ARABIAN SHIELD DEVELOPMENT CO, 10-K, 1995-03-30

ARABIAN SHIELD DEVELOPMENT CO
10-K, 1995-03-30
PETROLEUM REFINING

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<PAGE> 1

Form 10-K

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 [FEE REQUIRED]

For the fiscal year ended December 31, 1994

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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
----- -----
<PAGE> 2

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 20, 1995: 19,878,494.

The aggregate market value on March 20, 1995 of the registrant's
voting securities held by non-affiliates was $23,107,208.

DOCUMENTS INCORPORATED BY REFERENCE

(a) Selected portions of the registrant's Annual Report to
Stockholders for the year ended December 31, 1994. - Parts II
and IV

(b) Selected portions of the registrant's definitive Proxy
Statement for the Annual Meeting to be held May 5, 1995. -
Part III
<PAGE> 3
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 business of
developing its undeveloped mineral properties. None of the undeveloped mineral
properties are currently producing and significant capital expenditures will be
necessary before any commercial operations are commenced. In an updated full
bank feasibility study of the Al Masane lease area, which is under a 30-year
mining lease to the Company, conducted in 1994 by an independent
mining consulting firm, the consultants estimate the total capital costs of the
Al Masane project to be $81.3 million. The Company will diligently pursue the
financing of the project so that commercial production can begin in the fourth
quarter of 1996, 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.

The Company, through its indirect wholly-owned subsidiary, South
Hampton Refining Company ("South Hampton"), owns and operates a petroleum
refinery which is the Company's only significant revenue producing asset.
South Hampton has scheduled short-term and current portions of long-term debt
obligations which exceed its ability to repay from cash on hand and internally
generated funds. To satisfy its current debt obligations in an orderly manner,
South Hampton will need to renew certain debt obligations, achieve an increase
in cash flow from the refinery and/or receive funds from the Company from
future sales of the Company's Common Stock. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further discussion of these matters.

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 jointly holds with National Mining Company, a private
Saudi company ("National Mining"), exploration licenses for the Wadi Qatan and
Jebel Harr areas in Saudi Arabia. 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 is planning to apply for
formal extensions of these licenses in 1995. Although the exploration licenses
were awarded

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jointly to the Company and National Mining, the exploration work on the license
areas has been carried on exclusively by the Company.

The Company has had discussions with Chevron Chemical Company
regarding the Company's proposal to purchase 5,000 barrels per day of mixed
pentanes from an Aromax petrochemical project to be built in Jubail, Saudi
Arabia by Chevron Chemical in joint venture with Saudi Venture Capital Group
(SVCS). The Company and some Saudi joint venture partners, all of whom are
directors and/or stockholders of the Company, contemplate building a processing
plant located next to the Aromax plant in Saudi Arabia. As proposed, the
Company would have a 25% interest in the joint venture. Chevron Chemical
advised the Company by letter that Chevron Chemical and SVCS have jointly
agreed to commit to supply the joint venture's proposed pentane project with up
to 5,000 barrels per day of mixed pentane feedstock. Engineering and marketing
studies of the project have been made by outside consultants which reflect
positive results. Planning has begun toward the construction and operation of
the Aromax plant and the joint venture's processing plant. Construction is
estimated to be completed in late 1996. The Company will begin applying to the
Saudi government for a license for the project when the Aromax project receives
final approval from the Saudi government.

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 designs for a state of the art zinc refinery. Sherritt's zinc pressure
leach technology provides significant advantages over the other existing zinc
production processes, including having the reputation as the most favored
technology for environmental considerations. In the study Sherritt concludes,
after considering all of the presently, identifiable elements, that these
elements offer a strong potential for the project and enhance the concept.
Sherritt encourages the Company to carry out further studies toward the
implementation of the project.

United States Activities. American Shield Refining Company, a wholly
owned subsidiary of the 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, indirectly through South Hampton,
owns all of the capital stock of Gulf States Pipeline Company, Inc. ("Gulf
States"). South Hampton owns and operates a petroleum refinery

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near Silsbee, Texas. Gulf States 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 owns all of the capital stock of
American Shield Coal Company (the "Coal Company") and beneficially owns
approximately 55%, and directly owns approximately 46%, of the capital
stock of an inactive Nevada mining company, Pioche-Ely Valley Mines,
Inc. ("Pioche-Ely Valley").

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 pre-feasibility mining study was conduct
at Al Masane by the mining consulting firm of Watts, Griffis and McOuat 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

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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:

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<TABLE>
<CAPTION>

==============================================================================================================
Reserve Copper Zinc Gold Silver
Zone (Tonnes) (%) (%) (g/t) (g/t)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------------------------------------
</TABLE>

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.

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The metallurgical studies conducted on the ore samples taken from the
zones indicated that 87.7% of the copper and 82.6% of the zinc could be
recovered in copper and zinc concentrates. Overall, gold and silver recovery
from the ore was estimated to be 77.3% and 81.3%, respectively, partly into
copper concentrate and partly as bullion through cyanide processing of zinc
concentrates and mine tailings.

A test program to evaluate the economies of the cyanidation of the zinc
concentrate and tailings in order to improve gold and silver recoveries found
gold and silver recoveries to range from 50% to 77%. To recover gold and silver
from the zinc concentrate and tailings, WGM recommended that a cyanidation
plant be included in process flowsheet. Dore bullion would be produced. WGM
concluded that the inclusion of a cyanidation plant would make a positive
contribution to the economies of the project under the base conditions.

The mining and milling operation recommended by WGM for Al Masane
would involve the production of 2,800 tonnes of ore per day (700,000 tonnes per
year), with a mine life of over ten years. Annual production is estimated to
be 34,900 tonnes of copper concentrate (25% copper per tonne) containing
precious metal and 58,000 tonnes of zinc concentrate (54% zinc per tonne). The
construction of mining, milling and infrastructure facilities is estimated to
take 18 months to complete. The total capital cost to bring the Al Masane
project into production is estimated to be $81.3 million. This cost includes
the pre-production development of the mine, the construction of a 2,000 tonne
per day concentrator, infrastructure with a 300 man camp facility and the
installation of a cyanidation plant to increase the recovery of precious metals
from the deposit. Project power requirements will be met by diesel generated
power.

WGM recommended that the Al Masane reserves be mined by trackless
mining equipment using either cut-and-fill or open- stopping methods depending
on the shape and location of each orebody. Once the raw ore is mined, it would
be subjected to grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc
concentrate, copper concentrate and dore bullion. The copper concentrate will
contain valuable amounts of gold and silver. Total output per year is
estimated to be 22,000 ounces of gold and 800,000 ounces of silver. After
smelter refining process, the metals could be sold by the Company or the
smelter for the Company's account in the open market.

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the mine life. Based on these assumptions, and assuming the average prices of
metal over the life of the mine to be $1.00 per pound for copper, $0.60 per
pound for zinc, $400 per ounce of gold and $6.00 per ounce of silver, WGM's
economic analysis of the base case shows the project will realize an internal
rate of return of 14% to the project, a rate of return of 11.9% and a net cash
flow of $26.6 million to the equity investors in the new Saudi public stock
company, and a net cash flow of $37 million to the Company. Other cash flow
scenarios calculated to show the effect of various opportunities and risks
associated with the project were also prepared. Assuming the mine begins
commercial production in mid-1996, as contemplated in the feasibility study,
the Company would not pay any income tax to the Saudi government for the first
five years or until after mid-2001. In the feasibility study, WGM recommends
that the Company make a decision to bring the Al Masane mine into production.

