UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR QUARTER ENDING MARCH 31, 2000
COMMISSION FILE NUMBER 0-6247
ARABIAN SHIELD DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-1256622
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10830 NORTH CENTRAL EXPRESSWAY, SUITE 175 75231
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 692-7872
Former name, former address and former fiscal year, if
changed since last report.
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of the Registrant's Common Stock (par value $0.10 per share),
outstanding at March 31, 2000: 22,738,994.
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31,
(UNAUDITED) 1999
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 811,773 $ 434,313
Short-Term Investments -- 20,597
Trade Receivables 6,191,688 4,308,085
Inventories 674,587 745,396
--------------- ---------------
Total Current Assets 7,678,048 5,508,391
REFINERY PLANT, PIPELINE AND EQUIPMENT 14,799,957 9,357,956
Less: Accumulated Depreciation (4,550,738) (4,330,856)
--------------- ---------------
Net Plant, Pipeline and Equipment 10,249,219 5,027,100
AL MASANE PROJECT 34,731,685 34,621,335
OTHER INTERESTS IN SAUDI ARABIA 2,431,248 2,431,248
MINERAL PROPERTIES IN THE UNITED STATES 1,280,274 1,299,008
RESTRICTED CASH 1,250,000 3,500,000
OTHER ASSETS 520,225 461,127
--------------- ---------------
TOTAL ASSETS $ 58,140,699 $ 52,848,209
=============== ===============
LIABILITIES
CURRENT LIABILITIES
Accounts Payable-Trade $ 2,375,725 $ 1,129,926
Accrued Liabilities 1,019,036 1,005,110
Accrued Liabilities in Saudi Arabia 857,823 1,326,823
Notes Payable 11,873,780 11,873,780
Current Portion of Long-Term Debt 2,056,792 677,439
--------------- ---------------
Total Current Liabilities 18,183,156 16,013,078
LONG-TERM DEBT 6,495,508 3,572,561
ACCRUED LIABILITIES IN SAUDI ARABIA 754,093 741,218
DEFERRED REVENUE 157,227 165,835
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1,110,160 907,354
STOCKHOLDERS' EQUITY
COMMON STOCK-authorized 40,000,000
shares of $.10 par value; 22,488,994
shares issued and outstanding 2,248,899 2,201,999
ADDITIONAL PAID-IN CAPITAL 36,523,606 36,101,506
ACCUMULATED DEFICIT (7,331,950) (6,855,342)
--------------- ---------------
Total Stockholders' Equity 31,440,555 31,448,163
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,140,699 $ 52,848,209
=============== ===============
See notes to consolidated financial statements.
-1-
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
REVENUES
Refined Product Sales $ 10,050,805 $ 5,427,997
Processing Fees 517,945 113,117
--------------- ---------------
10,568,750 5,541,114
OPERATING COSTS AND EXPENSES
Cost of Refined Product
Sales and Processing 9,903,130 3,553,179
General and Administrative 776,982 749,487
Depreciation 219,882 113,630
--------------- ---------------
10,899,994 4,416,296
--------------- ---------------
OPERATING INCOME (LOSS) (331,244) 1,124,818
OTHER INCOME (EXPENSE)
Interest Income 20,992 20,944
Interest Expense (204,524) (39,521)
Minority Interest 15,386 1,439
Miscellaneous Income 22,782 76,144
--------------- ---------------
(145,364) 59,006
--------------- ---------------
NET INCOME (LOSS) $ (476,608) $ 1,183,824
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.02) $ 0.05
=============== ===============
Diluted $ (0.02) $ 0.05
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 22,325,148 22,019,494
=============== ===============
Diluted 22,325,148 22,798,159
=============== ===============
See notes to consolidated financial statements.
-2-
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
-------------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
JANUARY 1, 2000 22,019,994 $ 2,201,999 $ 36,101,506 $ (6,855,342) $ 31,448,163
Common Stock Issued in
Payment of Liabilities 469,000 46,900 422,100 469,000
Net Loss -- -- -- (476,608) (476,608)
------------ ------------ ------------ ------------ ------------
MARCH 31, 2000 22,488,994 $ 2,248,899 $ 36,523,606 $ (7,331,950) $ 31,440,555
============ ============ ============ ============ ============
See notes to consolidated financial statements.
