ARABIAN SHIELD
Development Company
Annual Report to Stockholders
For The Year Ended December 31, 1994
TO OUR STOCKHOLDERS:
The Company obtained the mining lease to the Al Masane area in Saudi Arabia on
May 22, 1993, and thereafter commissioned Watts, Griffis & McOuat of Toronto,
Canada ("WGM") to update the feasibility study for that area. The mining lease
has an initial thirty (30) year term, 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 terms of the mining lease agreement, the Company
will pay rental to the Ministry of Petroleum and Mineral Resources of 10,000
Saudi Riyals (approximately $2,667 at current exchange rate) per square
kilometer per year during the period of the lease for the total lease area of 44
square kilometers. The Company will also pay the Saudi government income taxes
in accordance with the income tax law then in force, in accordance with Article
45 of the Mining Code (the current tax is now 45% of net income). However, in
accordance with Article 46 of the Mining Code, such income tax will not be due
in respect to mining operations during the period of five years starting from
the date of the first sale of products or five years from the beginning of the
fourth year after the issue of the mining lease, whichever occurs first.
Pursuant to the terms of the mining lease agreement, the Company undertakes to
repay the $11 million loan provided to the Company and National Mining Company
in 1979 by the Ministry of Finance and National Economy, in accordance with the
terms of an agreement to be reached between the Company and the Ministry of
Finance and National Economy. In a memorandum to His Majesty the King in 1986,
the Minister of Petroleum and Mineral Resources and the Minister of Finance and
National Economy recommended that the $11 million loan be rescheduled with the
terms of rescheduling to be agreed upon after the mining lease is granted. The
Company will instigate negotiations on that basis with the Ministry of Finance
and National Economy.
The mining lease agreement also provides that, after the profitability of the
project is established, as determined by the Saudi Arabian government, the
Company will form a Saudi public stock company with the Petroleum and Mineral
Organization ("Petromin"), a company wholly-owned by the Saudi government. The
Company will own 50% of the shares of the Saudi public stock company and
Petromin no more than 25% of the shares. The remaining shares will be offered
for sale in Saudi Arabia pursuant to a public subscription. In consideration for
its receiving shares in the Saudi public stock company, the Company will
transfer title to the mining lease to the Saudi public stock company, including
responsibility for the repayment of the $11 million loan from the Saudi Arabian
government and the other obligations under the mining lease. In December 1994,
the Company received instructions from the office of the Minister of Petroleum
and Mineral Resources stating that it is possible for the Company to form the
Saudi public stock company without Petromin but that the sale of stock to the
Saudi public should occur only after assured profits from commercial operations
of the mine. The instructions added that Petromin will still have the right to
purchase shares in the Saudi public stock company any time it desires.
Following the granting of the mining lease to the Al Masane area, the Company
commissioned WGM to prepare a new fully bankable feasibility study for
presentation to financial institutions in connection with obtaining financing
for the project. The feasibility study includes more metallurgical work
incorporating advances in grinding of the ore; incorporation of the latest
advances in technology and reagents developed during the past ten years;
incorporation of new mill designs and the latest water recycling methods;
investigation into the shipping and marketing of zinc and copper concentrates;
and an economic analysis of the project. The feasibility study contains specific
recommendations to insure that the construction of the project is accomplished
as expeditiously and economically as possible. Engineering design and costing of
the project was done by Davy International of Toronto, Canada. The feasibility
study cost the Company approximately $1 million and was presented to the Company
on July 22, 1994.
The Al Masane ore is located in three mineralized zones known as Saadah, Al
Houra and Moyeath. The diluted minable, proven and probable ore reserves at the
Al Masane project were estimated to be 7.2 million tonnes, including mining
dilution. Mining dilution is the amount of wallrock adjacent to the ore body
which is included in the ore extraction process. The average grade of the proven
and probable diluted ore reserves was estimated to be 1.42% copper, 5.31% zinc,
1.19 grams of gold per tonne and
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40.20 grams of silver per tonne. For purposes of calculating the 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.
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.
A review by WGM of the equipment and process flowsheet contained in the 1982
feasibility study prepared by WGM indicated that new technology developed during
the past ten years could be used to reduce the capital cost and improve the
metallurgical recoveries. In particular, the use of semi-autogenous grinding to
reduce the capital cost of the grinding section and developments in reagents
were believed to hold the greatest potential for improving the economies of the
project. A detailed metallurgical testwork program was undertaken by Lakefield
Research in 1994 to address potential improvements and provide detailed design
criteria for the concentrator design. Results from this testwork program showed
that copper recovery could be improved by 5.7% and zinc recoveries improved by
13% compared to the 1982 results.
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.
A test program to evaluate the economies of the cyanidation of the zinc
concentrate and tailings in order to improve gold and silver recoveries found
gold and silver recoveries to range from 50% to 77%. To recover gold and silver
from the zinc concentrate and tailings, WGM recommended that a cyanidation plant
be included in process flowsheet. Dore bullion would be produced. WGM concluded
that the inclusion of a cyanidation plant would make a positive contribution to
the economies of the project under the base conditions.
The mining and milling operation recommended by WGM for Al Masane would involve
the production of 2,800 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). The construction of
mining, milling and infrastructure facilities is estimated to take 18 months to
complete. The total capital cost to bring the Al Masane project into production
is estimated to be $81.3 million. This cost includes the pre-production
development of the mine, the construction of a 2,000 tonne per day concentrator,
infrastructure with a 300 man camp 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 trackless mining
equipment using either cut-and-fill or open-stoping methods depending on the
shape and location of each orebody. Once the raw ore is mined, it would be
subjected to 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 concentrate will contain
valuable amounts of gold and silver. Total output per year is estimated to be
22,000 ounces of gold and 800,000 ounces of silver. After smelter refining
process, the metals could be sold by the Company or the smelter for the
Company's account in the open market.
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WGM prepared an economic analysis of the project utilizing cash flow
projections. The cash flow projection for a base case was made by WGM based on
the assumption that 50% of the financing of the project will come from the Saudi
Industrial Development Fund, which charges 2.5% service charge, 25% from
commercial loans at an interest rate of 5% and 25% from equity financing. The
cash flow projection includes the repayment of the $11 million loan outstanding
to the Saudi government in one payment at the end of the mine life. Based on
these assumptions, and assuming the average prices of metal over the life of the
mine to be $1.00 per pound for copper, $0.60 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 14% to the project,
a rate of return of 11.9% and net cash flow of $26.6 million to the equity
investors in the new Saudi public stock company, and a net cash flow of $37
million to the Company. Other cash flow scenarios calculated to show the effect
of various opportunities and risks associated with the project were also
prepared. Assuming the mine begins commercial production in mid-1996, as
contemplated in the feasibility study, the Company would not pay any income tax
to the Saudi government for the first five years or until after mid-2001. In the
feasibility study WGM recommends that the Company make a decision to bring the
Al Masane mine into production.
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.
On March 27, 1995 the Company's Board of Directors approved a Letter of
Agreement between the Company and Carlyle SEAG ("Carlyle"), of Washington, D.C.
and Saudi Arabia, whereby Carlyle has been retained as the Company's financial
advisor in connection with the Al Masane mining project. Carlyle's services will
include, but not be limited to, (1) advising on the capitalization structure of
the proposed Saudi company to be established for the project; (2) the raising of
capital funds for the project implementation; and (3) assisting the Company in
the filing of all licenses and necessary documents for regulatory purposes. In
addition to compensation for their services, including the grant of a five (5)
year option allowing Carlyle to purchase 2,000,000 shares of the Company's
Common Stock at $1.00 per share, the agreement provides that Carlyle is entitled
to nominate one person for election to the Company's Board of Directors. As a
result, at the next meeting of the Board of Directors the directors will appoint
the Carlyle nominee to the Board of Directors to serve until the next annual
meeting of the stockholders. Carlyle is also entitled to nominate another person
for election to the Company's Board of Directors upon the closing of the
financing for the Al Masane project.
The Company owns, through a wholly-owned subsidiary, South Hampton Refining
Company, of Silsbee, Texas ("South Hampton"), which owns and operates a
petrochemical plant which produces pure pentanes and hexanes and other specialty
chemicals for the plastics industry. Total revenues for 1994 for the refinery
were $17.7 million and the cash flow realized was approximately $2.4 million. It
is significant that the plant sells about 40% of all pentanes consumed in the
United States.
In May 1994, a lawsuit against South Hampton Refining Company relating to the
manufacture and sale of allegedly defective gasoline went to trial and judgment
was entered against South Hampton. In consideration of the judgment, another
lawsuit involving the same parties and identical issues was dismissed. At the
trial, South Hampton consented to a settlement agreement whereby the plaintiffs
took a judgment against South Hampton for the amounts claimed and the plaintiffs
signed a "non-execution agreement" agreeing not to execute upon the judgment in
return for the assignment by South Hampton of certain claims against its
insurance carrier. This concludes the claims and actions against South Hampton
in these matters.
The Company has had discussions with Chevron Chemical Company regarding the
Company's proposal to purchase 5,000 barrels per day of mixed pentanes from an
Aromax petrochemical project to be built in
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Jubail, Saudi Arabia by Chevron Chemical in joint venture with Saudi Venture
Capital Group (SVCS). The Company and some Saudi joint venture partners, all of
whom are directors and/or stockholders of the Company, contemplate building a
processing plant located next to the Aromax plant in Saudi Arabia. As proposed,
the Company would have a 25% interest in the joint venture. Chevron Chemical
advised the Company by letter that Chevron Chemical and SVCS have jointly agreed
to commit to supply the joint venture's proposed pentane project with up to
5,000 barrels per day of mixed pentane feedstock. Engineering and marketing
studies of the project have been made by outside consultants which reflect
positive results. Planning has begun toward the construction and operation of
the Aromax plant and the joint venture's processing plant. Construction is
estimated to be completed in late 1996. The Company will begin applying to the
Saudi government for a license for the project when the Aromax project receives
final approval from the Saudi government.
The Company directly owns approximately 46% and beneficially owns approximately
55% of the outstanding capital stock of Pioche-Ely Valley Mines, Inc.
("Pioche-Ely Valley"), an inactive mining company. Pioche-Ely Valley's principal
assets are a 300 ton per day mill, and 48 patented and 84 unpatented federal
lode mining claims in the Pioche Mining District in southeastern Nevada, on
which is located the Ely Valley Mine which, between 1941 and 1952, produced
675,207 tons of ore with an average grade of 9.09% zinc.
Based on geophysical work of the mining claims of Pioche-Ely Valley in 1989 by a
major mining company, the Company planned to drill a 1,500 foot test hole in
1994 in search of zinc deposits. Drilling was conducted in September 1994. The
drill hole encountered formation problems at 700 feet and further drilling had
to be abandoned. A new site will be selected and a second hole is expected to be
drilled in 1995. One of the mine properties has been leased to a group of
investors who plan to begin development operations in 1995. A significant core
hole is planned to be drilled on the Wide Awake claim in mid-1995.
Respectfully submitted,
John A. Crichton
Chairman of the Board
Hatem El-Khalidi
President and Chief
Executive Officer
March 27, 1995
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THE COMPANY.
Arabian Shield Development Company (the "Company") was organized as a Delaware
corporation in 1967 and is principally engaged in the business of developing its
undeveloped mineral properties. None of the undeveloped mineral properties are
currently producing and significant capital expenditures will be necessary
before any commercial operations are commenced. The Company has operations in
both the United States and Saudi Arabia. The Company is primarily engaged in the
exploration and development of minerals in Saudi Arabia.
SAUDI ARABIAN ACTIVITIES. The Company holds a mining lease covering a 44 square
kilometer area in the Al Masane area in southwestern Saudi Arabia. The lease was
granted to the Company by Royal Decree in May 1993. The lease has an initial
thirty (30)-year term and is renewable for additional periods not to exceed
twenty (20) years. The Al Masane area has proven and probable ore reserves of
copper, zinc, gold and silver (7.2 million tonnes of ore containing 1.42%
copper, 5.31% zinc, 1.19 grams per tonne of gold and 40.20 grams per tonne of
silver). The results of a bankable feasibility study conducted by an independent
mineral consulting firm in 1994 indicate that the proposed Al Masane mining
operation is economically viable and has the potential to provide a satisfactory
return on investment.
The Company jointly holds with National Mining Company, a private Saudi company,
exploration licenses for the Wadi Qatan and Jebel Harr areas in Saudi Arabia.