In the feasibility study, WGM states that there is potential to find
more reserves within the lease area, as the ore zones are all open at depth.
Further diamond drilling, which will be undertaken by the Company, is required
to quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.

Project Financing and Mining Lease. Pursuant to the mining lease
agreement, after the profitability of the project is established, as determined
by the Saudi Arabian government, the Company will form a Saudi public stock
company with the Petroleum and Mineral Organization ("Petromin"), the official
mining and petroleum company of the Saudi Arabian government. The Company will
own 50% of the shares of the Saudi public stock company and Petromin no more
than 25% of the shares. The remaining shares will be offered for sale in Saudi
Arabia pursuant to a public subscription. In consideration for its receiving
shares in the Saudi public stock company, the Company intends to transfer title
to the mining lease to the Saudi public stock company, including responsibility
for the repayment of the $11 million loan from the Saudi Arabian government and
the other obligations specified in the mining lease. In December 1994, the
Company received instructions from the Office of the Minister of Petroleum and
Mineral Resources stating that it is possible for the Company to form the Saudi
public stock company without Petromin but that the sale of stock to the Saudi
public should occur only after assured profits from commercial operations of
the mine. The instructions added that Petromin shall have the right to purchase
shares in the Saudi public stock company any time it desires.

Pursuant to these instructions the Company retained Carlyle SEAG
("Carlyle"), of Washington, D.C. and Saudi Arabia, as the Company's financial
advisor in connection with the Al Masane mining project. Carlyle's services
will include, but not be limited to, (1) advising on the capitalization
structure of the proposed Saudi company to be established for the project; (2)
the raising of capital funds for the project implementation; and (3) assisting
the Company on the filing of all licenses and necessary documents for
regulatory purposes.

While the Company agreed in the mining lease not to request a loan
which would fund 50% of the capital cost of the project from the Saudi Public
Development Fund, the Company intends to apply for a similar loan from the
Saudi Industrial Development Fund. The Saudi Industrial Development Fund makes
interest-free loans to industrial projects in Saudi Arabia and charges a 2.5%
service fee. The Company believes that it may be able to finance the cost of
the project through arrangements with suppliers and equipment manufacturers,
custom smelters and additional debt or equity financing secured by the Company,
however, there can be no assurances to that effect.

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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 jointly secured by the Company and National Mining from the Saudi Arabian
government. The mining lease provides that the Company will repay the loan
from the profits of the project. 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 agrees to pay surface rental
at the rate of ten thousand Saudi Riyals (approximately $2,667 at the current
exchange rate) per square kilometer per year during the period of the lease.
In addition, the Company must pay income tax in accordance with the income tax
laws of Saudi Arabia then in force and pay all infrastructure costs. Under the
Mining Code, income tax will not be due in respect to mining operations during
the period of five years starting from the date of the first sale of products
or five years from the beginning of the fourth year after the issue of the
mining lease, whichever comes first. 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 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 15 of this Report for information
concerning the location of the Al Masane project.

Other Exploration Areas in Saudi Arabia

The Company, along with National Mining and another Saudi private
company, have also applied to the Saudi government for an exploration license
covering a large area in northern Saudi Arabia

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known as Ghurayyah. Preliminary investigations have indicated that the
Ghurayyah area contains substantial columbium, tantalum and other mineral
deposits.

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 it has applied for certain additional exploration licenses in that
country, including the Ghurayyah license.

With respect to the license areas, the Company and National Mining are
parties to an agreement with Petromin which governs the rights of the parties
if the exploration licenses granted to the Company and National Mining 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 exploration
licenses granted to the Company and National Mining. The 25% interest is to be
derived from National Mining's interest in the mining lease. The Company will
have a 50% interest in the mining lease subject to this arrangement.

U.S. Mineral Interests

The Company has other mineral interests in the United States,
including approximately a 55% beneficial, and approximately a 46% direct,
equity interest in Pioche-Ely Valley. The Coal Company does not own or hold
any mineral interests and is presently inactive. The future of the Coal
Company's operations is uncertain. The Refining Company is a party to a joint
venture with a Saudi company and the former owners of TOCCO the purpose of
which is to engage in the trading of crude petroleum and refined petroleum
products. The joint venture has not consummated any petroleum trading
transactions.

Petroleum Refinery

South Hampton owns and operates a petroleum refinery near Silsbee,
Texas and currently employs 45 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: (1) a pentane-hexane unit; (2) a catalytic reformer; (3)
an aromatics hydrotreating and fractionation unit; (4) a cyclopentane unit; (5)
an aromax unit; (6) an aldehyde hydrogenation unit; and (7) a specialty
fractionation unit. All of these units are presently in operation, except the
aldehyde hydrogenation unit. South Hampton is evaluating potential processing
alternatives for the aldehyde hydrogenation unit.

The design capacity of the pentane-hexane unit is approximately 2,200
BPD of feedstock. The unit averaged 1,650 barrels per stream day during 1994.
The unit consists of a series

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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.

The catalytic reforming unit is a standard industry design using
platinum-rhenium catalyst which produces an aromatics concentrate used as
feedstock for the 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 standby source of hydrogen for the pentane-hexane
unit and does not run continually. The unit operates only when the aromax unit
has mechanical difficulties or when feedstock balances dictate. The unit
averaged 284 barrels per stream day during 1994.

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 was placed into
service for a toll processing customer in mid-1993 and is expected to continue
operation at a throughput rate of approximately 110 barrels per stream day.

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 261 barrels per stream day during 1994.

The aromax 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 pentane-
hexane unit and the other hydrotreaters. The unit averaged throughput of 211
barrels per stream day during 1994. Chevron Research has agreed to continue
development of the aromax process. The unit has continued to successfully
operate as designed.

The specialty fractionation unit consists of two fractionation towers
and a sulphur treater and has a design capacity of 1,000 BPD. The unit is
being used in toll processing for a customer and averaged 495 barrels per
stream day during 1994.

South Hampton also owns approximately 70 storage tanks with a total
capacity of approximately 250,000 barrels. The refinery is

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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.

The upgrading and expansion projects were completed at a cost which
exceeded the capital resources available to South Hampton to finance such
activities. Financing for the upgrading and expansion projects was provided
from advances by the Company through the Refining Company to South Hampton of a
portion of the proceeds of the sale of shares of the Company's Common Stock and
the advances by Chevron Research and another customer. The advances by the
Company through the Refining Company to South Hampton for the upgrading and
expansion of the refinery were $550,000 in the aggregate, $510,000 of which
amount is secured by a lien on the assets and properties of South Hampton,
which is subordinate to the liens securing the indebtedness of South Hampton to
Den norske Bank AS.

Gulf States owns and operates three 8" pipelines aggregating
approximately 45 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

With the exception of revenues generated by the operations of the
Refining Company, the Company has been without significant operating revenues
since 1972. Accordingly, it has been necessary for the Company continually to
seek additional debt and equity financing in order to have funds to continue
development activities. In 1992, the Company sold 105,000 shares of its Common
Stock for $105,000, borrowed $250,000 from a Saudi Arabian investor which was
used as partial payment of the purchase price of 1,500,000 shares of the
Company's Common Stock which the Company sold to the investor at $1.00 per
share, borrowed a total of $75,000 from a stockholder of the Company who is the
Vice Chairman of National Mining, which amount was payable on demand, and
issued 500,000 shares of its Common Stock, valued by the Company's Board of
Directors at $1.00 per share, in exchange for the cancellation of certain
indebtedness owed to this stockholder.