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ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
OPERATING ACTIVITIES
Net Income (Loss) $ (476,608) $ 1,183,824
Adjustments for Non-Cash Transactions
Depreciation 219,882 113,630
Increase (Decrease) in Deferred Revenue (8,608) 34,124
Effects of Changes in Operating Assets and Liabilities
Decrease (Increase) in Trade Receivables (338,152) 73,456
Decrease (Increase) in Inventories 316,807 (46,771)
Decrease (Increase) in Other Assets (51,122) 51,997
(Decrease) Increase in Accounts Payable and
Accrued Liabilities (566,326) 229,133
Other 27,503 (23,903)
-------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (876,624) 1,615,490
-------------- --------------
INVESTING ACTIVITIES
Proceeds from Sale of Short-Term Investments 20,597 25,830
Purchase of Business (Net of Cash Acquired) (2,279,665) --
Additions to Al Masane Project (110,350) (116,555)
Additions to Refinery Plant, Pipeline & Equipment (261,599) (1,419,155)
(Additions to) Reduction in Mineral Properties in the U.S. 18,734 (1,172)
Increase in Accrued Liabilities in Saudi Arabia 12,875 11,132
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (2,599,408) (1,499,920)
-------------- --------------
FINANCING ACTIVITIES
Common Stock Sold -- --
Additions to Notes Payable and Long-Term Obligations 1,781,827 --
Reduction of Notes Payable and Long-Term Obligations (178,335) --
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,603,492 --
-------------- --------------
NET INCREASE (DECREASE) IN CASH (1,872,540) 115,570
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,934,313 1,907,242
-------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,061,773 $ 2,022,812
============== ==============
See notes to consolidated financial statements.
-4-
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of
Arabian Shield Development Company and Subsidiaries' financial
position and operating results for the interim period. Interim period
results are not necessarily indicative of the results for the calendar
year. Please refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional
information and the Company's December 31, 1999 Annual Report on Form
10-K.
These financial statements include the accounts of Arabian Shield
Development Company (the "Company") and its wholly-owned subsidiaries,
American Shield Refining Company (the "Refining Company") and American
Shield Coal Company (the "Coal Company"). The Refining Company owns
all of the capital stock of Texas Oil and Chemical Company II, Inc.
("TOCCO"). TOCCO owns all of the capital stock of South Hampton
Refining Company ("South Hampton") and South Hampton owns all of the
capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State").
TOCCO also owns 92% of the capital stock of Productos Quimicos Coin,
S.A. de. C.V. ("Coin"), a specialty petrochemical products refining
company located near Veracruz, Mexico, which was purchased on January
25, 2000 for approximately $2.5 million. The Company also owns
approximately 51% of the capital stock of Pioche-Ely Valley Mines,
Inc. ("Pioche"), which owns mining properties in Nevada. The Refining
Company and its subsidiaries constitute the Company"s Specialty
Petrochemicals or Refining Segment. The Coal Company, Pioche and the
Company's mineral properties in Saudi Arabia constitute its Mining
Segment.
2. INVENTORIES
Inventories at March 31, 2000 and December 31, 1999 were $674,587 and
$745,396, respectively, and consisted entirely of finished goods.
3. NET INCOME (LOSS) PER COMMON SHARE
The following table (in thousands, except per share amounts) sets
forth the computation of basic and diluted net income (loss) per share
for the three months ended March 31, 2000 and 1999, respectively.
Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
Net Income (Loss) $ (477) $ 1,184
Add interest on convertible debt -- 8
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Net Income (Loss) - diluted $ (477) $ 1,192
========== ==========
Weighted average shares outstanding - basic 22,325 22,019
Dilutive effect of convertible debt -- 511
Dilutive effect of stock options -- 268
---------- ----------
Weighted average shares outstanding - diluted 22,325 22,798
========== ==========
Net income (loss) per share:
Basic $ (.02) $ .05
========== ==========
Diluted $ (.02) $ .05
========== ==========
-5-
4. ACQUISITION
On January 25, 2000, TOCCO purchased 92% of the issued and outstanding
shares of the common stock of Productos Quimicos Coin, S.A. de. C.V.
