Form 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission file number 0-6247 ARABIAN SHIELD DEVELOPMENT COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-1256622 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10830 North Central Expressway Suite 175 75231 Dallas, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 692-7872 Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, par value $0.10 per share (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Number of shares of registrant's Common Stock, par value $0.10 per share, outstanding as of March 16, 1998: 20,721,494. The aggregate market value on March 16, 1998 of the registrant's voting securities held by non-affiliates was $26,194,149. DOCUMENTS INCORPORATED BY REFERENCE (a) Selected portions of the registrant's Annual Report to Stockholders for the year ended December 31, 1997. - Parts II and IV (b) Selected portions of the registrant's definitive Proxy Statement for the Annual Meeting to be held May 15, 1998. - Part III PART I Item 1. Business. General Arabian Shield Development Company (the "Company") was organized as a Delaware corporation in 1967 and is principally engaged in the refining of various specialty petrochemical products and developing various mineral properties. All of its mineral properties are undeveloped and require significant capital expenditures before any commercial operations are commenced. The Company has operations in both the United States and Saudi Arabia. The Company's undeveloped mineral interests are primarily located in Saudi Arabia. The Company, through its indirect wholly owned subsidiary, South Hampton Refining Company ("South Hampton"), owns and operates a specialty products refinery which is the Company's only significant revenue producing asset. The Company holds a mining lease covering a 44 square kilometer area in the Al Masane area in southwestern Saudi Arabia. In a 1996 update to the 1994 full bank feasibility study of the Al Masane lease area conducted by an independent mining consulting firm, the consultants estimate the total capital costs of the Al Masane project to be $88.6 million. The Company and its Saudi Arabian advisors are in the process of forming a Saudi limited liability company to own and operate the project. On November 5, 1997, the Company and the Al Mashreq Company for Mining Investments ("Al Mashreq"), a Saudi limited liability company owned by Saudi Arabian investors, initialed a joint venture agreement to form a Saudi limited liability company which will be owned 50% by the Company and 50% by Al Mashreq. The new company, called "The Arabian Shield Company for Mining Industries Ltd.", is now under formation, and has applied to the Saudi Ministry of Commerce for a charter to operate the mine. The Company is diligently pursuing the financing of the project so that commercial production can begin as contemplated in the updated feasibility study. There can be no assurance that adequate capital for the project can be obtained in order for commercial production to begin as contemplated. The ultimate recovery of mineral exploration and development costs of the Company's other mineral properties cannot presently be determined. Saudi Arabian Activities. On May 22, 1993, the Company was granted a 30-year mining lease covering a 44 square kilometer area in the Al Masane area in southwestern Saudi Arabia. The Company was granted exploration licenses for the Wadi Qatan and Jebel Harr areas in southwestern Saudi Arabia, approximately 30 kilometers east of the Al Masane area, in 1971 and 1977, respectively. The exploration licenses by their terms have expired, and although Saudi Arabian government officials have orally advised the Company that the licenses will be extended as long as mineral exploration is being carried out on the areas which they cover, formal extensions from the government have not been obtained and there can be no assurance that the Company's license rights will be honored. The Company remains a party to an agreement with the Petroleum and Mineral Organization ("Petromin"), the official mining and petroleum company of the Saudi Arabian government, which governs the rights of the parties if an exploration license is converted into a mining lease. When financing for the Al Masane project is completed, the Company plans to make an application for an expanded exploration license for an area of approximately 2,800 square kilometers which includes the original Greater Al Masane area and the Wadi Qatan and Jebel Herr areas. See Item 2. Properties. -1- 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 partners, all of whom are directors and/or stockholders of the Company, plan to form a Saudi limited liability company which will build and manage a processing plant located next to the Aromax(R) plant in Saudi Arabia. The Company would have a 25% interest in the limited liability company and would manage the plant. The plant will be similar to the South Hampton refinery in producing purified pentanes from a feedstock of mixed pentanes obtained from the Aromax(R) plant. Chevron Chemical advised the Company by letter in July 1993 that Chevron Chemical and SVCS jointly agreed to commit to supply the proposed pentane project with up to 5,000 barrels per day of mixed pentane feedstock. Engineering and marketing studies of the project made in 1994 by outside consultants reflected positive results. Planning then began toward the construction and operation of the Aromax(R) plant. The Aromax(R) plant received final approval from the Saudi Arabian government in March 1996 and Chevron Chemical began construction soon thereafter. The source of feedstock supply to the Aromax(R) plant has changed resulting in Chevron Chemical and SVCS being unable to supply the proposed processing plant. The Company has held discussions with several Saudi Arabian companies regarding feedstock and transportation arrangements, although there can be no assurances that any such arrangements can be made. The Company applied for and received a license to build the proposed processing plant and further planning and design work are underway. In December 1993, the Company commissioned Sherritt Ltd. of Fort Saskatchewan, Canada, to prepare a conceptual engineering design for a proposed zinc refinery based on Sherritt's two stage pressure leach process, to be built by the Company and Saudi partners at the Red Sea port of Yanbu, Saudi Arabia. The refinery would have the capacity to produce 100,000 tonnes of slab zinc per year, with elemental sulfur as a by-product. Sherritt Ltd. completed the study in May 1994 which contains a proposed flow sheet that has been commercialized and designed for a state of the art zinc refinery. Sherritt's zinc pressure leach technology provides significant advantages over other existing zinc production processes, including having the reputation as the most favored technology for environmental considerations. In its study, Sherritt concluded, after considering all of the presently identifiable elements, that they offer a strong potential for the project and enhance the concept. Sherritt encouraged the Company to carry out further studies toward the implementation of the project. There has been a recent inquiry about this project from a zinc smelting and refining company in Asia. United States Activities. The Company has two direct wholly owned subsidiaries, American Shield Refining Company (the "Refining Company") and American Shield Coal Company (the "Coal Company"). The Refining Company owns all of the capital stock of Texas Oil and Chemical Co. II, Inc. ("TOCCO"). TOCCO owns all of the capital stock of South Hampton, and South Hampton owns all of the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State"). South Hampton owns and operates a special products refinery near Silsbee, Texas. Gulf State owns and operates three pipelines which connect the South Hampton refinery to a natural gas line, to South Hampton's truck and rail loading terminal and to a marine terminal owned by an unaffiliated third party. The Company also beneficially owns approximately 52%, and directly owns approximately 44%, of the capital stock of an inactive Nevada mining company, Pioche-Ely Valley Mines, Inc. ("Pioche"). Al Masane Project Prior Feasibility Studies. In the years following the granting of the exploration licenses in August 1971, substantial geological and geophysical work was accomplished on the Al Masane and Wadi Qatan license areas. Core drilling on the licensed areas and studies conducted by independent consulting firms indicated that the copper, zinc, gold and silver prospects at Al Masane had a chance of being put into production sooner than the nickel prospect at Wadi Qatan. Metallurgical tests also showed difficulty in separating the nickel at Wadi Qatan. During 1977, a -2- pre-feasibility mining study was conducted at Al Masane by the mining consulting firm of Watts, Griffis and McOuat Limited of Toronto, Canada ("WGM"). WGM concluded that the Al Masane prospect should be further developed and recommended an extensive development program for the area. Phase I of the development program recommended by WGM for Al Masane was completed in April 1981 and involved underground development in the form of a decline (700 meters) and tunnels (3,100 meters) parallel to the ore bodies from where extensive underground core drilling was done to prove the ore reserves. The project was financed for the most part with an $11 million interest-free loan from the Saudi Arabian government (Ministry of Finance). After completion of Phase I, the Company's consultants concluded that sufficient ore reserves had been established to justify a full bank feasibility study to determine the economic potential of establishing a commercial mining and ore treatment operation at Al Masane. The study was conducted principally by WGM, assisted by SNC/GECO of Montreal, Canada in engineering and costing. The consultants concluded in their 1982 study that the Al Masane deposits would support commercial production of copper, zinc, gold and silver and recommended implementation of Phase II of the Al Masane development program, which involves the construction of mining, ore treatment and support facilities. WGM reevaluated the Al Masane project in September 1984 and concluded that the cumulative effect of the factors considered in the reevaluation was positive. Additional exploration work conducted at Al Masane and substantial changes in metal prices and capital and operating costs occurring since 1984 led the Company to request WGM to reevaluate the project in early 1989. The additional exploration occurring after 1984 in the Al Houra and Moyeath zones resulted in a better definition of and addition to these zones. Consequently, the consultants revised their reserve estimates. Some of the reserves previously defined as possible were reclassified as proven or probable. Based on its reevaluation of the Al Masane project, WGM again concluded that under the most realistic scenarios the proposed mining operation was economically viable and had the potential to provide a satisfactory return on investment. In May 1992, WGM, at the Company's request, revised its cash flow projections for the Al Masane project based on then current metal prices. The cash flow projections were positive. In both the 1989 reevaluation and the 1992 cash flow projections, WGM continued to regard Al Masane as having high potential for the discovery of additional ore zones. 1994 Feasibility Study. Following the granting of the mining lease to the Al Masane area on May 22, 1993, the Company commissioned WGM to prepare a new fully bankable feasibility study for presentation to financial institutions in connection with obtaining financing for the project. The feasibility study includes more metallurgical work incorporating advances in grinding of the ore; incorporation of the latest advances in technology and reagents developed during the past ten years; incorporation of new mill designs and the latest water recycling methods; investigation into the shipping and marketing of zinc and copper concentrates; and an economic analysis of the project. The feasibility study contains specific recommendations to insure that the construction of the project is accomplished as expeditiously and economically as possible. Engineering design and costing of the project was done by Davy International of Toronto, Canada. The feasibility study cost the Company approximately $1 million and was presented to the Company on July 22, 1994. The Al Masane ore is located in three mineralized zones known as Saadah, Al Houra and Moyeath. The following table sets forth a summary of the diluted minable, proven and probable ore reserves at the Al Masane project, along with the estimated average grades of these reserves: -3-
========================================================================================================================= Reserve Copper Zinc Gold Silver Zone (Tonnes) (%) (%) (g/t) (g/t) - ------------------------------------------------------------------------------------------------------------------------- Saadah 3,872,400 1.67 4.73 1.00 28.36 Al Houra 2,465,230 1.22 4.95 1.46 50.06 Moyeath 874,370 0.88 8.92 1.29 64.85 --------- ---- ---- ---- ----- Total 7,212,000 1.42 5.31 1.19 40.20 - -------------------------------------------------------------------------------------------------------------------------
For purposes of calculating, proven and probable reserves, a dilution of 5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra and Moyeath zones was assumed. A mining recovery of 80% has been used for the Saadah zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the amount of wallrack adjacent to the ore body which is included in the ore extraction process. Proven reserves are those mineral deposits for which quantity is computed from dimensions revealed in outcrops, trenches, workings or drillholes, and grade is computed from results of detailed sampling. For ore deposits to be proven, the sites for inspection, sampling and measurement must be spaced so closely and the geologic character must be so well defined that the size, shape, depth and mineral content of reserves are well established. Probable reserves are those for which quantity and grade are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. However, the degree of assurance, although lower than that for proven reserves, must be high enough to assume continuity between points of observation. 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 2,000 tonnes of ore per day (700,000 tonnes per year), with a mine life of over ten years. Annual production is estimated to be 34,900 tonnes of copper concentrate (25% copper per tonne) containing precious metal and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total output per year of gold and silver is estimated to be 22,000 -4- ounces of gold and 800,000 ounces of silver from the copper concentrate and bullion produced. The construction of mining, milling and infrastructure facilities is estimated to take 18 months to complete. Construction necessary to bring the Al Masane project into production includes the construction of a 2,000 tonne per day concentrator, infrastructure with a 300 man housing facility and the installation of a cyanidation plant to increase the recovery of precious metals from the deposit. Project power requirements will be met by diesel generated power. WGM recommended that the Al Masane reserves be mined by underground methods using trackless mining equipment. Once the raw ore is mined, it would be subjected to a grinding and treating process resulting in three products to be delivered to smelters for further refining. These products are zinc concentrate, copper concentrate and dore bullion. The copper concentrate will contain valuable amounts of gold and silver. These concentrates are estimated to be 22,000 ounces of gold and 800,000 ounces of silver and will be sold to copper and zinc custom smelters and refineries worldwide. After 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. In the feasibility study, WGM recommends that the Company 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. 1996 Update. The Company requested WGM and Davy International to update the 1994 feasibility study of the project. The update details various changes required to update the 1994 feasibility study to reflect costs as of the first quarter of 1996. Capital and operating cost updates to the surface infrastructure and mill components were done by Davy International of Toronto, Canada. WGM was responsible for updating mining, mining related activities and an economic analysis. The 1996 update shows the estimated capital cost to bring the project into operation to be $88.6 million, a 9% increase over the $81.3 million capital cost estimated in the 1994 feasibility study. At a production rate of 700,000 tonnes per year, the operating cost of the project (excluding concentrate freight, ship loading, smelter charges, depreciation, interests and taxes) was estimated to be $38.49 per tonne of ore milled compared to $36.86 per tonne of ore milled estimated in the 1994 feasibility study. WGM prepared an economic analysis of the project utilizing cash flow projections. A base case was prepared that included those project elements which are most likely to be achieved. WGM believed that a majority of the base case assumptions used in the 1994 feasibility study remained valid, including the ore reserves, mill feed grade, production rate, metal recoveries and concentrate grade and smelter returns. Metal prices, capital costs, operating costs and the corporate structure were adjusted to reflect more current information. Capital and operating costs were adjusted in conformity with the updated estimates prepared by Davy International. The base case assumes the corporate structure of the entity to be formed to operate the project, currently planned to be a Saudi limited liability company, will be owned 50% by the Company and 50% by Saudi Arabian investors and that the owners of this entity would contribute an aggregate of $21.2 million to the cost of the project. The base case further assumes financing for the project from commercial loans in the aggregate amount of $21.2 million bearing interest at the rate of 8% per year and a loan in the amount of $43.8 million from the Saudi Industrial Development Fund ("SIDF") repayable in equal annual installments over the initial life of the mine. The remainder