In 1993, the Company (1) sold 75,000 shares of its Common Stock at
$1.00 per share to a private Saudi company controlled by

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a director of the Company and sold an additional 300,000 shares of its Common
Stock at $1.00 per share to the same purchaser pursuant to an option exercise,
which shares are partly paid as a result of $100,000 of the exercise price
having been paid during 1993, (2) sold 3,000,000 shares of its Common Stock at
$1.00 per share to a Saudi Arabian investor, $300,000 of the purchase price of
which consisted of the cancellation of various loans made to the Company, (3)
sold 256,250 shares of its Common Stock for $256,250, (4) borrowed $13,279
from a stockholder of the Company who is the Vice Chairman of National Mining
pursuant to an interest-free demand note and (5) issued 200,000 shares of its
Common Stock, valued by the Company's Board of Directors at $1.00 per share, to
a company owned by the wife of the President of the Company in exchange for the
cancellation of certain indebtedness.

In 1994, the Company (1) negotiated an extension until June 30, 1995
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (2) issued 14,000 shares of its Common Stock of $1.00 per share
pursuant to an option exercised by the company's Chairman of the Board in
exchange for the cancellation of certain indebtedness, (3) consolidated two
notes payable by the Company's President and Chief Executive Officer, in the
amounts of $99,000 and $27,000, which matured on December 31, 1993 and January
31, 1994, respectively, into one note for $126,000 having a December 31, 1995
maturity date and bearing interest at the rate of six percent per annum, (4)
received $50,000 from a 1993 sale of its Common Stock to a private Saudi
company controlled by a director of the Company pursuant to a partial option
exercise and (5) offset $30,000 in unpaid compensation due to the Company's
Chairman of the Board against amounts owned to the Company by four companies
owned by the Chairman of the Board. 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.

The Refining Company had operating income of approximately $2,414,000,
before depreciation and amortization of $646,000, on gross refined product
sales of $17,564,000 for the 1994 fiscal year, compared with operating income
of approximately $710,000, before depreciation and amortization of $678,000, on
gross refined product sales of $15,103,000 for the 1993 fiscal year, and a net
operating loss of approximately $113,000, before depreciation and amortization
of $682,000, on gross refined product sales of $13,320,000 for the 1992 fiscal
year.

Management believes that South Hampton will be able to continue to
attain a positive cash flow as a result of the upgrading and expansion
projects. Any such cash flow would, however, be insufficient to retire the
debt due on June 30, 1995, to Den norske Bank AS. At that time, South Hampton
will be required to attempt to re-extend or renegotiate the loan or seek to

-12-
<PAGE> 15
obtain additional financing. It is possible that any further extension or
renegotiation will not be permitted without the retirement of a significant
portion of the debt. Failure to extend or renegotiate the loan with Den norske
Bank AS would require the Company to seek alternative sources of financing
which, if unsuccessful, could result in a foreclosure action and subsequent
loss of the refinery. Expiration of the guarantee of the letter of credit
portion of the Amended and Restated Credit Agreement resulted in Den norske
Bank AS drawing down a $1,500,000 letter of credit provided by the guarantor.
As a consequence, the Company is indebted to the guarantor for such amount.

In connection with the latest extension of the Den norske Bank AS
loan, South Hampton agreed to make quarterly principal payments of $200,000 and
the Company committed to use its best efforts to raise and contribute new
equity to South Hampton of at least $1,500,000 by June 30, 1995, such funds to
be used by South Hampton to pay amounts outstanding under the Amended and
Restated Credit Agreement.

In addition to requiring that a substantial portion of South Hampton's
cash flow be applied to reduce the amount outstanding, the Amended and Restated
Credit Agreement with Den norske Bank AS prohibits the payment of dividends by
South Hampton. South Hampton is also required to collect all receivables
through a cash collateral account at a local bank. Only the amount of funds
required to operate South Hampton's business may be used and weekly reports of
cash receipts and disbursements in the cash collateral account must be provided
to Den norske Bank AS. If South Hampton defaults on the credit agreement, Den
norske Bank AS has the right to freeze the funds in the cash collateral
account. South Hampton met all of the loan covenants throughout 1994.

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 Coal Company's lack of significant
assets, combined with the Company's lack of operating funds, inhibits any
future activities of the Coal Company. The Company is planning limited
exploration of the Pioche-Ely Valley properties in 1995.

The Company believes that acceptable financing for the estimated cost
of the Al Masane project can be arranged, although

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<PAGE> 16
there can be no assurance that such financing could be obtained. The results
of the feasibility study show the estimated total capital costs of the project
to be $81.3 million.

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.

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,
and Mr. Drew Wilson, who works on a part-time basis for the Company and serves
as its Secretary and Treasurer. The other employees of the Company, numbering
approximately 29, 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 45 persons.

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<PAGE> 17
[map]

-15-
<PAGE> 18
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 and National Mining exclusive mineral exploration licenses
to explore and develop the Wadi Qatan area in southwestern Saudi Arabia. The
companies were 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 and
National Mining have also applied for an additional license covering an area
surrounding the original Al Masane prospect, which is referred to as the
Greater Al Masane area. Although the license has not been formally granted,
the companies have been authorized in writing to carry out exploration work on
the area. Reference is made to the map on page 15 of this Report for
information concerning the location of the foregoing areas. The Company,
together with National Mining and another Saudi private company, the Red Sea
Mining Company, have also applied for an exploration license covering the
Ghurayyah area in northern Saudi Arabia.

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 and National Mining are parties
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 and National Mining is

-16-
<PAGE> 19
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 and Jebel Harr 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 sulphides 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 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. The Company plans to obtain a renewal of its exploration licenses in
the Wadi Qatan and Jebel Harr areas to enable it 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 another 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.

Ghurayyah. In 1980, the Company, together with National Mining
Company and the Red Sea Mining Company, applied jointly for an additional
exploration license covering the 7,000 square kilometer Ghurayyah area in the
northern part of Saudi Arabia. The application is still pending with the Saudi
Arabian Ministry of Petroleum and Mineral Resources.

A preliminary investigation of the area, which included core drilling,
was arranged by the Saudi Arabian Ministry and conducted by WGM prior to the
time the license application was filed. Based on the preliminary
investigation, WGM observed in December 1980

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<PAGE> 20
that "[t]he columbium and tantalum content to a depth of 250 meters below the
surface could add very significantly to world resources."

Pursuant to an exploration and development contract between the
parties, the Company, National Mining and Red Sea would each have a 15%
interest in the Ghurayyah license and the responsibility to carry out the
exploration work, and Petromin would have a 55% interest. The costs of
exploration would be shared based on each participant's percentage interest in
the license. As between the parties responsible for the exploration
activities, the Company would be the operator on the license area.

Refining Operations

South Hampton owns and operates a petroleum refinery near Silsbee,
Texas. South Hampton owns all of the capital stock of Gulf States, which 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 States are more fully described in Item 1. Business.

Nevada Mining Properties

There are 48 patented and 84 unpatented claims totaling approximately
3,700 acres in the Pioche-Ely Valley 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).
The Company planned to drill a 1,500 foot test hole in 1994 in search of zinc
deposits. Drilling was conducted in September 1994. The drill hole
encountered formation problems at 700 feet and further drilling had to be
abandoned. A new site will be selected and a second hole is expected to be
drilled in 1995.