("Coin") from Spechem, S.A. de. C.V. for $2.5 million in cash. Coin is
a specialty petrochemical products refining company located in
Coatzacoalcos, Mexico near Veracruz. Financing was provided by a loan
from Heller Financial Leasing, Inc.
The following table (in thousands, except per share amounts) presents
pro forma unaudited consolidated results of operations for the
quarters ended March 31, 2000 and 1999, assuming that the acquisition
had taken place at the beginning of the periods presented. The pro
forma results are not necessarily indicative of the results of
operations that would have occurred had the acquisition been made at
the beginning of the periods presented, or of future results of
operations of the combined companies.
Three Months Ended
March 31,
--------------------------
2000 1999
---------- ----------
Revenue $ 11,569 $ 7,695
Net income (loss) (525) 1,520
Net income (loss) per share:
Basic $ (.02) $ .07
========== ==========
Diluted $ (.02) $ .07
========== ==========
5. SEGMENT INFORMATION
As discussed in Note 1, the Company has two business segments. The
Company measures segment profit or loss as operating income (loss),
which represents income (loss) before interest, miscellaneous income
and minority interest. Information on the segments is as follows:
Three Months ended March 31, 2000 Refining Mining Total
--------------------------------- ------------ ------------ ------------
Revenue from external customers $ 10,568,750 $ -- $ 10,568,750
Operating income (loss) (281,942) (49,302) (331,244)
Total assets $ 19,697,443 $ 38,443,256 $ 58,140,699
Three Months ended March 31, 1999 Refining Mining Total
--------------------------------- ------------ ------------ ------------
Revenue from external customers $ 5,541,114 $ -- $ 5,541,114
Operating income (loss) 1,136,358 (11,540) 1,124,818
Total assets $ 10,113,304 $ 38,026,792 $ 48,140,096
6. LEGAL PROCEEDINGS
South Hampton is a defendant in four lawsuits filed in Jefferson
County and Orange County, Texas in the period from December 1997 to
December 1999 by former employees of the southeast Texas plants of the
Goodyear Tire & Rubber Company, Dupont and South Hampton. The suits
claim illness and disease resulting from alleged exposure to
chemicals, including benzene, butadiene and/or isoprene, during their
employment. The plaintiffs claim that the companies engaged in the
business of manufacturing, selling and/or distributing these chemicals
in a manner which subjected them to liability for unspecified actual
and punitive damages. South Hampton intends to vigorously defend
itself against these lawsuits.
In August 1997, the Texas Natural Resource Conservation Commission
("TNRCC") notified South Hampton that it had violated various rules
and procedures. It proposed administrative penalties totaling $709,408
and recommended that South Hampton undertake certain actions necessary
to bring the operations at its refinery into compliance. The
violations generally
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relate to various air and water quality issues. Appropriate
modifications have been made by South Hampton where it appeared there
were legitimate concerns. South Hampton feels the penalty is greatly
overstated and intends to vigorously defend itself against it. A
preliminary hearing was held in November 1997, but no further action
has been taken.
On February 2, 2000, the TNRCC amended its pending administrative
action against South Hampton to add allegations dating through May 21,
1998 of 35 regulatory violations relating to air quality control and
industrial solid waste requirements. The TNRCC proposes that
administrative penalties be assessed in the amount of approximately
$765,000 and that certain corrective actions be taken. South Hampton
intends to vigorously defend itself against these additional
allegations, the proposed penalties and proposed corrective actions.
In May 1991, the Company filed a complaint with the U.S. Department of
Justice ("DOJ") against Hunt Oil Company of Dallas, Texas ("Hunt").
The Company's complaint alleged various violations of the Foreign
Corrupt Practices Act ("FCPA") by Hunt, at the Company's detriment, in
obtaining its 1981 Petroleum Production Sharing Agreement ("PSA") in
Yemen. The DOJ requested additional documentation regarding the
Company's allegations in 1995 that the Company provided in early 1996.