of the project financing would be contributed by cash generated by the operation of the project. The base case assumes that the $11 million loan outstanding to the Saudi Arabian government will be paid by the Company in accordance with a repayment schedule to be agreed upon with the Saudi Arabian government from the Company's share of the project's cash flows. Based on these assumptions, and assuming the average prices of metal over the life of the mine to be $1.05 per pound for copper, -5- $.60 per pound for zinc, $400 per ounce of gold and $6.00 per ounce of silver, WGM's economic analysis of the base case shows the project will realize an internal rate of return of 13.1%, the Company's and the Saudi Arabian investors' internal rates of return would be 27.3% and 12.1%, respectively, and projected net cash flow from the project of $95.1 million. The 1994 feasibility study base case showed the project would realize a 14.05% internal rate of return. Cash flow under the base case is exclusive of income tax as the base case assumes that any such tax would be paid by individual investors and not by the project. Assuming a 10% discount rate, the net present value of the project as shown in the update is $12.16 million compared to the $15.5 million net present value of the project shown in the 1994 feasibility study. Based on the update, WGM believes that the economic analysis shows that the project remains viable. Project Financing and Mining Lease. The 1996 update to the 1994 feasibility study shows the estimated total capital cost to bring the Al Masane project into production to be $88.6 million. At the present time, the Company does not have sufficient funds to bring the project into production. The Company and its Saudi Arabian advisors are in the process of forming a Saudi limited liability company to own and operate the project. On November 5, 1997, the Company and Al Mashreq initialed a joint venture agreement to form a Saudi limited liability company which will be owned 50% by the Company and 50% by Al Mashreq. The new company, called "The Arabian Shield Company for Mining Industries Ltd.", is now under formation, and has applied to the Saudi Ministry of Commerce for a charter to operate the mine. On May 20, 1996, the Company entered into a Financial and Legal Services and Advice Agreement with Nasir Ali Kadasah, for legal advice, and Dar Al Khaleej, for research and economic advice. The purpose of this agreement was for the two Saudi Arabian advisors to assist the Company in obtaining financing for the Al Masane project. To this end, the agreement contemplated that the Saudi Arabian advisors would perform the following: 1. The formation of a Saudi limited liability company, 50% of which would be owned by the Company and the remaining 50% of which would be owned by Saudi Arabian investors who will contribute 25% of the total capital cost of the project. 2. Obtain an industrial license for the project from The Ministry of Industry and Electricity. This license was a necessary prerequisite for obtaining an interest-free loan from the SIDF to fund 50% of the capital cost of the project. 3. Finalize the necessary procedures to obtain such loan from the SIDF, the application for which was submitted on September 30, 1995. 4. Apply for and receive loans from commercial banks necessary to finance the project. 5. Apply for and obtain the Ministerial Resolution from the Minister of Petroleum and Mineral Resources approving the transfer of the mining lease to the Saudi limited liability company. The agreement provided that the Saudi Arabian advisors would be solely responsible for the performance of the foregoing obligations and that the Company had no obligation therefor. As consideration for performing these obligations, the Company agreed to pay Mr. Kadasah and Dar Al Khaleej $10,000 each upon the issuance of the industrial license and Mr. Kadasah $10,000 upon approval of the loan by the SIDF. The Company also agreed to issue to Mr. Kadasah and Mr. Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, up to 1,025,000 and 975,000 shares of the Company's Common Stock, respectively, and to grant Mr. Kadasah and Mr. Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, options to purchase up to 1,425,000 and 875,000 shares of the Company's Common Stock, respectively. The Company was obligated to issue -6- such shares and grant such options in designated amounts upon completion of each of the foregoing obligations. The issuance of the shares would be for consideration consisting solely of services rendered to the Company. The options are immediately exercisable on the date of grant, have a five-year term commencing on the date of formation of the Saudi limited liability company and an exercise price of $1.00 per share. On December 3, 1996, the industrial license was issued to the Company and its Saudi Arabian advisors. As a result, the Company paid the advisors $20,000 in the aggregate and was obligated at December 31, 1997 to issue to these advisors 300,000 shares of the Company's Common Stock in the aggregate and options to purchase 345,000 shares of the Company's Common Stock in the aggregate having an exercise price of $1.00 per share. The agreement was terminated in August 1997 and negotiations are being held to complete a new agreement, although there can be no assurances that any such agreement can be reached. A loan application was submitted to SIDF on September 30, 1995 and conditional approval was received on December 17, 1997 for a $38.08 million loan. The SIDF 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. The joint venture agreement with Al Mashreq contemplates the formation of a new Saudi limited liability company, "The Arabian Shield Company for Mining Industries Ltd.", to be owned 50% by the Company and 50% by Al Mashreq. As contemplated, the Saudi limited liability company will be responsible for the construction and operation of the mining facilities. Title to the mining lease would be transferred to the Saudi limited liability company. The joint venture agreement further contemplates the Company transferring its beneficial interest in the Al Masane project to the Saudi limited liability company when title to the mining lease is transferred to the Saudi limited liability company. The Company and Al Mashreq agree to attempt to obtain financing for the project, and that if firm commitments for such financing on acceptable terms are not obtained by November 5, 1998, either party may terminate the agreement without liability, except that the Company will return to Al Mashreq any consideration paid for the assignment of the beneficial interest in the project and full title to the mining lease will revert to the Company. 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 Petromin. It is contemplated that the Saudi limited liability company then will be transformed into a Saudi public stock company, that the Company and Al Mashreq will own no less than 50% of the shares of the Saudi public stock company, that Petromin will have an option to acquire up to 25% of the shares and that the remaining shares will be offered for sale in Saudi Arabia pursuant to a public subscription. Title to the mining lease and the other obligations specified in the mining lease will be transferred to the Saudi public stock company. Responsibility for the repayment of the $11 million loan from the Saudi Arabian government will remain with the Company. 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 still have the right to purchase shares in the Saudi public stock company any time it desires. As the holder of the Al Masane mining lease, the Company is solely responsible to the Saudi Arabian government for the rental payments and other obligations provided for by the mining lease and repayment of the $11 million loan secured by the Company from the Saudi Arabian government. The mining lease provides that the Company intends to repay the loan in accordance with a repayment schedule to be agreed upon with the Saudi Arabian government from its share of project cash flows. The initial term of the lease is for a period of thirty (30) years from May 22, 1993, with the Company having the option to renew or extend the term of the lease for additional periods not to exceed twenty (20) years. Under the lease, the Company agreed to pay in advance a surface rental at the rate of ten thousand Saudi Riyals (approximately $2,667 at the current exchange rate) per square kilometer per year (approximately $117,300 annually) during the period of the lease. The Company has made all rental payments under the -7- lease. It is contemplated that responsibility for the payment of all future rental payments would be assumed by the Saudi limited liability company when title to the Al Masane mining lease is transferred to it. In addition, the Company must pay income tax in accordance with the income tax laws of Saudi Arabia then in force and pay all infrastructure costs. Under the Saudi Arabian Mining Code, income tax will not be due during the first stage of mining operations, which is the period of five years starting from the earlier of (i) the date of the first sale of products or (ii) the beginning of the fourth year since the issue of the mining lease. The