The exploration licenses by their terms have expired. The Company has been
orally advised by Saudi Arabian government officials that the licenses will be
extended as long as mineral exploration is being conducted on the areas which
they cover, although there can be no assurance that the Company's license rights
will be honored. The Company is planning to apply for formal extensions of these
licenses in 1995.
The Company has had discussions with Chevron Chemical Company regarding the
Company's proposal to purchase 5,000 barrels per day of mixed pentanes from an
Aromax petrochemical project to be built in Jubail, Saudi Arabia by Chevron
Chemical in joint venture with Saudi Venture Capital Group (SVCS). The Company
and some Saudi joint venture partners, all of whom are directors and/or
stockholders of the Company, contemplate building a processing plant located
next to the Aromax plant in Saudi Arabia. Chevron Chemical advised the Company
by letter that Chevron Chemical and SVCS have jointly agreed to commit to supply
the Joint Venture's proposed pentane project with up to 5,000 barrels per day of
mixed pentane feedstock. As proposed, the Company would have a 25% interest in
the joint venture. Engineering and marketing studies of the project have been
made by outside consultants which reflect positive results. Planning has begun
toward the construction and operation of the Aromax plant and the joint
venture's processing plant. Construction is estimated to be completed in late
1996. The Company will begin applying to the Saudi government for a license for
the project when the Aromax project receives final approval from the Saudi
government.
In December 1993, the Company commissioned Sherritt Ltd. of Fort Saskatchawan,
Canada, to prepare a conceptual engineering design for a proposed zinc refinery
based on Sherritt's two stage pressure leach process, to be built by the Company
and Saudi partners at the Red Sea port of Yanbu, Saudi Arabia. The refinery
would have the capacity to produce 100,000 tonnes of slab zinc per year, with
elemental sulfur as a by-product. Sherritt Ltd. completed the study in May 1994
which contains a proposed flow sheet that has been commercialized and designs
for a state of the art zinc refinery. Sherritt's zinc pressure leach technology
provides significant advantages over the other existing zinc production
processes, including having the reputation as the most favored technology for
environmental considerations. In the study Sherritt concludes, after considering
all of the presently identifiable elements, that these elements offer a strong
potential for the project and enhance the concept. Sherritt encourages the
Company to carry out further studies toward the implementation of the project.
UNITED STATES ACTIVITIES. The Company's United States operations include the
ownership and operation of a petroleum refinery and the leasing of mineral
properties.
5
An indirect wholly-owned subsidiary of the Company owns and operates a petroleum
refinery near Silsbee, Texas. The refinery is presently devoted to specialized
processing activities. Another indirect wholly-owned subsidiary owns and
operates three pipelines connected to the refinery.
The Company owns all of the capital stock of a coal company which does not own
or hold any mineral interests and is presently inactive. The coal company has a
tax loss carry-forwards of $14.8 million and is currently negotiating with a
company toward the possible use of this amount, although there can be no
assurance that any agreement relating thereto will be reached.
The Company beneficially owns approximately 55% and directly owns approximately
46% of the outstanding capital stock of a company which leases mineral
properties containing 132 inactive mining claims totalling approximately 3,700
acres in southeastern Nevada. There are prospects and mines on these claims
which formerly produced silver, gold, lead, zinc and copper.
The Company leases office space in Jeddah, Saudi Arabia and in Dallas, Texas. It
also has a base camp with a capacity to accommodate 60 people in its Al Masane
mining lease area. The Company owns heavy mining equipment at the lease area,
which will be used for future mining operations. The Company also has an
exploration and drilling camp in the Wadi Qatan area in Saudi Arabia.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock traded on The NASDAQ Stock Market under the symbol:
ARSD. The following table sets forth the high and low closing sale prices for
each quarter of 1994 and 1993, respectively, as reported by NASDAQ.
1994 1993
------------------------ ------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
High 2 3/4 2 3/8 2 1/2 2 1/4 2 7/8 5 3/8 4 1/8 2 7/8
Low 2 1 3/4 1 1/4 1 1/2 2 1/4 2 1/8 2 1/4 2 1/8
At March 20, 1995, there were 979 record holders of the Company's Common Stock.
The Company has not paid a dividend since its inception.
SELECTED FINANCIAL DATA.
The following is a five-year summary of selected financial data of the Company
(in thousands, except per share amounts):
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Revenues................................ $ 17,765 $ 15,267 $ 13,468 $ 18,707 $ 19,173
Net Income (Loss)....................... $ 2,852 $ (1,338) $ (2,196) $ 452 $ (2,880)
Net Income (Loss) Per Share............. $ .14 $ (.08) $ (.14) $ .03 $ (.19)
Total Assets (At December 31)........... $ 41,057 $ 41,090 $ 38,729 $ 27,603 $ 28,224
Total Long-Term Obligations>
(At December 31)...................... $ 1,148 $ 908 $ 889 $ 1,841 $ 1,427
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
With the exception of revenues generated by the operations of American Shield
Refining Company, a wholly-owned subsidiary of the Company (the "Refining
Company"), the Company has been without any significant operating revenues since
1972. Accordingly, it has financed its development activities and its general
and administrative costs through the sale of shares of its Common Stock and
loans. The Company experienced serious difficulties during prior years in
obtaining additional financing, and is currently in need of additional funds to
meet its obligations and continue development activities. The Company is
exploring various alternatives for obtaining additional operating funds,
including additional debt or equity financing, but there is no assurance that
sufficient funds can be obtained. It is also possible that the terms of any
additional financing that the Company is able to obtain will be unfavorable to
the Company and its existing stockholders. For example, additional equity
financing could result in a significant dilution of the interests of existing
stockholders. Management of the Company expects to be devoting a significant
amount of its attention in the near future to addressing the Company's immediate
and longer term needs for the funds that are required in order to continue its
business and maintain and develop its properties.
During 1994, the Company took certain actions designed to generate additional
equity capital and improve its financial condition, including: (1) the
negotiation by South Hampton Refining Company, an indirect wholly-owned
subsidiary of the Company ("South Hampton"), of an extension until June 30, 1995
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (2) issued 14,000 shares of its Common Stock at $1.00 per share
pursuant to an option exercise by the Company's Chairman of the Board in
exchange for the cancellation of certain indebtedness, (3) consolidated two
notes payable by the Company's President and Chief Executive Officer, in the
amounts of $99,000 and $27,000, which matured on December 31, 1993 and January
31, 1994, respectively, into one note for $126,000 having a December 31, 1995
maturity date and bearing interest at the rate of six percent per annum, (4)
received $50,000 from a 1993 sale of shares of its Common Stock to a private
Saudi company controlled by a director of the Company pursuant to a partial
option exercise and (5) offset $30,000 in unpaid compensation due to the
Company's Chairman of the Board against amounts owed to the Company by four
companies owned by the Chairman of the Board.
The exploration licenses jointly held by the Company and National Mining Company
for the Wadi Qatan and Jebel Harr areas in Saudi Arabia, by their terms, have
expired, although officials of the Saudi government have provided verbal
assurance to the Company that the licenses will be extended as long as
exploratory work is being carried out on the areas which they cover. None of the
related projects at Al Masane or the other interests in Saudi Arabia were being
developed at December 31, 1994 and significant additional expenditures will be
necessary before commercial operations are commenced. A substantial portion of
the Company's total assets is comprised of the mineral acquisition, exploration
and development costs in Saudi Arabia. The ultimate recoverability of these
deferred costs cannot be determined at the present time. The Company holds the
mining lease for the Al Masane area exclusively.
The feasibility study shows the estimated total capital cost to bring the Al
Masane project into production to be $81.3 million. The Company does not have
sufficient funds to bring the project into production. Pursuant to the mining
lease agreement, after the profitability of the project is established, as
determined by the Saudi Arabian government, the Company will form a Saudi public
stock company with the Petroleum and Mineral Organization ("Petromin"), the
official mining and petroleum company of the Saudi Arabian government. The
Company will own 50% of the shares of the Saudi public stock company and
Petromin no more than 25% of the shares. The remaining shares will be offered
for sale in Saudi Arabia pursuant to a public subscription. In consideration for
its receiving shares in the Saudi public stock company, the Company intends to
transfer title to the mining lease to the Saudi public stock company, including
responsibility for the repayment of the $11 million loan from the Saudi Arabian
government and the other obligations specified in the mining lease. In December,
1994, the Company received instructions from the office of the Minister of
Petroleum and Mineral Resources stating that it is possible for the Company to
form the Saudi public stock company without Petromin but that the sale of stock
to the Saudi public should occur only after assured profits from commercial
operations of the mine. The
7
instructions added that Petromin will still have the right to purchase shares in
the Saudi public stock company any time it desires.
Pursuant to these instructions, the Company retained Carlyle SEAG ("Carlyle") as
the Company's financial advisor in connection with the Al Masane mining project.
Carlyle's services will include, but not be limited to, (i) advising on the
capitalization structure of the proposed Saudi company to be established for the
project; (2) the raising of capital funds for the project implementation; and
(3) assisting the Company in the filing of all licenses and necessary documents
for regulatory purposes.
While the Company agreed in the mining lease not to request a loan which would
fund 50% of the capital cost of the project from the Saudi Public Development
Fund, the Company intends to apply for a similar loan from the Saudi Industrial
Development Fund. The Saudi Industrial Development Fund makes interest-free
loans to industrial projects in Saudi Arabia and charges a 2.5% service fee. The
Company believes that it may be able to finance the cost of the project through
arrangements with suppliers and equipment manufacturers, custom smelters and
additional debt or equity financing secured by the Company, however, there can
be no assurances to that effect.
On December 31, 1994, the outstanding principal amount under the Amended and
Restated Credit Agreement with Den norske Bank AS was $2,916,951. The entire
balance under the Amended and Restated Credit Agreement facility, including
amounts drawn under the letter of credit facility, was due on December 15, 1994.
The amounts due to Den norske Bank AS were not paid in full on the December 15,
1994 maturity date. The maturity date under the Amended and Restated Credit
Agreement has been extended to June 30, 1995. In connection with the latest
extension of the Den norske Bank AS loan, South Hampton has agreed to make
quarterly principal payments of $200,000, and the Company committed to use its
best efforts to raise and contribute new equity to South Hampton of at least
$1,500,000 by June 30, 1995, such funds to be used by South Hampton to pay
amounts outstanding under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement is secured by all of the assets of
South Hampton and all of the issued and outstanding shares of Texas Oil and
Chemical Co. II, Inc. ("TOCCO"), South Hampton and Gulf States Pipe Company,
Inc. ("Gulf States"), all of which are indirect wholly-owned subsidiaries of the
Company. In addition to requiring that a substantial part of South Hampton's
cash flow be applied to reduce the amount outstanding, the Amended and Restated
Credit Agreement prohibits the payment of dividends by South Hampton. South
Hampton is also required to collect all receivables through a cash collateral
account at a local bank. Only the amount of funds required to operate South
Hampton's business may be used and weekly reports of cash receipts and
disbursements in the cash collateral account must be provided to Den norske Bank
AS. If South Hampton defaults on the credit agreement, Den norske Bank AS has
the right to freeze the funds in the cash collateral account. South Hampton met
all of the loan covenants throughout 1994. The Refining Company agreed to
subordinate all intercompany notes to the Amended and Restated Credit Agreement.
The letter of credit facility was guaranteed by a stockholder of the Company.
When this guarantee was not renewed, Den norske Bank AS drew down on the
$1,500,000 letter of credit provided by the stockholder as its guarantee. As a
consequence, South Hampton is now indebted to the stockholder for such amount.
The outstanding loan balance exceeded the amount available under the borrowing
base ratio, as defined in the Amended and Restated Credit Agreement, until May
1994. South Hampton expects that its outstanding loan balance will be in excess
of the amount allowed by the borrowing base ratio from time to time during 1995.
South Hampton does not have adequate resources to pay the full amount
outstanding under the Amended and Restated Credit Agreement at maturity on June
30, 1995 (or earlier if accelerated due to default). Management believes that
South Hampton will continue to make interest payments and monthly reductions on
the outstanding principal of this loan as required under the Amended and
Restated Credit Agreement.
The advances totalling $1,363,000 made by the Company through the Refining
Company to South Hampton for various refinery upgrading and expansion projects
are evidenced by a promissory note bearing interest at a varying rate equal to
the interest rate under the Amended and Restated Credit
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Agreement with Den norske Bank AS for as long as any indebtedness remains
outstanding thereunder and thereafter at the rate of 2% above the prime
commercial rate of NationsBank of Texas, National Association as announced from
time to time. The promissory note is secured by a lien on all the physical
assets of South Hampton and Gulf States which is subordinate to the lien of Den
norske Bank AS under the Amended and Restated Credit Agreement. The note is
payable in monthly installments in an amount equal to the monthly cash flow of
South Hampton in excess of $125,000, not to exceed $25,000 per month, and was
due in full on July 28, 1994. An extension of the note is expected to be made in
1995. Repayments of these advances is prohibited under the Amended and Restated
Credit Agreement since South Hampton is in default in its loan repayments
thereunder.
