5 million credit facility with Heller
Financial Leasing, Inc. The credit facility is evidenced by a 47 month
promissory note bearing interest at the rate of 10.55% per annum. The terms and
conditions of this credit facility are discussed in Note 8 to the Company's
Consolidated Financial Statements. The credit facility is secured by a pledge of
all of the capital stock of South Hampton and Gulf State, a first lien on all of
South Hampton's and Gulf State's present and future machinery and equipment and
a ground lease relating to South Hampton's real property, and is guaranteed by
the Company, the Refining Company and TOCCO.
Mining Segment. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As discussed in
Item 2. Properties, the joint venture formed with Al Mashreq to develop the
project was dissolved and implementation of the project delayed until the open
market prices for the minerals to be produced by the mine improve. At that time,
the Company will attempt to locate a joint venture partner, form a joint venture
and, together with the joint venture partner, attempt to obtain acceptable
financing to commercially develop the project. There is no assurance that a
joint venture partner can be located, a joint venture formed or, if it is
formed, that the joint venture would be able to obtain acceptable financing for
the project.
Management also is addressing 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 $900,000 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 $741,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. 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 and requested formal negotiations to restructure this obligation.
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 Company's share of 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. 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 from the cash flows generated by its two specialty
petrochemical refineries.
With respect to the accrued salaries and termination benefits due employees
working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.
At this time, the Company has no definitive plans for the development of
its domestic mining assets. It periodically receives proposals from outside
parties who are interested in possibly developing or using certain
14
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
Comparison of the Years 1999 to 1998
Specialty Petrochemicals Segment. During 1999, total revenues increased
approximately $2.7 million or 10.8% while the cost of sales (excluding
depreciation) increased approximately $3.2 million or 17.4% from 1998.
Consequently, 1999's gross profit margin decreased approximately $.5 million or
6.6% even as sales volume increased by 6.2% and average selling prices increased
slightly by 1.7%. As a result of these changes in sales volume and cost of
sales, the petrochemical segment experienced a decreased in net income of $.6
million due primarily to increased feedstock and operating costs. The price of
its primary feedstock, natural gasoline, remained stable throughout the first
half of 1999, but began a steady increase in the second half of 1999. Natural
gasoline is the heavier liquid produced by natural gas processing plants and by
LPG fractionators. Feedstock prices in the fourth quarter of 1999 were almost
91% higher than those in the first quarter of 1999. The petrochemical segment's
reputation for superior product quality and service reliability in the
petrochemical industry's specialty products segment allowed it to increase sales
volume and prices during 1999. Management expects its feedstock costs to
continue to increase through the first quarter of 2000.
Toll processing continued to be a growing contributor to the segment's
business as fees increased 101.5% to approximately $1.5 million in 1999. The
increase in the toll processing business is indicative of the direction of the
U.S. refining and petrochemical industries. Many larger companies are
outsourcing smaller jobs and processes that were formerly processed internally.
The Refining Company has been in the toll processing business for over 30 years,
enjoys a good reputation within the industry and believes it offers customers
several competitive advantages over other suppliers. Management intends to
expand the segment's involvement in this area as opportunities arise.
Construction began in early 2000 on a hydrogenation unit for a major customer on
a multi-year contract. Production from the unit is scheduled to begin in June
2000.
The decrease in interest income was due to the reduced amount of excess
cash while the decrease in interest expense was due to the reduction in debt.
Miscellaneous income represents various items that individually are not
significant enough to disclose separately. This includes income from tank and
other rentals, dividend income from investments of excess cash and occasional
gains from small asset sales. The increase in 1999 is due primarily to expanded
tank rentals.
Mining Segment and General Corporate Expenses. None of the Company's other
operations generate significant operating or other revenues. Minority interest
amounts represent the Pioche minority shareholders' share of Pioche's losses
that are primarily attributable to the costs of maintaining the Nevada mining
properties.
The Company periodically reviews and evaluates its mineral exploration and
development projects as well as its other mineral properties and related assets.
The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 1999, for purposes of estimating future cash
flows, the price assumptions contained in the 1996 update to the Al Masane
project's feasibility study, which was prepared by WGM, were used. See Item 2.
Properties. 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. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values on market comparables. Using these price assumptions, no asset
impairments were evident.
15
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.
The Company's income tax expense includes $75,400 for the 1999 payment of
its 1998 federal income tax liability, $60,000 for an estimate of its 1999
federal income tax liability (both of which are due to the alternative minimum
income tax), and $147,700 for its state tax liability. Due primarily to the 1988
write-off of its coal lease investments, the Company had net operating loss
carryforwards of approximately $25.0 million at December 31, 1999, approximately
$5.9 million and $2.8 million of which are limited to the Coal Company's and
Refining Company's, respectively, future taxable income. These loss
carryforwards expire during the years 2000 through 2019.
Comparison of the Years 1998 to 1997
Specialty Petrochemicals Segment. During 1998, total revenues decreased
approximately $1.2 million or 4.1% while the cost of sales decreased
approximately $3.9 million or 17.8% from 1997. Consequently, 1998's gross profit
margin increased approximately $2.8 million or 70.1%. Sales volume decreased
slightly by 2.4%. The average selling price also decreased slightly by 2.5% as a
result of the adverse economic conditions affecting the petroleum refining
industry during much of 1998. As a result of these changes in sales and cost of
sales, the Refining Company significantly increased its gross profit (and net
income) due primarily to lower operating expenses and reduced feedstock costs.
The price of its primary feedstock, natural gasoline, continued to decrease
throughout 1998. Natural gasoline is the heavier liquid produced by natural gas
processing plants and by LPG fractionators. Feedstock prices continued the
decline throughout 1998 that began in the fourth quarter of 1997. Prices in the
fourth quarter of 1998 were almost 25% lower than those experienced in the first
quarter. The Refining Company's reputation for superior product quality and
service reliability in the petrochemical industry's specialty products segment
allowed it to substantially maintain sales volumes and prices during 1998,
thereby permitting it to take advantage of feedstock's reduced cost. Management
expects its feedstock costs to remain near present levels during much of 1999.
Toll processing continued to be a growing contributor to the refinery's
business as fees increased 27% to $.7 million in 1998. The increase in the toll
processing business is indicative of the direction of the U.S. refining and
petrochemical industries. Many larger companies are outsourcing smaller jobs and
processes that were formerly processed internally. The Refining Company has been
in the toll processing business for over 30 years, enjoys a good reputation
within the industry and believes it offers customers several competitive
advantages over other suppliers. Management intends to expand the refinery's
involvement in this area as opportunities arise. Construction has begun on a
unit designed to produce a line of specialty solvents for a major customer on a
multi-year contract. Production is scheduled to begin on April 1, 1999.
The increase in interest income was due to the investment of increased
excess cash while the slight absolute decrease in interest expense was due to
the previously discussed reduction in debt as well as a slight decrease in
interest rates.
Miscellaneous income represents various items that individually are not
significant enough to disclose separately. This includes income from tank and
other rentals, commission income and occasional gains from small asset sales.
The $.2 million decrease in 1998 is due to reduced tank rentals and no rental
income from a building that was sold in 1997.
Mining Segment and General Corporate Expenses. None of the Company's other
operations generate significant operating or other revenues. Minority interest
amounts represent the Pioche minority shareholders' share of Pioche's losses
that are primarily attributable to the costs of maintaining the Nevada mining
properties.