lease gives the Saudi Arabian government priority to purchase the Company's whole production of gold or any part thereof from the project. The lease also gives the Saudi Arabian government the right to purchase up to 10% of the Company's annual production of other minerals on the same terms and conditions then available to other similar buyers and at current prices then prevailing in the free market. The lease contains provisions requiring that preference be given to Saudi Arabian suppliers and contractors and that the Company employ Saudi Arabian citizens and provide training to Saudi Arabian personnel. Reference is made to the map on page 13 of this Report for information concerning the location of the Al Masane project. Other Exploration Areas in Saudi Arabia During the course of the exploration and development of the Al Masane area, the Company has carried on exploration work in other areas in Saudi Arabia and is planning to apply for an additional exploration license for these areas. With respect to these other areas, the Company has an agreement with Petromin which governs the rights of the parties if the exploration licenses granted to the Company are converted into a mining lease. Under this agreement, Petromin is granted an option to acquire, at any time, a 25% interest in any project to mine minerals in Saudi Arabia the exploration for which has been conducted under the exploration licenses. U.S. Mineral Interests The Company's mineral interests in the United States include its equity interest in the Coal Company and Pioche. The Coal Company no longer owns or holds any mineral interests and is presently inactive. The future of the Coal Company's operations is uncertain. Pioche has been inactive for many years, but in October 1997, Pioche entered into an Exploration Agreement and Option to Purchase with a large mining company which provides for annual payments to Pioche of $50,000 for seven years until, or unless, the mining company exercises an option to purchase an 85% interest in the mining claims for $3 million. The agreement can be terminated upon 60 days written notice by the mining company. The mining company has agreed to expend at least $50,000 in exploration work each year and to drill at least one hole in the first year. Special Products Refinery South Hampton owns and operates a special products refinery near Silsbee, Texas and currently employs 50 people. The refinery is presently devoted to specialized processing activities. The refinery currently consists of seven operating units which, while interconnected, make distinct products through differing processes: (i) a pentane-hexane unit; (ii) a catalytic reformer; (iii) an aromatics hydrotreating and fractionation unit; (iv) a cyclopentane unit; (v) an Aromax(R) unit; (vi) an aldehyde hydrogenation unit; and (vii) a specialty fractionation unit. All of these units are presently in operation. The design capacity of the pentane-hexane unit is approximately 2,200 BPD of feedstock. The unit averaged 1,945 barrels per stream day during 1997. The unit consists of a series of fractionation towers and hydrotreaters capable of producing high purity solvents which are sold primarily to expandable polystyrene and high density polyethylene producers. South Hampton purchases most of its feedstock for this unit on the spot market. -8- The catalytic reforming unit is a standard industry design using platinum-rhenium catalyst which produces an aromatics concentrate used as feedstock for an aromatics extraction unit, as well as hydrogen which is utilized in other processes. The design capacity of the reformer is 4,000 BPD. The unit is operated as a source of hydrogen for the pentane-hexane unit and operates in tandem with the Aromax(R) unit as feedstock balances dictate. The unit averaged 417 barrels per stream day during 1997. The aromatics hydrotreating and fractionation unit consists of a hydrotreating reactor and a single fractionation tower and has a design capacity of 500 BPD. By-product chemical streams have historically been processed by this unit into two products, high octane gasoline blendstocks and heavy aromatic oils sold as fuel oil blending stock. This unit is leased to a customer for its own use pursuant to a contract providing for the payment of a minimum daily charge. The cyclopentane unit consists of three specialized fractionation towers designed to produce a consistently high quality product which is used in the expandable polystyrene industry. The design capacity of the cyclopentane unit is 400 BPD. The unit operates according to the feedstock supplied by the pentane-hexane unit and averaged 192 barrels per stream day during 1997. The Aromax(R) unit is the world's first commercial unit using a proprietary process of Chevron Research Company to produce a high benzene content product which is sold as feedstock to refiners operating benzene extraction units. The process converts petroleum naphtha into liquid hydrocarbons having a higher aromatic hydrocarbon content. The aromax unit capacity is 400 BPD and uses a by-product of the pentane-hexane unit as feedstock. The unit operates according to the feedstock supplied from the pentane-hexane unit and the other hydrotreaters. The unit averaged throughput of 122 barrels per stream day during 1997. Chevron Research has agreed to continue development of the Aromax(R) process. The unit has continued to successfully operate as designed. The specialty fractionation unit consists of two fractionation towers and has a design capacity of 1,000 BPD. This unit is leased to a customer for its own use pursuant to a contract providing for the payment of a minimum daily charge. South Hampton also owns approximately 70 storage tanks with a total capacity of approximately 250,000 barrels. The refinery is situated on 100 acres of land, approximately 70 acres of which is developed. South Hampton owns a truck and railroad loading terminal consisting of eight storage tanks, a rail spur and truck and tank car loading facilities. As a result of an expansion program of the production capacity of the South Hampton refinery completed in 1990, essentially all of the standing equipment at South Hampton is operational. The Company has surplus equipment in storage on site with which to assemble further processing units, such as a hydrocracking unit with a 2,000 BPD capacity. Gulf State owns and operates three 8" pipelines aggregating approximately 50 miles in length which connect the South Hampton refinery to a natural gas line, to South Hampton's truck and rail loading terminal and to a marine terminal owned by an unaffiliated third party. South Hampton leases storage facilities at the marine terminal. Revenues and Financing The Company's revenues and cash flows have been insufficient to meet its debt service and capital expenditure requirements. Accordingly, it has been necessary for the Company continually to seek additional debt and equity financing in order to have funds to continue development and other investing activities. In 1995, the Company (i) negotiated an extension until April 30, 1996 of the maturity of the Amended and Restated Credit Agreement with Den norske Bank AS, (ii) borrowed $721,000 in the aggregate from four individuals, including a stockholder of the Company who is the Vice Chairman of National Mining Company, a stockholder of -9- the Company, the President and Chief Executive Officer of the Company and a relative of such executive 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 the loan and all accrued interest into shares of the Company's Common Stock at the rate of $1.00 per share, (iii) 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 (iv) granted the President and Chief Executive Officer of the Company an option to convert at any time $400,000 of deferred compensation for services rendered to the Company into shares of the Company's Common Stock at the rate of $1.00 per share. In 1996, the Company (i) through South Hampton negotiated an Amended and Restated Credit Agreement with Den norske Bank ASA, amending and restating the then outstanding credit agreement to provide for a revolving credit facility in an aggregate principal amount of up to $1,965,000, (ii) restructured certain indebtedness of South Hampton owed to Saudi Fal Co., Ltd., a limited liability company owned by a stockholder of the Company ("Saudi Fal"), and the Refining Company pursuant to promissory notes in the original principal amounts of $1,945,773.49 and $1,694,605.08, respectively, which promissory notes are subordinated to the Amended and Restated Credit Agreement with Den norske Bank ASA, (iii) approved the sale of up to 1 million shares of the Company's Common Stock through private placements at a price no less than $1.00 per share, (iv) sold 450,000 shares of the Company's Common Stock at $1.00 per share to a Saudi Arabian investor who is a stockholder of the Company and approved the sale of an additional 450,000 shares of the Company's Common Stock at $1.00 per share to the same investor, the purchase price for such additional shares being payable in monthly installments of $100,000 and (v) approved the sale of 50,000 shares of the Company's Common Stock to a Saudi Arabian investor. During 1997, the Company took certain