Although the refinery had net income during 1994, the refinery's historical
operations do not demonstrate adequate cash flow to repay the current portion of
its debt obligations. The refinery had cash flow from operations in 1994 of
approximately $2.4 million. Den norske Bank AS has indicated that, if certain
conditions are met by June 30, 1995, the bank may consider converting a large
portion of the indebtedness to a long-term liability, although there are no
assurances that any such conversion will occur. Assuming South Hampton is able
to renegotiate an extension of the Amended and Restated Credit Agreement with
Den norske Bank AS, management believes that the remaining debt obligations can
be repaid from increased cash flows from the refinery, but acknowledges that
there can be no assurance that such increased cash flows will occur.
If South Hampton is unable to meet its cash needs for debt service from
internally generated funds, it may be necessary for management of the Company to
re-extend or negotiate its debt obligations or attempt to obtain funds to repay
such obligations from the sale of additional Common Stock or through the sale of
all or a portion of its interest in South Hampton. There are no assurances that
such an extension or renegotiation could be obtained, that such sales could be
arranged or that sufficient additional equity financing could be obtained.
The Clean Air Act Amendments of 1990 have had a positive effect on South
Hampton'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 South Hampton's product line. Management believes that South
Hampton's ability to manufacture high quality solvents in the C5 hydrocarbon
market will provide the basis for growth over the next few years; however, there
can be no assurance that such growth will occur. While South Hampton continues
to manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The AROMAX unit, which was jointly developed by South Hampton and Chevron
Research, has the ability to convert C6 hydrocarbons into benzene and other more
valuable aromatic compounds, which was part of the reason South Hampton
participated in the AROMAX development project initially.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's current primary source of cash
flow attributable to its indirect wholly-owned subsidiary, South Hampton, is
fully dedicated to the repayment of debt and the funding of refinery operations.
The Company is not presently generating any cash flow from any of its other
activities. Management plans to fund future operations primarily through sales
of its Common Stock and loans, but there is no assurance that sufficient funds
can be obtained. The Company currently has in its treasury approximately
$250,000 from which funds are being used for the implementation plan for the Al
Masane project and for meeting all of the Company's current expenditures in the
United States and Saudi Arabia. This amount should be sufficient until mid-1995
when additional financing will be necessary. In the event that the Company is
unable to complete these sales of its Common Stock, obtain additional financing
or reach a final agreement on the repayment of the $11,000,000 loan from the
Saudi Arabian government, there is substantial doubt about the Company's ability
to continue as a going concern past mid-1995. The Company's financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
9
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109") in 1993. SFAS No. 109 requires
the Company to compute deferred income taxes based on the amount of taxes
payable in future years, after considering changes in tax rates and other
statutory provisions that will be in effect in those years. The provision for
income taxes includes taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets
and liabilities. The adoption had no significant impact on current period
earnings or cash flow.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1994 TO 1993
During the fiscal year ended December 31, 1994, the Company had net income of
$2,852,306 compared to a net loss of $1,338,321 for the fiscal year ended
December 31, 1993.
The gross refined product sales in 1994 of $17,564,226 was an increase of
$2,460,804 from 1993 while the cost of sales in 1994 of $13,750,750 was an
increase of $436,323 from 1993, resulting in a net margin increase in 1994 of
$2,024,481. There is no assurance that the Refining Company can achieve the same
results in 1995. After processing fee income, general and administrative
expenses and depreciation and amortization, the operating income of the Company
in 1994 of $2,305,626 was $3,240,193 more than the operating loss in 1993 of
$934,567. The net income for the refining operations in 1994 of $3,271,625 was
$3,627,740 more than the net loss in 1993 of $356,115. Operating income for 1994
included $975,000 relating to the reversal of a charge in 1992 for potential
expenses relating to litigation that was settled in 1994. The extraordinary item
of $578,150 in 1994 was attributed to the settlement of indebtedness owed to a
vendor.
The Refining Company's net profit in 1994 reflected the growth in the U.S.
economy which began to effect the plastics industry in the last half of 1993.
During mid-year 1993, product sales volumes began to strengthen due to increased
activity in the industries served by the Refining Company. The number of
customers served by the Refining Company grew slightly during 1994, however the
total volume of products sold increased by 15% from 18.6 million gallons in 1993
to 21.4 million gallons in 1994. This was in addition to the 22% increase during
1993. The Refining Company continued the past trend of placing the majority of
its production into the higher priced premium petroleum solvent markets. During
the last six years the Refining Company has raised the percentage sold into
these markets from 53% in 1989 to over 70% for the last four years. The ability
to produce products of the quality sufficient for these higher priced markets
has enabled the Refining Company to remain competitive even during the down
periods in the industry.
The weak economy in 1992 and early 1993 contributed to a lack of toll processing
opportunities. 1994 toll processing revenues were $297,757, an increase of
$133,779, or 82%, over 1993 toll processing revenues. Many in the industry have
turned their focus toward complying with federal and state regulations and are
not actively searching for new opportunities which would require toll processing
services. This is typical of the industry during difficult times and will
improve as the economy improves, although there can be no assurance to that
effect. The Refining Company has experienced an increase in the number of
inquiries relating to toll processing opportunities.
Margins were not good for much of the year 1992 and the early part of 1993. The
Clean Air Act has upset the traditional price and supply relationships of many
materials in the petroleum world. The spot price of natural gasoline, the
primary feedstock for the refinery has in the past normally fluctuated in a
range of $.08 to $.18 per gallon below the spot price of regular unleaded
gasoline. Price fluctuations in the past have depended upon the season of the
year and the demand from other parts of the petrochemical industry which also
might use natural gasoline for feedstock to various operations. In 1992, the
demand from other segments of the petrochemical industry kept the price near the
low end of the range much of the year. Demand was strong because more
traditional alternative feedstocks for the industry were more scarce and higher
priced due to changes brought about in the nationwide gasoline blending pool by
the Clean Air Act. It is anticipated that the price relationships in the
petroleum products markets will continue
10
to find their economic levels, although there can be no assurance to that
effect. During the last half of 1993, due to the oversupply of crude oil and a
stable demand, the prices of all petroleum prices dropped by as much as 25% from
their 1992 levels. The price of natural gasoline also dropped and the Refining
Company enjoyed margins which are greater than those experienced during the
previous 18 months. The favorable feedstock prices continued throughout most of
1994 and began rising slightly toward the end of the year.
General and administrative expenses decreased by $172,122 to $2,036,470 in 1994
from $2,208,592 in 1993. 1993 expenses included the recording of $478,500 for
the value of stock options granted. Without this 1993 expense, the general and
administrative expenses in 1994 would have reflected an increase of $306,378.
This increase was incurred primarily at the refinery and was mostly attributable
to higher payroll, insurance and regulatory expenses. The expenses of regulatory
compliance and reporting continue to increase. Interest expense, which is
practically all attributable to the debt of the refinery, decreased by $228,974
from $576,338 in 1993 to $347,364 in 1994. This decrease in interest expense was
attributable to the reversal of an adjustment made in 1993 for accrued interest
of $155,525 on a note which was settled in 1994. Under the terms of the
settlement, all accrued interest was forgiven. In 1994, there was a reduced
amount of debt. The income tax expense of $39,973 reflects the federal income
tax provision on the Company's net income after the utilization of net operating
loss carry-forwards of $679,536.
The equity in losses of an affiliate in 1994 of $144,460 was applicable to the
cost of maintaining the Nevada mining properties of Pioche-Ely Valley Mines,
Inc. ("Pioche-Ely Valley"). The 1994 loss was higher than usual due to an
increased loss experienced by Pioche-Ely Valley on the write-off of several
unpatented claims that were considered to have no future value. There was no
activity in 1994 and 1993 on the Pioche-Ely Valley properties primarily due to
the lack of financing for claims to be explored and developed. Interest income
in 1994 and 1993 was from the investment of excess cash in Saudi Arabia and time
deposits of the refinery operations. In 1994 and 1993 there was no operating
activity in any of the Saudi Arabia mining properties. Assuming financing can be
obtained, the results of the updated feasibility study contemplate that
construction of an ore treatment plant and all infrastructure for a mining
facility will commence in 1995 and be completed in 1996. The feasibility study
estimates the cost of the mining facility to be $81.3 million.
With one exception, other income represents various items of miscellaneous
income which individually are not significant enough to warrant being separately
disclosed. Other income in 1994 includes $172,737 relating to the write-off of a
contingent liability established in 1992 to provide for possible future expenses
relating to certain indebtedness of the coal company which were completely paid
in 1994. Other items included in other income are tank rentals, building
rentals, cancellation of debt income, commission income and occasional small
asset sale proceeds. In 1994, the refinery collected $101,640 from leasing an
office building, a $11,012 increase from 1993. Tank rentals increased from
$4,600 in 1993 to $97,000 in 1994 since a new lease began in March 1994.
Primarily as a result of the Company's write-off of its total investment in the
coal leases, the Company had net operating loss carry-forwards of approximately
$27.3 million at December 31, 1994, of which approximately $14.8 million is
limited to the net income of the coal company and approximately $1.1 million of
this amount is limited to the net income of TOCCO. These carry-forwards expire
during the years 1994 through 2008. The Company is currently negotiating with a
company toward the possible use of the coal company's amount, although there can
be no assurances that any agreement relating thereto will be reached.
At December 31, 1994, a total of approximately $1,237,000 in accrued salaries
and termination benefits was due to Company employees in Saudi Arabia, which
includes approximately $586,000 due to Hatem El-Khalidi, the Company's President
and Chief Executive Officer. Accrued unpaid salaries and termination benefits to
Company employees in Saudi Arabia and to Mr. El-Khalidi at December 31, 1993
were approximately $676,000 and $507,000, respectively. These unpaid amounts
have been deferred until the Company's working capital position improves.
11
COMPARISON OF THE YEARS 1993 TO 1992
During the fiscal year ended December 31, 1993, the Company had a net loss of
$1,338,321 compared to a net loss of $2,195,861 for the fiscal year ended
December 31, 1992.
The gross refined product sales in 1993 of $15,103,422 was an increase of
$1,783,477 from 1992 while the cost of sales in 1993 of $13,314,427 was an
increase of $1,463,843 from 1992, resulting in a net margin increase in 1993 of
$319,634. After processing fee income, general and administrative expenses and
depreciation and amortization, the operating loss of the Company in 1993 of
$934,567 was $992,246 less than the operating loss in 1992 of $1,926,813. The
net loss for the refining operations in 1993 of $356,115 was $1,410,000 less
than the net loss in 1992 of $1,661,000 (after a charge of $975,000 for possible
litigation expenses). The last five months of 1993 reflected a net profit for
the refining operations.
The reduction in the size of the Refining Company's net loss in 1993 reflected
the improvement in the U.S. economy, primarily over the last half of the year.
Product sales volumes began to strengthen in mid-1993 due to increased activity
in the industries served by the Company. The number of customers served by the
Refining Company increased by 7% during 1993, and the total volume of products
sold increased by 22% from 15.5 million gallons in 1992 to 18.6 million gallons
in 1993. The Refining Company continued the past trend of placing the majority
of its production into the higher priced premium petroleum solvent markets.
During the last five years, the Refining Company has increased the percentage
sold into these markets from 53% in 1989 to over 70% for each of the last three
years. The ability to produce products of the quality sufficient for these
higher priced markets has enabled the Refining Company to remain competitive
even during down periods in the industry.
The weak economy in 1992 and early 1993 contributed to a lack of toll processing
opportunities. In 1992, the Refining Company generated just over $147,879 in
toll processing revenues while 1993 toll processing revenues were $163,977. Many
in the industry have turned their focus toward complying with federal and state
regulations and are not actively searching for new opportunities which would
require toll processing services. This is typical of the industry during
difficult times and will improve as the economy improves, although there can be
no assurance to that effect.