In late 1996, the DOJ advised the Company that the documents presented
did not provide sufficient evidence of any criminal activity and that
the DOJ did not intend to pursue the investigation. In December 1996,
after providing the DOJ with additional legal analyses, the Company's
representatives were told that the DOJ would take a more aggressive
stance if additional legal evidence was presented to the DOJ. In an
effort to comply with the DOJ's request, in 1997 the Company requested
certain documents from the Central Intelligence Agency ("CIA") under
the Freedom of Information Act ("FOIA"). The Company believes the
requested documents may contain the evidentiary information that the
DOJ needs to properly and sufficiently evaluate the Company's
compliant against Hunt. The CIA refused to either confirm or deny the
existence of the requested information. After exhausting its
administrative appeals, the Company filed suit against the CIA in
early 1998 in the U.S. District Court for the Northern District of
Texas seeking a judicial determination of the Company's FOIA request.
The Company argued the FOIA specifically prohibits any agency from
using Executive Order 12958, relating to classification of documents,
and the FOIA to conceal criminal activity, in this instance Hunt's
violation of the FCPA. Following a February 1999 hearing, the Court
rejected the Company's arguments and issued a summary judgment in
favor of the CIA. The Company filed an appeal with the U.S. Court of
Appeals for the Fifth Circuit, which on January 28, 2000 rejected the
Company's appeal. The Company believes that this could be a landmark
case. As a consequence, on April 22, 2000, it filed a writ of
certiorari with the United States Supreme Court in which the Company
argued that the District and Appellate Courts erred in their
judgments. The Company has requested the Supreme Court to issue its
ruling that the matter be remandered to the trial court with
instructions that the CIA review its own documents to determine if any
information requested by the Company should not have been classified
but handed over the Company for use in the pursuit of its case with
the DOJ against Hunt for conspiracy and violation of the FCPA. In
addition, the Company has requested and will continue to request
additional documents from both the CIA and DOJ under appropriate
provisions of the FOIA and may seek judicial review in the event its
requests are denied. In the event the Company is able to provide the
DOJ with appropriate legal evidence and the DOJ prevails in any FCPA
action against Hunt regarding the PSA, the Company would then
institute an appropriate action against Hunt in accordance with the
provisions of the Victim Restitution Act. Based on the advice of its
counsel, the Company believes that it would be entitled to restitution
of monies lost as a result of the wrongdoing by Hunt, if Hunt is
convicted under the FCPA. The Company further believes, based on such
advice, that the amount of restitution could include all of the
profits received by Hunt from its Yemen operations and also could
include proceeds from the sale of a portion of Hunt's interest in the
PSA. However, there can be no assurance that the DOJ will pursue or
obtain a conviction of Hunt regarding the PSA under the FCPA and no
assurance that the Company would receive or be entitled to receive any
restitution as a result of any such conviction.
-7-
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Statements in Part 1, Item 2 as well as elsewhere in, or incorporated by
reference in, this Quarterly Report on Form 10-Q regarding the Company's
financial position, business strategy and plans and objectives of the Company's
management for future operations and other statements that are not historical
facts, are "forward-looking statements" as that term is defined under applicable
Federal securities laws. In some case, "forward-looking statements" can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "contemplates," "proposes," believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks, uncertainties and factors
include, but are not limited to, general economic conditions domestically and
internationally; insufficient cash flows from operating activities; difficulties
in obtaining financing; outstanding debt and other financial and legal
obligations; competition; industry cycles; feedstock, specialty petrochemical
product and mineral prices; feedstock availability; technological developments;
regulatory changes; environmental matters; foreign government instability;
foreign legal and political concepts; and foreign currency fluctuations, as well
as other risks detailed in the Company's filings with the U.S. Securities and
Exchange Commission, including this Quarterly Report on Form 10-Q, all of which
are difficult to predict and many of which are beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in two business segments, specialty petrochemicals
(which is composed of the entities owned by the Refining Company) and mining.
Its corporate overhead needs are minimal. A discussion of each segment's
liquidity and capital resources follows.