actions designed to generate additional equity capital and improve its financial condition, including: (i) approval by the Company's Board of Directors in August 1997 of the sale of up to 1 million shares of the Company's Common Stock through private placements at a price no less than $1.00 per share; (ii) the sale of 450,000 shares of the Company's Common Stock at $1.00 per share to a Saudi Arabian investor who is a stockholder of the Company; (iii) the sale of 50,000 shares of the Company's Common Stock at $1.00 per share to a Saudi Arabian investor; (iv) the issuance of 10,000 shares of its Common Stock at $1.375 per share pursuant to an option exercise by an officer of the Company; (v) the issuance of 345,000 shares of its Common Stock in exchange for the cancellation of certain indebtedness; (vi) borrowing $200,000 from a Saudi Arabian investor pursuant to a two- year demand promissory note bearing interest at prime plus 2% per annum; (vii) the sale by South Hampton Refining Company, an indirect, wholly owned subsidiary of the Company ("South Hampton"), in June 1997 of an office building to a third party for approximately $695,000, on terms which included a ten-year promissory note having a principal amount of $610,000 and bearing interest at 9% per annum; and (viii) receiving conditional approval for a $38.08 million loan from the SIDF. It may be necessary to secure funds to continue operations through the sale of portions of the Company's properties, its investments or a portion of the Company's interest therein. There are no assurances that these sales could be arranged or that sufficient additional equity or debt financing can be obtained. On October 15, 1996, South Hampton entered into an Amended and Restated Credit Agreement (the "Credit Agreement") with Den norske Bank ASA (the "Bank"), amending and restating the then outstanding credit agreement to provide for a revolving loan facility in an aggregate principal amount of up to $1,965,000. The Bank's commitment to make funds available under the credit facility will be reduced by (i) $75,000 on the last day of each fiscal quarter commencing December 31, 1996 and (ii) the amount of any distribution by South Hampton to Saudi Fal, the Company, the Refining Company or TOCCO in excess of amounts permitted under the Credit Agreement. Advances under the Credit Agreement may not at any time exceed the lesser of the commitment or a borrowing base calculated based upon the cash collateral account, eligible accounts receivable and inventory. Interest is payable monthly in arrears on all outstanding advances under the credit facility at the Bank's prime lending rate, as in effect from time to time, plus 1%. Principal and accrued and unpaid interest was payable on December 31, 1998, but in March 1998 the maturity date was extended to December 31, 1999. Subject to certain conditions and South Hampton maintaining various financial covenants and ratios, the Credit Agreement permits South Hampton to make distributions to (i) Saudi Fal, the Company, the Refining Company and TOCCO for legal, auditing and accounting fees attributable to the operations of South Hampton in an annual aggregate amount not in excess of $60,000, (ii) Saudi Fal and the Company in respect of accrued interest on any debt owned by South -10- Hampton to Saudi Fal or the Company in an amount not in excess of $17,500 per month and (iii) Saudi Fal and the Company in respect of principal on any debt owed by South Hampton to Saudi Fal or the Company. The Credit Agreement is secured by all of the assets of South Hampton and Gulf State and all of the issued and outstanding shares of TOCCO, South Hampton and Gulf State. South Hampton is required to collect all receivables through a cash collateral account at a local bank. In connection with South Hampton's entry into the Credit Agreement with the Bank, South Hampton issued a Second Lien Promissory Note to Saudi Fal and a Third Lien Promissory Note to the Refining Company in the original principal amounts of $1,945,773.49 and $1,694,605.08, respectively, evidencing certain indebtedness of South Hampton owed to such parties. The promissory notes bear interest at the Bank's prime lending rate, as in effect from time to time, plus 1%. Interest only is due and payable monthly on the promissory notes, and the entire unpaid balance of principal and accrued and unpaid interest was due on December 31, 1998, but in March 1998 the maturity date was extended to December 31, 1999. The promissory notes are secured by all of the assets of South Hampton and Gulf State. The promissory notes and related liens are subordinated to the Credit Agreement. The promissory note issued to the Refining Company and related liens are subordinate to the promissory note issued to Saudi Fal. The refinery had operating income of approximately $1,868,000, before depreciation and amortization of approximately $420,000, on gross refined product sales of approximately $25,600,000 for the 1997 fiscal year compared with operating income of approximately $655,000, before depreciation and amortization of approximately $413,000, on gross refined product sales of approximately $21,367,000 for the 1996 fiscal year and operating income of approximately $916,000, before depreciation and amortization of approximately $396,000, on gross refined product sales of approximately $17,742,000 for the 1995 fiscal year. There can be no assurance that the Company will successfully develop any of its undeveloped mineral properties or, if developed, that they will be commercially productive. None of the Company's undeveloped mineral properties currently produces revenues, and such properties will not produce revenues from operations to the Company unless and until exploration is completed and successful development is accomplished. Meaningful progress in some of these efforts is currently hampered by the Company's lack of sufficient operating funds. In the case of the Al Masane project, the Company must secure the financing and construction of the mining and milling facilities before revenues from that project may be realized. The Company believes that acceptable financing for the estimated cost of the Al Masane project can be arranged, although there can be no assurance that such financing could be obtained. The results of the 1996 update to the 1994 feasibility study show the estimated total capital costs of the project to be $88.6 million. The Coal Company's lack of significant assets, combined with the Company's lack of operating funds, inhibits any future activities of the Coal Company. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 12. Security Ownership of Certain Beneficial Owners and Management and Item 13. Certain Relationships and Related Transactions for further discussion of these matters. Foreign Operations 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. Competition If it reaches the point of engaging in commercial mineral production, the Company expects to encounter strong competition from established mining companies which in many cases will be more extensively capitalized and have more extensive facilities and more numerous personnel than does the Company. -11- Personnel In order to conserve all available funds, the Company continues to keep its general and administrative personnel to a minimum. Its only officers resident in the United States are Mr. John A. Crichton, Chairman of the Board, Mr. Jonathan Cocks, Vice President, and Mr. Drew Wilson, Jr., Secretary and Treasurer. The other employees of the Company, numbering approximately 28, consist of the office personnel and field crews conducting core drilling and other exploration activities in Saudi Arabia under the supervision of Mr. Hatem El-Khalidi, President and Chief Executive Officer of the Company. South Hampton currently employs 50 persons. -12- [map] -13- Item 2. Properties. Saudi Arabia Mining Properties Al Masane. The Al Masane project, which consists of an area of approximately 44 square kilometers, contains extensive ancient mineral workings and smelters. From ancient inscriptions in the area, it is believed that mining activities went on sporadically from 1000 B.C. to 700 A.D. The ancients are believed to have extracted mainly gold, silver and copper. The discussion of the Al Masane project set forth under Item 1. Business is incorporated herein by reference. Other Saudi Arabian Areas. In 1971, the government of Saudi Arabia awarded the Company exclusive mineral exploration licenses to explore and develop the Wadi Qatan area in southwestern Saudi Arabia. The Company was subsequently awarded an additional license in August of 1977 covering an area to the north of Wadi Qatan at Jebel Harr. The licenses have expired by their terms, and although the Company has received verbal assurance from Saudi Arabian government officials that the licenses will be extended as long as exploratory work is being carried out on the areas which they cover, formal extensions from the government have not been obtained. The Company has applied for a license covering an area surrounding the Al Masane mining lease area, which is referred to as the Greater Al Masane area. Although a license has not been formally granted for the Greater Al Masane area, the Company