16
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 1998, for purposes of estimating future cash
flows, the price assumptions contained in the 1996 update to the Al Masane
project's feasibility study, which was prepared by WGM, were used. See Item 2.
Properties. 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. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values based on market comparables. 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.
The Company's income tax expense includes $24,800 for the 1998 payment of
its 1997 federal income tax liability (which was due to the alternative minimum
income tax) and $231,000 for its state tax liability. Due primarily to the 1988
write-off of its coal lease investments, the Company had net operating loss
carryforwards of approximately $28.0 million at December 31, 1998, approximately
$5.9 million and $2.5 million of which are limited to the Coal Company's and
Refining Company's, respectively, future taxable income. These loss
carryforwards expire during the years 1999 through 2011.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in the Company's financial instruments represents
the potential loss resulting from adverse changes in interest rates, foreign
currency rates and commodity prices. The Company's exposure to interest rate
changes results from its variable rate debt instruments which are vulnerable to
changes in short term United States prime interest rates. At December 31, 1999,
the Company had $4.7 million in variable rate debt outstanding. A hypothetical
10% change in interest rates underlying these borrowings would result in
approximately a $43,000 annual change in the Company's earnings and cash flows.
At December 31, 1998, the Company had $1.7 million in variable rate debt
outstanding and a hypothetical 10% change in interest rates underlying these
borrowings would have resulted in approximately a $16,000 annual change in the
Company's earnings and cash flows.
The Company is also exposed to market risk in the exchange rate of the
Saudi Arabian riyal as measured against the United States dollar. The Company
does not view this exposure as significant and has not acquired or issued any
foreign currency derivative financial instruments. The Company's strategy in
managing its exposure to commodity prices is to purchase options on commodity
based derivative futures contracts when available. At December 31, 1999 and
1998, the Company's investment in such instruments was insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company, including the independent
auditor's report thereon, and the financial statement schedules, including the
independent auditor's report thereon, are included elsewhere in this document.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is set forth under the captions "Nominees for Election as
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Company's Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
This information is set forth under the caption "Executive Compensation" of
the Company's Proxy Statement for the Company's Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is set forth under the caption "Outstanding Capital Stock"
of the Company's Proxy Statement for the Company's Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is set forth under the caption "Other Matters" of the
Company's Proxy Statement for the Company's Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are filed with this Report:
Reports of Independent Accountants.
Consolidated Balance Sheets dated December 31, 1999 and 1998.
Consolidated Statements of Income for the three years ended December 31, 1999.
Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1999.
Consolidated Statements of Cash Flows for the three years ended December 31,
1999.
Notes to Consolidated Financial Statements.
2. The following financial statement schedules are filed with this
Report:
Schedule II -- Valuation and Qualifying Accounts for the three years ended
December 31, 1999.
3. The following documents are filed or incorporated by reference as
exhibits to this Report. Exhibits marked with an asterisk (*) are
management contracts or a compensatory plan, contract or arrangement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3(a) -- Certificate of Incorporation of the Company as amended
through the Certificate of Amendment filed with the
Delaware Secretary of State on January 29, 1993.
3(b) -- Bylaws of the Company, as amended through March 4, 1998.
10(a) -- Contract dated July 29, 1971 between the Company,
National Mining Company and Petromin.
10(b) -- Loan Agreement dated January 24, 1979 between the
Company, National Mining Company and the Government of
Saudi Arabia.
18
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10(c) -- Mining Lease Agreement effective May 22, 1993 by and
between the Ministry of Petroleum and Mineral Resources
and the Company.
10(d) -- Stock Option Plan of the Company, as amended.*
10(e) -- 1987 Non-Employee Director Stock Plan.*
10(f) -- Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.*
10(g) -- Agreement dated March 10, 1988 between Chevron Research
Company and South Hampton Refining Company, together with
related form of proposed Contract of Sale by and between
Chevron Chemical Company and South Hampton Refining
Company.
10(h) -- Addendum to the Agreement Relating to AROMAX(R)
Process -- Second Commercial Demonstration dated June 13,
1989 by and between Chevron Research Company and South
Hampton Refining Company.
10(i) -- Vehicle Lease Service Agreement dated September 28, 1989
by and between Silsbee Trading and Transportation Corp.
and South Hampton Refining Company.*
10(j) -- Letter Agreement dated May 3, 1991 between Sheikh Kamal
Adham and the Company.
10(k) -- Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company.*
10(l) -- Letter Agreement dated August 15, 1995 between Hatem
El-Khalidi and the Company.*
10(m) -- Letter Agreement dated August 24, 1995 between Sheikh
Kamal Adham and the Company.
10(n) -- Letter Agreement dated October 23, 1995 between Sheikh
Fahad Al-Athel and the Company.
10(o) -- Letter Agreement dated November 30, 1996 between Sheikh
Fahad Al-Athel and the Company (incorporated by reference
to Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No.
0-6247)).
10(p) -- Stock Purchase Agreement dated as of January 25, 2000
between Spechem, S.A. de. C.V. and Texas Oil and Chemical
Co. II, Inc.
10(q) -- Loan and Security Agreement dated as of December 30, 1999
by and among Heller Financial Leasing, Inc., South
Hampton Refining Company and Gulf State Pipe Line
Company, Inc., together with related Promissory Note,
Guaranty made by the Company, Guaranty made by American
Shield Refining Company, Guaranty made by Texas Oil and
Chemical Co. II, Inc., Pledge Agreement made by Texas Oil
and Chemical Co. II, Inc., Pledge Agreement made by South
Hampton Refining Company, Ground Lease, Sub-Ground Lease
and Hazardous Materials Indemnity Agreement.
10(r) -- Loan Agreement dated as of September 30, 1999 between
South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note,
Security Agreement, Arbitration Agreement and Guaranty
Agreement made by Texas Oil and Chemical Co. II, Inc.
21 -- Subsidiaries.
27 -- Financial Data Schedule.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
19
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Arabian Shield Development
Company, a Delaware corporation, and the undersigned directors and officers of
Arabian Shield Development Company, hereby constitutes and appoints John A.
Crichton its or his true and lawful attorney-in-fact and agent, for it or him
and in its or his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this Report, and to file
each such amendment to the Report, with all exhibits thereto, and any and all
other documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorney-in-fact and agent full power and
authority to do and perform any and all acts and things requisite and necessary
to be done in and about the premises as fully to all intents and purposes as it
or he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARABIAN SHIELD DEVELOPMENT COMPANY
By: /s/ HATEM EL-KHALIDI
-------------------------------------
Hatem El-Khalidi
President and Chief Executive Officer
Dated: March 21, 2000
20
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in the capacities indicated on March 21, 2000.
SIGNATURE TITLE
--------- -----
/s/ HATEM EL-KHALIDI President, Chief Executive Officer and
- ----------------------------------------------------- Director (principal executive officer)
Hatem El-Khalidi
/s/ DREW WILSON, JR. Secretary and Treasurer (principal financial
- ----------------------------------------------------- and accounting officer)
Drew Wilson, Jr.