Margins were not good for much of the year 1992 and the early part of 1993. The
Clean Air Act has upset the traditional price and supply relationships of many
materials in the petroleum industry. The spot price of natural gasoline, the
primary feedstock for the refinery, has in the past normally fluctuated in a
range of $.08 to $.18 per gallon below the spot price of regular unleaded
gasoline. Price fluctuations in the past have depended upon the season of the
year and the demand from other parts of the petrochemical industry which also
might use natural gasoline for feedstock to various operations. In 1992, the
demand from other segments of the petrochemical industry kept the price near the
low end of the range much of the year. Demand was strong because more
traditional alternative feedstocks for the industry were more scarce and higher
priced due to changes brought about in the nationwide gasoline blending pool by
the Clean Air Act. It is anticipated that the price relationships in the
petroleum products markets will continue to find their economic levels, although
there can be no assurance to that effect. During the last half of 1993, due to
the oversupply of crude oil and stable demand, the prices of all petroleum
products, including natural gasoline, dropped by as much as 25% from their 1992
levels. As a result, the Refining Company's margins during the last half of 1993
were greater than those experienced during the previous 18 months.
General and administrative expenses increased by $323,176 to $2,208,592 in 1993
from $1,885,416 in 1992. This increase was attributable to the recording of
$478,500 for the value of stock options granted in 1993. Without this expense
amount, the general and administrative expenses would have reflected a decrease
of $155,324 due to the continued cost saving measures initiated at the refinery.
The expenses of regulatory compliance and reporting continue to increase.
Interest expense, which is practically all attributable to the debt of the
refinery, increased by $108,017 from $468,321 in 1992 to $576,338 in 1993. This
increase in interest expense was attributable to accrued interest of $155,525 in
1993 on a note for which a settlement had been expected in 1992, which
settlement would have provided for no
12
interest. This settlement had not yet occurred. Without this adjustment,
interest expense in 1993 would have deceased by $47,508 as debt was being
retired in 1993.
The equity in losses of an affiliate in 1993 of $59,812 was applicable to the
cost of maintaining the Nevada mining properties of Pioche-Ely Valley. There was
no activity in 1993 and 1992 on these properties primarily due to the lack of
financing for claims to be explored and developed. Interest income in 1993 and
1992 was from the investment of excess cash in Saudi Arabia and time deposits of
the refinery operations. In 1993 and 1992 there was no operating activity on any
of the Saudi Arabia mining properties. Assuming financing can be obtained, the
preliminary results of the updated feasibility study contemplate that
construction of an ore treatment plant and all infrastructure for a mining
facility commence in 1994 and be completed in 1996. The preliminary results show
the estimated cost of the mining facility to be $70 million.
Other income represents various items of miscellaneous income which individually
are not significant enough to warrant being separately disclosed. Such items
include tank rentals, building rentals, cancellation of debt income, commission
income and occasional small asset sale proceeds. In 1993 the refinery began
leasing an office building and collected $90,628. Tank rentals decreased from
$61,200 in 1992 to $4,600 in 1993 since the lessee discontinued leasing the
tanks in early 1993.
Primarily as a result of the Company's write-off of its total investment in the
coal leases, the Company had a tax loss carry-forward of approximately $27.5
million at December 31, 1993, of which approximately $14.8 million is limited to
the net income of the coal company during the years 1994 through 2008.
Additionally, approximately $3 million of this amount is limited to the net
income of TOCCO. The Company will be actively seeking a method of utilizing this
tax loss carry-forward.
At December 31, 1993, a total of approximately $1,183,000 in accrued unpaid
salaries and termination benefits was due to Company employees in Saudi Arabia,
which includes approximately $507,000 due to Hatem El-Khalidi, the Company's
President and Chief Executive Officer. Accrued unpaid salaries and termination
benefits to Company employees in Saudi Arabia and to Mr. El-Khalidi at December
31, 1992 were approximately $625,000 and $455,000, respectively. These unpaid
amounts have been deferred until the Company's working capital position
improves.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors
of Arabian Shield Development Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Arabian Shield Development Company and its subsidiaries at December 31, 1994
and 1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to
the financial statements, the Company's primary source of cash flow is fully
dedicated to repayment of debt and funding of refinery operations.
Additionally, the Company is not generating cash flow from any of its other
activities. These matters raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As described in Notes 4 and 6 to the financial statements, a substantial
portion of the Company's total assets is comprised of mineral acquisition,
exploration and development costs relating to its interests in Saudi Arabia
which have been deferred at December 31, 1994. None of the related projects
have been developed for commercial operation as of December 31, 1994, and
significant expenditures, for which the Company must obtain financing, will be
necessary before commercial operations, if any, are commenced.
As described in Note 6 to the financial statements, the Company is in default
on repayment of an $11 million loan from the Saudi Arabian government which was
made to the Al Masane Project. The Company is attempting to negotiate a
restructuring of the loan.
14
As described in Notes 4 and 9 to the financial statements, the Company's
refining subsidiary, South Hampton Refining Company ("South Hampton"), has
short-term notes payable and current portions of long-term obligations
totalling $4.5 million. South Hampton does not have the ability to repay these
current obligations from internally generated funds. Arabian Shield
Development Company has not guaranteed the debt obligations of South Hampton.
The Company's financial statements do not include any adjustments that might be
necessary should South Hampton be unable to satisfy its current obligations in
an orderly manner.
As described in Note 13, in 1993 the Company changed its method of accounting
for income taxes.
PRICE WATERHOUSE LLP
Dallas, Texas
March 27, 1995
15
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1994 1993
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents in United States $ 1,326,119 $ 118,828
Accounts receivable (net of allowance for doubtful
accounts of $129,617 in 1994 and $117,066 in 1993) 1,402,982 1,504,116
Inventories 471,074 647,039
---------------- ----------------
Total current assets 3,200,175 2,269,983
Cash in Saudi Arabia 430,976 1,688,018
Refinery plant, pipeline and equipment at cost 5,440,208 5,161,086
Less accumulated depreciation (2,187,256) (1,872,386)
---------------- ----------------
Refinery plant, pipeline and equipment, net 3,252,952 3,288,700
Al Masane Project and surrounding properties 30,112,132 29,368,423
Other interests in Saudi Arabia 2,431,248 2,431,248
Investment in and advances to Pioche-Ely Valley
Mines, Inc. 247,052 351,397
Goodwill 678,206 958,510
Other assets (net of allowance for doubtful
accounts of $114,537 in 1994 and 1993) 704,035 734,087
---------------- ----------------
Total assets $ 41,056,776 $ 41,090,366
================ ================
See notes to consolidated financial statements.
16
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1994 1993
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 944,007 $ 668,300
Accrued liabilities 616,459 1,869,025
Accrued liabilities in Saudi Arabia 785,743 969,940
Notes payable 15,945,393 18,044,099
Current portion of long-term debt 67,968 -
Current portion of long-term obligations 18,805 17,278
---------------- ----------------
Total current liabilities 18,378,375 21,568,642
Long-term debt 195,386 -
Long-term obligations 206,013 224,445
Accrued liabilities in Saudi Arabia 585,918 506,997
Deferred revenue 160,693 176,197
Commitments and contingencies
Stockholders' equity:
Common stock, authorized 40,000,000 shares
of $.10 par value; issued and outstanding,
20,028,494 shares in 1994 and 20,014,494 shares
in 1993 2,002,849 2,001,449
Additional paid-in capital 32,899,119 32,886,519
Receivables from stockholders (276,000) (326,000)
Accumulated deficit (13,095,577) (15,947,883)
---------------- ----------------
21,530,391 18,614,085
---------------- ----------------
Total liabilities and stockholders' equity $ 41,056,776 $ 41,090,366
================ ================
See notes to consolidated financial statements.
17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
1994 1993 1992
---------------- --------------- --------------
Revenues:
Refined product sales $ 17,564,226 $ 15,103,422 $ 13,319,945
Processing fees 200,757 163,977 147,879
---------------- ---------------- ----------------
Total 17,764,983 15,267,399 13,467,824
Operating costs and expenses:
Cost of refined product sales and
processing 13,750,750 13,314,427 11,850,584
General and administrative 2,036,470 2,208,592 1,885,416
Depreciation and amortization 647,137 678,947 683,637
Litigation (975,000) - 975,000
---------------- ---------------- ----------------
Total 15,459,357 16,201,966 15,394,637
---------------- ---------------- ----------------
Operating income (loss) 2,305,626 (934,567) (1,926,813)
Other income (expenses):
Interest income 56,491 46,433 8,085
Interest expense (347,364) (576,338) (468,321)
Equity in losses of affiliate (144,460) (59,812) (10,275)
Other income 443,836 185,963 206,588
---------------- ---------------- ----------------
Income (loss) before income taxes
and extraordinary item 2,314,129 (1,338,321) (2,190,736)
Income tax expense (39,973) - (5,125)
---------------- ---------------- ----------------
Income (loss) before extraordinary item 2,274,156 (1,338,321) (2,195,861)
Extraordinary item 578,150 - -
---------------- ---------------- ----------------
Net income (loss) $ 2,852,306 $ (1,338,321) $ (2,195,861)
================ ================ ================
Per common share:
Income (loss) before extraordinary
item $ .11 $ (.08) $ (.14)
Extraordinary item .03 - -
---------------- ---------------- ----------------
Net income (loss) $ .14 $ (.08) $ (.14)
================ ================ ================
Weighted average number of common
shares outstanding 20,027,881 17,532,335 15,660,893
================ ================ ================
See notes to consolidated financial statements.
18
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional Receivables
------------------------- Paid-in From Accumulated
Shares Amount Capital Stockholders Deficit Total
----------- ----------- ------------ ------------ ------------ ------------
January 1, 1992 15,595,240 $ 1,559,524 $ 28,223,794 $ (181,000) $(12,413,701) $ 17,188,617
Common stock and common
stock subscriptions 605,000 60,500 544,500 605,000
Stock options issued 189,900 189,900
Offset of stockholder receivables
with unpaid salaries 55,000 55,000
Other (16,996) (1,700) 1,700
Net loss (2,195,861) (2,195,861)
----------- ------------ ------------ ------------ ------------ ------------
December 31, 1992 16,183,244 1,618,324 28,959,894 (126,000) (14,609,562) 15,842,656
Common stock and common
stock subscriptions 3,831,250 383,125 3,448,125 (200,000) 3,631,250
Stock options issued 478,500 478,500
Net loss (1,338,321) (1,338,321)
----------- ------------ ------------ ------------ ------------ ------------
December 31, 1993 20,014,494 2,001,449 32,886,519 (326,000) (15,947,883) 18,614,085
Common stock and common
stock subscriptions 14,000 1,400 12,600 14,000
Payment on stockholder
receivables 50,000 50,000
Net income 2,852,306 2,852,306
----------- ------------ ------------ ------------ ------------ ------------
December 31, 1994 20,028,494 $ 2,002,849 $ 32,899,119 $ (276,000) $(13,095,577) $ 21,530,391
=========== ============ ============ ============ ============ ============
See notes to consolidated financial statements.
19
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
1994 1993 1992
---------------- --------------- --------------
Operating activities:
Net income (loss) $ 2,852,306 $ (1,338,321) $ (2,195,861)
Adjustments for non-cash transactions:
Depreciation and amortization 647,137 678,947 683,637
Equity in loss of affiliates 144,460 59,812 10,275
Stock options issued - 478,500 189,900
Extraordinary item (578,150) - -
Effects of changes in:
Decrease (increase) in accounts
receivable 101,134 (430,924) 672,836
Decrease (increase) in inventories 175,965 (124,395) 52,117
Decrease (increase) in other assets 30,052 222,466 (8,947)
(Decrease) increase in accounts
payable and accrued liabilities (821,334) 46,659 787,701
(Decrease) increase in deferred
revenue (15,504) (15,504) 21,658
Other 21,922 (4,282) 79,383
---------------- ---------------- ----------------
Net cash provided by (used for)
operating activities 2,557,988 (427,042) 292,699
Investing activities:
Additions to Al Masane Project and
surrounding properties (743,709) (965,162) (661,202)
Additions to other interests in
Saudi Arabia - (41,144) (69,333)
Additions to refinery plant, pipeline and
equipment (279,122) (2,818) (120,860)
(Increase) decrease in cash in Saudi Arabia 1,257,042 (1,674,078) (4,457)
Increase (decrease) in accrued liabilities in
Saudi Arabia (105,276) 104,947 372,108
---------------- ---------------- ----------------
Net cash provided by (used for)
investing activities 128,935 (2,578,255) (483,744)
---------------- ---------------- ----------------
Financing activities:
Common stock issued for cash - 3,131,250 105,000
Decrease in receivables from stockholders (50,000) - -
Additions to notes payable and long-term
obligations - 70,748 495,076
Reduction of notes payable and long-term
obligations (1,429,632) (174,342) (411,077)
---------------- ---------------- ----------------
Net cash provided by financing
activities (1,479,632) 3,027,656 188,999
---------------- ---------------- ----------------
Net increase (decrease) in cash 1,207,291 22,359 (2,046)
Cash and cash equivalents at beginning
of year 118,828 96,469 98,515
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,326,119 $ 118,828 $ 96,469
================ ================ ================
See notes to consolidated financial statements.