was authorized in writing by the Saudi Arabian government to carry out exploration work on the area. Exploration work has been carried on and paid for exclusively by the Company. When financing for the Al Masane project is completed, the Company plans to make an application for an expanded exploration license for an area of approximately 2,800 square kilometers which includes the original Greater Al Masane area plus the Wadi Qatan and Jebel Harr areas. Reference is made to the map on page 13 of this Report for information concerning the location of the foregoing areas. The absence of current formal exploration licenses covering the areas on which the Company has conducted, and is continuing to conduct, exploration and development work in Saudi Arabia creates uncertainty concerning the Company's rights and obligations concerning those areas. However, the Company believes that it has satisfied the government's requirements concerning the license areas and that the government should honor the Company's claims to those areas. In the event of the establishment of commercially exploitable minerals, exploration licenses granted by the Saudi Arabian government may be converted into mining leases upon application to the Saudi Arabian Ministry of Petroleum and Mineral Resources. The Company is a party to an agreement with Petromin, the official mining and petroleum company of the Saudi Arabian government, which governs the rights of the parties if an exploration license granted to the Company is converted into a mining lease. Reference is made to the discussion concerning the agreement under Item 1. Business. Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30 kilometers east of the Al Masane area. These areas consist of 40 square kilometers, plus a northern extension of an additional 13 square kilometers. Geological and geophysical work by the Company and limited core drilling disclose the existence of massive sulfides containing nickel. Preliminary core drilling to shallow depths disclosed the existence of massive sulfides containing an average of 1.2% nickel. Reserves for these areas have not been classified and more drilling is needed to classify them as proven or probable. Initial metallurgical studies by consultants to the Company in 1976 indicated difficulty in concentrating -14- the nickel minerals. However, in 1983 the ore was examined by a metallurgical consulting company and it was demonstrated that the ore can be treated to produce ferronickel and iron which can be used to produce steel. The proposed method could be commercially viable if enough ore is proven. Further metallurgical work by another consulting company in 1985 indicated that the ore can be treated by hydrometallurgical methods. An exploration license which includes the Wadi Qatan and Jebel Harr areas will enable the Company to continue its drilling program to prove enough ore for a viable mining operation. Although the indications are encouraging there is no assurance that a viable mining operation could be established. Greater Al Masane. An application has been made and verbally approved for an exploration license covering approximately 1,100 square kilometers around Al Masane, sometimes referred to as Greater Al Masane, which includes an ancient gold mining prospect at Jubal Guyan, about six miles east of the original Al Masane prospect and seven miles west of Wadi Qatan. The Saudi Arabian government has given the Company written authorization to conduct exploration work on the area, although the license has not been formally granted. Core samples indicate an average grade of 7 grams of gold per tonne. Additional sampling is being conducted at Jubal Guyan, and after the results of the sampling are obtained, an evaluation will be made as to future drilling locations. Geological, geochemical and geophysical work on the Greater Al Masane area has disclosed mineralization similar to that discovered at Al Masane. Refining Operations South Hampton owns and operates a special products refinery near Silsbee, Texas. Gulf State owns and operates three pipelines which connect the South Hampton refinery to a natural gas line, to South Hampton's truck and rail loading terminal and to a marine terminal owned by an unaffiliated third party. The properties owned by South Hampton and Gulf State are more fully described in Item 1. Business. Nevada Mining Properties There are 48 patented and 81 unpatented claims totaling approximately 3,600 acres in the Pioche properties. All the claims are located in the Pioche District, Lincoln County, in southeastern Nevada. There are prospects and mines on these claims which formerly produced silver, gold, lead, zinc and copper. The ore bodies are both oxidized and sulfide deposits, classified into three groups: fissure veins in quartzite, mineralized granite porphyry and replacement deposits in carbonate rocks (limestone and dolomites). In October 1997, Pioche entered into an Exploration Agreement and Option to Purchase with a large mining company which provides for annual payments to Pioche of $50,000 for seven years until, or unless, the mining company exercises an option to purchase an 85% interest in the mining claims for $3 million. The agreement can be terminated upon 60 days written notice by the mining Company. The mining company has agreed to expend at least $50,000 in exploration work each year and to drill at least one hole in the first year. There is a 300-ton-a-day processing mill on property owned by Pioche. The mill is not currently in use and a significant expenditure would be required in order to put the mill into continuous operation. Colorado Coal Properties The Coal Company had a net operating loss carryforward of approximately $5.9 million at December 31, 1997 which is limited to any future net income. Offices The Company has a year-to-year lease on space in an office building in Jeddah, Saudi Arabia, used for office occupancy. The Company also leases a house in Jeddah which is used as a technical office and for staff housing. The Company continues to lease office space in an office building in Dallas, Texas on a month-to-month basis. It also has a base camp and accompanying facilities and equipment at its license areas in Saudi Arabia. -15- Item 3. Legal Proceedings. South Hampton, together with over twenty-five other companies, was a defendant in two proceedings pending in the 60th Judicial District Court in Jefferson County, Texas and in the 136th Judicial District Court of Jefferson County, Texas, respectively, brought on July 21, 1993 and July 18, 1994, respectively, by two former employees of the Goodyear Tire & Rubber Company plant located in Beaumont, Texas, claiming illness and diseases resulting from alleged exposure to chemicals, including benzene, butadiene and/or isoprene, during their employment with Goodyear. Plaintiffs claimed that the defendant companies engaged in the business of manufacturing, selling and/or distributing these chemicals in a manner which subjects each and all of them to liability for unspecified actual and punitive damages. South Hampton entered into settlement agreements with the two plaintiffs in March 1997 and January 1998, respectively, by agreeing to pay each plaintiff the amount of $25,000 in full and final settlement of all claims by each such plaintiff against South Hampton. A lawsuit by another former Goodyear employee was filed in a Jefferson County District Court on December 16, 1997 alleging the same injuries and seeking unspecified actual and punitive damages. South Hampton intends to vigorously defend against this lawsuit. In 1993, while remediating a small spill area, the Texas Natural Resources Conservation Commission ("TNRCC") requested South Hampton to drill a well to check the groundwater under the spill area. Based on the results, estimated costs of $60,000 were accrued at December 31, 1996 to cover the recovery and remediation activity expected to take place in 1997. However, no action was taken other than further study, and another $50,000 was accrued at December 31, 1997 for a total of $110,000. This amount is considered adequate in that various alternative and less expensive means of recovery are being developed. Approximately $85,000 has been expended over a three-year period to develop recovery alternatives. The consulting engineers expect approximately 10,000 barrels of recoverable material may be available to South Hampton for use in their refining process, but no reduction has been made in the accrual for estimated remediation costs due to the uncertainties relating to the recovery process. There can be no assurances that any such recovery can be made. In November 1996, South Hampton agreed to a proposed settlement with the TNRCC's Air Permit Section for various alleged violations identified during the 1991 through 1994 inspections. An agreed fine of $50,000 in the aggregate was paid in 1997 and 1996. South Hampton vigorously denied many of the allegations in the settlement document, but determined that further protest of the TRNCC's interpretation and application of the rules would result in higher expenses. On August 18, 1997, the Executive Director of the TNRCC filed a preliminary report and petition with the TNRCC recommending that the TNRCC enter an