/s/ JOHN A. CRICHTON Chairman of the Board and Director
- -----------------------------------------------------
John A. Crichton
/s/ MOHAMMED O. AL-OMAIR Director
- -----------------------------------------------------
Mohammed O. Al-Omair
/s/ GHAZI SULTAN Director
- -----------------------------------------------------
Ghazi Sultan
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Arabian Shield Development Company
We have audited the accompanying consolidated balance sheets of Arabian
Shield Development Company and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Arabian Shield
Development Company and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
GRANT THORNTON LLP
Dallas, Texas
March 10, 2000
F-1
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 434,313 $ 1,907,242
Short-term investments.................................... 20,597 30,636
Trade receivables......................................... 4,308,085 2,779,964
Inventories............................................... 745,396 178,714
----------- -----------
Total current assets.............................. 5,508,391 4,896,556
REFINERY PLANT, PIPELINE AND EQUIPMENT -- AT COST........... 9,357,956 7,151,134
LESS ACCUMULATED DEPRECIATION............................... (4,330,856) (3,651,626)
----------- -----------
REFINERY PLANT, PIPELINE AND EQUIPMENT, NET................. 5,027,100 3,499,508
AL MASANE PROJECT........................................... 34,621,335 34,121,501
OTHER INTERESTS IN SAUDI ARABIA............................. 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES..................... 1,299,008 1,280,656
RESTRICTED CASH............................................. 3,500,000 --
OTHER ASSETS................................................ 461,127 453,854
----------- -----------
TOTAL ASSETS...................................... $52,848,209 $46,683,323
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- trade................................. $ 1,129,926 $ 668,683
Accrued liabilities....................................... 1,005,110 1,027,809
Accrued liabilities in Saudi Arabia....................... 1,326,823 1,444,156
Notes payable............................................. 11,873,780 11,873,780
Current portion of long-term debt......................... 677,439 --
----------- -----------
Total current liabilities......................... 16,013,078 15,014,428
LONG-TERM DEBT.............................................. 3,572,561 1,250,000
ACCRUED LIABILITIES IN SAUDI ARABIA, NET.................... 741,218 703,214
DEFERRED REVENUE............................................ 165,835 98,677
COMMITMENTS AND CONTINGENCIES............................... -- --
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY................ 907,354 909,600
STOCKHOLDERS' EQUITY
Common stock -- authorized 40,000,000 shares of $.10 par
value; issued and outstanding, 22,019,994 shares in
1999 and 22,019,494 shares in 1998..................... 2,201,999 2,201,949
Additional paid-in capital................................ 36,101,506 36,101,150
Accumulated deficit....................................... (6,855,342) (9,595,695)
----------- -----------
Total stockholders' equity........................ 31,448,163 28,707,404
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $52,848,209 $46,683,323
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues
Refined product sales............................... $26,302,862 $24,350,938 $25,591,600
Processing fees..................................... 1,487,804 738,237 582,519
----------- ----------- -----------
27,790,666 25,089,175 26,174,119
Operating costs and expenses
Cost of refined product sales and processing........ 21,352,555 18,192,488 22,119,668
General and administrative.......................... 2,933,616 2,669,088 2,695,043
Depreciation and amortization....................... 719,793 428,743 538,240
----------- ----------- -----------
25,005,964 21,290,319 25,352,951
----------- ----------- -----------
Operating income............................ 2,784,702 3,798,856 821,168
Other income (expense)
Interest income..................................... 65,052 112,129 51,062
Interest expense.................................... (155,829) (346,117) (405,270)
Minority interest................................... 2,245 7,905 19,282
Miscellaneous income................................ 327,297 124,650 332,122
----------- ----------- -----------
238,765 (101,433) (2,804)
----------- ----------- -----------
Net income before income taxes.............. 3,023,467 3,697,423 818,364
Income tax expense.................................... 283,114 255,777 --
----------- ----------- -----------
Net income.................................. $ 2,740,353 $ 3,441,646 $ 818,364
=========== =========== ===========
Net income per common share:
Basic............................................... $ 0.12 $ 0.16 $ 0.04
=========== =========== ===========
Diluted............................................. $ 0.12 $ 0.14 $ 0.04
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding:
Basic............................................... 22,026,114 21,995,735 21,306,040
=========== =========== ===========
Diluted............................................. 22,604,240 25,649,695 22,017,652
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-3
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL
---------- ---------- ----------- ----------- ------------ -----------
January 1, 1997............. 20,956,494 $2,095,649 $34,932,700 $(126,000) $(13,855,705) $23,046,644
Common stock sold......... 500,000 50,000 450,000 -- -- 500,000
Common stock issued for
services............... 50,000 5,000 45,000 -- -- 50,000
Common stock issued on
debt conversion........ 345,000 34,500 310,500 -- -- 345,000
Stock options exercised... 10,000 1,000 12,750 -- -- 13,750
Stock options issued for
services............... -- -- 125,000 -- -- 125,000
Net income................ -- -- -- -- 818,364 818,364
---------- ---------- ----------- --------- ------------ -----------
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... 58,000 5,800 85,200 -- -- 91,000
Offset of receivable
against related
payables............... -- -- -- 126,000 -- 126,000
Net income................ -- -- -- -- 3,441,646 3,441,646
---------- ---------- ----------- --------- ------------ -----------
December 31, 1998........... 22,019,494 2,201,949 36,101,150 -- (9,595,695) 28,707,404
Common stock sold......... 500 50 356 -- -- 406
Net income................ -- -- -- -- 2,740,353 2,740,353
---------- ---------- ----------- --------- ------------ -----------
December 31, 1999........... 22,019,994 $2,201,999 $36,101,506 $ -- $ (6,855,342) $31,448,163
========== ========== =========== ========= ============ ===========
The accompanying notes are an integral part of this statement.
F-4
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ----------- ---------
Operating activities
Net income........................................... $ 2,740,353 $ 3,441,646 $ 818,364
Adjustments for non-cash transactions
Depreciation and amortization..................... 719,793 428,743 538,240
Common stock and stock options issued for
services........................................ -- -- 175,000
(Decrease) increase in deferred revenue........... 67,158 (15,504) (15,504)
Effects of changes in operating assets and
liabilities
Decrease (increase) in trade receivables.......... (1,528,121) 267,347 (403,620)
Decrease (increase) in inventories................ (566,682) 369,606 17,026
Decrease (increase) in other assets............... (7,273) 9,376 42,336
(Decrease) increase in accounts payable and
accrued liabilities............................. 438,544 232,222 (464,852)
Other................................................ (42,809) (150,627) (7,945)
----------- ----------- ---------
Net cash provided by operating activities.... 1,820,963 4,582,809 699,045
----------- ----------- ---------
Investing activities
Additions to short-term investments.................. -- (14,387) (108,816)
Proceeds from sale of short-term investments......... 10,039 391,293 --
Additions to Al Masane Project....................... (499,834) (599,074) (639,589)
Additions to refinery plant, pipeline and
equipment......................................... (2,206,822) (1,224,946) (167,336)
(Additions to) reduction in mineral properties in the
United States..................................... (18,352) 130,534 7,425
Increase (decrease) in accrued liabilities in Saudi
Arabia............................................ (79,329) 210,820 174,178
----------- ----------- ---------
Net cash used in investing activities........ (2,794,298) (1,105,760) (734,138)
----------- ----------- ---------
Financing activities
Common stock sold.................................... 406 241,000 513,750
Additions to notes payable and long-term
obligations....................................... 4,250,000 1,985,000 200,000
Reduction of notes payable and long-term
obligations....................................... (1,250,000) (4,329,893) (529,861)
----------- ----------- ---------
Net cash provided by (used in) financing
activities................................. 3,000,406 (2,103,893) 183,889
----------- ----------- ---------
Net increase in cash................................... 2,027,071 1,373,156 148,796
Cash and cash equivalents at beginning of year......... 1,907,242 534,086 385,290
----------- ----------- ---------
Cash and cash equivalents at end of year............... $ 3,934,313 $ 1,907,242 $ 534,086
=========== =========== =========
The accompanying notes are an integral part of these statements.