SPECIALTY PETROCHEMICALS SEGMENT. This segment contributes substantially
all of the Company's internally generated cash flows from operating activities
and its primary sources of revenue are the specialty products refineries owned
and operated by South Hampton near Silsbee, Texas and by Coin in Mexico. In
order to supplement its cash flows from operating activities, this business
segment has a $2.25 million credit agreement with the Southwest Bank. In
connection with the acquisition of the common stock of Coin, South Hampton and
Gulf State entered into the $3.5 million note with Heller Financial. This
segment's cash flows from operating activities, along with its available credit
facility, are expected to be adequate to finance its planned capital
expenditures and debt service requirements. In the event this segment were to
undertake a major capital expenditure, such as construction of a new facility,
financing for this activity would most likely come from some combination of
internal resources, a debt placement with a financial institution or a joint
venture partner. Any major capital expenditure requires the Southwest Bank's
advance review and approval.
MINING SEGMENT. This segment is in the development stage. Its most
significant asset is the Al Masane mining project in Saudi Arabia, which is a
net user of the Company's available cash and capital resources. In order to
commercially develop the Al Masane project, the Company entered into a joint
venture arrangement with Al Mashreq Company for Mining Investments ("Al
Mashreq"), a Saudi limited liability company owned by Saudi Arabian investors
(including certain of the Company's shareholders). The partners formed The
Arabian Shield Company for Mining Industries Ltd., a Saudi limited liability
company ("Arabian Mining"), which was officially registered and licensed in
August 1998 to conduct business in Saudi Arabia and authorized to mine and
process minerals from the Al Masane lease area. Arabian Mining received
conditional approval for a $38.1 interest-free loan from the Saudi Industrial
Development Fund ("SIDF").
Due to the severe decline in the open market prices for the minerals to be
produced by the Al Masane project and the financial crisis affecting Eastern
Asia in 1998, SIDF and other potential lenders required additional guarantees
and other financing conditions, which were unacceptable to the Company and Al
Mashreq. As a consequence, Al Mashreq withdrew from the joint venture. By letter
dated May 11, 1999, the Company informed the Ministry of Petroleum and Mineral
Resources that the joint venture was dissolved and that implementation of the
project would be delayed until open market prices for the minerals to be
produced by the Al Masane project improve to the average price levels
experienced during the period from 1988 through 1997. At
-8-
that time, the Company will attempt to locate a joint venture partner, form a
joint venture and, together with the joint venture partner, attempt to obtain
acceptable financing to commercially develop the project. There can be no
assurances that the Company will be able to locate a joint venture partner, form
a joint venture or obtain financing from SIDF or any other sources. In the
meantime, the Company intends to maintain the Al Masane mining lease through the
payment of the annual advance surface rental, the implementation of a drilling
program to attempt to increase proven and probable reserves and to attempt to
improve the metallurgical recovery rates beyond those stated in the feasibility
study, which may improve the commercial viability of the project at lower metal
prices than those assumed in the feasibility study.
On June 22, 1999, the Company submitted a formal application for a five-year
exclusive mineral exploration license for the Greater Al Masane Area of
approximately 2,850 square kilometers, which surrounds the Al Masane mining
lease area and includes the Wadi Qatan and Jebel Harr. The Company previously
worked the Greater Al Masane Area after obtaining written authorization from the
Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3
million in exploration work. Geophysical and geochemical work and diamond core
drilling on the Greater Al Masane area has revealed mineralization similar to
that discovered at Al Masane.
The Company's mineral interests in the United States include its ownership
interests in the Coal Company and Pioche. The Coal Company's sole remaining
asset is its net operating loss carryforward of approximately $5.9 million at
December 31, 1999 and its future, if any, is uncertain. Pioche has been inactive
for many years. Its properties include 48 patented and 80 unpatented claims
totaling approximately 3,500 acres in Lincoln County, Nevada. There are
prospects and mines on these claims that previously produced silver, gold, lead,
zinc and copper.
