ARABIAN SHIELD
DEVELOPMENT COMPANY
ANNUAL REPORT TO STOCKHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1995
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. The Company will 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.
Until the profitability of the project is established, the Company plans to form
a joint venture with a Saudi limited liability company owned by Saudi Arabian
investors to initially own and operate the project when approval is received for
a loan from the Saudi Industrial Development Fund which was applied for on
September 30, 1995. As contemplated, the mining lease would be transferred so
that the Company and the Saudi limited liability company would each own a 50%
interest therein. The mining lease agreement provides that, when the
profitability of the project is established, the Company is obligated to 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 could
occur only after two years of profits from commercial operations of the mine.
The instructions added that Petromin will have the right to purchase shares in
the Saudi public stock company any time it desires.
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.
Under the terms of the mining lease agreement, the Company agreed to pay in
advance 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 (approximately $117,300 annually) during the period of the
lease for the total lease area of 44 square kilometers. The Company made rental
payments for the first year of the lease. As of December 31, 1995, the Company
has not paid for rentals of approximately $191,000. It is proposed that the
joint venture will assume responsibility for the rental payments and all
arrearages.
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
1
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 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 the 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.
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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 ore body. Once the raw ore is mined, it would be
subjected to a grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc concentrate,
copper concentrate and dore bullion. The copper 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.
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 as contemplated in the
feasibility study, the Company would not pay any income tax to the Saudi
government for the first five years. 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.
The Company retained Carlyle SEAG ("Carlyle"), of Washington, D.C. and Saudi
Arabia, in March 1995 as the Company's financial advisor in connection with the
Al Masane mining project. In February, 1996, the agreement with Carlyle was
effectively terminated by mutual consent. An agreement with a Saudi Arabian
financial advisor is currently being negotiated.
On September 30, 1995, the Company made a formal application to the Saudi
Industrial Development Fund to obtain 50% of the capital needed to finance the
Al Masane mining project. The feasibility study was presented to the Fund for
consideration.
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 gross revenues for 1995 for the
refinery were approximately $18 million and the cash flow realized was
approximately $809,000. It is significant that the plant sells about 40% of all
pentanes consumed in the United States.
In May 1993, the Company had discussions with Chevron Chemical Company regarding
the Company's proposal to purchase 5,000 barrels per day of mixed pentanes from
an Aromax(R) petrochemical project to be built in Jubail, Saudi Arabia by
Chevron Chemical in a 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(R) plant in Saudi Arabia. As proposed, the Company would have
a 25% interest in the joint venture. Chevron Chemical advised the Company by
letter in July 1993 that Chevron Chemical and SVCS have jointly agreed to commit
to supply the joint venture's proposed pentane project with up to 5,000 barrels
per day
3
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(R) plant and the
joint venture's processing plant but was delayed during 1995 because of the
absence of a firm commitment for the feedstock supply to the Aromax(R) plant.
The Company will begin applying to the Saudi government for a license for the
project when the Aromax(R) 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. The Company is planning
limited exploration of the Pioche-Ely Valley properties in 1996.
Respectfully submitted,
John A. Crichton
Chairman of the Board
Hatem El-Khalidi
President and Chief
Executive Officer
March 29, 1996
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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.
National Mining Company, a private Saudi company ("National Mining"), which
previously had a 50% interest in the joint venture formed to explore and develop
the Al Masane area, relinquished its rights to the mining lease and assigned
them to the Company. National Mining has orally advised the Company that it has
relinquished its rights in all other areas in Saudi Arabia and assigned them to
the Company. The Company holds 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 1996.
In May 1993, the Company had discussions with Chevron Chemical Company regarding
the Company's proposal to purchase 5,000 barrels per day of mixed pentanes from
an Aromax(R) petrochemical project to be built in Jubail, Saudi Arabia by
Chevron Chemical in a 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(R) plant in Saudi Arabia. Chevron Chemical advised the
Company by letter in July 1993 that Chevron Chemical and SVCS have jointly
agreed to commit to supply the joint venture's proposed pentane project with up
to 5,000 barrels per day of mixed pentane feedstock. As proposed, the Company
would have a 25% interest in the joint venture. Engineering and marketing
studies of the project have been made by outside consultants which reflect
positive results. Planning has begun toward the construction and operation of
the Aromax(R) plant and the joint venture's processing plant, but was delayed
during 1995 because of the absence of a firm commitment for the feedstock supply
to the Aromax(R) plant. The Company will begin applying to the Saudi government
for a license for the project when the Aromax(R) project receives final approval
from the Saudi government.
In December 1993, the Company commissioned Sherritt Ltd. of Fort Saskatchewan,
Canada, to prepare a conceptual engineering design for a proposed zinc refinery
based on Sherritt's two-stage pressure leach process, to be built by the Company
and Saudi partners at the Red Sea port of Yanbu, Saudi Arabia. The refinery
would have the capacity to produce 100,000 tonnes of slab zinc per year, with
elemental sulfur as a by-product. Sherritt Ltd. completed the study in May 1994
which contains a proposed flow sheet that has been commercialized and designed
for a state of the art zinc refinery. Sherritt's zinc pressure leach technology
provides significant advantages over other existing zinc production processes,
including having the reputation as the most favored technology for environmental
considerations. In 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 encouraged the Company to
carry out further studies toward the implementation of the project.
5
UNITED STATES ACTIVITIES. The Company's United States operations include the
ownership and operation of a petroleum refinery and the leasing of mineral
properties.
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
tax loss carry-forwards of approximately $5.9 million and has been negotiating
with several companies toward the possible use of this amount, although there
can be no assurance that any agreement relating thereto will be reached.
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 1995 and 1994, respectively, as reported by NASDAQ.