F-5
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND OPERATIONS OF THE COMPANY
Arabian Shield Development Company (the "Company") was organized as a
Delaware corporation in 1967. The Company's principal business activities
include refining various specialty petrochemical products (also referred to as
the "Refining Segment") and developing mineral properties in Saudi Arabia and
the United States (also referred to as the "Mining Segment"). All of its mineral
properties are presently undeveloped and require significant capital
expenditures before beginning any commercial operations (see Notes 2, 6 and 7).
The Company's Refining Segment activities are primarily conducted through a
wholly-owned subsidiary, American Shield Refining Company (the "Refining
Company"), which owns all of the capital stock of Texas Oil and Chemical Co. II,
Inc. ("TOCCO"). TOCCO owns all of the capital stock of South Hampton Refining
Company ("South Hampton"), and South Hampton owns all of the capital stock of
Gulf State Pipe Line Company, Inc. ("Gulf State"). South Hampton owns and
operates a specialty petrochemical products refinery near Silsbee, Texas that is
one of the largest domestic manufacturers of pentanes. Gulf State owns and
operates three pipelines which connect the South Hampton refinery to a natural
gas line, to South Hampton's truck and rail loading terminal and to a marine
terminal owned by an unaffiliated third party. The Company also directly owns
all of American Shield Coal Company (the "Coal Company") and approximately 51%
of the capital stock of a Nevada mining company, Pioche-Ely Valley Mines, Inc.
("Pioche"). Neither the Coal Company nor Pioche conduct any substantial business
activities. The Coal Company, Pioche and the Company's mineral properties in
Saudi Arabia constitute its Mining Segment.
The Company consolidates all subsidiaries for which it has majority
ownership or voting control that is other than temporary. All material
intercompany accounts and transactions are eliminated.
NOTE 2 -- BUSINESS RISKS
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 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.
The Company's mining segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. As discussed in
Note 6, the Company intends to take steps to finance commercial development of
the Al Masane mining project. However, there is no assurance the Company will be
able to arrange financing.
Management also is addressing 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 $900,000 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 $741,000).
The note payable 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 from the Saudi government regarding the
note payable. This is 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 as long as the Company diligently attempts to explore and
develop the Al Masane project that no repayment demand will be made. The Company
recently communicated to the Saudi government that its
F-6
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
delay in repaying the note is a direct result of the government's lengthy delay
in granting the Al Masane lease and requested formal negotiations to restructure
this obligation. 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 which would result in 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. 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 the Refining
Company.
The second issue is the accrued salaries and termination benefits due
employees working in Saudi Arabia. The Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.
A significant component of the Company's assets consists of undeveloped
mineral deposits. There is no assurance that the Company will ultimately
successfully develop either the Al Masane project or any of the other properties
discussed in Notes 6 and 7, and if, developed, whether the mineral acquisition,
development and development costs incurred will be recovered. The recovery of
these costs is dependent upon a number of factors and future events, many of
which are beyond the Company's control. Furthermore, the Company's ability to
develop and realize its investment in these properties is dependent upon (i)
obtaining significant additional financing and (ii) attaining successful
operations from one or more of these projects.
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. Based upon an updated feasibility study by Watts,
Griffis and McQuat Ltd. updated in 1996, projected positive cash flows, net of
repayment of debt, are $95.1 million over the life of the project. Prices used
in the feasibility study were $1.05 per pound for copper, $.60 per pound for
zinc, $400 per ounce for gold and $6.00 per ounce for silver. Although present
mineral prices are less than those used in the feasibility study, the Company
believes that these price declines are not permanent and that the prior
assumptions used in the study are still appropriate.
The Company assesses 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.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Short-Term Investments -- The Company's
principal bank and short-term investing activities are with local and national
financial institutions. Short-term investments with an original maturity of
three months or less are classified as cash equivalents. At December 31, 1999
and 1998, the Company held certificates of deposit and mutual funds with
original maturities of less than one year that the Company intends to hold until
maturity. At December 31, 1999, the fair value of these items approximated their
carrying values. Cash balances may at times exceed federally insured limits. The
Company has not experienced any losses in its cash and short-term investment
accounts and does not believe it is exposed to any significant such risks.
F-7
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Refined products and feedstock are recorded at the lower of
cost, determined on the last-in, first-out method (LIFO), or market.
Mineral Exploration and Development Costs -- All costs related to the
acquisition, exploration, and development of mineral deposits are capitalized
until such time as (1) the Company commences commercial exploitation of the
related mineral deposits at which time the costs will be amortized, (2) the
related project is abandoned and the capitalized costs are charged to
operations, or (3) when any or all deferred costs are permanently impaired. At
December 31, 1999, none of the projects described in Notes 6 and 7 had reached
the commercial exploration stage. No indirect overhead or general and
administrative costs have been allocated to any of the projects.
Refinery Plant, Pipeline and Equipment -- Refinery plant, pipeline and
equipment are stated at cost. Depreciation is provided over the estimated
service lives using the straight-line method. Gains and losses from disposition
are included in operations in the period incurred.
Other Assets -- Other assets include catalysts used in refinery operations,
prepaid expenses, a note receivable and certain refinery assets which are being
leased to a third party.
Environmental Liabilities -- Remediation costs are accrued based on
estimates of known environmental remediation exposure. Such accruals are
recorded even if uncertainties exist over the ultimate cost of the remediation.
Ongoing environmental compliance costs, including maintenance and monitoring
costs, are expensed as incurred.
Deferred Revenue -- Deferred revenue represents funds advanced by two
suppliers and customers to defray development and processing costs and are being
amortized over five year and 15 year periods.
Statements of Cash Flows -- In the statements of cash flows, cash includes
cash held in the United States and Saudi Arabia. Significant noncash changes in
financial position in 1997 include the issuance of 345,000 shares of common
stock at $1.00 per share for the conversion of $345,000 of indebtedness (Note 9)
as well as the issuance of stock and options for services, valued at a total of
$175,000, which is included in general and administrative expenses (Note 10).
Net Income Per Share -- The Company computes basic income per common share
based on the weighted-average number of common shares outstanding. Diluted
income per common share is computed based on the weighted-average number of
common shares outstanding plus the number of additional common shares that would
have been outstanding if dilutive potential common shares, consisting of stock
options and shares issuable upon conversion of debt, had been issued (Note 13).
Foreign Currency and Operations -- Assets and liabilities denominated in
foreign currencies, principally Saudi Riyals, are translated at rates in effect
at the time the transaction occurs. There has been no significant change in the
exchange rate for Saudi Riyals to the United States dollar during the period
covered by these financial statements. Due to the stability of the Saudi Riyals,
the Company feels it has no material exposure to foreign currency risks and does
not employ any practices to minimize any such risks. It is anticipated that its
products in Saudi Arabia will be sold in United States dollars.
The Company's foreign operations have been, and will continue to be,
affected by periodic changes or developments in Saudi Arabia's political and
economic conditions as well as changes in their laws and regulations. Any such
changes could have a material adverse effect on the Company's financial
condition, operating results or cash flows.
Saudi Arabian investors, including certain members of the Company's board
of directors, own approximately 62% of the Company's outstanding common stock at
December 31, 1999.