Management also is addressing two other significant financing issues within
this segment. These issues are the $11.0 million note payable due the Saudi
Arabian government and accrued salaries and termination benefits of
approximately $900,000 due employees working in Saudi Arabia (this amount does
not include any amounts due the Company's President and Chief Executive Officer
who also primarily works in Saudi Arabia and is owed approximately $754,000).
Regarding the note payable, this loan was originally due in ten annual
installments beginning in 1984. The Company has not made any repayments nor has
it received any payment demands or other communications regarding the note
payable from the Saudi government. By memorandum to the King of Saudi Arabia in
1986, the Saudi Ministers of Finance and Petroleum recommended that the $11.0
million note be incorporated into a loan from SIDF to finance 50% of the cost of
the Al Masane project, repayment of the total amount of which would be made
through a mutually agreed upon repayment schedule from the Company's share of
the operating cash flows generated by the project. The Company remains active in
Saudi Arabia and received the Al Masane mining lease at a time when it had not
made any of the agreed upon repayment installments. Based on its experience to
date, management believes that as long as the Company diligently attempts to
explore and develop the Al Masane project no repayment demand will be made. The
Company recently communicated to the Saudi government that its delay in repaying
the note is a direct result of the government's lengthy delay in granting the Al
Masane lease. Based on its interpretation of the Al Masane mining lease and
other documents, management believes the government is likely to agree to link
repayment of this note to the Company's share of the operating cash flows
generated by the commercial development of the Al Masane project and to a
long-term installment repayment schedule. In the event the Saudi government were
to demand immediate repayment of this obligation, which management considers
unlikely, the Company would be unable to pay the entire amount due. If a
satisfactory rescheduling agreement could not reached, and there are no
assurances that one could be, the Company believes it could obtain the necessary
resources to meet the rescheduled installment payments from the cash flows
generated by its two specialty petrochemical refineries.
With respect to the accrued salaries and termination benefits due employees
working in Saudi Arabia, the Company plans to continue employing these
individuals until it is able to generate sufficient excess funds to begin
payment of this liability. Management will then begin the process of gradually
releasing certain employees and paying its obligation as they are released from
the Company's employment.
At this time, the Company has no definitive plans for the development of its
domestic mining assets. It periodically receives proposals from outside parties
who are interested in possibly developing or using certain assets. Management
will continue to review these proposals as they are received, but at this time
does not anticipate making any significant domestic mining capital expenditures
or receiving any significant proceeds from the sale or use of these assets.
If the Company seeks additional outside financing, there is no assurance
that sufficient funds can be obtained. It is also possible that the terms of any
additional financing that the Company would be able to obtain would be
unfavorable to the Company and its existing shareholders.
-9-
RESULTS OF OPERATIONS
SPECIALTY PETROCHEMICALS SEGMENT. A 92% interest in the Coin refinery in
Mexico was purchased on January 25, 2000, therefore, its revenues and expenses
for February and March are included in the financial statements for the first
quarter of 2000. While there have been some additional expenses involved in the
acquisition, the primary factor affecting first quarter results was the dramatic
rise in the cost of feedstock in late 1999 and early 2000. In the three months
ended March 31, 2000, total revenue increased approximately $5,027,000
($1,554,000 attributable to Coin) or 91%, while the cost of sales (excluding
depreciation) increased approximately $6,350,000 ($1,502,000 attributable to
Coin) or 179% from the same period in 1999. Consequently, the gross profit
margin in 2000 decreased approximately $1,322,000 or 67%. Some of the revenue
increase came from additional sales of the acquired company but product prices
and toll processing fees were also higher than in the previous year. Sales
volume in the first quarter of 2000 increased 57% over the same period in 1999
with 9.8 million gallons being sold. Toll processing fee income rose by 358%,
which offsets in part the feedstock price increases. The increase in these fees
is primarily due to the addition of a new unit added in 1999. An additional unit
in being constructed and is expected to begin operation in June 2000. The new
unit is expected to add approximately $70,000 per month in processing fee
income.