1995 1994
------------------------ ------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
High 2 3/8 2 3/8 1 7/8 1 1/4 2 3/4 2 3/8 2 1/2 2 1/2
Low 1 3/4 1 5/8 5/8 5/8 2 1 3/4 1 1/4 1 1/2
At March 18, 1996, there were 919 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):
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Revenues................................ $ 18,359 $ 17,765 $ 15,267 $ 13,468 $ 18,707
Net Income (Loss)....................... $ (369) $ 2,852 $ (1,338) $ (2,196) $ 452
Net Income (Loss) Per Share............. $ (.02) $ .14 $ (.08) $ (.14) $ .03
Total Assets (At December 31)........... $ 40,805 $ 41,057 $ 41,090 $ 38,729 $ 27,603
Total Long-Term Obligations
(At December 31)...................... $ 1,676 $ 1,148 $ 908 $ 889 $ 1,841
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
6
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 1995, 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 April 30,
1996 of the maturity of the Amended and Restated Credit Agreement with Den
norske Bank AS, (2) borrowed $721,000 in the aggregate from four individuals,
including a stockholder of the Company who is the Vice Chairman of National
Mining, a stockholder of the Company, the President and Chief Executive Officer
of the Company and a relative of such officer, pursuant to loans payable on
demand two years after their issuance bearing interest at LIBOR plus 2%, such
lenders having the option for a period of five years from the date of the loan
to convert the principal amount of their loan and all accrued interest into
shares of the Company's Common Stock at the rate of $1.00 per share, (3)
received $50,000 payment on a stockholder receivable from a 1993 sale of shares
of its Common Stock to a private Saudi company controlled by a director and (4)
granted the President and Chief Executive Officer of the Company an option to
convert at any time $400,000 of deferred compensation for services rendered to
the Company into shares of the Company's Common Stock at the rate of $1.00 per
share.
The exploration licenses held by the 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, 1995 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 1994 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. Until the profitability
of the project is established, the Company plans to form a joint venture with a
Saudi limited liability company owned by Saudi Arabian investors to initially
own and operate the project when approval is received for a loan from the Saudi
Industrial Development Fund which was applied for on September 30, 1995. As
contemplated, the mining lease would be transferred so that the Company and the
Saudi limited liability company would each own a 50% interest therein. Pursuant
to the mining lease agreement, when the profitability of the project is
established, the Company is obligated to 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 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 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
could occur only after two years of profits
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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.
Pursuant to these instructions, in March 1995 the Company retained Carlyle SEAG
("Carlyle") as the Company's financial advisor in connection with the Al Masane
mining project. In February 1996, the agreement with Carlyle was terminated by
mutual consent. An agreement with a Saudi Arabian financial advisor is currently
being negotiated.
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, on September 30, 1995 the Company applied 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 also be able to finance the
remaining 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, 1995, the outstanding principal amount and accrued interest
under the Amended and Restated Credit Agreement with Den norske Bank AS was
$2,222,911. The entire balance under the Amended and Restated Credit Agreement
facility, including amounts drawn under the letter of credit facility, was due
on December 31, 1995. The amounts due to Den norske Bank AS were not paid in
full on the December 31, 1995 maturity date. The maturity date has been extended
to April 30, 1996. In connection with the latest extension of the Den norske
Bank AS loan, South Hampton agreed to make a principal payment of $100,000
during the four month extension period. Except for the foregoing, the terms and
conditions of the loan remain the same. The extension is designed to permit Den
norske Bank AS and South Hampton to negotiate a restructuring of the loan into a
two-year revolving credit loan, which has been agreed to in principle by the
parties, but no formal agreement has been reached.
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 State Pipe Line Company,
Inc. ("Gulf State"), 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 1995, except that in July 1995 South
Hampton remitted $30,000 to the Company in partial repayment of the intercompany
note, causing the loan to be in default. At December 31, 1995, the Company had
not repaid this advance. Den norske Bank AS has agreed to receiving payment of
the $30,000 by April 30, 1996 in addition to the $100,000 in principal due by
April 30, 1996. 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 did not exceed the amount available under the
borrowing base ratio as defined in the Amended and Restated Credit Agreement.
South Hampton expects that the loan balance will no longer be in excess of the
borrowing base ratio due to the reduced balance of the debt. South Hampton does
not have adequate resources to pay the full amount outstanding under the Amended
and Restated Credit Agreement at maturity on April 30, 1996, however, Den norske
Bank AS and South Hampton have agreed in principle to restructure the loan into
a two-year revolving credit facility and it is anticipated that the
documentation of the restructured loan will be completed by April 30, 1996.
8
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 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
State 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 1996. Repayments of these
advances is prohibited under the Amended and Restated Credit Agreement.
The refinery's historical operations do not demonstrate adequate cash flow to
repay the current portion of its debt obligations. 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(R) 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(R) 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 whollyowned 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. 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.
The Company's financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The Company is dependent on the services of its president. In the event his
services discontinue, the ability of the Company to continue its activities in
Saudi Arabia is uncertain.
In 1995, the Financial Accounting Standards Board issued Statement No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and Statement No.123, "Accounting for Stock-Based Compensation."
Both statements must be adopted in 1996.
Statement No.121 requires the review for impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset. The amount of the impairment loss will be measured
as the difference between the carrying amount of the
9
asset and its estimated fair value. The Company has determined that the adoption
of Statement No.121 in 1996 will result in an impairment loss of $2,431,248 on
the other interests in Saudi Arabia. This impairment loss to conform to
Statement No.121 does not represent the abandonment of this exploration effort.
The Company is in the process of applying for an exploration license from the
Saudi Arabian government covering its other interests in Saudi Arabia and fully
intends to develop these interests in the future.
Statement No.123 establishes accounting and reporting standards for various
stock-based compensation plans. Statement No.123 encourages the adoption of a
fair value-based method of accounting for employee stock options, but permits
continued application of the accounting method prescribed by Accounting
Principles Board Opinion No. 25 (Opinion 25), "Accounting for Stock Issued to
Employees." Entities that continue to apply the provisions of Opinion 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value-based method of accounting had been applied. The Company will adopt
Statement No.123 in 1996 and currently expects to continue to account for its
employee stock options in accordance with the provisions of Opinion 25.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS 1995 TO 1994
During the fiscal year ended December 31, 1995, the Company had a net loss of
$369,232 compared to net income of $2,852,306 for the fiscal year ended December
31, 1994.
The gross refined product sales in 1995 of $17,741,862 was an increase of
$177,636 from 1994 while the cost of sales in 1995 of $15,575,054 was an
increase of $1,824,304 from 1994, resulting in a net margin decrease in 1995 of
$1,646,668. After processing fee income, general and administrative expenses and
depreciation and amortization, the operating loss of the Company in 1995 of
$266,236 was $2,571,862 less than the operating income in 1994 of $2,305,626.
The net income for the refining operations in 1995 of $132,447 was $3,067,980
less than the net income in 1994 of $3,271,625. Two refining company items
contributed to the higher income in 1994: (i) operating income included $975,000
relating to the reversal of a charge in 1992 for potential expenses relating to
litigation that was settled in 1994; and (ii) an extraordinary income item of
$578,150 attributable to the settlement of an indebtedness owed to a vendor.