20
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND OPERATIONS OF THE COMPANY
Since its organization on May 4, 1967, the principal interest of Arabian
Shield Development Company (the "Company" or "ASDC") has been the
exploration and development of mineral deposits in Saudi Arabia (Note 6).
In February 1986, the Company purchased all of the issued and outstanding
capital stock of Dorchester Coal Company, which was subsequently renamed
American Shield Coal Company ("ASCC") and is currently dormant. The
Company, through its wholly-owned subsidiary American Shield Refining
Company ("ASRC"), owns all of the outstanding common stock of Texas Oil
and Chemical Company II, Inc. ("TOCCO"), and its subsidiaries, South
Hampton Refining Company ("South Hampton") and Gulf States Pipeline
Company, Inc. ("Gulf States"). The principal assets of TOCCO and its
subsidiaries are a special products refinery located outside of Beaumont,
Texas, which currently processes light naphtha feedstock, and 45 miles of
natural gas and product pipelines which connect the refinery to supplies
and a marine terminal on the Gulf of Mexico (Note 7). The Company also
has an equity interest in Pioche-Ely Valley Mines, Inc. ("Pioche") which
owns mineral deposits in Nevada (Note 8).
Prior to 1988, the Company was considered a development stage company.
Although the Company has not yet commenced the principal operations for
which it was formed, the significance of the refining operations led
management to conclude that the Company ceased to be a development stage
company effective January 1, 1988.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's
sources of cash flow in 1994 were the operations of South Hampton and the
proceeds from issuance of the Company's stock. The Company is not
currently generating cash flow from any other activities. As described
in Notes 4 and 9, the cash flow attributable to South Hampton is fully
dedicated to repayment of debt and funding of refinery operations. The
cash flow attributable to South Hampton currently is not adequate for
these purposes. As described in Note 9, the Company is liable to the
Saudi Arabian government for an $11,000,000 loan. The Company does not
currently have the financial resources to pay this obligation.
Management plans to fund future operations initially through sales of its
common stock and borrowings (Note 16). Subsequent to the start up of
operations of the Al Masane mine, anticipated in 1996, it is expected
that the operations and obligations of the Company will be funded from
these operations. In the event that the Company is unable to complete
sales of its common stock, obtain suitable financing, and reach an
agreement on the repayment of the loan to the Saudi Arabian government,
there is substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
21
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - All majority-owned subsidiaries are
consolidated and all material intercompany accounts and transactions are
eliminated. Investments in 20 to 50% owned subsidiaries and investments
in subsidiaries for which greater than 50% ownership is deemed temporary
are accounted for on the equity method. Investments in other companies
that are less than 20% owned are accounted for on the basis of the
Company's cost. In 1992, the Company began to fully consolidate the Al
Masane Project (Note 6). Previously, the Company accounted for the Al
Masane Project by the equity method.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
INVENTORIES - Refined products and feedstock are carried 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, 1994, none of the projects
described in Notes 6 and 8 had reached the commercial exploitation stage.
No indirect overhead or general and administrative costs have been
allocated to any of the projects.
REFINERY PLANT, PIPELINE AND EQUIPMENT - Beginning in 1994, all additions
to refinery plant, pipeline, buildings and equipment are being
depreciated on the straight-line method over useful lives of five to
seven years (5 to 15 years prior to January 1, 1994). Maintenance and
repairs are charged to expense. Renewals and betterments are
capitalized.
OTHER ASSETS - Other assets include notes receivable from related
parties, prepaid expenses, certain refinery assets which are being leased
to a third party and a certificate of deposit collateralizing reclamation
work on formerly owned coal leases.
DEFERRED REVENUE - Deferred revenue represents funds advanced by a
supplier and customer for equipment purchases and is being amortized over
a 15 year period.
STATEMENT OF CASH FLOWS - On the statement of cash flows, cash includes
cash held in the United States. Significant noncash changes in financial
position in 1994 include the issuance of 14,000 shares of common stock in
exchange for the cancellation of $14,000 of indebtedness and the
forgiveness of debt and accrued interest (Note 12). Transactions of this
type in 1993 include the issuance of 200,000 shares of common stock in
exchange for the cancellation of $142,099 of notes payable and $57,901 of
accrued interest, and the issuance of 300,000 shares of common stock in
exchange for the cancellation of $300,000 of indebtedness (Notes 9 and
11). Transactions of this type in 1992 include the issuance of 500,000
shares of common stock in exchange for cancellation of $500,000 in
indebtedness.
22
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HEDGING PROGRAM - In July 1994, South Hampton established a hedging
program to help decrease the volatility of the price of fuel gas to the
refinery. South Hampton purchased several commodity based derivative
futures contracts during 1994. Gains and losses related to these
contracts are recognized when the contracts expire. The natural gas
market suffered severe price declines in the third quarter of 1994 which
resulted in a net recognized loss of $117,000 during 1994. This loss is
included as a cost of refined product sales and processing in the
consolidated statement of operations. As of December 31, 1994, South
Hampton has incurred $65,000 of unrecognized losses related to its open
contracts. These contracts expire within the next twelve months.
PER SHARE DATA - Net income (loss) per share has been computed on the
basis of the weighted average number of shares of common stock
outstanding during the year.
FOREIGN CURRENCY - Assets and liabilities denominated in foreign
currencies, principally Saudi Riyals, are translated at rates in effect
at the time the transaction occurred. There has been no change in the
exchange rate for Saudi Riyals to the United States dollar during the
period covered by these financial statements.
INCOME TAXES - In the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the Company to
compute deferred income taxes based on the amount of taxes payable in
future years, after considering changes in tax rates and other statutory
provisions that will be in effect in those years. The provision for
income taxes includes taxes currently payable and those deferred because
of temporary differences between the financial statement and tax bases of
assets and liabilities. The adoption had no significant impact on 1993
earnings or cash flow.
Deferred income taxes in 1992 were provided in accordance with Accounting
Principles Board Opinion No. 11 ("APB Opinion No. 11"). Timing
differences resulted principally from depreciation of property and
equipment.
GOODWILL - Goodwill acquired in connection with the acquisition of TOCCO
is being amortized over ten years. The amounts reflected in the balance
sheet are net of accumulated amortization of $2,104,809 and $1,824,505 at
December 31, 1994 and 1993, respectively. The Company periodically
reviews goodwill for any permanent impairment in value or life.
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
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.
RECLASSIFICATIONS - Certain prior year amounts have been restated to
conform to the current year presentation.
23
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CONTINGENCIES
The operations of the Company in Saudi Arabia have been, and may in the
future be, affected from time to time in varying degree by political
developments and laws and regulations, such as forced divestiture of
assets; restrictions on production, imports and exports; price controls;
tax increases and retroactive tax claims; expropriation of property,
cancellation of contract rights and environmental regulations.
A major component of the Company's activities relates to the acquisition,
exploration and development of mineral deposits. There can be no
assurance that the Company will successfully develop any of the
properties described in Notes 6 and 8, and, if developed, whether the
mineral acquisition, exploration and development costs incurred will
ultimately be recovered. The recovery of such costs is dependent upon a
number of future events, some of which are beyond the control of the
Company. The ability of the Company to develop any of these properties
is dependent upon obtaining additional financing as may be required and,
ultimately, its financial success depends on its ability to attain
successful operations from one or more of its projects.
On November 14, 1990, Cajun Energy, Inc. ("Cajun Energy"), a distributor
of refined gasoline to retail stations, filed a lawsuit alleging South
Hampton manufactured and sold defective gasoline and/or failed to
properly test its product prior to sale to Cajun Energy. Prior to
initiation of this lawsuit by Cajun, claims in excess of $906,000 were
paid by South Hampton's insurance carrier under a $1 million liability
policy.
E-Z Mart Stores filed a lawsuit on May 22, 1991 against Cajun Energy and
South Hampton related to the aforementioned manufacture and sale of
alleged defective gasoline. E-Z Mart Stores claimed that defective
gasoline was distributed to its stores in late April and May 1990
resulting in customers suffering damage to their automobiles.
South Hampton filed suit on August 18, 1992 in the 58th Judicial District
Court, in Jefferson County, Texas against National Union Fire Insurance
Company, ("National Union") as the insurance carrier for a second named
party in the Cajun Energy litigation, for failing and refusing to defend
South Hampton in the two causes of action described above. South Hampton
had asserted that it was an additional named insured on the insurance
policy provided to this second named party in the litigation described
above and that the insurer should have provided defense to the claims
asserted.
In May 1994, the E-Z Mart Stores lawsuit went to trial and a judgement
was entered against South Hampton. In consideration of the judgement
and, since the issues were identical to the claims asserted in the Cajun
Energy lawsuit, there has been a dismissal by Cajun Energy of its lawsuit
against South Hampton. At the trial, South Hampton consented to a
settlement agreement whereby E-Z Mart Stores and Cajun were awarded a
judgement against South Hampton for approximately $6 million. E-Z Mart
Stores and Cajun signed a "nonexecution agreement" not to execute the
judgement in return for the assignment by South Hampton of its claims
against National Union. South Hampton has also agreed not to pursue its
1992 lawsuit against National Union. This concluded the claims and
actions against South Hampton in these matters.
24
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
South Hampton is involved as a defendant in other litigation incident to
its activities. The outcome of these matters is not expected to have a
material impact on the Company's financial position or results of
operations.
South Hampton has short-term notes payable and current portions of
long-term obligations totalling $4.5 million, of which $2.9 million
relate to bank financing which has historically been renewed in six-month
intervals and is not guaranteed by the Company. South Hampton does not
currently have the ability to repay these current obligations from the
level of internally generated funds. Any cash flow generated by the
refinery is fully dedicated to the repayment of debt and funding of
refining operations. In order to satisfy these obligations in an orderly
manner, management of South Hampton must: (1) obtain a renewal of the
bank debt (see Note 9) and have continued forbearance by the bank with
respect to debt covenants and provisions, and (2) generate increased cash
flows from refinery operations to service debt obligations and fund other
working capital needs of the refinery.
Should South Hampton not meet its cash flow requirements during 1995,
management believes that it will be able to obtain modifications of the
repayment terms of the debt obligations. Management believes that
additional funds may be obtained from the proceeds of future common stock
sales or the sale of all or a partial interest in South Hampton. On
March 16, 1992, the Company received an offer from a Saudi Arabian
company, also a related party, to purchase all of the issued and
outstanding shares of TOCCO for $2,230,000, which was rejected due to its
unfavorable terms. The Company's financial statements do not include any
adjustments that might be necessary should South Hampton be unable to
satisfy its obligations in an orderly manner.
ASCC has been a responsible party for certain reclamation work on coal
properties which it previously leased. ASCC had provided a letter of
credit secured by a $36,000 certificate of deposit to the Mined Land
Reclamation Division of Colorado in connection with this liability. In
March 1994, the Mined Land Reclamation Division exercised its rights
under the letter of credit and ASCC paid the $36,000. This concluded
ASCC's involvement in the reclamation project.
South Hampton has been spending an increased amount of time and expense
on environmental and regulatory functions and compliance. In mid-1993,
while remediating a small spill area, the Texas Natural Resources
Conservation Commission ("TNRCC") requested the refinery to drill a well
to check the groundwater under the refinery property to ensure that
contamination had not taken place. The well disclosed a pool of
hydrocarbons on top of the groundwater under the loading rack area. An
analysis of the material indicated that the hydrocarbons were produced
over ten years ago when the refinery processed crude oil. Consulting
engineers were hired to determine the size of the pool. Three recovery
wells were utilized and the hydrocarbons are being pumped out and treated
in treatment ponds. The TNRCC has been cooperating in the investigation
and cleanup. Due to the apparent age of the material, no fine or
enforcement action is expected. A site assessment plan is being
developed to determine the extent of the hydrocarbon pool. The costs
through 1994 for this problem totaled approximately $35,000. Future
costs for recovery and remediation should be small as it is primarily a
matter of operating the recovery wells.