enforcement order assessing administrative penalties against and requiring certain actions of South Hampton. The TNRCC alleges that South Hampton has violated various TNRCC rules, TNRCC permits issued to South Hampton, a TNRCC order issued to South Hampton, the Texas Water Code, the Texas Clean Air Act and the Texas Solid Waste Disposal Act. The violations generally relate to the management of volatile organic compounds in a manner that allegedly violates the TNRCC's air quality rules and the storage, processing and disposal of hazardous waste in a manner that allegedly violates the TNRCC's industrial and hazardous waste rules. The Executive Director of the TNRCC recommends that the TNRCC enter an order assessing administrative penalties against South Hampton in the amount of $709,408, and recommends that the TNRCC order South Hampton to undertake such actions as are necessary to bring its operations at its refinery and its bulk terminal into compliance with Texas Water Code, the Texas Health and Safety Code, TNRCC rules, permits and orders. South Hampton intends to vigorously defend against this proceeding. A preliminary hearing was held in November 1997, but no further action has been taken to date. On May 15, 1991, the Company filed a complaint with the U.S. Department of Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt"), alleging violations of the Foreign Corrupt Practices Act ("FCPA") by Hunt in obtaining its Petroleum Production Sharing Agreement ("PSA") in Yemen in 1981, subsequent to the Company presenting a bid to the Yemen government for the same area before Hunt made its application. The Company's Washington, D.C. attorneys opined that, because the PSA of Hunt is still ongoing, and under its auspices, payments and receipts occur daily, the DOJ still has 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. -16- On February 28, 1996, the Company sent more documents to the DOJ which it believed further supported its allegations. The Company's Washington, D.C. attorneys opined also that the Victim Restitution Act provides for restitution to the Company of monies lost as a result of the alleged wrongdoing by Hunt, if Hunt is convicted under the FCPA. A letter from the DOJ dated October 1, 1996 stated that the documents presented did not suggest any criminal events occurred within the statute of limitations, and that, at that time, the DOJ did not intend to pursue the investigation. On November 18, 1996, legal counsel retained by the Company, after studying the facts of the case, sent the DOJ an analysis concluding that while the statute of limitations of FCPA may have lapsed, the statute of limitations for conspiracy to violate the FCPA had not lapsed, and that, as a consequence, the DOJ could criminally prosecute Yemen Hunt for conspiracy to violate the FCPA. The Company's legal counsel met with the Fraud Section of the DOJ on December 13, 1996 and were told that the DOJ would take a more aggressive stance if more information of evidentiary quality were presented to the DOJ. The Company intends to vigorously pursue obtaining such further information in the United States and in Yemen. Late in 1994, articles were published in two prominent Yemen newspapers in which Yemen Hunt Oil Company, a wholly owned subsidiary of Hunt Oil Company of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a petroleum production sharing agreement in Yemen in 1981 through the corruption of Yemen officials in order to exclude the application of the Company and its then partner, Dorchester Gas Company, from consideration for the same area. A letter to the editor of one of these newspapers, published on December 7, 1994 and signed by the executive vice president of Yemen Hunt, after explicitly mentioning the Company and Dorchester Gas Company, stated that "[Yemen Hunt] knows well those suspicious companies who are mainly engaged in political activities for the purpose of undermining the economic interest of Yemen...." On December 26, 1995, the Company filed a complaint of criminal libel with the Yemen Attorney General for Publications in Sana'a, Yemen against Yemen Hunt, alleging that Yemen Hunt, in its published letter to the prominent Yemen newspaper, had criminally libeled the Company, which, if not addressed, could seriously affect the business and reputation of the Company and its employees in the Middle East. In October 1996, the Company received the official decision from the Deputy Attorney General for Publications of Yemen which stated that, after taking the statement of the President of the Company and the statement of the chief of the legal department of Yemen Hunt, it was evident that the letter from Yemen Hunt published in the Yemen newspaper on December 7, 1994 was libelous to the Company. However, since the four month statute of limitations period under Yemen criminal law had run, Yemen Hunt could not be prosecuted for criminal libel. The Company intends to vigorously pursue the matter under the civil libel laws of Yemen. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Company' stockholders during the fourth quarter of 1997. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. This information is set forth under the caption "Market for the Company's Common Stock and Related Stockholder Matters" of the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is incorporated herein by reference. Item 6. Selected Financial Data. This information is set forth under the caption "Selected Financial Data" for each of the five years in the period ended December 31, 1997, of the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is incorporated herein by reference. -17- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This information is set forth under the caption "Other Matters-Quantitative and Qualitative Disclosures About Market Risks" of the Company's Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements of the Company including the independent auditor's report thereon of the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13, are incorporated herein by reference. Item 9. Disagreements on Accounting and Financial Disclosure. On May 6, 1996, Price Waterhouse LLP resigned as the independent accountants of the Company. The resignation of Price Waterhouse LLP was previously reported in a Current Report on Form 8-K dated May 6, 1996. PART III Item 10. Directors and Executive Officers of the Registrant. This information is set forth under the captions "Nominees for Election as Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Company's Annual Meeting of Stockholders. Item 11. Executive Compensation. This information is set forth under the caption "Executive Compensation" of the Company's Proxy Statement for the Company's Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information is set forth under the caption "Outstanding Capital Stock" of the Company's Proxy Statement for the Company's Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. This information is set forth under the caption "Other Matters" of the Company's Proxy Statement for the Company's Annual Meeting of Stockholders. -18- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. The following financial statements are incorporated by reference from the Company's 1997 Annual Report to Stockholders filed herein as Exhibit 13: Reports of Independent Accountants. Consolidated Balance Sheets dated December 31, 1997 and 1996. Consolidated Statement of Operations for the three years ended December 31, 1997. Consolidated Statement of Stockholders' Equity for the three years ended December 31, 1997. Consolidated Statement of Cash Flows for the three years ended December 31, 1997. Notes to Consolidated Financial Statements. 2. The following financial statement schedules are filed with this Report: Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 1997. 3. The following documents are filed or incorporated by reference as exhibits to this Report: 3(a) Certificate of Incorporation of the Company as amended through the Certificate of Amendment filed with the Delaware Secretary of State on January 29, 1993 (incorporated by reference to Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 3(b) Bylaws of the Company, as amended through July 6, 1994 (incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(a) Contract dated July 29, 1971 between the Company, National Mining Company and Petromin (incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(b) Loan Agreement dated January 24, 1979 between the Company, National Mining Company and the Government of Saudi Arabia (incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(c) Mining Lease Agreement effective May 22, 1993 by and between the Ministry of Petroleum and Mineral Resources and the Company, together with English translation thereof (incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). -19- 10(d) Stock Option Plan of the Company, as amended (incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(e) 1987 Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc. (incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(g) Agreement dated March 10, 1988 between Chevron Research Company and South Hampton Refining Company, together with related form of proposed Contract of Sale by and between Chevron Chemical Company and South Hampton Refining Company (incorporated by reference to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(h) Addendum to the Agreement Relating to AROMAX(R) Process -- Second Commercial Demonstration dated June 13, 1989 by and between Chevron Research Company and South Hampton Refining Company (incorporated by reference to Exhibit 10(p) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(i) Vehicle Lease Service Agreement dated September 28, 1989 by and between Silsbee Trading and Transportation Corp. and South Hampton Refining Company (incorporated by reference to Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(j) Letter Agreement dated May 3, 1991 between Sheikh Kamal Adham and the Company (incorporated by reference to Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(k) Promissory Note dated February 17, 1994 from Hatem El-Khalidi to the Company (incorporated by reference to Exhibit 10(u) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(l) Letter Agreement dated August 15, 1995 between Hatem El-Khalidi and the Company (incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). 