There is a 300-ton-a-day processing mill on property owned by
Pioche-Ely Valley. The mill is not currently in use and a significant
expenditure would be required in order to put the mill into continuous
operation. Pursuant to a lease commencing on October 1, 1993, the Wide Awake
mine property was leased for a primary term of twenty-seven months, which lease
will continue as long as minerals are produced in commercial quantities or
unless terminated by the parties. The lease stipulates a 6% royalty on net
smelter returns with no annual rental required. A significant core hole is
planned to be drilled on the Wide Awake claim in mid-1995.

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<PAGE> 21
Colorado Coal Properties

In March 1994, the Mined Land Reclamation Division, Department of
Natural Resources, of the State of Colorado elected to exercise its rights
under the letter of credit given by the Coal Company to secure completion of
the reclamation work on coal properties in Colorado previously leased by the
Coal Company. The Coal Company was required by the Mined Land Reclamation
Division to monitor the completed reclamation work and conduct additional
reclamation work on the coal properties until 2000. The letter of credit was
secured by a $36,000 certificate of deposit and in April 1994 was paid to the
State of Colorado. The Mined Land Reclamation Division's action concludes the
Coal Company's involvement in the reclamation project. The Coal Company has a
tax loss carry-forward of approximately $14.8 million which is limited to its
net income. The Coal Company is currently negotiating with a company toward the
possible use of this amount, although there can be no assurance that any
agreement relating thereto will be reached.

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 the northern
part of 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.

Item 3. Legal Proceedings.

South Hampton filed suit on July 18, 1994 in the 88th Judicial
District Court in Hardin County, Texas against National Union Fire Insurance
Company arising from the claim of South Hampton under the Uniform Declaratory
Judgment Act for a ruling as to the construction of an insurance contract
issued by National Union insuring South Hampton. South Hampton also asserted
claims against National Union for breach of contract, negligence, breach of the
duty of good faith and fair dealing and certain violations of the Texas
Insurance Code. This case was removed to the United States District Court on
August 22, 1994. The court ordered that it will first consider South
Hampton's contractual coverage claims under the Uniform Declaratory Judgment
Act and abated all of the other claims pending the outcome of the
contractual coverage claims.

Any proceeds received by South Hampton from this cause of action would
be payable by South Hampton to Cajun Energy, Inc. and E-Z Mart Stores pursuant
to the terms of a judgment entered against South Hampton. South Hampton
consented to a settlement agreeement with Cajun Energy and E-Z Mart Stores in
May 1994 whereby the plaintiffs took a judgment against South Hampton for the
amounts claimed and the plaintiffs signed a "non-execution agreement" agreeing
not to execute upon the judgment in return for the assignment by South Hampton
of certain claims against National Union. This concludes the claims and actions
against South Hampton in these matters.

South Hampton, together with over twenty-five other companies, is 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 John Ricklefsen and James Griffin, 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 claim 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 intends to vigorously defend against these lawsuits.

The Company is not involved in any proceeding regarding environmental
matters. See Note 4 to the Consolidated Financial Statements for a discussion
of certain environmental matters.

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<PAGE> 22
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 1994.

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 1994
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, 1994, of the
Company's 1994 Annual Report to Stockholders filed herein as Exhibit 13, which
portion of such Annual Report is incorporated herein by reference.

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 1994 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 1994 Annual Report to Stockholders
filed herein as Exhibit 13, are incorporated herein by reference.

Item 9. Disagreements on Accounting and Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

This information is set forth under the captions "Nominees for
Election as Directors" and "Executive Officers" of the

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<PAGE> 23
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.

PART IV

<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.

<S> <C> <C>
(a) 1. The following financial statements are incorporated by reference from the Company's 1994 Annual Report
to Stockholders filed herein as Exhibit 13:

Report of Independent Accountants.
Consolidated Balance Sheets dated December 31,
1994 and 1993.
Consolidated Statement of Operations for the three
years ended December 31, 1994.
Consolidated Statement of Stockholders' Equity for
the three years ended December 31, 1994.
Consolidated Statement of Cash Flows for the three
years ended December 31, 1994.
Notes to Consolidated Financial Statements.

2. The following documents, separately bound, 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
</TABLE>

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<PAGE> 24
<TABLE>
<S> <C>
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(d) 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(e) 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)).

</TABLE>

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<PAGE> 25
<TABLE>
<S> <C>
10(f) 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(g) 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(h) Amended and Restated Credit Agreement dated December 13, 1990 between South Hampton Refining
Company and Den norske Bank AS, together with related Promissory Note, Cash Collateral Account
Agreement, Subordination Agreement and Intercreditor Agreement, all of even date therewith
(incorporated by reference to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No. 0-6247)).

10(j) Subordination Agreement dated July 28, 1989 by and among Texas Oil and Chemical Co. II, Inc.,
South Hampton Refining Company, Gulf States Pipe Line Company, the Company, American Shield
Refining Company and den Norske Creditbank (incorporated by reference to Exhibit 10(j) to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No.
0-6247)).

</TABLE>

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<PAGE> 26
<TABLE>
<S> <C>
Chemical Co. II, Inc. and Den norske Bank AS and Pledge Agreement and Irrevocable Proxy dated
as of December 31, 1991, between South Hampton Refining Company and Den norske Bank AS
(incorporated by reference to Exhibit 10(k) 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 February 28, 1994 by and between South Hampton Refining Company and Den
norske Bank AS (incorporated by reference to Exhibit 10(l) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)).

10(m) Letter Agreement dated June 2, 1994 by and between South Hampton Refining Company and Den
norske Bank AS together with related Letter Agreement dated June 2, 1994 by and between the
Company and Den norske Bank AS (incorporated by reference to Exhibit 10(m) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)).

10(n) Letter Agreement dated December 2, 1994 by and between South Hampton Refining Company and Den
norske Bank AS (incorporated by reference to Exhibit 10(n) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)).

10(o) 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(p) Addendum to the Agreement Relating to AROMAX 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

</TABLE>

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<PAGE> 27
<TABLE>
<S> <C>
Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)).

10(q) 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(s) One-Year Adjustable Interest Rate Note dated February 1, 1995, effective December 31, 1994,
from Texas Oil & Chemical Co. II, Inc. to Silsbee State Bank, together with Deed of Trust of
even date therewith (incorporated by reference to Exhibit 10(s) to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-6247)).

10(t) 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(u) 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(v) Lease Agreement dated as of August 13, 1993 by and among Pioche-Ely Valley Mines, Inc.,
Minerals Processing, Inc. and World Hydrocarbons, Inc. (incorporated by reference to Exhibit
10(v) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).

</TABLE>

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<PAGE> 28
<TABLE>
<S> <C>
10(w) Letter Agreement dated March 27, 1995 between Carlyle (SEAG) and the Company.

13 1994 Annual Report to Stockholders. With the exception of the information incorporated by
reference into Items 5,6,7,8 and 14 of this Form 10-K, the 1994 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.
</TABLE>

(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this Report.

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<PAGE> 29
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 27, 1995

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<PAGE> 30
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 27, 1995.