Management Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported
F-8
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation -- The Company accounts for employee stock options
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 and has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 (Statement No. 123). Accordingly, the
compensation expense of employee stock options is the excess, if any, of the
quoted market price of the Company's common stock at the grant date over the
amount the employee must pay to acquire the stock. Note 10 includes pro forma
disclosures of net income and income per share as if the Company had adopted the
fair value based method of accounting set forth in Statement No. 123.
Hedging Program -- The Company's refining segment uses a hedging program to
decrease the price volatility of its natural gas fuel requirements. For each of
the years ended December 31, 1999, 1998 and 1997 the net recognized gain (loss)
from hedging transactions was $28,244, ($74,500), and $46,000, respectively. At
December 31, 1999, the Company had pledged a $100,000 bank letter of credit as
collateral for its unpaid natural gas purchases.
Accounting Standards Not Adopted -- During the second quarter of 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (Statement No. 133), Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards requiring that derivative instruments, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company will adopt
Statement No. 133 no later than the first quarter of fiscal year 2001. Statement
No. 133 is not expected to have a material impact on the consolidated financial
statements.
NOTE 4 -- CONCENTRATIONS OF CREDIT RISK
The refining segment sells its products and services to companies in the
chemical and plastics industries. It performs periodic credit evaluations of its
customers and does not require collateral from its customers. The Company's
largest customer accounted for 11% of its total product sales in 1999, and 10%
in 1998 and 1997. It has incurred minimal credit losses. The carrying amount of
accounts receivable approximates fair value at December 31, 1999.
NOTE 5 -- INVENTORIES
Inventories include the following at December 31:
1999 1998
-------- --------
Refinery feedstock.......................................... $ -- $ --
Refined products............................................ 745,396 178,714
-------- --------
Total inventories................................. $745,396 $178,714
======== ========
At December 31, 1999, current cost exceeded LIFO value by approximately
$142,000. In 1998, the LIFO inventory value approximated current cost.
NOTE 6 -- MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
In the accompanying consolidated financial statements, the deferred
development costs have been presented based on the related projects' geographic
location within Saudi Arabia. This includes the
F-9
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Al Masane Project" (the "Project") and "Other Interests in Saudi Arabia" which
primarily pertains to the costs of rentals, field offices and camps, core
drilling and labor incurred at the Wadi Qatan and Jebel Harr properties.
In 1971, the Saudi Arabian government awarded the Company exclusive mineral
exploration licenses to explore and develop the Wadi Qatan area in southwestern
Saudi Arabia. The Company was subsequently awarded an additional license in 1977
for an area north of Wadi Qatan at Jebel Harr. These licenses have expired. On
June 22, 1999, the Company filed a formal application for a five year
exploration license covering an area of 2,850 square kilometers that includes
Wadi Qatan and Jebel Harr and an area surrounding the Al Masane mining lease
area, which is referred to as the Greater Al Masane area. Although a license has
not been formally granted for the Greater Al Masane area, the Company has been
authorized in writing by the Saudi Arabian government to carry out exploration
work on the area. The Company has incurred mineral exploration costs in each of
these areas and intends to formalize its claims.
The Al Masane project, consisting of a mining lease area of approximately
44 square kilometers, contains extensive ancient mineral workings and smelters.
From ancient inscriptions in the area, it is believed that mining activities
went on sporadically from 1000 BC to 700 AD. The ancients are believed to have
extracted mainly gold, silver and copper. The Project includes various
quantities of proved zinc, copper, gold and silver reserves.
As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for the rental payments and other
obligations provided for by the mining lease and repayment of the previously
discussed $11 million loan. The Company's interpretation of the mining lease is
that repayment of this loan will be made in accordance with a repayment schedule
to be agreed upon with the Saudi Arabian government from the Company's share of
the project's cash flows. The initial term of the lease is for a period of
thirty (30) years from May 22, 1993, with the Company having the option to renew
or extend the term of the lease for additional periods not to exceed twenty (20)
years. Under the lease, the Company is obligated to pay advance surface rental
in the amount of 10,000 Saudi Riyals (approximately $2,667 at the current
exchange rate) per square kilometer per year (approximately $117,300 annually)
during the period of the lease. In addition, the Company must pay income tax in
accordance with the income tax laws of Saudi Arabia then in force and pay all
infrastructure costs. The Saudi Arabian Mining Code provides that income tax
will not be due during the first stage of mining operations, which is the period
of five years starting from the earlier of (i) the date of the first sale of
products or (ii) the beginning of the fourth year since the issue of the mining
lease. The lease gives the Saudi Arabian government priority to purchase any
gold production from the project as well as the right to purchase up to 10% of
the annual production of other minerals on the same terms and conditions then
available to other similar buyers and at current prices then prevailing in the
free market. Furthermore, the lease contains provisions requiring that
preferences be given to Saudi Arabian suppliers and contractors, that the
Company employ Saudi Arabian citizens and provide training to Saudi Arabian
personnel.
Pursuant to the mining lease agreement, when the Al Masane project is
profitable the Company is obligated to form a Saudi public stock company with
the Saudi Arabian Mining Company, a corporation wholly owned by the Saudi
Arabian government (Ma'aden), as successor to and assignee of the mining
interests formerly held by the Petroleum Mineral Organization ("Petromin").
Ma'aden is the Saudi Arabian government's official mining company. In 1994, the
Company received instructions from the Saudi Ministry of Petroleum and Mineral
Resources stating that it is possible for the Company to form a Saudi company
without Petromin (now Ma'aden), but the sale of stock to the Saudi public could
not occur until the mine's commercial operations were profitable for at least
two years. The instructions added that Petromin (now Ma'aden) still had the
right to purchase shares in the Saudi public stock company any time it desires.
Title to the mining lease and the other obligations specified in the mining
lease will be transferred to the Saudi public
F-10
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock company. However, the Company would remain responsible for the repaying
the $11 million loan to the Saudi Arabian government.
In order to commercially develop the Al Masane project, the Company entered
into a joint venture arrangement with Al Mashreq Company for Mining Investments
("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian
investors (including certain of the Company's shareholders). The partners formed
The Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability
company ("Arabian Mining"), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and
process minerals from the Al Masane lease area.
Due to the severe decline in the open market prices for the minerals to be
produced by the Al Masane project and the financial crisis affecting Eastern
Asia in 1998, the Saudi Industrial Development Fund (SIDF) and other potential
lenders required additional guarantees and other financing conditions which were
unacceptable to the Company and Al Mashreq. As a consequence, Al Mashreq
withdrew from the joint venture. By letter dated May 11, 1999, the Company
informed the Ministry of Petroleum and Mineral Resources that the joint venture
was dissolved and that implementation of the project will be delayed until open
market prices for the minerals to be produced by the Al Masane project improve
to the average price levels experienced during the period from 1988 through
1997. At that time, the Company will attempt to locate a joint venture partner,
form a joint venture and, together with the joint venture partner, attempt to
obtain acceptable financing to commercially develop the project. There can be no
assurances that the Company would be able to locate a joint venture partner,
form a joint venture or obtain financing from SIDF or any other sources. In the
meantime, the Company intends to maintain the Al Masane mining lease through the
payment of the annual advance surface rental, the implementation of a drilling
program to attempt to increase proven and probable reserves and to attempt to
improve the metallurgical recovery rates beyond those stated in the feasibility
study, which may improve the commercial viability of the project at lower metal
prices than those assumed in the feasibility study.