The Refining Company's net profit in 1995 reflected the steady demand which the
plastics industry experienced toward the end of 1994 and throughout 1995. Most
of 1994 could be characterized as a period of rising prices, pent-up demand and
high operating utilization rates with strong gross margins on feedstock costs.
In comparison, the Refining Company's 1995 results reflect a 3% decrease in
sales volume, from 21,430,000 gallons in 1994 to 20,798,000 gallons in 1995, and
a 43% reduction in gross margins. The Refining Company's sales continued to be
solid with the majority of its products continuing to be placed into the
higher-priced specialty markets. Several new customers were added during 1995
and product sales attained a reasonable level of performance. The ability of the
Refining Company to produce the highest quality products available in its field
has enabled it to remain competitive even during the periods of low demand or
high feedstock prices.
The primary feedstock of the Company, natural gasoline, is the heavier liquid
produced by natural gas processing plants and by LPG fractionators. Feedstock
prices in 1995 were approximately 23% higher than in 1994 resulting in reduced
gross margins. The chemical industry, primarily the ethylene crackers, continued
to be a big user of natural gasoline in 1995 which contributed to the higher
feedstock prices. Feedstock prices are expected to sustain 1995 levels
throughout most of 1996.
The Refining Company has experienced a healthy growth in its toll processing
business over the last three years and expects the opportunities to continue to
develop, although there can be no assurances to that effect. Toll processing
fees were $163,977, $200,757 and $616,796 in 1993, 1994 and 1995, respectively.
The increase in the toll processing business is indicative of the direction of
the refining and petrochemical industries in the U.S. Many larger companies are
"rightsizing", and outsourcing smaller
10
jobs and processes which might have been formerly managed in their own
facilities. South Hampton has been in the toll processing business for over 30
years and has a good reputation in the industry for this type of work.
Management intends to expand the Refining Company's involvement in this area as
opportunities arise.
General and administrative expenses increased by $336,213 to $2,372,683 in 1995
from $2,036,470 in 1994. This increase was mostly attributable to higher
payroll, franchise tax, insurance and regulatory expenses at the refinery and
stock option expense incurred in 1995 by the Company. The expenses of regulatory
compliance and reporting continued to increase. Interest expense, which was
practically all attributable to the debt of the refinery, increased slightly by
$22,182 from $347,364 in 1994 to $369,546 in 1995. This increase was primarily
due to higher interest rates in 1995.
The equity losses of an affiliate in 1995 of $24,112 represented a decrease of
$120,348 from 1994 and 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 1995 and 1994 on
the Pioche-Ely Valley properties primarily due to the lack of financing for
claims to be explored and developed. Interest income in 1995 and 1994 was from
the investment of excess cash in time deposits in Saudi Arabia and a short-term
investment by South Hampton. In 1995 and 1994, there was no operating activity
on any of the Saudi Arabia mining properties. Assuming financing can be
obtained, the results of the 1994 feasibility study contemplate that
construction of an ore treatment plant and all infrastructure for a mining
facility at Al Masane is estimated to take 18 months to complete. The 1994
feasibility study estimated the cost of the mining facility to be $81.3 million.
Miscellaneous income represents various items of other income which individually
are not significant enough to warrant being separately disclosed. Miscellaneous
income in 1994 included $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 miscellaneous income are tank rentals, building rentals,
cancellation of debt income, commission income and occasionally small asset sale
proceeds. In 1995 and 1994, the refinery received $101,640 each year from the
leasing of an office building. Tank rentals decreased from $97,000 in 1994 to
$78,000 in 1995 due to a change in lessees and a decrease in the rental rate.
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
$33.2 million at December 31, 1995, of which approximately $5.9 million is
limited to any future net income of the coal company and approximately $1.7
million of this amount is limited to any future net income of TOCCO. These
carry-forwards expire during the years 1996 through 2009. The Company has been
negotiating with several companies toward the possible use of the coal company's
carry-over amount, although there can be no assurances that any agreement
relating thereto will be reached.
At December 31, 1995, a total of approximately $1,373,296 in accrued salaries
and termination benefits was due to Company employees in Saudi Arabia, which
includes approximately $651,737 due to Hatem El-Khalidi, the Company's President
and Chief Executive Officer. Accrued salaries and termination benefits to
Company employees in Saudi Arabia and to Mr. El-Khalidi at December 31, 1994
were approximately $654,000 and $586,000, respectively. These unpaid amounts
have been deferred until the Company's working capital position improves.
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
11
margin increase in 1994 of $2,024,481. 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 $200,757, an increase of
$36,780, or 22%, 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 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
12
provision on the Company's net income after the utilization of net operating
loss carry-forwards of $482,965.
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. 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 1994 feasibility study estimated 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 received $101,640 from leasing an
office building, a $12,862 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 $5.9 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 1995 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.
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, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, 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 5 and 7 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, 1995. None of the related projects have been developed
for commercial operation as of December 31, 1995, and significant expenditures,
for which the Company must obtain financing, will be necessary before commercial
operations, if any, are commenced.
As described in Note 10 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 reschedule payment
of the loan.
As described in Notes 5 and 10 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 totaling
$3.8 million. South Hampton does not have the ability to fully 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.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1996
14
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-----------------------------
1995 1994
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents in United States................. $ 302,039 $ 1,078,349
Short-term investment...................................... 294,610 247,770
Accounts receivable (net of allowance for doubtful accounts
of $145,709 in 1995 and $129,617 in 1994)............... 1,791,821 1,402,982
Inventories................................................ 430,732 471,074
------------ ------------
Total current assets......................................... 2,819,202 3,200,175
Cash in Saudi Arabia......................................... 396,809 430,976
Refinery plant, pipeline and equipment at cost............... 5,563,776 5,440,208
Less accumulated depreciation................................ (2,557,454) (2,187,256)
------------ ------------
Refinery plant, pipeline and equipment, net.................. 3,006,322 3,252,952
Al Masane Project............................................ 30,897,883 30,112,132
Other interests in Saudi Arabia.............................. 2,431,248 2,431,248
Investment in and advances to Pioche-Ely Valley Mines,
Inc........................................................ 239,032 247,052
Goodwill..................................................... 397,902 678,206
Other assets (net of allowance for doubtful accounts of
$114,537 in 1995 and 1994)................................. 617,019 704,035
------------ ------------
Total assets................................................. $ 40,805,417 $ 41,056,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 674,641 $ 944,007
Accrued liabilities........................................ 617,995 616,459
Accrued liabilities in Saudi Arabia........................ 1,011,980 785,743
Notes payable.............................................. 15,086,191 15,945,393
Current portion of long-term debt.......................... 78,090 67,968
Current portion of long-term obligations................... 20,285 18,805
------------ ------------
Total current liabilities.................................... 17,489,182 18,378,375
Long-term debt............................................... 708,534 195,386
Long-term obligations........................................ 185,875 206,013
Accrued liabilities in Saudi Arabia.......................... 636,047 585,918
Deferred revenue............................................. 145,189 160,693
Commitments and contingencies
Stockholders' equity:
Common stock, authorized 40,000,000 shares of $.10 par
value; issued and outstanding, 20,206,494 shares in 1995
and 20,028,494 shares in 1994........................... 2,020,649 2,002,849
Additional paid-in capital................................. 33,210,750 32,899,119
Receivables from stockholders.............................. (126,000) (276,000)
Accumulated deficit........................................ (13,464,809) (13,095,577)
------------ ------------
21,640,590 21,530,391
------------ ------------
Total liabilities and stockholders' equity................... $ 40,805,417 $ 41,056,776
============ ============
See notes to consolidated financial statements.