<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Hatem El-Khalidi President, Chief Executive
------------------------- Officer and Director (principal
Hatem El-Khalidi executive officer)

/s/ Drew Wilson Secretary and Treasurer
------------------------- (principal financial and
Drew Wilson accounting officer)

/s/ John A. Crichton Chairman of the Board and
------------------------- Director
John A. Crichton

/s/ O.W. Hammonds Director
-------------------------
Oliver W. Hammonds

_________________________ Director
Harb S. Al Zuhair

/s/ Mohammed O. Al-Omair Director
-------------------------
Mohammed O. Al-Omair

_________________________ Director
Ghazi Sultan

</TABLE>

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<PAGE> 31
EXHIBIT INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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) Form of Contract for the Exploration and Development of the
Al-Ghurayyah Area entered into in December 1982 between Petromin
and the Company, National Mining Company and Red Sea Mining
Company (incorporated by reference to Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
</TABLE>
<PAGE> 32
<TABLE>
<S> <C>
10(d) 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(e) 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(f) 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(g) 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(h) Amended and Restated Credit Agreement dated December 13, 1990
between South Hampton Refining Company and Den norske Bank AS,
together with related Promissory Note, Cash Collateral Account
Agreement, Subordination Agreement and Intercreditor Agreement, all
of even date therewith (incorporated by reference to Exhibit
10(h) to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0-6247)).

10(i) Second Lien Promissory Note dated July 28, 1989 from South Hampton
Refining Company to American Shield Refining Company
(incorporated by reference to Exhibit 10(i) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).
</TABLE>
<PAGE> 33
<TABLE>
<S> <C>
10(j) Subordination Agreement dated July 28, 1989 by and among Texas Oil
and Chemical Co. II, Inc., South Hampton Refining Company, Gulf
States Pipe Line Company, the Company, American Shield Refining
Company and den Norske Creditbank (incorporated by reference to
Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q/A for
the quarter ended September 30, 1994 (File No. 0-6247)).

10(k) Amendment No. 1 and Amendment No. 2 to Amended and Restated Credit
Agreement dated March 15, 1991 and December 31, 1991, respectively,
between South Hampton Refining Company and Den norske Bank AS,
together with related Guaranty dated as of December 31, 1991, by
Texas Oil & Chemical Co. II, Inc. in favor of Den norske Bank AS,
Pledge Agreement and Irrevocable Proxy dated as of December 31,
1991, between Texas Oil & Chemical Co. II, Inc. and Den norske Bank
AS and Pledge Agreement and Irrevocable Proxy dated as of December
31, 1991, between South Hampton Refining Company and Den norske
Bank AS (incorporated by reference to Exhibit 10(k) 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 February 28, 1994 by and between South
Hampton Refining Company and Den norske Bank AS (incorporated by
reference to Exhibit 10(l) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-
6247)).

10(m) Letter Agreement dated June 2, 1994 by and between South Hampton
Refining Company and Den norske Bank AS, together with related
Letter Agreement dated June 2, 1994 by and between the Company and
Den norske Bank AS (incorporated by reference to Exhibit 10(m) to
the Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
10(n) Letter Agreement dated December 2, 1994 by and between South
Hampton Refining Company and Den norske Bank AS (incorporated by
reference to Exhibit 10(n) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1994 (File No. 0-
6247)).

10(o) 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(p) Addendum to the Agreement Relating to AROMAX 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(q) 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(r) Agreement for Purchase of Feedstock dated July 1, 1992 by Silsbee
Trading and Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit 10(r) to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
10(s) One-Year Adjustable Interest Rate Note dated February 1, 1995,
effective December 31, 1994, from Texas Oil & Chemical Co. II, Inc.
to Silsbee State Bank, together with Deed of Trust of even date
therewith (incorporated by reference to Exhibit 10(s) to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(t) 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(u) 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(v) Lease Agreement dated as of August 13, 1993 by and among Pioche-Ely
Valley Mines, Inc., Minerals Processing, Inc. and World
Hydrocarbons, Inc. (incorporated by reference to Exhibit 10(v) to
the Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(w) Letter Agreement dated March 27, 1995 between Carlyle (SEAG) and
the Company.

13 1994 Annual Report to Stockholders. With the exception of the
information incorporated by reference into Items 5, 6, 7, 8 and
14 of this Form 10-K, the 1994 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.

</TABLE>

<PAGE> 1
EXHIBIT 10(w)

Letter of Agreement

This Letter of Agreement is made this 27th day of March, 1995 by and
between Carlyle SEAG ("SEAG") and Arabian Shield Development Company ("ASDC").

WHEREAS this Letter of Agreement sets forth that ASDC wishes to enter
into a contractual arrangement retaining SEAG as its financial advisor in
connection with the financing of the Al Masane Mining Project ("the Project");
and

WHEREAS SEAG is currently disposed to provide certain financial
advisor services;

THEREFORE, it is agreed that the scope of the services to be provided
by SEAG will include, but is not limited to, (1) advising on the capitalization
structure (SIDF, Commercial Debt and Equity) of the newly established Saudi
company "Newco", established for the Project; (2) raising of capital for
project implementation and (3) assisting ASDC in the filing of all licenses and
needed documents for regulatory purposes.

It is further agreed that ASDC shall prepare or cause to be prepared
necessary loan documentation and supporting information including a full
feasibility study, or as agreed by SEAG, ASDC shall provide SEAG all necessary
assistance in the accomplishment of the same.

Accordingly, SEAG will receive the following compensation for services
rendered in its role as financial advisor.

1. SEAG will receive a retainer payment of two hundred and fifty thousand
US dollars ($250,000), to cover a period of one year in duration, seventy five
thousand dollars ($75,000) of which is payable by ASDC upon the signing of this
Agreement, and twenty five thousand ($25,000) monthly thereafter. In no case
or circumstances shall SEAG receive a retainer payment of less than one hundred
twenty five thousand US Dollars ($125,000).

2. SEAG will receive cash compensation equaling two and one quarter
percent (2 1/4%) of the total capital value, inclusive of debt and equity
funding, of the Al Masane Project in recognition of SEAG's role in the
financial structuring of the Project and in providing financial and such other
assistance as may be provided.
<PAGE> 2
3. SEAG will also receive a cash compensation fee totaling five percent
(5%) of the amount of equity funds raised from equity investors up to US twenty
five million ($25,000,000); an additional cash compensation fee totaling three
percent (3%) for equity funds raised from investors between US twenty five
million ($25,000,000) and US fifty million ($50,000,000); an additional cash
compensation fee totaling two percent (2%) for equity funds raised from
investors between US fifty million ($50,000,000) and US seventy five million
($75,000,000); an additional cash compensation fee totaling one percent (1%)
for equity funds raised from investors equal to or above US seventy five
million ($75,000,000).

4. In addition SEAG shall also be entitled to receive compensation in the
form of an option to purchase two million shares (2,000,000), or approximately
10%, of ASDC's common stock, during a period of five (5) years, commencing upon
the first closing of either the debt or equity portion of the financing for
the Al Masane Project, at an exercise price of US one dollar ($1) per share.
Such issuance will be made in compliance with Rule 144 of the SEC. It is
understood that standard anti-dilution provision will be in effect for the full
period of the option.

5. SEAG shall nominate one member of the Board of Directors in its next
annual meeting of the shareholders to be held on May 9, 1995. SEAG shall
nominate a second Board member upon the closing of the financing for the Al
Masane Project.

6. SEAG reserves the right and at its sole discretion to withdraw from
this Agreement, and will give ASDC one month's notice prior to its withdrawal,
if SEAG determines that the transaction is no longer reasonably viable based on
due diligence findings; availability of financing, especially SIDF funding
and/or otherwise adverse material changes. In such event SEAG shall not be
entitled to any compensation pursuant to paragraphs 2,3 and 4 herein. ASDC also
reserves the right and at its sole discretion to withdraw from this agreement
if there is a determination of fraud or gross negligence on the part of SEAG in
its performance relating to the Project.