25
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1994, the TNRCC's Air Permit Section proposed a fine of
approximately $46,000 to settle various alleged permit violations
identified in their 1991, 1992 and 1993 inspections. South Hampton
agreed to the proposed settlement with the stipulation that payments be
spread over a twelve month period. The Commission has not yet formally
adopted the agreement. In October 1994, the TNRCC formally adopted an
agreement with South Hampton to settle alleged water violations regarding
monitoring water wells with a fine of $9,600 to be paid over four months
and a deferred fine of $9,600 to be dependent upon the future operation
of a bioremediation site.
In addition to the various Environmental Protection Agency and TNRCC air,
water and solid waste regulations, South Hampton is also subject to the
regulations of the U.S. Department of Transportation, the Occupational,
Health and Safety Administration and the Texas General Land Office, among
others. In response to various regulations from these and other
agencies, South Hampton has developed OPA-90 Emergency Response Plans for
the pipeline and the refinery, and is in the process of meeting the
requirements of the OSHA Process Safety Management rules. By the time
these various agency requirements are met, it is expected that South
Hampton will spend in excess of $100,000 over the eighteen month period
ending May 1995 to develop the procedures and documentation required.
5. INVENTORIES
Inventories include the following:
December 31,
------------------------------------
1994 1993
---------------- ----------------
Refinery feedstock $ 226,265 $ 298,928
Refined products 244,809 348,111
---------------- ----------------
Total inventories $ 471,074 $ 647,039
================ ================
In 1994, a liquidation of LIFO inventory quantities carried at lower
costs prevailing in prior years decreased cost of goods sold and
increased net income by approximately $57,000. At December 31, 1994,
market value exceeded LIFO value by approximately $193,000. At December
31, 1993, LIFO value approximated market value.
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. "Al Masane Project and
surrounding properties" primarily pertains to the Al Masane Project (the
"Project"), but also includes costs attributable to the interests in the
Greater Al Masane areas. "Other interests in Saudi Arabia" primarily
pertains to the costs of rentals, field offices and camps, core drilling
and labor incurred at the Wadi Qatan and Jebel Harr properties.
26
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1971, the Saudi Arabian government awarded exploration licenses to the
Company and National Mining Company ("NMC"), a Saudi Arabian company, for
the Al Masane Project, Wadi Qatan and Jebel Harr areas. Until April
1992, the Company and NMC each held a 50% interest in the exploration
licenses. The Company and NMC also obtained written authority to explore
an area of 1,100 square kilometers surrounding Al Masane ("Greater Al
Masane"). The Saudi Arabian government has verbally indicated that an
exploration license for Greater Al Masane will be granted (unaudited).
Prior to 1979, the Company funded all costs related to these properties.
In 1979, the Company formed a joint venture with NMC related to the Al
Masane Project in which each company held a 50% interest in the
exploration license. The joint venture obtained an $11 million
interest-free loan from the Saudi Arabian government which was scheduled
to be repaid in ten equal annual installments beginning December 1984.
None of the scheduled payments have been made. The proceeds from this
loan were used to fund the costs of the Project. Other than the use of
the proceeds from the loan, subsequent to the formation of the joint
venture with NMC, 100% of the exploration costs of the Project as well as
all exploration costs for the other interests continued to be funded by
the Company.
In 1992, NMC relinquished its rights to the exploration license and the
mining lease in the Al Masane area, and assigned them to the Company.
The Company accepted the conditions set by the Saudi Arabian government
in a letter dated March 30, 1992. In connection with NMC's assignment of
its interest to the Company, the Company agreed to provide for public
subscription in Saudi Arabia of 50% of the capital of the Project at such
time as the Project proves to be commercial. On April 13, 1992, the
Company and NMC signed an agreement dissolving the joint venture and NMC
assigned its rights and obligations to the exploration license and the
mining lease in the Al Masane area to the Company. Subsequently, a
formal Mining Lease Agreement assigning the lease solely to the Company
was initialled by the Company and the Ministry on October 4, 1992.
Prior to April 13, 1992, the Company had accounted for its interest in
the Al Masane Project on an equity basis and its investment in the joint
venture was recorded at the amount of the owners' capital of the joint
venture. When the joint venture was dissolved, the Company consolidated
the Al Masane Project by eliminating the related investment balance
against the owners' capital account of the Project, and by recording the
assets and liabilities of the Project (including the $11 million loan) in
the consolidated balance sheet.
Since NMC assigned its 50% interest in the exploration license and any
resulting mining lease to the Company, the Company is solely responsible
for the repayment of the $11 million loan. Pursuant to Article 15 of the
Mining Lease Agreement which was initialled on October 4, 1992, the loan
is to be rescheduled to be repaid from the profits of the mining
operations after the mining lease is issued to the Company. A
rescheduling of the loan payments has not yet been negotiated. All of
the Company's assets in Saudi Arabia are pledged as collateral for the
loan.
27
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If exploration licenses for Wadi Qatan, Jebel Harr or Greater Al Masane
(which includes Jabal Guyan) are converted to mining leases, NMC will
reimburse the Company for its share of costs (as defined in an agreement
between the parties). The Company has had positive results from its
exploration work at these sites; however, it has directed limited amounts
of time and resources on these sites in recent years while it has
negotiated with the Saudi government for the Al Masane lease. The
Company intends to negotiate agreements for these sites in the near
future, does not intend to abandon these sites, and considers the costs
deferred at December 31, 1994 to be recoverable.
The Company had filed in 1984 with the Council of Ministers of the Saudi
Arabian government for a mining lease for the Al Masane Project based on
the presumption that commercial productibility had been proven. On April
26, 1993, the Council of Ministers passed the resolution granting the
Company the mining lease, and on May 22, 1993, a Royal Decree was issued
by the King. The initial period of the mining lease is 30 years, which
can be renewed for another period or periods, not to exceed 20 years.
The lease area is 44 square kilometers in size. An amendment was made in
the lease agreement which stipulates that, when the profitability of the
project is demonstrated, a Saudi public stock company will be formed and
the Company will contribute its investment in the Al Masane Project in
return for 50% of the stock of the Saudi company. The Petroleum and
Mineral Organization ("PETROMIN"), a company wholly-owned by the Saudi
government, has an option to acquire up to 25% of the stock in the Saudi
company and the remaining interests not owned by the Company or acquired
by PETROMIN are to be put out for public subscription to Saudi citizens.
Phase I of the work on the Project (sinking shaft, tunneling and
drilling) was completed in April 1981. Since that time, there have been
a series of project feasibility studies in 1982, 1984, 1989, 1992, and
1994, conducted by Watts, Griffis and McOuat Limited, consulting
geologist, indicating the commercial viability of the Project. The 1994
report estimates proven and probable reserves of copper, zinc, silver and
gold of 7.2 million tons in the Al Masane area with the potential to
increase these reserves with further exploration. The report projects
production of the proven and probable reserves over a twelve-year period
commencing in 1996. The cash flow projection was made based on the
assumption that 50% of the financing of the project will come from loans
from the Saudi Industrial Development Fund, 25% from bank loans, and 25%
from equity financing in connection with the public subscription in Saudi
Arabia. Revenues were estimated utilizing projected mineral prices from
a third party pricing expert. The report projects positive net cash
flows to the Company of $37 million over the life of the Project. It is
not anticipated that taxes will be paid to the Saudi government in the
first five years of production of the Project. (unaudited)
28
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred development costs of the Al Masane Project and surrounding areas
at December 31, 1994, 1993 and 1992, and the changes in these amounts for
each of the three years then ended are detailed below:
Balance at Activity Balance at Activity Balance at Activity
December 31, for December 31, for December 31, for
1994 1994 1993 1993 1992 1992
------------- --------- ------------- ---------- ------------- ---------
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 and project
administration
costs 16,023,275 $ 237,908 15,785,367 $ 653,930 15,131,437 $ 564,407
Materials and
maintenance 6,161,684 683 6,161,001 1,232 6,159,769 71,801
Feasibility study 2,626,474 505,118 2,121,356 310,000 1,811,356 24,994
------------- --------- ------------- ---------- ------------- ---------
Total 24,811,433 743,709 24,067,724 965,162 23,102,562 661,202
------------- --------- ------------- ---------- ------------- ---------
$ 30,112,132 $ 743,709 $ 29,368,423 $ 965,162 $ 28,403,261 $ 661,202
============= ========= ============= ========== ============= =========
The Company has not made all of the surface rental payments due to the
government of Saudi Arabia under the terms of the Al Masane Project
lease. At December 31, 1994, the past due amount of these rent payments
is approximately $74,000. In addition, the Company has not complied with
certain statutory reporting requirements in Saudi Arabia. Management of
the Company believes that the lack of compliance with these license
requirements will not have any effect on the Company's planned operations
in Saudi Arabia.
Since cash in Saudi Arabia is generally intended for the support and
development of the Saudi Arabian projects, a long-term asset, such cash
and certain associated liabilities relating to the Saudi Arabian projects
have been classified as noncurrent.
7. REFINERY OPERATIONS
South Hampton, the Company's only revenue producing asset, sells its
products primarily to companies in the petroleum industry. Downturns in
the petroleum industry could negatively impact refinery operations in the
future. South Hampton does not require collateral on its outstanding
accounts receivable balances. South Hampton's largest customer accounted
for 13%, 16% and 11% of total sales in 1994, 1993 and 1992, respectively.
29
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENT IN PIOCHE-ELY VALLEY MINES, INC.
The Company effectively controls approximately 55% and directly owns
approximately 46% of the outstanding common stock of Pioche. During
1988, approximately 634,000 shares of Pioche stock were deemed acquired
through in-substance foreclosure on a $114,000 note due from the issuer's
estate. The note balance was reclassified to Other Assets and was fully
reserved in 1989. This note is due in 1995; however, management of the
Company intends to postpone the due date indefinitely if the issuer's
estate is unable to repay the note in 1995. At this point, it is not
possible to determine whether the issuer's estate will repay the note and
claim these shares. If it is determined that the note will not be
repaid, the Company will consolidate Pioche as a majority-owned
subsidiary. The principal assets of Pioche are an undivided interest in
48 patented and 84 unpatented mining claims and a 300 ton-per-day mill
located on the aforementioned properties in the Pioche Mining District in
southeastern Nevada. The properties held by Pioche have not been
commercially operated for approximately 35 years. During 1994, Pioche
attempted to drill a core hole on this property. The core hole was
intended to go down to 1,500 feet but encountered formation problems at
700 feet and further drilling had to be abandoned. A new site will be
selected and management expects a second core hole to be drilled in 1995.
In 1991 and 1992, the Company leased its Wide Awake Mine property to a
joint venture under an agreement which called for annual rental payments
of $5,000 and a 7% royalty on net smelter returns. The annual advance
rental was received for 1992 and 1991 but the joint venture did not
commence any operations on the property. In December 1992, the agreement
was terminated. In August 1993, Pioche entered into a new lease of the
Wide Awake mine property with the same joint venture to which it had
previously leased the property. This agreement stipulates a 6% royalty
on net smelter returns with no annual rental required. The lease
commenced on October 1, 1993, for a primary term of twenty-seven months,
and will continue as long as minerals are produced in commercial
quantities or unless terminated by the parties. No royalties were earned
in 1994.
30
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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:
1994 1993
--------------- ---------------
Notes payable:
Revolving bank note. See (A) $ 2,927,113 $ 3,934,036
Secured note to Saudi Arabian government. See (B) 11,000,000 11,000,000
Unsecured note to a Saudi company. See (C) 1,500,000 1,500,000
Unsecured note to a Saudi investor. See (D) 168,280 168,280
Unsecured note to a Saudi investor. See (E) 350,000 350,000
Unsecured installment note. See (F) - 597,625
Bank note payable. See (G) - 360,702
Other - 133,456
---------------- ----------------
Total $ 15,945,393 $ 18,044,099
================ ================
Long-term debt:
Bank note. See (H) $ 263,354
Less current portion 67,968
----------------
Long-term debt $ 195,386
================
Long-term obligations:
Noninterest-bearing note to a supplier and
customer for capital improvements. See (I) $ 128,683 $ 128,683
Other financing obligations:
Deferred compensation contracts. See (J) 96,135 113,040
---------------- ----------------
Total long-term obligations 224,818 241,723
Less current portion 18,805 17,278
---------------- ----------------
Long-term obligations $ 206,013 $ 224,445
================ ================
(A) In 1990, South Hampton and a bank entered into an Amended and
Restated Credit Agreement ("the Agreement") in order to modify
certain provisions and embody all amendments of the previous
agreement in one document. Funding under the Agreement was provided
in two facilities: Facility A in the principal amount of
$4,400,000, funded in a lump-sum and used to refinance the previous
note, and Facility B in the principal amount of up to $1,500,000, to
be used by South Hampton for working capital purposes and support of
feedstock purchases. Facility B was fully drawn down in the form of
letters of credit. In 1992, the bank drew on the letters of credit
provided by a related party of the Company (see (C) below.)