15
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
Revenues:
Refined product sales.................................... $17,741,862 $17,564,226 $15,103,422
Processing fees.......................................... 616,796 200,757 163,977
----------- ----------- -----------
Total................................................. 18,358,658 17,764,983 15,267,399
Operating costs and expenses:
Cost of refined product sales and processing............. 15,575,054 13,750,750 13,314,427
General and administrative............................... 2,372,683 2,036,470 2,208,592
Depreciation and amortization............................ 677,157 647,137 678,947
Litigation............................................... -- (975,000) --
----------- ----------- -----------
Total................................................. 18,624,894 15,459,357 16,201,966
----------- ----------- -----------
Operating income (loss).................................... (266,236) 2,305,626 (934,567)
Other income (expenses):
Interest income.......................................... 33,395 56,491 46,433
Interest expense......................................... (369,546) (347,364) (576,338)
Equity in losses of affiliate............................ (24,112) (144,460) (59,812)
Miscellaneous income..................................... 257,267 443,836 185,963
----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item....................................... (369,232) 2,314,129 (1,338,321)
Income tax expense......................................... -- (39,973) --
----------- ----------- -----------
Income (loss) before extraordinary item.................... (369,232) 2,274,156 (1,338,321)
Extraordinary item......................................... -- 578,150 --
----------- ----------- -----------
Net income (loss).......................................... $ (369,232) $ 2,852,306 $(1,338,321)
=========== =========== ===========
Per common share:
Income (loss) before extraordinary item.................. $ (.02) $ .11 $ (.08)
Extraordinary item....................................... -- .03 --
----------- ----------- -----------
Net income (loss)........................................ $ (.02) $ .14 $ (.08)
=========== =========== ===========
Weighted average number of common shares outstanding....... 20,030,434 20,027,881 17,532,335
=========== =========== ===========
See notes to consolidated financial statements.
16
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
----------- ----------- ------------ ------------ ------------- ------------
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
Common stock and common stock
subscriptions........................ 278,000 27,800 250,200 278,000
Payment on stockholder receivables..... 50,000 50,000
Write-off of stockholder receivables... (100,000) (10,000) (90,000) 100,000 --
Stock options issued................... 151,431 151,431
Net loss............................... (369,232) (369,232)
---------- ---------- ----------- --------- ------------ -----------
December 31, 1995........................ 20,206,494 $ 2,020,649 $ 33,210,750 $ (126,000) $ (13,464,809) $ 21,640,590
========== ========== =========== ========= ============ ===========
See notes to consolidated financial statements.
17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1995 1994 1993
----------- ------------ ------------
Operating activities:
Net income (loss).......................................... $ (369,232) $ 2,852,306 $ (1,338,321)
Adjustments for non-cash transactions:
Depreciation and amortization........................... 677,157 647,137 678,947
Equity in losses of affiliate........................... 24,112 144,460 59,812
Stock options issued.................................... 151,431 -- 478,500
Extraordinary item...................................... -- (578,150) --
Effects of changes in:
Decrease (increase) in accounts receivable.............. (388,839) 101,134 (430,924)
Decrease (increase) in inventories...................... 40,342 175,965 (124,395)
Decrease in other assets................................ 87,016 30,052 222,466
(Decrease) increase in accounts payable and accrued
liabilities........................................... (267,830) (821,334) 46,659
Decrease in deferred revenue............................ (15,504) (15,504) (15,504)
Other...................................................... (12,190) (82,078) (4,282)
----------- ----------- -----------
Net cash provided by (used for) operating activities......... (73,537) 2,453,988 (427,042)
----------- ----------- -----------
Investing activities:
Purchase of short-term investment.......................... (291,915) (243,770) --
Proceeds from sale of short-term investment................ 255,787 -- --
Additions to Al Masane Project............................. (785,751) (743,709) (965,162)
Additions to other interests in Saudi Arabia............... -- -- (41,144)
Additions to refinery plant, pipeline and equipment........ (153,235) (279,122) (2,818)
(Increase) decrease in cash in Saudi Arabia................ 34,167 1,257,042 (1,674,078)
Increase (decrease) in accrued liabilities in Saudi
Arabia.................................................. 276,366 (105,276) 104,947
----------- ----------- -----------
Net cash used for investing activities....................... (664,581) (114,835) (2,578,255)
----------- ----------- -----------
Financing activities:
Common stock issued for cash............................... -- -- 3,131,250
Decrease in receivables from stockholders.................. 50,000 50,000 --
Additions to notes payable and long-term obligations....... 721,000 -- 70,748
Reduction of notes payable and long-term obligations....... (809,192) (1,429,632) (174,342)
----------- ----------- -----------
Net cash provided by (used for) financing activities......... (38,192) (1,379,632) 3,027,656
----------- ----------- -----------
Net increase (decrease) in cash.............................. (776,310) 959,521 22,359
Cash and cash equivalents at beginning of year............... 1,078,349 118,828 96,469
----------- ----------- -----------
Cash and cash equivalents at end of year..................... $ 302,039 $ 1,078,349 $ 118,828
=========== =========== ===========
See notes to consolidated financial statements.
18
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 7). 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
State Pipe Line Company, Inc. ("Gulf State"). 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 8). The Company also has an equity
interest in Pioche-Ely Valley Mines, Inc. ("Pioche") which owns mineral deposits
in Nevada (Note 9).