7. ASDC agrees to defend, indemnify and hold harmless (including, without
limitations, reasonable attorney fees and expenses) SEAG and SEAG affiliates,
each of the employees, directors, officers, stockholders and agents of SEAG,
and their respective successors, against any and all losses, damages,
deficiencies or liabilities are caused by, resulting or arising from or
otherwise relating to the Project, unless such losses, damages, deficiencies or
liabilities are caused by, resulting or arising from fraud or gross negligence
by SEAG in its performance relating to the Project.
<PAGE> 3
8. It is agreed that SEAG shall be reimbursed for all of its reasonable
out of pocket expenses with regard to its role as financial advisor in the
financing of the Al Masane Project. If such expenses are expected to exceed US
ten thousand dollars ($10,000) in any given month, an estimate for such month
shall be prepared and presented to ASDC for approval, and prompt approval shall
not be unreasonably denied by ASDC. ASDC will be responsible for reimbursing
SEAG's expenses within five (5) business days following the receipt of such
expenses, SEAG will instruct in writing ASDC as to the banking institution and
appropriate account which the reimbursement should be deposited.

9. The duly authorized parties designated below hereby signify their
agreement with the terms and conditions contained herein through execution of
this letter of agreement by signing as indicated below,

Carlyle SEAG

By: /s/ AMB. ALTON G. KEEL JR.
Name: Amb. Alton G. Keel Jr.
Title: Chairman

Arabian Shield Development Company

By: /s/ HATEM EL-KHALIDI
Name: Hatem El-Khalidi
Title: President

<PAGE> 1

ARABIAN SHIELD
Development Company

Annual Report to Stockholders
For The Year Ended December 31, 1994
<PAGE> 2

TO OUR STOCKHOLDERS:

The Company obtained the mining lease to the Al Masane area in Saudi Arabia on
May 22, 1993, and thereafter commissioned Watts, Griffis & McOuat of Toronto,
Canada ("WGM") to update the feasibility study for that area. The mining lease
has an initial thirty (30) year term, with the Company having the option to
renew or extend the term of the lease for additional periods not to exceed
twenty (20) years. Under the terms of the mining lease agreement, the Company
will pay rental to the Ministry of Petroleum and Mineral Resources of 10,000
Saudi Riyals (approximately $2,667 at current exchange rate) per square
kilometer per year during the period of the lease for the total lease area of 44
square kilometers. The Company will also pay the Saudi government income taxes
in accordance with the income tax law then in force, in accordance with Article
45 of the Mining Code (the current tax is now 45% of net income). However, in
accordance with Article 46 of the Mining Code, such income tax will not be due
in respect to mining operations during the period of five years starting from
the date of the first sale of products or five years from the beginning of the
fourth year after the issue of the mining lease, whichever occurs first.

Pursuant to the terms of the mining lease agreement, the Company undertakes to
repay the $11 million loan provided to the Company and National Mining Company
in 1979 by the Ministry of Finance and National Economy, in accordance with the
terms of an agreement to be reached between the Company and the Ministry of
Finance and National Economy. In a memorandum to His Majesty the King in 1986,
the Minister of Petroleum and Mineral Resources and the Minister of Finance and
National Economy recommended that the $11 million loan be rescheduled with the
terms of rescheduling to be agreed upon after the mining lease is granted. The
Company will instigate negotiations on that basis with the Ministry of Finance
and National Economy.

The mining lease agreement also provides that, after the profitability of the
project is established, as determined by the Saudi Arabian government, the
Company will form a Saudi public stock company with the Petroleum and Mineral
Organization ("Petromin"), a company wholly-owned by the Saudi government. The
Company will own 50% of the shares of the Saudi public stock company and
Petromin no more than 25% of the shares. The remaining shares will be offered
for sale in Saudi Arabia pursuant to a public subscription. In consideration for
its receiving shares in the Saudi public stock company, the Company will
transfer title to the mining lease to the Saudi public stock company, including
responsibility for the repayment of the $11 million loan from the Saudi Arabian
government and the other obligations under the mining lease. In December 1994,
the Company received instructions from the office of the Minister of Petroleum
and Mineral Resources stating that it is possible for the Company to form the
Saudi public stock company without Petromin but that the sale of stock to the
Saudi public should occur only after assured profits from commercial operations
of the mine. The instructions added that Petromin will still have the right to
purchase shares in the Saudi public stock company any time it desires.

Following the granting of the mining lease to the Al Masane area, the Company
commissioned WGM to prepare a new fully bankable feasibility study for
presentation to financial institutions in connection with obtaining financing
for the project. The feasibility study includes more metallurgical work
incorporating advances in grinding of the ore; incorporation of the latest
advances in technology and reagents developed during the past ten years;
incorporation of new mill designs and the latest water recycling methods;
investigation into the shipping and marketing of zinc and copper concentrates;
and an economic analysis of the project. The feasibility study contains specific
recommendations to insure that the construction of the project is accomplished
as expeditiously and economically as possible. Engineering design and costing of
the project was done by Davy International of Toronto, Canada. The feasibility
study cost the Company approximately $1 million and was presented to the Company
on July 22, 1994.

The Al Masane ore is located in three mineralized zones known as Saadah, Al
Houra and Moyeath. The diluted minable, proven and probable ore reserves at the
Al Masane project were estimated to be 7.2 million tonnes, including mining
dilution. Mining dilution is the amount of wallrock adjacent to the ore body
which is included in the ore extraction process. The average grade of the proven
and probable diluted ore reserves was estimated to be 1.42% copper, 5.31% zinc,
1.19 grams of gold per tonne and

1
<PAGE> 3

40.20 grams of silver per tonne. For purposes of calculating the proven and
probable reserves, a dilution of 5% at zero grade on the Saadah zone and 15% at
zero grade on the Al Houra and Moyeath zones was assumed. A mining recovery of
80% has been used for the Saadah zone and 88% for the Al Houra and Moyeath
zones.

Proven reserves are those mineral deposits for which quantity is computed from
dimensions revealed in outcrops, trenches, workings or drillholes, and grade is
computed from results of detailed sampling. For ore deposits to be proven, the
sites for inspection, sampling and measurement must be spaced so closely and the
geologic character must be so well defined that the size, shape, depth and
mineral content of reserves are well established. Probable reserves are those
for which quantity and grade are computed from information similar to that used
for proven reserves, but the sites for inspection, sampling and measurement are
farther apart or are otherwise less adequately spaced. However, the degree of
assurance, although lower than that for proven reserves, must be high enough to
assume continuity between points of observation.

A review by WGM of the equipment and process flowsheet contained in the 1982
feasibility study prepared by WGM indicated that new technology developed during
the past ten years could be used to reduce the capital cost and improve the
metallurgical recoveries. In particular, the use of semi-autogenous grinding to
reduce the capital cost of the grinding section and developments in reagents
were believed to hold the greatest potential for improving the economies of the
project. A detailed metallurgical testwork program was undertaken by Lakefield
Research in 1994 to address potential improvements and provide detailed design
criteria for the concentrator design. Results from this testwork program showed
that copper recovery could be improved by 5.7% and zinc recoveries improved by
13% compared to the 1982 results.

The metallurgical studies conducted on the ore samples taken from the zones
indicated that 87.7% of the copper and 82.6% of the zinc could be recovered in
copper and zinc concentrates. Overall, gold and silver recovery from the ore was
estimated to be 77.3% and 81.3%, respectively, partly into copper concentrate
and partly as bullion through cyanide processing of zinc concentrates and mine
tailings.