Deferred development costs of the Al Masane Project at December 31, 1999,
1998 and 1997, and the changes in these amounts for each of the three years then
ended are detailed below:
BALANCE AT BALANCE AT BALANCE AT
DECEMBER 31, ACTIVITY DECEMBER 31, ACTIVITY DECEMBER 31, ACTIVITY
1999 FOR 1999 1998 FOR 1998 1997 FOR 1997
------------ -------- ------------ -------- ------------ --------
Property and equipment:
Mining equipment.......... $ 2,160,206 $ 2,160,206 $ 2,160,206
Construction costs........ 3,140,493 3,140,493 3,140,493
----------- ----------- -----------
Total............. 5,300,699 5,300,699 5,300,699
Other costs:
Labor, consulting services
and project
administration costs... 20,240,984 $496,832 19,744,152 $598,856 19,145,296 $562,523
Materials and
maintenance............ 6,171,881 3,002 6,168,879 218 6,168,661 737
Feasibility study......... 2,907,771 -- 2,907,771 -- 2,907,771 76,329
----------- -------- ----------- -------- ----------- --------
Total............. 29,320,636 499,834 28,820,802 599,074 28,221,728 639,589
----------- -------- ----------- -------- ----------- --------
$34,621,335 $499,834 $34,121,501 $599,074 $33,522,427 $639,589
=========== ======== =========== ======== =========== ========
The deferred development costs of the "Other Interests in Saudi Arabia", in
the total amount of approximately $2.4 million, consist of approximately $1.5
million associated with the Greater Al Masane area and the balance of
approximately $900,000 is associated primarily with the Wadi Qatan and Jebel
Harr areas.
F-11
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event exploration licenses for these areas are not granted, then all or a
significant amount of deferred development costs relating thereto would be
written off.
NOTE 7 -- MINERAL PROPERTIES IN THE UNITED STATES
The principal assets of Pioche are an undivided interest in 48 patented and
80 unpatented mining claims and a 300 ton-per-day mill located on the
aforementioned properties in the Pioche Mining District in southeastern Nevada.
Due to the lack of capital , the properties held by Pioche have not been
commercially operated for approximately 35 years. However, in 1997 Pioche and a
prominent mining company entered into an agreement regarding certain claims. As
a result of this agreement, which was terminated in November 1998, Pioche
received $50,000.
The Company has an option (which expires in 2002) to buy 720,000 shares
(approximately 10% of the outstanding shares) of Pioche common stock at $0.20
per share.
NOTE 8 -- NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS
Notes payable, long-term debt and long-term obligations at December 31 are
summarized as follows:
1999 1998
----------- -----------
Notes payable:
Secured note to Saudi Arabian government. See (A)........ $11,000,000 $11,000,000
Unsecured demand notes payable to Saudi investors........ 363,280 363,280
Unsecured notes to foreign investors. See (B)............ 498,000 498,000
Other.................................................... 12,500 12,500
----------- -----------
Total............................................ $11,873,780 $11,873,780
=========== ===========
Long-term debt:
Revolving bank note. See (C)............................. $ -- $ 1,250,000
Revolving bank note. (See (D)............................ 750,000 --
Secured note with commercial lender. (See (E)............ 3,500,000 --
----------- -----------
Total............................................ 4,250,000 1,250,000
Less current portion..................................... (677,439) --
----------- -----------
Total............................................ $ 3,572,561 $ 1,250,000
=========== ===========
- ---------------
(A) The Company has an interest-free loan of $11,000,000 from the Saudi Arabia
Ministry of Finance and National Economy, the proceeds of which were used
to finance the development phase of the Al Masane Project. The loan was
repayable in ten equal annual installments of $1,100,000, with the initial
installment payable on December 31, 1984. None of the ten scheduled
payments have been made. Pursuant to the mining lease agreement covering
the Al Masane Project, the Company intends to repay the loan in accordance
with a repayment schedule to be agreed upon with the Saudi Arabian
government from its share of cash flows. An agreement has not yet been
reached regarding either the rescheduling or source of these payments. The
loan is collateralized by all of the Company's "movable and immovable"
assets in Saudi Arabia.
(B) Represents loans payable to a shareholder of the Company for $445,000, and
the Company's president for $53,000. The loans are due on demand with
interest payable at the LIBOR rate plus 2%. Each loan provides for an
option to convert the loan amount to shares of the Company's common stock
at $1.00 per share anytime within five years from the date of the loan.
(C) The Refining Segment had a $2.25 million revolving credit facility with the
U.S. office of a multinational bank that was collateralized by a first
security interest in all of its assets. Interest (at the
F-12
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bank's prime rate plus 1%) was payable monthly. The bank's loan commitment
was to be reduced by at least $105,000 per calendar quarter beginning March
31, 1999. In addition, the agreement for this credit facility contained
various restrictive covenants including the maintenance of various
financial ratios, net worth and parent company distribution limitations.
The credit facility balance was paid off on September 30, 1999.
(D) The Refining Segment entered into a $2.25 million revolving credit facility
with a Houston, Texas bank in September 1999 that is collateralized by a
first security interest in certain of its assets. Interest (at the bank's
prime rate plus .5%) is payable monthly. The agreement contains various
restrictive covenants including the maintenance of various financial
ratios, net worth and parent company distribution limitations. The credit
agreement expires on May 31, 2001.
(E) The Refining Segment entered into a loan agreement with a commercial
lending company in December 1999 that is collateralized by a first security
interest in all of its assets, except those dedicated to the bank mentioned
in Note (D) above. Interest is at 10.55% per annum with principal and
interest payable in 47 consecutive monthly installments of $89,696 each
commencing February 1, 2000. The agreement for this loan contains various
restrictive covenants including the maintenance of a working capital credit
facility in an amount not less than $2 million and parent company
distribution limitations.
Scheduled maturities of long-term debt, which exclude current notes payable
balances aggregating $11,873,780, are as follows:
2001.................................................... $1,567,349
2002.................................................... 907,874
2003.................................................... 1,008,424
2004.................................................... 88,915
----------
Total......................................... $3,572,562
==========
Interest of $118,145, $418,403 and $305,007 was paid in 1999, 1998, and
1997, respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company's Refining Segment leases various vehicles and equipment from a
related party on a month to month basis at a monthly cost of approximate
$30,000. The Company's total rental costs were approximately $373,000 in 1999
and $361,000 in 1998 and 1997.
The Refining Segment has guaranteed a note payable of $160,000 of a limited
partnership in which South Hampton has a 19% interest.
South Hampton, together with several other companies, is a defendant in two
lawsuits brought in Jefferson County, Texas District Court and one lawsuit
brought in the 163rd Judicial District Court of Orange County, Texas. The
lawsuits brought in Jefferson County, Texas were filed in December 1997 and
April 1998 by former employees of the Goodyear Tire & Rubber Company plant
located in Beaumont, Texas. The lawsuit brought in Orange County, Texas was
filed in April 1999 by a former employee of DuPont in Orange, Texas. Each of the
suits claims illness and diseases resulting from alleged exposure to chemicals,
including benzene, butadiene and/or isoprene, during the plaintiffs' employment
with Goodyear or DuPont. The plaintiffs claim the defendant companies engaged in
the business of manufacturing, selling and/or distributing these chemicals in a
manner which subjected each and all of them to liability for unspecified actual
and punitive damages. South Hampton intends to vigorously defend itself against
those lawsuits.