10(m) Letter Agreement dated August 24, 1995 between Sheikh Kamal Adham and the Company. (incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). 10(n) Letter Agreement dated October 23, 1995 between Sheikh Fahad Al-Athel and the Company (incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). 10(o) Amended and Restated Credit Agreement dated October 15, 1996 between South Hampton Refining Company and Den norske Bank ASA, together with related Promissory Note, Ratification of Security Agreement, Ratification of Pledge Agreement, Ratification of Assignment of Insurance, Subordination Agreement, -20- Termination Agreement, Ratification of Subordination Agreement, Renewal, Extension and Modification Agreement, Second Lien Promissory Note and Third Lien Promissory Note of even date therewith (incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(p) Letter Agreement dated November 30, 1996 between Sheikh Fahad Al-Athel and the Company (incorporated by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(q) Financial and Legal Services and Advice Agreement dated May 20, 1996 by and among Nasir Ali Kadasah, Dar Al Khaleej and the Company, as amended by Letter Agreement dated March 3, 1997 (incorporated by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(r) Joint Venture Agreement dated November 5, 1997 initialed by Al Mashreq Company for Mining Investments and the Company. 10(s) Exploration Agreement and Option to Purchase dated as of October 21, 1997 between Homestake Mining Company of California and Pioche-Ely Valley Mines, Inc. 10(t) Amendment No. 1 to Amended and Restated Credit Agreement dated as of December 31, 1997 between South Hampton Refining Company and Den norske Bank ASA. 13 1997 Annual Report to Stockholders. With the exception of the information incorporated by reference into Items 5, 6, 7, 7A, 8 and 14 of this Form 10-K, the 1997 Annual Report to Stockholders is not to be deemed filed as part of this Report. 21 Subsidiaries (incorporated by reference to Exhibit 21 to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 27 Financial Data Schedule. (b) The following report on Form 8-K was filed during the last quarter of the period covered by this Report: Current Report on Form 8-K dated October 30, 1997. -21- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of Arabian Shield Development Company, a Delaware corporation, and the undersigned directors and officers of Arabian Shield Development Company, hereby constitutes and appoints John A. Crichton its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in- fact and agent may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ARABIAN SHIELD DEVELOPMENT COMPANY By: /s/ HATEM EL-KHALIDI -------------------------------------- Hatem El-Khalidi, President and Chief Executive Officer Dated: March 30, 1998 -22- Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company in the capacities indicated on March 30, 1998. Signature Title - --------- ----- /s/ HATEM EL-KHALIDI President, Chief Executive Officer and - ----------------------------- Director (principal executive officer) Hatem El-Khalidi /s/ DREW WILSON, JR. Secretary and Treasurer - ----------------------------- (principal financial and accounting Drew Wilson, Jr. officer) /s/ JOHN A. CRICHTON Chairman of the Board and Director - ----------------------------- John A. Crichton /s/ MOHAMMED O. AL-OMAIR Director - ----------------------------- Mohammed O. Al-Omair /s/ GHAZI SULTAN Director - ----------------------------- Ghazi Sultan -23- EXHIBIT INDEX PAGE 3(a) Certificate of Incorporation of the Company as amended through the Certificate of Amendment filed with the Delaware Secretary of State on January 29, 1993 (incorporated by reference to Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 3(b) Bylaws of the Company, as amended through July 6, 1994 (incorporated by reference to Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(a) Contract dated July 29, 1971 between the Company, National Mining Company and Petromin (incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(b) Loan Agreement dated January 24, 1979 between the Company, National Mining Company and the Government of Saudi Arabia (incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(c) Mining Lease Agreement effective May 22, 1993 by and between the Ministry of Petroleum and Mineral Resources and the Company, together with English translation thereof (incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(d) Stock Option Plan of the Company, as amended (incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(e) 1987 Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc. (incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). PAGE 10(g) Agreement dated March 10, 1988 between Chevron Research Company and South Hampton Refining Company, together with related form of proposed Contract of Sale by and between Chevron Chemical Company and South Hampton Refining Company (incorporated by reference to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(h) Addendum to the Agreement Relating to AROMAX(R) Process -- Second Commercial Demonstration dated June 13, 1989 by and between Chevron Research Company and South Hampton Refining Company (incorporated by reference to Exhibit 10(p) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(i) Vehicle Lease Service Agreement dated September 28, 1989 by and between Silsbee Trading and Transportation Corp. and South Hampton Refining Company (incorporated by reference to Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(j) Letter Agreement dated May 3, 1991 between Sheikh Kamal Adham and the Company (incorporated by reference to Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(k) Promissory Note dated February 17, 1994 from Hatem El-Khalidi to the Company (incorporated by reference to Exhibit 10(u) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 10(l) Letter Agreement dated August 15, 1995 between Hatem El-Khalidi and the Company (incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). 10(m) Letter Agreement dated August 24, 1995 between Sheikh Kamal Adham and the Company. (incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). 10(n) Letter Agreement dated October 23, 1995 between Sheikh Fahad Al-Athel and the Company (incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-6247)). PAGE 10(o) Amended and Restated Credit Agreement dated October 15, 1996 between South Hampton Refining Company and Den norske Bank ASA, together with related Promissory Note, Ratification of Security Agreement, Ratification of Pledge Agreement, Ratification of Assignment of Insurance, Subordination Agreement, Termination Agreement, Ratification of Subordination Agreement, Renewal, Extension and Modification Agreement, Second Lien Promissory Note and Third Lien Promissory Note of even date therewith (incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(p) Letter Agreement dated November 30, 1996 between Sheikh Fahad Al-Athel and the Company (incorporated by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(q) Financial and Legal Services and Advice Agreement dated May 20, 1996 by and among Nasir Ali Kadasah, Dar Al Khaleej and the Company, as amended by Letter Agreement dated March 3, 1997 (incorporated by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-6247)). 10(r) Joint Venture Agreement dated November 5, 1997 initialed by Al Mashreq Company for Mining Investments and the Company. 10(s) Exploration Agreement and Option to Purchase dated as of October 21, 1997 between Homestake Mining Company of California and Pioche-Ely Valley Mines, Inc. 10(t) Amendment No. 1 to Amended and Restated Credit Agreement dated as of December 31, 1997 between South Hampton Refining Company and Den norske Bank ASA. 13 1997 Annual Report to Stockholders. With the exception of the information incorporated by reference into Items 5, 6, 7, 7A, 8 and 14 of this Form 10-K, the 1997 Annual Report to Stockholders is not to be deemed filed as part of this Report. 21 Subsidiaries (incorporated by reference to Exhibit 21 to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)). 27 Financial Data Schedule.