In late 1999 and the first two months of 2000, feedstock costs rose in
conjunction with the tremendous increase in crude oil prices worldwide. Prices
for the refinery feedstock increased from $.33 per gallon in the first quarter
of 1999 to over $.75 per gallon the first quarter of 2000, an average increase
of 225%. During periods of rapid feedstock price increases, it is not possible
to raise product prices quickly enough to cover the increased costs; therefore
any changes in costs will not affect the profitability on a one to one basis in
the near term. The cost of natural gas, which is the refinery's single largest
expense, other than feedstock costs, rose by 65% due to the increase in the
worldwide prices. In the first quarter of 1999, the refinery was paying $1.70
per MMBTU for fuel gas, which increased to $2.80 per MMBTU by the end of the
first quarter of 2000. Expenses in the first quarter of 2000 were higher by
approximately $888,000, with about 25% of the increase due to the addition of
the new refinery business. Sales of the refinery's products remain stable and
expanded marketing efforts have kept the Silsbee refinery at near capacity since
the second quarter of 1997. Management expects that the acquisition of the
refinery in Mexico and the blending of its similar operations with the Silsbee
refinery will produce improved results in the second quarter of 2000.
MINING SEGMENT AND GENERAL CORPORATE EXPENSES. None of the Company's other
operations generate significant operating or other revenues. Minority interest
amounts represent the Pioche minority stockholders' share of Pioche losses that
are primarily attributable to the costs of maintaining the Nevada mining
properties.
The Company periodically reviews and evaluates its mineral exploration and
development projects as well as its other mineral properties and related assets.
The recoverability of the Company's carrying values of its development
properties are assessed by comparing the carrying values to estimated future net
cash flows from each property. In 1999 and 2000, for purposes of estimating
future cash flows, the price assumptions contained in the 1996 update to the Al
Masane project's feasibility study, which was prepared by its mining consultant,
were used. These price assumptions are averages over the projected life of the
Al Masane mine and are $1.05 per pound for copper, $.60 per pound for zinc, $400
per ounce for gold, and $6.00 per ounce for silver. For its other mineral
properties and related assets, carrying values were compared to estimated net
realizable values on market comparables. Using these price assumptions, no asset
impairments were evident.
The Company intends to assess the carrying values of its assets on an
ongoing basis. Factors which may affect carrying values include, but are not
limited to, mineral prices, capital cost estimates, the estimated operating
costs of any mines and related processing, ore grade and related metallurgical
characteristics, the design of any mines and the timing of any mineral
production. There are no assurances that, particularly in the event of a
prolonged period of depressed mineral prices, the Company will not be required
to take a material write-down of its mineral properties.
-10-
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
SHAREHOLDER'S PROPOSALS
Any proposal by a shareholder of the Company intended to be presented at
the 2001 annual meeting of shareholders, which is tentatively scheduled sometime
in May 2001, must be received by the Company at its principal executive office
no later than December 4, 2000 for inclusion in the Company's Proxy Statement
and form of proxy. Any such proposal must also comply with the other
requirements of the proxy solicitation rules of the Securities and Exchange
Commission. The Company intends to exercise discretionary voting authority
granted under any proxy which is executed and returned to the Company on any
matter that may properly come before the 2001 annual meeting of shareholders,
unless written notice of the matter is delivered to the Company at its principal
executive office no later than February 15, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(B) REPORTS ON FORM 8-K
A Form 8-K report was filed on January 25, 2000, which reported that TOCCO
had purchased 92% of the issued and outstanding shares of the common stock of
Productos Quimicos Coin, S.A. de. C.V. ("Coin") from Spechem, S.A. de. D.V. for
$2.5 million in cash. Coin is a specialty petrochemical products refining
company located in Coatzacoalcos, Mexico. Financing was provided by a loan from
Heller Financial Leasing, Inc.
----------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 10, 2000 ARABIAN SHIELD DEVELOPMENT COMPANY
------------- ----------------------------------------
(Registrant)
/s/ J. A. CRICHTON
----------------------------------------
J. A. Crichton, Chairman of the
Board of Directors
/s/ DREW WILSON, JR.
----------------------------------------
Drew Wilson, Jr. Secretary/Treasurer
-11-
INDEX TO EXHIBITS
Exhibit
Number Description
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27 Financial Data Schedule