The note is collateralized by all of the assets of TOCCO and its
subsidiaries and a pledge of TOCCO stock by ASRC. In addition, the
Company and ASRC have subordinated intercompany accounts receivable
of approximately $1,363,355 at December 31, 1994 to
31
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the bank debt, and no other funds are to be advanced to the Company
or ASRC by TOCCO or its subsidiaries. In the event of an
enforcement by the bank of the security interests on the collateral
under the Agreement, the proceeds from the security interests in the
cash, accounts receivable and inventory of South Hampton will first
be used to repay 60% of the outstanding principal and interest under
the Agreement with any remaining proceeds used to repay any amounts
owed by South Hampton to the related party due to the draw down by
the bank of the letters of credit for Facility B. Any amounts
recovered through other forms of collateral are to be used first to
repay any remaining amounts due to the bank for principal and
interest, and remaining amounts, if any, are to be used to repay any
amounts still owed to the related party. South Hampton was not in
compliance with the borrowing base ratio and was in default in its
loan repayments at various times in 1993 and 1992.
Facility A was to be repaid under the initial agreement by June 30,
1992. South Hampton did not have adequate resources to pay the full
amount outstanding during 1992. The maturity date has been extended
at various times subsequent to default and has currently been
extended to June 30, 1995. In connection with the latest extension,
South Hampton has agreed to make quarterly principal payments of
$200,000, and Arabian Shield Development Company has committed to
use its best efforts to obtain new equity financing of at least
$1,500,000 by June 30, 1995, to be remitted to the bank.
Additionally, South Hampton has agreed to collect all receivables
through a cash collateral account at a local bank. Only the amount
of funds required to operate South Hampton's business may be used
and weekly reports of cash receipts and disbursements in the cash
collateral account must be provided to the creditor. If South
Hampton defaults on the credit agreement, the creditor has the right
to freeze the funds in the cash collateral account. The note is
subject to interest at the London Interbank Eurocurrency Market
(LIBOR) rate 6.0% and 3.21875% at December 31, 1994 and 1993,
respectively, plus 2%.
(B) On January 24, 1979, the Company and NMC jointly obtained an
interest-free loan of $11,000,000 from the Saudi Arabia Ministry of
Finance and National Economy 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. On April 13, 1992, NMC agreed to assign all its rights and
obligations in the Al Masane Project (including its 50% obligation
for the $11,000,000 loan) to the Company. The Company is now solely
responsible for the repayment of the loan. Pursuant to the mining
lease agreement, the loan will be rescheduled to be repaid from the
profits of the mining operations when they commence. An agreement
has not yet been reached regarding the rescheduling of these
payments. The loan is secured by all of the Company's assets in
Saudi Arabia.
(C) In 1990, Saudi Fal, a Saudi company owned by a shareholder of the
Company, agreed to issue a guarantee of $1,500,000 securing a letter
of credit facility to enable South Hampton to buy feedstock. In
return for the guarantee, Saudi Fal was given an option to purchase
all of the outstanding stock of TOCCO. The option was not exercised
and has expired. On March 31, 1992, the $1,500,000 guarantee was
not renewed by Saudi Fal. As a result, the bank drew on the letter
of credit provided by Saudi Fal for its guarantee and applied the
$1,500,000 to reduce the principal amount of the bank note. The
$1,500,000 is now owed by South Hampton to Saudi Fal. This note is
collateralized as discussed in (A) above.
32
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(D) Represent noninterest demand loans payable to a Saudi investor.
(E) Represents an advance made by a Saudi investor in 1984 to the Al
Masane Project on behalf of NMC. Prior to 1992, since NMC had no
liability for exploration costs unless the exploration license was
converted to a mining lease, the advance was classified as a
deferred capital contribution on the separate Al Masane balance
sheet. Due to the relinquishment of NMC's rights and obligations in
the license and the mining lease in March of 1992, the advance is
now classified as an unsecured noninterest demand debt.
(F) In 1991, South Hampton issued a note payable to a vendor to
establish payment terms for past-due trade accounts payable. The
note was payable in monthly installments with all amounts owed due
by February 25, 1993. In May 1994 the principal balance and
$156,000 accrued interest payable under the terms of this note was
settled by a $175,000 cash payment. Accordingly, the Company
recorded an extraordinary gain of $578,150 in 1994, for which there
is no tax effect after application of operating loss carryforwards,
which represents the amount of trade payables forgiven.
(G) All unpaid principal and interest related to this bank loan was due
and payable in December 1994. TOCCO was in arrears with its
payments in the prior and current year. Effective December 31,
1994, all unpaid principal and interest was refinanced by another
bank and the Company's obligation under this note was satisfied.
See (H) below.
(H) This note payable is collateralized by land, an office building, and
all equipment and furniture and fixtures of TOCCO. As described in
Note 10, the building collateralized by this note has been leased to
a third party. The original balance of the note was due and payable
on December 31, 1994. This note was refinanced effective December
31, 1994 with principal and interest payments starting in March 1995
and each month thereafter until February 1, 1998. The note bears
interest of 10% from the date of the agreement to February 1, 1996
and at prime rate + 1 1/2% thereafter.
(I) Balance represents amount due under a note payable to an unrelated
refining company that provided loans to the refinery to fund certain
refining processes. Repayment is to be made when certain feed rate
criteria and number of days of operations have been reached.
(J) In connection with the acquisition of TOCCO, deferred compensation
contracts between TOCCO and certain former employees and one current
employee were restructured, reducing the gross payments due under
the existing contracts. Default on payments due under the
restructured agreements would invalidate the negotiated settlement
amounts resulting in TOCCO being liable for the amounts due under
the original contracts. Currently, all contracts have been fully
satisfied except for the contracts of one current and one former
employee. TOCCO has complied with the terms of these contracts
through 1994. If TOCCO were to default on these contracts, it would
be liable for an additional amount of $458,000. The recorded
liability has been determined utilizing a discount rate of 8.0%.
33
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of long-term debt and long-term obligations, which
exclude current notes payable balances aggregating $15,945,393, for the
next five years and thereafter are as follows:
1995 $ 86,773
1996 234,008
1997 115,912
1998 30,274
1999 0
Thereafter 21,205
----------------
Total $ 488,172
================
Interest of $275,561, $472,131 and $343,058 was paid in 1994, 1993 and
1992, respectively.
10. COMMITMENTS
South Hampton entered into an arrangement in July 1991 with a
partnership, in which Silsbee Trading and Transportation Corp. ("STTC",
a company owned by the president and vice president of TOCCO) and M.A.
Bomer (the former owner of the refinery) each owned a 50% interest, to
facilitate the future purchase of feedstock. Feedstock was purchased by
South Hampton from the partnership at a price equal to the cost of the
feedstock to the partnership plus two cents per gallon. Approximately
4,977,000 gallons of feedstock were purchased in 1992 under the terms of
this agreement at a cost of approximately $2,320,000. In June 1992, Mr.
Bomer withdrew from the partnership and it was terminated. On July 1,
1992, South Hampton entered into a new agreement with STTC whereby STTC
financed the feedstock in the pipeline. As a result, South Hampton has a
liability to STTC for the cost of the 453,600 gallons of capacity of the
pipeline. This amount is $215,460 and $217,048 at December 31, 1994 and
1993, respectively. Also in connection with this agreement, South
Hampton pays a one-half cent per gallon fee to STTC on each gallon of
feedstock transported through the pipeline. The agreement is currently
operating on a month to month basis. The fees paid by South Hampton to
STTC pursuant to this agreement were $103,212, $88,974 and $21,525 in
1994, 1993 and 1992, respectively.
South Hampton leases vehicles and equipment for use in operations for
$24,140 per month plus certain reimbursed costs from STTC under a lease
agreement. The lease agreement expired in September 1994 and is
currently continuing on a month-to-month basis. South Hampton incurred
costs (most of which are billed to customers) related to this agreement
of approximately $341,000, $320,000 and $291,000 in 1994, 1993 and 1992,
respectively. Accounts payable to STTC under the leasing arrangement
were $16,917 and $2,431 at December 31, 1994 and 1993, respectively.
The Company incurred rental expenses for office space, one automobile and
other vehicles and equipment of approximately $302,000 in 1994 and 1993,
and $305,000 in 1992.
In February 1993, South Hampton entered into an agreement to lease to a
third party a building with a net book value at December 31, 1994 of
$324,591 which South Hampton does not use in its operations. The lease
provides for an option to the lessee to purchase the building after three
or five years. The lease is being recorded as an operating lease and the
building is
34
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included in other assets. As described in Note 9, the leased building is
pledged as collateral for a note payable. Other income for 1994 and 1993
includes $102,000 and $87,000, respectively, of rental income pursuant to
this lease.
A provision of the purchase agreement related to the acquisition of TOCCO
by ASRC requires TOCCO to reserve up to 10% of its common stock to be
available for sale to the employees of TOCCO on such terms and conditions
and at such times as determined by TOCCO.
South Hampton has guaranteed a note for $160,000 for a limited
partnership in which South Hampton has a 19% interest.
11. COMMON STOCK AND STOCK OPTIONS
At December 31, 1994, Saudi Arabian investors owned approximately 62% of
the Company's outstanding common stock.
COMMON STOCK - The proceeds from common stock sales are used to finance
mineral exploration and development activities in Saudi Arabia and
general and administrative expenses in the United States. Proceeds from
certain common stock sales were used to finance the acquisitions of ASRC
and to finance the expansion of the refinery. Agreements relating to
certain stock sold to investors provide that shares may not be traded in
United States markets unless registered under the United States
Securities Act of 1933 or unless they are sold pursuant to an available
exemption from registration. Estimates of fair values of the Company's
unregistered common stock are made by management.
Notes receivable from stockholders for the purchase of common stock of
$276,000 in 1994 represent a note from a director and officer for
$126,000 which matures on December 31, 1995 and a note from an entity
controlled by a stockholder for $200,000 with a balance of $150,000 at
December 31, 1994. The note for $200,000 was issued in March 1993 and
was due in October 1994. Payments of $50,000 were received on this note
in 1994 and management of the Company expects to collect the remaining
balance in 1995. Notes receivable from stockholders are classified as a
debit in stockholders' equity.
STOCK OPTIONS - Under the terms of the Company's Employee Stock Option
Plan (the "Employee Plan"), incentive options are granted at the market
price of the stock on the date of grant and nonincentive options are
granted at a price not less than 85% of the market price of the stock on
the date of grant. The Employee Plan was adopted on May 16, 1983 for a
term of ten years. At the Company's annual stockholders meeting on
December 29, 1992, the stockholders approved an extension of the term of
the Employee Plan for another ten years to May 16, 2003 and also approved
an increase in the number of shares reserved for issuance thereunder from
250,000 to 500,000.
To enhance the Company's ability to obtain and retain qualified
directors, it instituted the 1987 Non-Employee Director Stock Option Plan
(the "Non-Employee Director Plan") which provides for each non-employee
director 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 was instituted in 1987 and has
35
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a duration of ten years. Options granted under this plan become
exercisable in 20% increments each year and are granted for a ten year
period. The number of shares reserved for issuance under this plan is
100,000.
On March 20, 1992, the Compensation Committee of the board of directors
approved an option replacement program which permitted holders of
outstanding options under the Employee Plan to surrender and cancel the
options held by them and to receive in exchange new options covering an
equal number of shares having an exercise price equal to the market price
of the Company's common stock on March 20, 1992. Under the option
replacement program, two officers and directors surrendered for
cancellation the outstanding options held by them and in exchange
received new options covering 70,000 shares having an option exercise
price of $1.38 per share, the market price on the date of grant. On the
same date, another officer was granted an option covering 10,000 shares
in exchange for the surrender and cancellation of an existing option
covering 5,000 shares. On the same date, an officer of TOCCO surrendered
for cancellation an outstanding option and in exchange received a new
option covering 10,000 shares. On the same date, another officer of
TOCCO was granted a new option covering 10,000 shares. These options
also have an exercise price of $1.38 per share, the market price on the
date of the grants.
In 1993, four new directors were elected to the Company's board of
directors. Pursuant to the Company's Non-Employee Director Plan, each
director received on election an option for 10,000 shares of common stock
at an exercise price equal to the fair market value of the stock at the
date of grant. In December 1993, one of the new directors did not stand
for reelection at the Company's annual stockholders' meeting and, by the
terms of the Non-Employee Director Plan, his option expired in July 1994.