A test program to evaluate the economies of the cyanidation of the zinc
concentrate and tailings in order to improve gold and silver recoveries found
gold and silver recoveries to range from 50% to 77%. To recover gold and silver
from the zinc concentrate and tailings, WGM recommended that a cyanidation plant
be included in process flowsheet. Dore bullion would be produced. WGM concluded
that the inclusion of a cyanidation plant would make a positive contribution to
the economies of the project under the base conditions.

The mining and milling operation recommended by WGM for Al Masane would involve
the production of 2,800 tonnes of ore per day (700,000 tonnes per year), with a
mine life of over ten years. Annual production is estimated to be 34,900 tonnes
of copper concentrate (25% copper per tonne) containing precious metal and
58,000 tonnes of zinc concentrate (54% zinc per tonne). The construction of
mining, milling and infrastructure facilities is estimated to take 18 months to
complete. The total capital cost to bring the Al Masane project into production
is estimated to be $81.3 million. This cost includes the pre-production
development of the mine, the construction of a 2,000 tonne per day concentrator,
infrastructure with a 300 man camp facility and the installation of a
cyanidation plant to increase the recovery of precious metals from the deposit.
Project power requirements will be met by diesel generated power.

WGM recommended that the Al Masane reserves be mined by trackless mining
equipment using either cut-and-fill or open-stoping methods depending on the
shape and location of each orebody. Once the raw ore is mined, it would be
subjected to grinding and treating process resulting in three products to be
delivered to smelters for further refining. These products are zinc concentrate,
copper concentrate and dore bullion. The copper concentrate will contain
valuable amounts of gold and silver. Total output per year is estimated to be
22,000 ounces of gold and 800,000 ounces of silver. After smelter refining
process, the metals could be sold by the Company or the smelter for the
Company's account in the open market.

2
<PAGE> 4

WGM prepared an economic analysis of the project utilizing cash flow
projections. The cash flow projection for a base case was made by WGM based on
the assumption that 50% of the financing of the project will come from the Saudi
Industrial Development Fund, which charges 2.5% service charge, 25% from
commercial loans at an interest rate of 5% and 25% from equity financing. The
cash flow projection includes the repayment of the $11 million loan outstanding
to the Saudi government in one payment at the end of the mine life. Based on
these assumptions, and assuming the average prices of metal over the life of the
mine to be $1.00 per pound for copper, $0.60 per pound for zinc, $400 per ounce
of gold and $6.00 per ounce of silver, WGM's economic analysis of the base case
shows the project will realize an internal rate of return of 14% to the project,
a rate of return of 11.9% and net cash flow of $26.6 million to the equity
investors in the new Saudi public stock company, and a net cash flow of $37
million to the Company. Other cash flow scenarios calculated to show the effect
of various opportunities and risks associated with the project were also
prepared. Assuming the mine begins commercial production in mid-1996, as
contemplated in the feasibility study, the Company would not pay any income tax
to the Saudi government for the first five years or until after mid-2001. In the
feasibility study WGM recommends that the Company make a decision to bring the
Al Masane mine into production.

In the feasibility study, WGM states that there is potential to find more
reserves within the lease area, as the ore zones are all open at depth. Further
diamond drilling, which will be undertaken by the Company, is required to
quantify the additional mineralization associated with these zones. A
significant feature of the Al Masane ore zones is that they tend to have a much
greater vertical plunge than strike length; relatively small surface exposures
such as the Moyeath zone are being developed into sizeable ore tonnages by
thorough and systematic exploration. Similarly, systematic prospecting of the
small gossans in the area could yield significant tonnages of new ore.

On March 27, 1995 the Company's Board of Directors approved a Letter of
Agreement between the Company and Carlyle SEAG ("Carlyle"), of Washington, D.C.
and Saudi Arabia, whereby Carlyle has been retained as the Company's financial
advisor in connection with the Al Masane mining project. Carlyle's services will
include, but not be limited to, (1) advising on the capitalization structure of
the proposed Saudi company to be established for the project; (2) the raising of
capital funds for the project implementation; and (3) assisting the Company in
the filing of all licenses and necessary documents for regulatory purposes. In
addition to compensation for their services, including the grant of a five (5)
year option allowing Carlyle to purchase 2,000,000 shares of the Company's
Common Stock at $1.00 per share, the agreement provides that Carlyle is entitled
to nominate one person for election to the Company's Board of Directors. As a
result, at the next meeting of the Board of Directors the directors will appoint
the Carlyle nominee to the Board of Directors to serve until the next annual
meeting of the stockholders. Carlyle is also entitled to nominate another person
for election to the Company's Board of Directors upon the closing of the
financing for the Al Masane project.

The Company owns, through a wholly-owned subsidiary, South Hampton Refining
Company, of Silsbee, Texas ("South Hampton"), which owns and operates a
petrochemical plant which produces pure pentanes and hexanes and other specialty
chemicals for the plastics industry. Total revenues for 1994 for the refinery
were $17.7 million and the cash flow realized was approximately $2.4 million. It
is significant that the plant sells about 40% of all pentanes consumed in the
United States.

In May 1994, a lawsuit against South Hampton Refining Company relating to the
manufacture and sale of allegedly defective gasoline went to trial and judgment
was entered against South Hampton. In consideration of the judgment, another
lawsuit involving the same parties and identical issues was dismissed. At the
trial, South Hampton consented to a settlement agreement whereby the plaintiffs
took a judgment against South Hampton for the amounts claimed and the plaintiffs
signed a "non-execution agreement" agreeing not to execute upon the judgment in
return for the assignment by South Hampton of certain claims against its
insurance carrier. This concludes the claims and actions against South Hampton
in these matters.

The Company has had discussions with Chevron Chemical Company regarding the
Company's proposal to purchase 5,000 barrels per day of mixed pentanes from an
Aromax petrochemical project to be built in

3
<PAGE> 5

Jubail, Saudi Arabia by Chevron Chemical in joint venture with Saudi Venture
Capital Group (SVCS). The Company and some Saudi joint venture partners, all of
whom are directors and/or stockholders of the Company, contemplate building a
processing plant located next to the Aromax plant in Saudi Arabia. As proposed,
the Company would have a 25% interest in the joint venture. Chevron Chemical
advised the Company by letter that Chevron Chemical and SVCS have jointly agreed
to commit to supply the joint venture's proposed pentane project with up to
5,000 barrels per day of mixed pentane feedstock. Engineering and marketing
studies of the project have been made by outside consultants which reflect
positive results. Planning has begun toward the construction and operation of
the Aromax plant and the joint venture's processing plant. Construction is
estimated to be completed in late 1996. The Company will begin applying to the
Saudi government for a license for the project when the Aromax project receives
final approval from the Saudi government.

The Company directly owns approximately 46% and beneficially owns approximately
55% of the outstanding capital stock of Pioche-Ely Valley Mines, Inc.
("Pioche-Ely Valley"), an inactive mining company. Pioche-Ely Valley's principal
assets are a 300 ton per day mill, and 48 patented and 84 unpatented federal
lode mining claims in the Pioche Mining District in southeastern Nevada, on
which is located the Ely Valley Mine which, between 1941 and 1952, produced
675,207 tons of ore with an average grade of 9.09% zinc.