South Hampton, together with several other companies, is a defendant in a
lawsuit brought in Jefferson County, Texas District Court in December 1999 by a
former electrician claiming illness and disease resulting
F-13
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from alleged exposure to chemical and products while on certain of the
defendants' properties. The plaintiff claims he was exposed to benzene,
butadiene and products containing these chemicals supplied by certain of the
defendants, including South Hampton. The plaintiff asserts claims of strict
liability, gross negligence and negligence against South Hampton for unspecified
actual and punitive damages. South Hampton intends to vigorously defend itself
against this lawsuit.
South Hampton spends a considerable amount of time and expense on
environmental and regulatory functions and compliance. It is South Hampton's
policy to accrue costs associated with regulatory compliance when those costs
are reasonably determinable. Amounts accrued at December 31, 1999 and 1998 were
$250,000 each. Amounts charged to expense were approximately $186,000 in 1999,
$430,000 in 1998 and $220,000 in 1997.
In 1993, while remediating a small spill area, the Texas Natural Resources
Conservation Commission ("TNRCC") requested South Hampton to drill a well to
check for groundwater contamination under the spill area. Based on the results,
two pools of hydrocarbons were discovered in the groundwater. The recovery
process was initiated in June 1998, and is expected to continue for several
years until the pools are reduced to an acceptable level. In August 1997, the
TNRCC notified South Hampton that it had violated various rules and procedures.
It proposed administrative penalties totaling $709,408 and recommended the South
Hampton undertake certain actions necessary to bring its refinery operations
into compliance. The violations generally relate to various air and water
quality issues. Appropriate modifications have been made by South Hampton where
it appeared there were legitimate concerns. South Hampton feels the penalty is
greatly overstated and intends to vigorously defend itself against it. A
preliminary hearing was held in November 1997, but no further action has been
taken.
On February 2, 2000, the TNRCC amended its pending administrative action
against South Hampton to add allegations dating through May 21, 1998 of 35
regulatory violations relating to air quality control and industrial solid waste
requirements. The TNRCC proposes that administrative penalties be assessed in he
amount of approximately $765,000 and that certain corrective action be taken.
South Hampton intends to vigorously defend itself against these additional
allegations, the proposed penalties and proposed corrective actions.
NOTE 10 -- STOCK OPTIONS
Stock Options -- The Company's Employee Stock Option Plan (the "Employee
Plan") provides for the grant of incentive options at the market price of the
stock on the date of grant and non-incentive options at a price not less than
85% of the market price of the stock on the date of grant. The Company has
reserved up to 500,000 shares of common stock for grant pursuant to the Employee
Plan. At December 31, 1999, 335,000 shares were reserved for grant. The options
vest at such times and in such amounts as is determined by the Compensation
Committee of the Board of Directors at the date of grant. The Employee Plan is
registered with the Securities and Exchange Commission and expires May 16, 2003.
The 1987 Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan") provided for non-employee directors to receive an option for
10,000 shares of common stock upon election to the board of directors with the
exercise price equal to the fair market value of the stock at the date of grant.
The Non-Employee Director Plan expired in 1997.
The Company periodically grants stock options to various parties, including
certain officers and directors, who have made loans to or performed critical
services for the Company. Most of these options allow the parties to purchase
common share for $1.00 per share. The Company recorded $175,000 of compensation
expense in 1997 with respect to below market grants to directors of 100,000
options and the issuance of 50,000 shares of stock for services to two
directors.
F-14
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company recognized compensation expense based upon the fair value at
the grant date for options granted to employees, the Company's net income and
income per share for 1998 and 1997 (there was no effect of fair value accounting
in 1999) would be the pro forma amounts indicated as follows:
1998 1997
---------- --------
Net income
As reported............................................... $3,441,646 $818,364
Pro forma................................................. $3,429,996 $635,714
Net income per common share -- basic and diluted
As reported............................................... $ .16 $ .04
Pro forma................................................. $ .16 $ .03
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 85 percent; risk-free interest rate of 6
percent; no dividend yield; and expected lives of 3 to 10 years.
Additional information with respect to all options outstanding at December
31, 1999, and changes for the three years then ended was as follows:
1997
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at beginning of year........................... 1,558,000 $1.11
Granted.................................................. 110,000 1.14
Forfeited................................................ (10,000) 3.50
Exercised................................................ (10,000) 1.38
---------
Outstanding at end of year................................. 1,648,000 $1.10
========= =====
Options exercisable at December 31, 1997................... 1,639,000 $1.09
========= =====
Weighted average fair value per share of options granted in 1997 was $1.77.
1998
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at beginning of year........................... 1,648,000 $1.10
Forfeited................................................ (10,000) 2.25
Exercised................................................ (58,000) 1.57
---------
Outstanding at end of year................................. 1,580,000 $1.08
========= =====
Options exercisable at December 31, 1998................... 1,580,000 $1.08
========= =====
1999
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at beginning of year........................... 1,580,000 $1.08
Forfeited................................................ (10,000) 2.50
---------
Outstanding at end of year................................. 1,570,000 $1.07
========= =====
Options exercisable at December 31, 1999................... 1,570,000 $1.07
========= =====
F-15
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about stock options outstanding at December 31, 1999 is
summarized as follows:
OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------
WEIGHTED AVERAGE
---------------------------
REMAINING EXERCISE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE
- ------------------------ --------- ---------------- --------
- -- to$ 1.00........ ................................... 1,443,000 4.1 years $1.00
1.00 $to $2.00...... ................................... 107,000 3.4 years 1.54
2.00 $to $3.75...... ................................... 20,000 3.6 years 3.32
---------
1,570,000 $1.07
========= =====
NOTE 11 -- INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998, and 1997
differs from the amount computed by applying the applicable U.S. corporate
income tax rate of 34% to net income before income taxes. The reasons for this
difference are as follows:
1999 1998 1997
---------- ----------- ---------
Income taxes at U.S. statutory rate............. $1,027,979 $ 1,257,124 $ 278,244
State taxes..................................... 147,700 231,019 --
Goodwill amortization........................... -- 6,461 39,252
Net operating losses utilized................... (929,278) (1,255,792) (326,839)
Other items..................................... 36,713 16,965 9,343
---------- ----------- ---------
Total tax expense..................... $ 283,114 $ 255,777 $ --
========== =========== =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows:
DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
Deferred tax liabilities:
Refinery plant, pipeline and equipment..... $ (355,978) $ (331,263) $ (323,513)
Deferred tax assets:
Accounts receivable........................ 50,985 49,761 45,967
Mineral interests.......................... 196,446 196,446 196,446
Accrued liabilities........................ 118,749 93,137 49,341
Net operating loss and contribution
carryforwards........................... 8,525,532 9,594,376 10,943,970
Tax credit carryforwards................... 325,789 197,397 147,501
Deferred gain on sale of property.......... 99,570 107,853 --
----------- ----------- ------------
Gross deferred tax assets.................... 9,317,071 10,238,970 11,383,225
Valuation allowance.......................... (8,961,093) (9,907,707) (11,059,712)
----------- ----------- ------------
Net deferred tax assets.................... 355,978 331,263 323,513
----------- ----------- ------------
Net deferred taxes......................... $ -- $ -- $ --
=========== =========== ============
The Company has provided a valuation allowance against the deferred tax
assets because of uncertainties regarding their realization.