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 1995 were the operations of South Hampton and the proceeds from loans from
Saudi Arabian investors (Note 10). The Company is not currently generating cash
flow from any other activities. As the cash flow attributable to South Hampton
is fully dedicated to repayment of debt and funding of refinery operations
(described in Notes 5 and 10), the cash flow attributable to South Hampton
currently is not adequate to support the Company's operations. As described in
Note 10, 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.
The Company is dependent on the services of its president. In the event his
services discontinue, the ability of the Company to continue its activities in
Saudi Arabia is uncertain.
Management plans to fund future operations initially through sales of its common
stock and borrowings (Note 12). It is expected that the operations and
obligations of the Company will be eventually funded from operations of the Al
Masane mine. 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.
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.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENT -- At December 31, 1995 and 1994, the Company held a
United States treasury bill with an original maturity of less than one year. The
Company intends to hold this investment to maturity.
19
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1995, none of the projects described in Notes 7 and 9 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 using
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 catalysts used in refinery operations,
prepaid expenses and certain refinery assets which are being leased to a third
party.
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
1995 include the write-off of a stockholder receivable to purchase 100,000
shares of common stock at $1.00 per share and the issuance of 278,000 shares of
common stock at $1.00 per share for the cancellation of $278,000 of indebtedness
(Note 10). Transactions of this type 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 10 and 12).
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
last few months of 1994 and into 1995, which resulted in net recognized losses
of $101,000 in 1995 and $117,000 in 1994. These losses are included as a cost of
refined product sales and processing in the consolidated statement of
operations. Since the fuel prices decreased in 1995 and were expected to soften
in the next year or two, the hedging program was discontinued in June 1995.
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 significant 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
20
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 $2,385,113 and $2,104,809 at December 31,
1995 and 1994, 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.
RECENT ACCOUNTING PRONOUNCEMENTS -- In 1995, the Financial Accounting Standards
Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and Statement No. 123,
"Accounting for Stock-Based Compensation." Both Statements must be adopted in
1996.
Statement No. 121 requires the review for impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset. The amount of the impairment loss will be measured
as the difference between the carrying amount of the asset and its estimated
fair value. The Company has determined that the adoption of Statement No. 121 in
1996 will result in an impairment loss of $2,431,248 on the other interests in
Saudi Arabia. This impairment loss to conform to Statement No. 121 does not
represent the abandonment of this exploration effort. The Company is in the
process of applying for an exploration license from the Saudi Arabian government
covering its other interests in Saudi Arabia and fully intends to develop these
interests in the future.
Statement No. 123 establishes accounting and reporting standards for various
stock based compensation plans. Statement No. 123 encourages the adoption of a
fair value based method of accounting for employee stock options, but permits
continued application of the accounting method prescribed by Accounting
Principles Board Opinion No. 25 (Opinion 25), "Accounting for Stock Issued to
Employees." Entities that continue to apply the provisions of Opinion 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. The Company will adopt
Statement No. 123 in 1996 and currently expects to continue to account for its
employee stock options in accordance with the provisions of Opinion 25.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
At December 31, 1995, the Company's financial instruments included cash, cash
equivalents, investments, accounts receivable, current obligations, and
noncurrent liabilities. The fair values of cash, cash equivalents, investments,
accounts receivable, current obligations, and deferred revenue approximated
their carrying values at December 31, 1995. The estimated fair value of
long-term debt and long-term obligations, based on market data for similar
instruments, was $764,726 at December 31, 1995. Accrued
21
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
liabilities in Saudi Arabia consist primarily of accrued salary and benefits.
Payment of these items is contingent on the Company's ability to obtain future
financing. As such, a fair value cannot be reasonably estimated.
Financial instruments that are potentially subject to concentrations of credit
risk consist of cash equivalents, short-term investments, and trade accounts
receivable. The Company places its cash equivalents and short-term investments
with high credit quality financial institutions. Trade accounts receivable are
with credit worthy customers. The Company believes the risk of incurring losses
related to these instruments is remote.
5. 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 7
and 9, 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.
22
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.
Prior to 1995, the Company filed a complaint with the U. S. Department of
Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"), alleging
violations of the Foreign Corrupt Practices Act by Hunt in obtaining its
Petroleum Production Sharing Agreement ("PSA") in Yemen in 1981, subsequent to
the Company presenting a bid to the Yemen government for the same area. The
Company believes that, because the PSA of Hunt is still ongoing, and under its
auspices, payments and receipts occur daily, the DOJ still has ample
jurisdiction to continue its investigation. A letter from the DOJ on December
19, 1995 stated its interest in receiving additional documentation regarding the
Company's allegations. On February 28, 1996, the Company sent more documents to
the DOJ which it believes will further support its allegations and is awaiting a
response by the DOJ. The Company believes that the Victim Restitution Act
provides for restitution to the Company of monies lost as a result of the
alleged wrong doing by Hunt, if Hunt is convicted under the Foreign Corrupt
Practices Act.
South Hampton has short-term notes payable and current portions of long-term
obligations totaling $3.8 million at December 31, 1995, of which $2.2 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 fully repay these current obligations on the due date 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 obtain a renewal of the bank debt (see Note 10) and 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 1996, management
believes that it will be able to obtain modifications of the repayment terms of
the debt obligations. Although there can be no assurance to that effect.
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. 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 was 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. It is South Hampton's
policy to accrue for costs associated with regulatory compliance. In mid-1993,
while remediating a small spill area, the Texas Natural Resources Conservation
Commission ("TNRCC") requested that the refinery 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 to determine the extent of the
hydrocarbon pool was completed and approved in November 1995. The costs through
1995 related to the clean up totaled
23
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
approximately $75,000. At December 31, 1995, $25,000 has been accrued as a
current liability for the estimated future costs associated with the clean up.
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 TNRCC
did not respond to South Hampton's offer and in December 1995, the TNRCC
proposed an increase in the fine to $67,200. South Hampton is vigorously
protesting the increased fine as it believes that the settlement had been
previously agreed upon. However, no agreement has been reached with the TNRCC.
At December 31, 1995, South Hampton has accrued $40,000 as a current liability
to cover the potential costs of the contingency which it believes is adequate to
cover the possible range of loss.
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 voluntarily adopting the requirements of the OSHA Process Safety
Management rules. Approximately $80,000 was spent in fiscal year 1995 on safety
improvements.