In January 1994, another of the new directors resigned from the board and
his option expired in August 1994.
On September 26, 1994, the Compensation Committee of the board of
directors approved the granting of options to purchase a total of 75,000
shares of common stock for $1.75 per share, the market value on the date
of the grant, to four employees of the Company. These options expire in
2004.
A summary of stock option transactions under the Employee Plan and
Non-Employee Director Plan is as follows:
Outstanding December 31, 1991 105,000
Granted ($1.38 per share) 100,000
Expired (85,000)
-------
Outstanding December 31, 1992 120,000
Granted ($2.88 to $3.75 per share) 40,000
-------
Outstanding December 31, 1993 160,000
Granted ($1.75 per share) 75,000
Expired (20,000)
-------
Outstanding at December 31, 1994 215,000
=======
36
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994, 161,500 options were exercisable at prices ranging
from $1.38 to $3.75 per share. Under these plans, 385,000 shares are
available for grant. The options for the Employee Plan 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 options for the
Non-Employee Director Plan vest in cumulative annual installments of 20%
beginning one year from the date of grant. The options for both plans
are exercisable for a period of ten years.
The Company granted a creditor (a company owned by the wife and other
relatives of the Company's president) two, three-year options, which
expired December 31, 1991, to purchase an aggregate of 1,000,000 shares
at $1.00 per share. In January 1992, these options were extended to
March 1992. They were not exercised and the options expired. In March
1992, the Company granted the creditor an option to purchase 200,000
shares of common stock at $1.00 per share to expire in December 1995. In
July 1993, the creditor exercised the option and the shares were issued
in exchange for the cancellation of $200,000 of an outstanding debt.
On May 1, 1992, in consideration for a personal loan of $200,000 from a
Saudi investor who is the president of two Saudi Arabian government
charitable organizations, the Board granted to the organizations an
option to purchase 1,500,000 shares at $1.00 per share by August 8, 1992
provided that these organizations accepted a previous Company offer for
them to purchase 1,500,000 shares at $1.00 per share by May 8, 1992. On
September 17, 1992, in consideration for an additional loan of $50,000
from the investor, the Board of Directors extended both the offer to sell
the shares and the exercise period of the option to December 15, 1992.
In consideration for an additional loan from the investor of $50,000 in
January 1993, the board of directors extended both the sell offer and the
option offer to March 29, 1993. On March 23, 1993, the offers were
further extended without an expiration date. On May 13, 1993, the
organizations elected not to exercise these options and the options were
cancelled. Concurrent with this decision, the board of directors
approved a sale of 3,000,000 shares at $1 per share to the Saudi
investor. The shares were purchased by the payment of $2.7 million in
cash and the cancellation of the $300,000 of indebtedness to the investor
by the Company.
On January 21, 1992, a director and officer of the Company was granted a
two-year option to purchase 14,000 shares at $1.00 per share. In January
1994, the option was exercised and the shares were issued in exchange for
the cancellation of $14,000 of unpaid compensation. In May 1992, a Saudi
investor purchased 35,000 shares of stock at $1.00 per share and was
granted an option until December 31, 1992 to purchase an additional
35,000 shares at $1.00 per share. The option was not exercised and has
expired. On December 29, 1992, the Board approved an extension of an
option to a U.S. investor to buy 46,250 shares at $1.00 per share from
December 31, 1992 to June 30, 1993. In June 1993, the option was
exercised.
In March 1993, the board of directors approved the sale of 75,000 shares
of common stock at $1.00 per share to a company controlled by a director
of the Company, and the grant of an option to such company to purchase
300,000 shares of common stock at $1.00 per share, which was exercisable
on or before September 10, 1993. The option for the 300,000 shares was
exercised in September 1993. For the issuance of the 300,000 shares, the
Company received $100,000 in cash and a receivable from this related
party of $200,000 which has been recorded as a debit in the stockholders'
equity section of the consolidated balance sheet. This receivable
balance is $150,000 at December 31, 1994.
37
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option transactions with individuals is as follows:
Outstanding December 31, 1991 1,746,250
Granted ($1.00 per share) 1,899,000
Expired (1,735,000)
----------
Outstanding December 31, 1992 1,910,250
Granted ($1.00 per share) 300,000
Exercised ($1.00 per share) (546,250)
Expired or forfeited (1,650,000)
----------
Outstanding December 31, 1993 14,000
Exercised (14,000)
----------
Outstanding at December 31, 1994 -0-
==========
All stock sold to individuals in connection with these options includes a
restriction that it cannot be traded for a three year period.
For stock options granted to employees and directors at an exercise price
below market price on the date of grant, the Company records an expense
equal to the difference between the exercise and market prices. An
expense is also recorded for the difference between sales price and
market price for stock sold to employees and directors not pursuant to
options at below market prices.
12. EXTRAORDINARY ITEM
In May 1994, South Hampton settled its note payable and accrued interest
payable to a vendor for $175,000 cash. An extraordinary gain of
$578,150, for which there is no tax effect after application of operating
loss carryforwards, was recorded, representing the amount of trade
accounts payable and accrued interest forgiven. See Note 9 (F).
13. INCOME TAXES
INCOME TAXES - In January 1993, the Company adopted SFAS No. 109. The
adoption had no significant impact on earnings or cash flow.
The income (loss) before income taxes and extraordinary item was
$2,314,129, ($1,338,321) and ($2,190,736) for the years ended December 31,
1994, 1993 and 1992, respectively.
The Company's provision for income taxes was comprised of the following:
1994 1993 1992
--------------- --------------- ---------------
Federal
Current $ 522,938 $ - $ 5,125
Deferred - - -
Utilization of operating
loss carryforward (482,965) - -
---------------- ---------------- ----------------
Provision for income taxes $ 39,973 $ -0- $ 5,125
================ ================ ================
38
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In years prior to 1993, the Company accounted for income taxes in
accordance with APB Opinion No. 11. In 1992, the Company had significant
net operating loss carryforwards to fully offset the effects of the
timing differences (attributable principally to depreciation of property
and equipment) which existed between financial and regular income tax
reporting. However, the Company was required to provide alternative
minimum tax.
Income tax expense (benefit) for the years ended December 31, 1994 and
1993 differs from the amount computed by applying the applicable U.S.
corporate income tax rate of 34% to net income (loss) before income taxes
(excluding the cumulative effect of the change in accounting for income
taxes). The reasons for this difference are as follows:
1994 1993
--------------- ---------------
Income taxes at U.S. statutory rate $ 786,804 $ (455,029)
Goodwill 95,303 95,303
Liability reserves (392,700) -
Net operating losses (482,965) 359,726
Alternative minimum tax 39,973 -
Other items (6,442) -
---------------- ----------------
Total tax expense $ 39,973 $ -0-
================ ================
In 1992, income taxes differed from the statutory tax rate due to
goodwill amortization, equity investment loss and unutilized tax loss
carryforwards.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for 1994
and 1993 were as follows:
December 31, December 31, January 1,
1994 1993 1993
--------------- --------------- ---------------
Deferred tax liabilities:
Refinery plant, pipeline and
equipment $ (379,668) $ (434,700) $ (407,754)
---------------- ---------------- ----------------
Gross deferred tax liability (379,668) (434,700) (407,754)
---------------- ---------------- ----------------
Deferred tax assets:
Accounts receivable 44,070 40,973 33,888
Mineral interests 196,446 202,224 202,224
Net operating loss carryforwards 9,277,552 9,791,240 9,400,963
Tax credit carryforwards 650,907 1,640,037 1,640,037
---------------- ---------------- ----------------
Gross deferred tax assets 10,168,975 11,674,474 11,277,112
Valuation allowance (9,789,307) (11,239,774) (10,869,358)
---------------- ---------------- ----------------
Net deferred tax assets 379,668 434,700 407,754
---------------- ---------------- ----------------
Net deferred taxes $ -0- $ -0- $ -0-
================ ================ ================
39
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of current year operations, the Company's net deferred tax
asset decreased by $55,032 to $379,668 at December 31, 1994. However,
there was no change in judgment about the Company's ability to realize
its net deferred tax asset; therefore, the valuation allowance was
decreased by a corresponding amount.
At December 31, 1994, the Company had approximately $27,287,000 of net
operating loss carryforwards and approximately $610,000 of general
business credit carryforwards. These carryforwards expire in 1995 through
2008. In addition, the Company has minimum tax credit carryforwards of
approximately $40,000 that may be carried forward indefinitely.
Approximately $1,100,000 of the net operating loss carryforwards and
$610,000 of the general business credit carryforwards are limited to the
net income of TOCCO. Approximately $14.8 million of the net operating
loss carryforwards are limited to the net income of ASCC.
The Company has no Saudi Arabian tax liability for its activities there.
14. SEGMENT INFORMATION
The Company has operations in two industry segments and geographic
regions. Its refinery operations represent the significant portion of
its current operating results and are exclusively in the United States,
whereas its mining operations, conducted mainly in Saudi Arabia, mostly
relate to costs which have been deferred during the development phase of
these operations. The only mining operations conducted in the United
States relate to the Company's investment in Pioche-Ely Valley Mines,
Inc. for which the related investment and equity income and losses are
shown separately on the balance sheet and statement of operations,
respectively. The Company has no significant corporate activities.
For 1994, 1993 and 1992, essentially all activity on the Company's
consolidated statement of operations relates to the refinery operations
except for equity income and losses from Pioche. The 1994 results include
$74,580 of unallocated costs recorded in general and administrative
expenses related to the Saudi Arabian operations. The 1992 results
include immaterial amounts of interest expense related to the Saudi
Arabian mining operations. All items included in the Company's
consolidated balance sheet related to the Saudi Arabian operations are
specifically identified on the face of the consolidated balance sheet
with the exception of notes payable which have been identified in Note 9.
15. RELATED PARTY TRANSACTIONS
The Company shares office facilities and certain expenses with companies
owned by the chairman of the Company. At December 31, 1994, these
companies did not owe any amounts to the Company. Accounts receivable
from these companies aggregated approximately $16,200 at December 31,
1993.
Noncurrent accrued liabilities in Saudi Arabia in the consolidated
balance sheet represent amounts payable to the Company's president.
Other significant related party transactions have been addressed in the
related notes to the consolidated financial statements. In particular,
see Note 10 for additional information.
40
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENT
On March 27, 1995, the board of directors approved a Letter of Agreement
between the Company and Carlyle SEAG ("Carlyle"), whereby Carlyle has
been retained as the Company's financial advisor in connection with the
Al Masane mining project. Carlyle's services will include, but not be
limited to, (1) advising on the capitalization structure of the proposed
Saudi company to be established for the project; (2) the raising of
capital funds for the project implementation; and (3) assisting the
Company in the filing of all licenses and necessary documents for
regulatory purposes. In addition to compensation for their services,
including the grant of an option allowing Carlyle to purchase 2,000,000
shares of the Company's common stock at $1 per share, Carlyle will
nominate one member to the board of directors at the Company's next board
meeting and will nominate a second board member upon the closing of the
financing for the Al Masane project.
41
DIRECTORS
John A. Crichton
Chairman of the Board
Arabian Shield Development Company
Dallas, Texas
Hatem El-Khalidi
President and Chief Executive Officer
Arabian Shield Development Company
Jeddah, Saudi Arabia
Oliver W. Hammonds
Attorney-at-Law
Dallas, Texas
Harb S. Al Zuhair
Chairman and Chief Executive Officer
TETRAD Development Co. Ltd.
Riyadh, Saudi Arabia
(Investments)
Mohammed O. Al-Omair
Executive Vice President
Saudi Fal Group of Companies
Riyadh, Saudi Arabia
(Investments)
Ghazi Sultan
Chairman
Sultan Group of Companies
Jeddah, Saudi Arabia
(Investments and marble mining)
EXECUTIVE OFFICERS
John A. Crichton
Chairman of the Board
Hatem El-Khalidi
President and Chief Executive Officer
Drew Wilson
Secretary/Treasurer
Nicholas N. Carter
President of Texas Oil and
Chemical Co. II, Inc.
TRANSFER AGENT AND REGISTRAR
KeyCorp Shareholder Services, Inc.
STOCK LISTING
NASDAQ National Market System
Symbol ARSD
FORM 10-K
Single copies of the Annual Report on Form 10-K which the Company has
filed with the Securities and Exchange Commission can be obtained by
stockholders without charge by writing to Arabian Shield Development
Company, Suite 175, 10830 North Central Expressway, Dallas, Texas
75231.