At December 31, 1999, the Company had approximately $25,000,000 of net
operating loss carryforwards and approximately $58,000 of general business
credit carryforwards. These carryforwards expire during the
F-16
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years 2000 through 2019. In addition, the Company has minimum tax credit
carryforwards of approximately $205,000 that may be carried over indefinitely.
Approximately $2,800,000 of the net operating loss carryforwards and $57,000 of
the general business credit carryforwards are limited to the net income of
TOCCO. Approximately $5,900,000 of the net operating loss carryforwards are
limited to the net income of the Coal Company.
The Company has no Saudi Arabian tax liability.
NOTE 12 -- 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 segments is as follows:
DECEMBER 31, 1999
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------
Revenue from external customers............... $27,790,666 $ -- $27,790,666
Depreciation and amortization................. 717,705 2,088 719,793
Operating income (loss)....................... 3,135,730 (351,028) 2,784,702
Total assets........................ $11,640,497 $41,207,712 $52,848,209
DECEMBER 31, 1998
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------
Revenue from external customers............... $25,089,175 $ -- $25,089,175
Depreciation and amortization................. 428,452 291 428,743
Operating income (loss)....................... 4,160,786 (361,930) 3,798,856
Total assets........................ $ 8,566,887 $38,116,436 $46,683,323
DECEMBER 31, 1997
---------------------------------------
REFINING MINING TOTAL
----------- ----------- -----------
Revenue from external customers............... $26,174,119 $ -- $26,174,119
Depreciation and amortization................. 537,949 291 538,240
Operating income (loss)....................... 1,277,704 (456,536) 821,168
Total assets........................ $ 7,505,075 $37,547,844 $45,052,919
F-17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- NET INCOME PER COMMON SHARE
Net income per share has been calculated as follows:
1999 1998 1997
----------- ----------- -----------
Basic
Net income.................................. $ 2,740,353 $ 3,441,646 $ 818,364
Weighted average shares outstanding......... 22,026,114 21,995,735 21,306,040
Per share................................ $ .12 $ .16 $ .04
Diluted
Net income.................................. $ 2,740,353 $ 3,441,646 $ 818,364
Add interest on convertible debt............ 36,434 218,228 --
----------- ----------- -----------
Net income -- diluted....................... $ 2,776,787 $ 3,659,874 $ 818,364
Weighted shares outstanding................. 22,026,114 21,995,735 21,306,040
Dilutive effect of convertible debt......... 511,280 2,818,138 --
Dilutive effect of stock options............ 66,846 835,822 711,612
----------- ----------- -----------
Weighted shares outstanding -- diluted...... 22,604,240 25,649,695 22,017,652
Per share................................ $ .12 $ .14 $ .04
In 1997, the effect of assumed debt conversions was antidilutive. In 1999,
options for 1,180,000 shares were excluded from diluted shares outstanding
because their effect was antidilutive.
NOTE 14 -- SUBSEQUENT EVENTS
On January 25, 2000, TOCCO purchased 92% of the issued and outstanding
shares of the common stock of Productos Quimicos Coin, S.A. de. C.V. ("Coin")
from Spechem, S.A. de. D.V. for $2.5 million in cash. Coin is a specialty
petrochemical products refining company located in Coatzacoalcos, Mexico
Financing was provided by a loan from Heller Financial Leasing, Inc. The loan
had been funded at December 31, 1999, and total proceeds of $3,500,000 are
reflected on the balance sheet as restricted cash.
F-18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors and Stockholders
Arabian Shield Development Company
In connection with our audit of the consolidated financial statements of
Arabian Shield Development Company and Subsidiaries referred to in our report
dated March 10, 2000, which is included in the annual report to stockholders in
Part II of this Form 10-K, we have also audited Schedule II at December 31,
1999, 1998, and 1997 and for the years then ended. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Dallas, Texas
March 10, 2000
F-19
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1999
CHARGED
BEGINNING (CREDITED) ENDING
DESCRIPTION BALANCE TO EARNINGS DEDUCTIONS BALANCE
- ----------- ----------- ----------- ----------- -----------
ALLOWANCE FOR DEFERRED TAX ASSET
December 31, 1997....................... $11,553,118 $--(b) $ (326,839) $11,059,712
(a) (166,567)
December 31, 1998....................... 11,059,712 --(b) (1,017,340) 9,907,707
(a) (134,665)
December 31, 1999....................... 9,907,707 --(b) (946,610) 8,961,093
- ---------------
(a) Expiration of carryforwards
(b) Utilization of carryforwards
F-20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3(a) -- Certificate of Incorporation of the Company as amended
through the Certificate of Amendment filed with the
Delaware Secretary of State on January 29, 1993.
3(b) -- Bylaws of the Company, as amended through March 4, 1998.
10(a) -- Contract dated July 29, 1971 between the Company,
National Mining Company and Petromin.
10(b) -- Loan Agreement dated January 24, 1979 between the
Company, National Mining Company and the Government of
Saudi Arabia.
10(c) -- Mining Lease Agreement effective May 22, 1993 by and
between the Ministry of Petroleum and Mineral Resources
and the Company.
10(d) -- Stock Option Plan of the Company, as amended.*
10(e) -- 1987 Non-Employee Director Stock Plan.*
10(f) -- Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.*
10(g) -- Agreement dated March 10, 1988 between Chevron Research
Company and South Hampton Refining Company, together with
related form of proposed Contract of Sale by and between
Chevron Chemical Company and South Hampton Refining
Company.
10(h) -- Addendum to the Agreement Relating to AROMAX(R)
Process -- Second Commercial Demonstration dated June 13,
1989 by and between Chevron Research Company and South
Hampton Refining Company.
10(i) -- Vehicle Lease Service Agreement dated September 28, 1989
by and between Silsbee Trading and Transportation Corp.
and South Hampton Refining Company.*
10(j) -- Letter Agreement dated May 3, 1991 between Sheikh Kamal
Adham and the Company.
10(k) -- Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company.*
10(l) -- Letter Agreement dated August 15, 1995 between Hatem
El-Khalidi and the Company.*
10(m) -- Letter Agreement dated August 24, 1995 between Sheikh
Kamal Adham and the Company.
10(n) -- Letter Agreement dated October 23, 1995 between Sheikh
Fahad Al-Athel and the Company.
10(o) -- Letter Agreement dated November 30, 1996 between Sheikh
Fahad Al-Athel and the Company (incorporated by reference
to Exhibit 10(bb) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No.
0-6247)).
10(p) -- Stock Purchase Agreement dated as of January 25, 2000
between Spechem, S.A. de. C.V. and Texas Oil and Chemical
Co. II, Inc.
10(q) -- Loan and Security Agreement dated as of December 30, 1999
by and among Heller Financial Leasing, Inc., South
Hampton Refining Company and Gulf State Pipe Line
Company, Inc., together with related Promissory Note,
Guaranty made by the Company, Guaranty made by American
Shield Refining Company, Guaranty made by Texas Oil and
Chemical Co. II, Inc., Pledge Agreement made by Texas Oil
and Chemical Co. II, Inc., Pledge Agreement made by South
Hampton Refining Company, Ground Lease, Sub-Ground Lease
and Hazardous Materials Indemnity Agreement.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10(r) -- Loan Agreement dated as of September 30, 1999 between
South Hampton Refining Company and Southwest Bank of
Texas, N.A., together with related Promissory Note,
Security Agreement, Arbitration Agreement and Guaranty
Agreement made by Texas Oil and Chemical Co. II, Inc.
21 -- Subsidiaries.
27 -- Financial Data Schedule.