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, 1995, the past due amount of these rent payments is approximately
$191,000. In addition, the Company has not complied with certain statutory
reporting requirements in Saudi Arabia. Management of the Company believes that
the lack of compliance with these license requirements will not have any effect
on the Company's planned operations in Saudi Arabia.
At December 31, 1995, South Hampton had a $100,000 letter of credit in support
of payment for purchases of natural gas used in the refinery from its main
supplier.
6. INVENTORIES
Inventories include the following:
December 31,
---------------------
1995 1994
-------- --------
Refinery feedstock........................................... $ 59,358 $226,265
Refined products............................................. 371,374 244,809
-------- --------
Total inventories.................................. $430,732 $471,074
======== ========
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, 1995 and 1994, market value exceeded
LIFO value by approximately $152,092 and $193,000, respectively.
24
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA
In the accompanying consolidated financial statements, the deferred development
costs have been presented based on the related projects' geographic location
within Saudi Arabia. This includes the "Al Masane Project"(the "Project") and
"Other interests in Saudi Arabia" which primarily pertains to the costs of
rentals, field offices and camps, core drilling and labor incurred at the Wadi
Qatan and Jebel Harr properties.
In 1971, the Saudi Arabian government awarded 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. 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
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 initialed 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.
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 initialed 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. As noted below, the mining lease was granted in 1993.
However, 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.
25
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has held exploration licenses for the Wadi Qatan, Jebel Harr and
Greater Al Masane areas in Saudi Arabia. Although the licenses have expired, the
Saudi Arabian government has orally advised the Company that they will be
extended as long as mineral exploration is being carried out on the areas which
they cover. The Company is planning to apply for formal extensions in 1996.
Although the licenses were originally awarded jointly to the Company and NMC,
the exploration work has been carried on exclusively by the Company. NMC has
orally advised the Company that it has relinquished its rights in these areas;
therefore, the Company intends to obtain the license extensions in the name of
the Company only. 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 negotiated with the Saudi government for
the Al Masane lease. The Company does not intend to abandon these sites.
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. The
lease agreement stipulates that the Company is to pay the Saudi government a
surface rental of approximately $117,000 per year. The Company made the first
year's payment in August 1993. All subsequent payments are being deferred to be
paid until a Saudi limited liability company is formed and acquires 50% of the
Project from the Company. ASDC and this new company will jointly operate the
Project when approval is received for the loan from the Saudi Industrial
Development Fund ("SIDF"), which was applied for on September 30, 1995. The
lease also stipulates that, after two years of profitable mine operations, a
Saudi public stock company will be formed in which the Company will contribute
its investment in the Al Masane Project in return for 50% of the stock. The
Petroleum and Mineral Organization ("PETROMIN"), a company wholly-owned by the
Saudi government, has an option to acquire up to 25% of the stock and the
remaining interests not owned by the Company or acquired by PETROMIN are to be
put out for public subscription to Saudi citizens.
On March 27, 1995, the board of directors approved a Letter of Agreement between
the Company and Carlyle SEAG ("Carlyle"), whereby Carlyle had been retained as
the Company's financial advisor in connection with the Al Masane mining project.
In February 1996, the agreement with Carlyle was terminated by mutual consent.
An agreement with a new financial advisor in Saudi Arabia is being negotiated.
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 Project 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. 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
projected 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).
26
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, 1995, 1994 and 1993, 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
1995 1995 1994 1994 1993 1993
----------- -------- ----------- -------- ----------- --------
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.......................... 16,640,187 $616,912 16,023,275 $237,908 15,785,367 $653,930
Materials and maintenance........ 6,167,010 5,326 6,161,684 683 6,161,001 1,232
Feasibility study................ 2,789,987 163,513 2,626,474 505,118 2,121,356 310,000
----------- -------- ----------- -------- ----------- --------
Total.......................... 25,597,184 785,751 24,811,433 743,709 24,067,724 965,162
----------- -------- ----------- -------- ----------- --------
$30,897,883 $785,751 $30,112,132 $743,709 $29,368,423 $965,162
=========== ======== =========== ======== =========== ========
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. Cash in Saudi Arabia includes time deposits of
$300,735 and $333,333 at December 31, 1995 and 1994, respectively.
8. REFINERY OPERATIONS
South Hampton, the Company's only revenue producing asset, sells its products
primarily to companies in the chemical and plastics industry. Downturns in these
industries 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 25%, 13% and 16% of
total sales in 1995, 1994 and 1993, respectively.
9. INVESTMENT IN PIOCHE-ELY VALLEY MINES, INC.
The Company temporarily 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 was due in 1995; however, management of the Company extended the due
date to December 31, 1998. 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 when financing becomes available.
In August 1993, Pioche entered into a lease of the Wide Awake mine property.
This agreement stipulates a 6% royalty on net smelter returns with no annual
rental required. The lease commenced on October 1,
27
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1993, for a primary term of twenty-seven months (to December 31, 1995). In
August 1995, it was agreed by all parties concerned that the lease would be
extended for one year to December 31, 1996, under the same terms, and will
continue as long as minerals are produced in commercial quantities or unless
terminated by the parties. No royalties were earned in 1995 or 1994. A core hole
is planned to be drilled on the Wide Awake claim in 1996. In 1995, the Company
received an extension of its option to buy 720,000 shares of Pioche common stock
at $0.20 per share. The option expires on June 1, 1997.
10. 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:
1995 1994
----------- -----------
Notes payable:
Revolving bank note. See (A)......................... $ 2,222,911 $ 2,927,113
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).......... 13,280 168,280
Unsecured note to a Saudi investor. See (E).......... 350,000 350,000
----------- -----------
Total................................................ $15,086,191 $15,945,393
=========== ===========
Long-term debt:
Unsecured notes to foreign investors. See (F)........ $ 598,000 --
Bank note. See (G)................................... 188,624 $ 263,354
Less current portion................................. 78,090 67,968
----------- -----------
Long-term debt....................................... $ 708,534 $ 195,386
=========== ===========
Long-term obligations:
Noninterest-bearing note to a supplier and customer
for capital improvements. See (H)................. $ 128,683 $ 128,683
Other financing obligations:
Deferred compensation contracts. See (I)............. 77,477 96,135
----------- -----------
Total long-term obligations.......................... 206,160 224,818
Less current portion................................. 20,285 18,805
----------- -----------
Long-term obligations................................ $ 185,875 $ 206,013
=========== ===========
(A) In 1990, South Hampton and a bank entered into an Amended and Restated
Credit Agreement ("the Agreement"). 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 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, and the Agreement
prohibits the payment of dividends by South Hampton. In addition, the
Company and ASRC have subordinated intercompany accounts receivable of
$1,363,355 at December 31, 1995 to the bank debt, and no other funds are to
be advanced to the Company or ASRC by TOCCO or its subsidiaries. However,
during 1995, South Hampton advanced the Company $30,000, violating South
Hampton's debt covenants, causing the loan to be in default. At December
31, 1995, the Company had not repaid this loan. The bank agreed to payment
of the
28
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$30,000 by April 30, 1996 in addition to $100,000 in principal due by April
30, 1996. 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 at various times in 1993.
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 and has currently been extended to April 30, 1996. South Hampton does
not have the ability to repay the loan on the current due date. South
Hampton is negotiating with the bank to extend the Agreement and expects to
be able to do so. 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 5.9375% and 6.0% at
December 31, 1995 and 1994, 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. South
Hampton is currently negotiating with Saudi Fal to restructure the loan
terms. This note is collateralized as discussed in (A) above.
(D) Represents a noninterest demand loan payable to a Saudi investor. In
September 1995, this investor loaned the Company an additional $123,000.
The loan agreement granted an option to convert the loan into shares of the
Company's common stock at $1 per share. Also in September 1995, the
investor exercised this option and converted the $123,000 into 123,000
shares of the Company's common stock (see Note 12). In December 1995, the
investor agreed to exchange $155,000 of his remaining debt balance for
155,000 shares of the Company's common stock.
29
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(E) Represents an unsecured, noninterest bearing advance made by a Saudi
investor in 1984 to the Al Masane Project on behalf of NMC. ASDC became
liable for this obligation in 1992 upon dissolution of the joint venture.
(F) Represents loans payable to a stockholder of the Company for $245,000, the
Company's president for $53,000 and a relative of the Company's president
and stockholder for $300,000. Each loan has a term of two years with
interest payable at the LIBOR rate plus 2% and due at the end of the two
year period. Each loan provides for an option to convert the loan amount to
shares of the Company's common stock at $1.00 per share anytime within five
years from the date of the loan. See Note 12 for a discussion of the
related options.
(G) This note payable is collateralized by land, an office building, and all
equipment and furniture and fixtures of TOCCO. As described in Note 11, 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, 10.25% from February 1, 1996 to February 1, 1997, and at
prime rate plus 1.5% thereafter.
(H) 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.
(I) In connection with the acquisition of TOCCO, deferred compensation contracts
between TOCCO and a certain former employee and one current employee were
restructured, reducing the gross payments due under the original 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. TOCCO has complied with the terms
of these contracts through 1995. However, if TOCCO were to default on these
contracts, it would be liable for an additional amount of $453,000. The
recorded liability at December 31, 1995 and 1994 has been determined
utilizing a discount rate of 8.0%.
Scheduled maturities of long-term debt and long-term obligations, which exclude
current notes payable balances aggregating $15,086,191, for the next five years
and thereafter are as follows:
1996............................................................. $ 98,375
1997............................................................. 842,577
1998............................................................. 30,627
1999............................................................. 0
2000............................................................. 0
Thereafter....................................................... 21,205
--------
Total.................................................. $992,784
========
Interest of $244,828, $275,561 and $472,131 was paid in 1995, 1994 and 1993,
respectively.
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 was no tax effect after application of operating loss carryforwards was
recorded, representing the amount of trade accounts payable and accrued interest
forgiven.
30
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. 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. In June 1992, Mr. Bomer withdrew from the partnership and the
feedstock agreement was terminated. On July 1, 1992, South Hampton entered into
a new agreement with STTC whereby STTC financed the feedstock in the pipeline.
As a result, South Hampton had a liability to STTC for the cost of the 453,600
gallons of capacity of the pipeline. This amount was $215,460 at December 31,
1994. Also in connection with this agreement, South Hampton paid a one-half cent
per gallon fee to STTC on each gallon of feedstock transported through the
pipeline. The agreement was operating on a month to month basis and was
terminated in August 1995. The fees paid by South Hampton to STTC pursuant to
this agreement were $76,080, $103,212, and $88,974 in 1995, 1994 and 1993,
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 $316,000, $341,000 and
$320,000 in 1995, 1994 and 1993, respectively. Accounts payable to STTC under
the leasing arrangement were $16,917 at December 31, 1994. There were no amounts
payable to STTC at December 31, 1995.
The Company incurred rental expenses for office space and certain vehicles and
equipment of approximately $302,000 in 1995, 1994 and 1993.
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, 1995 of $329,740 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 included in other
assets. As described in Note 10, the leased building is pledged as collateral
for a note payable. If the leasee exercises its option to purchase the building,
the proceeds will be used by South Hampton to pay down the note payable to the
bank. Other income includes $102,000 in 1995 and 1994 and $87,000 in 1993 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.
12. COMMON STOCK AND STOCK OPTIONS
At December 31, 1995, 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. 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.
31
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Notes receivable from stockholders for the purchase of common stock of $126,000
at December 31, 1995 represents a note from a director and officer which matures
on December 31, 1998. The amount at December 31, 1994 of $276,000 included the
$126,000 and a $150,000 note from an entity controlled by a stockholder. The
note was issued in March 1993 for $200,000 and was due in October 1994. The
maturity date was extended to August 1995. Payments of $50,000 each were
received on this note in 1994 and 1995. The remaining balance of $100,000 was
not paid by the due date and, accordingly, the note receivable was canceled and
common stock outstanding and additional paid in capital were reduced by $10,000
and $90,000, respectively. 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 a
duration of ten years. The number of shares reserved for issuance under this
plan is 100,000.
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.
No options were granted or exercised in 1995 under either of these two Plans.
A summary of stock option transactions under the Employee Plan and Non-Employee
Director Plan is as follows:
Outstanding December 31, 1992 ($1.38 per share)........................... 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 and 1995................................. 215,000
=======
32
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the above plans, 165,500 options were exercisable at prices ranging from
$1.38 to $3.75 per share and 385,000 shares were reserved for grant at December
31, 1995. 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.
In March 1992, the Company granted a creditor (a company owned by the wife and
other relatives of the Company's president) 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
canceled. 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. 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 was recorded as a debit in
the stockholders' equity section of the consolidated balance sheet. After a
payment in 1994 of $50,000, this receivable balance was $150,000 at December 31,
1994. In 1995 a payment of $50,000 was made, but the remaining $100,000 balance
was not paid when due in 1995 and the receivable was written off, reducing
common stock by $10,000 and additional paid in capital by $90,000.
In 1995, three investors and the president of the Company loaned the Company
$668,000 and $53,000, respectively (See Note 10). The agreements provide that
the lender would have the option, at anytime within five years from the date of
the loan, to convert the debt plus accrued interest into shares of the Company's
common stock at $1.00 per share.
In September 1995, one of the three foreign investors exercised his option and
converted $123,000 of his loan to 123,000 shares of common stock outstanding
(See (D) in Note 10).
33
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In October 1995, the board of directors approved an option for the president of
the Company to exchange $400,000 of his unpaid salary for shares of the
Company's common stock at $1.00 per share. The options do not expire and they
were exercisable immediately upon grant.
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 price and the market prices on the date of
grant. 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.
For the options issued to investors during 1995, the Company recognized an
expense of $76,500 which is included in general and administrative expense in
the Company's results of operations for the year ended December 31, 1995. This
expense is based on the fair value of the options as of the grant date. For the
options issued to the Company's president, the Company recorded compensation
expense in the amount of $74,900 which is included in general and administrative
expense in the Company's results of operations for the year ended December 31,
1995. This expense is based on the difference between the market price of the
Company's stock as of the grant date and the price of the option.
A summary of stock option transactions with individuals is as follows:
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-
Granted ($1.00 per share).............................................. 1,121,000
Exercised.............................................................. (123,000)
-----------
Outstanding at December 31, 1995......................................... 998,000
===========
All stock sold to individuals in connection with these options includes a
restriction that it cannot be traded for a three-year period.
13. INCOME TAXES
The income (loss) before income taxes and extraordinary item was ($369,232),
$2,314,129, and ($1,338,321) for the years ended December 31, 1995, 1994 and
1993, respectively.
The Company's provision for income taxes was comprised of the following:
1995 1994 1993
--------- --------- ---------
Federal
Current..................................... $ -- $ 522,938 $ --
Deferred.................................... -- -- --
Utilization of operating loss
carryforward............................. -- (482,965) --
--------- --------- ---------
Provision for income taxes.................... $ -- $ 39,973 $ --
========= ========= =========
34
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Income tax expense (benefit) for the years ended December 31, 1995, 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:
1995 1994 1993
--------- --------- ---------
Income taxes at U.S. statutory rate........... $(125,539) $ 786,804 $(455,029)
Goodwill...................................... 95,303 95,303 95,303
Liability reserves............................ -- (392,700) --
Net operating losses.......................... 25,731 (482,965) 359,726
Alternative minimum tax....................... -- 39,973 --
Other items................................... 4,505 (6,442) --
--------- --------- ---------
Total tax expense................... $ -0- $ 39,973 $ -0-
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities for 1995, 1994 and 1993
were as follows:
December 31,
---------------------------------------------
1995 1994 1993
------------ ----------- ------------
Deferred tax liabilities:
Refinery plant, pipeline and
equipment........................ $ (368,385) $ (379,668) $ (434,700)
------------ ----------- ------------
Gross deferred tax liability.......... (368,385) (379,668) (434,700)
------------ ----------- ------------
Deferred tax assets:
Accounts receivable................. 49,544 44,070 40,973
Mineral interests................... 196,446 196,446 202,224
Net operating loss carryforwards.... 11,274,638 9,277,552 9,791,240
Tax credit carryforwards............ 651,504 650,907 1,640,037
------------ ----------- ------------
Gross deferred tax assets........ 12,172,132 10,168,975 11,674,474
Valuation allowance................... (11,803,747) (9,789,307) (11,239,774)
------------ ----------- ------------
Net deferred tax assets.......... 368,385 379,668 434,700
------------ ----------- ------------
Net deferred taxes.................... $ -0- $ -0- $ -0-
============ =========== ============
As a result of current year operations, the Company's gross deferred tax asset
increased by $2,003,157 to $12,172,132 at December 31, 1995. The primary reason
for the increase in the gross deferred tax asset is due to a restatement of
NOL's from prior years. There was no change in judgment about the Company's
ability to realize its net deferred tax asset; therefore, the valuation
allowance was increased by a corresponding amount. If certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of tax carryforwards which could be utilized.
At December 31, 1995, the Company had approximately $33,160,700 of net operating
loss carryforwards and approximately $610,000 of general business credit
carryforwards. These carryforwards expire in 1996 through 2009. In addition, the
Company has minimum tax credit carryforwards of approximately $40,000 that may
be carried forward indefinitely. Approximately $1,700,000 of the net operating
loss carryforwards and $610,000 of the general business credit carryforwards are
limited to the net income of TOCCO. Approximately $5.9 million of the net
operating loss carryforwards are limited to the net income of ASCC.
The Company has no Saudi Arabian tax liability.
35
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Since a substantial portion of the Company's mineral properties and interests
are located outside of the United States, its business and properties are
subject to foreign laws and foreign conditions, with the attendant varying risks
and advantages. Foreign exchange controls, foreign legal and political concepts,
foreign government instability, international economics and other factors create
risks not necessarily comparable with those involved in doing business in the
United States.
For 1995, 1994 and 1993, essentially all activity on the Company's consolidated
statement of operations relates to the refinery except for equity income and
losses from Pioche. The 1995 and 1994 results include $54,063 and $74,580,
respectively, of unallocated costs recorded in general and administrative
expenses related to the Saudi Arabian operations. The 1995 results include
immaterial amounts of interest expense related to notes payable entered into in
1995 that relate 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 10.
15. RELATED PARTY TRANSACTIONS
The Company shares office facilities and certain expenses with companies owned
by the chairman of the Company. At December 31, 1995 and 1994, these companies
did not owe any amounts to the Company.
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 Notes 10 and
11 for additional information.
16. SUBSEQUENT EVENTS
On January 1, 1996, South Hampton entered into a five year supply contract with
a natural gas supplier to purchase natural gas for use in its refinery. The
contract stipulates that South Hampton may purchase up to 1,500 million Btu per
day at an indexed price adjusted for an agreed discount.
36
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, Jr.
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, Attention: Letty Edes.
LOGO
General Office: 10830 North Central Expressway, Suite 175, Dallas, Texas 75231
Field Office: P.O. Box 1516, Jeddah, Saudi Arabia
Transfer Agent: KeyCorp Shareholder Services, Inc.