Based on geophysical work of the mining claims of Pioche-Ely Valley in 1989 by a
major mining company, the Company planned to drill a 1,500 foot test hole in
1994 in search of zinc deposits. Drilling was conducted in September 1994. The
drill hole encountered formation problems at 700 feet and further drilling had
to be abandoned. A new site will be selected and a second hole is expected to be
drilled in 1995. One of the mine properties has been leased to a group of
investors who plan to begin development operations in 1995. A significant core
hole is planned to be drilled on the Wide Awake claim in mid-1995.

Respectfully submitted,

John A. Crichton
Chairman of the Board

Hatem El-Khalidi
President and Chief
Executive Officer

March 27, 1995

4
<PAGE> 6

THE COMPANY.

SAUDI ARABIAN ACTIVITIES. The Company holds a mining lease covering a 44 square
kilometer area in the Al Masane area in southwestern Saudi Arabia. The lease was
granted to the Company by Royal Decree in May 1993. The lease has an initial
thirty (30)-year term and is renewable for additional periods not to exceed
twenty (20) years. The Al Masane area has proven and probable ore reserves of
copper, zinc, gold and silver (7.2 million tonnes of ore containing 1.42%
copper, 5.31% zinc, 1.19 grams per tonne of gold and 40.20 grams per tonne of
silver). The results of a bankable feasibility study conducted by an independent
mineral consulting firm in 1994 indicate that the proposed Al Masane mining
operation is economically viable and has the potential to provide a satisfactory
return on investment.

The Company jointly holds with National Mining Company, a private Saudi company,
exploration licenses for the Wadi Qatan and Jebel Harr areas in Saudi Arabia.
The exploration licenses by their terms have expired. The Company has been
orally advised by Saudi Arabian government officials that the licenses will be
extended as long as mineral exploration is being conducted on the areas which
they cover, although there can be no assurance that the Company's license rights
will be honored. The Company is planning to apply for formal extensions of these
licenses in 1995.

The Company has had discussions with Chevron Chemical Company regarding the
Company's proposal to purchase 5,000 barrels per day of mixed pentanes from an
Aromax petrochemical project to be built in Jubail, Saudi Arabia by Chevron
Chemical in joint venture with Saudi Venture Capital Group (SVCS). The Company
and some Saudi joint venture partners, all of whom are directors and/or
stockholders of the Company, contemplate building a processing plant located
next to the Aromax plant in Saudi Arabia. Chevron Chemical advised the Company
by letter that Chevron Chemical and SVCS have jointly agreed to commit to supply
the Joint Venture's proposed pentane project with up to 5,000 barrels per day of
mixed pentane feedstock. As proposed, the Company would have a 25% interest in
the joint venture. Engineering and marketing studies of the project have been
made by outside consultants which reflect positive results. Planning has begun
toward the construction and operation of the Aromax plant and the joint
venture's processing plant. Construction is estimated to be completed in late
1996. The Company will begin applying to the Saudi government for a license for
the project when the Aromax project receives final approval from the Saudi
government.

In December 1993, the Company commissioned Sherritt Ltd. of Fort Saskatchawan,
Canada, to prepare a conceptual engineering design for a proposed zinc refinery
based on Sherritt's two stage pressure leach process, to be built by the Company
and Saudi partners at the Red Sea port of Yanbu, Saudi Arabia. The refinery
would have the capacity to produce 100,000 tonnes of slab zinc per year, with
elemental sulfur as a by-product. Sherritt Ltd. completed the study in May 1994
which contains a proposed flow sheet that has been commercialized and designs
for a state of the art zinc refinery. Sherritt's zinc pressure leach technology
provides significant advantages over the other existing zinc production
processes, including having the reputation as the most favored technology for
environmental considerations. In the study Sherritt concludes, after considering
all of the presently identifiable elements, that these elements offer a strong
potential for the project and enhance the concept. Sherritt encourages the
Company to carry out further studies toward the implementation of the project.

UNITED STATES ACTIVITIES. The Company's United States operations include the
ownership and operation of a petroleum refinery and the leasing of mineral
properties.

5
<PAGE> 7

An indirect wholly-owned subsidiary of the Company owns and operates a petroleum
refinery near Silsbee, Texas. The refinery is presently devoted to specialized
processing activities. Another indirect wholly-owned subsidiary owns and
operates three pipelines connected to the refinery.

The Company owns all of the capital stock of a coal company which does not own
or hold any mineral interests and is presently inactive. The coal company has a
tax loss carry-forwards of $14.8 million and is currently negotiating with a
company toward the possible use of this amount, although there can be no
assurance that any agreement relating thereto will be reached.

The Company beneficially owns approximately 55% and directly owns approximately
46% of the outstanding capital stock of a company which leases mineral
properties containing 132 inactive mining claims totalling approximately 3,700
acres in southeastern Nevada. There are prospects and mines on these claims
which formerly produced silver, gold, lead, zinc and copper.

The Company leases office space in Jeddah, Saudi Arabia and in Dallas, Texas. It
also has a base camp with a capacity to accommodate 60 people in its Al Masane
mining lease area. The Company owns heavy mining equipment at the lease area,
which will be used for future mining operations. The Company also has an
exploration and drilling camp in the Wadi Qatan area in Saudi Arabia.

MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock traded on The NASDAQ Stock Market under the symbol:
ARSD. The following table sets forth the high and low closing sale prices for
each quarter of 1994 and 1993, respectively, as reported by NASDAQ.

At March 20, 1995, there were 979 record holders of the Company's Common Stock.
The Company has not paid a dividend since its inception.

SELECTED FINANCIAL DATA.

The following is a five-year summary of selected financial data of the Company
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 17,765 $ 15,267 $ 13,468 $ 18,707 $ 19,173
Net Income (Loss)....................... $ 2,852 $ (1,338) $ (2,196) $ 452 $ (2,880)
Net Income (Loss) Per Share............. $ .14 $ (.08) $ (.14) $ .03 $ (.19)
Total Assets (At December 31)........... $ 41,057 $ 41,090 $ 38,729 $ 27,603 $ 28,224
Total Long-Term Obligations>
(At December 31)...................... $ 1,148 $ 908 $ 889 $ 1,841 $ 1,427
</TABLE>

6
<PAGE> 8

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

With the exception of revenues generated by the operations of American Shield
Refining Company, a wholly-owned subsidiary of the Company (the "Refining
Company"), the Company has been without any significant operating revenues since
1972. Accordingly, it has financed its development activities and its general
and administrative costs through the sale of shares of its Common Stock and
loans. The Company experienced serious difficulties during prior years in
obtaining additional financing, and is currently in need of additional funds to
meet its obligations and continue development activities. The Company is
exploring various alternatives for obtaining additional operating funds,
including additional debt or equity financing, but there is no assurance that
sufficient funds can be obtained. It is also possible that the terms of any
additional financing that the Company is able to obtain will be unfavorable to
the Company and its existing stockholders. For example, additional equity
financing could result in a significant dilution of the interests of existing
stockholders. Management of the Company expects to be devoting a significant
amount of its attention in the near future to addressing the Company's immediate
and longer term needs for the funds that are required in order to continue its
business and maintain and develop its properties.

During 1994, the Company took certain actions designed to generate additional
equity capital and improve its financial condition, including: (1) the
negotiation by South Hampton Refining Company, an indirect wholly-owned
subsidiary of the Company ("South Hampton"), of an extension until June 30, 1995
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (2) issued 14,000 shares of its Common Stock at $1.00 per share
pursuant to an option exercise by the Company's Chairman of the Board in
exchange for the cancellation of certain indebtedness, (3) consolidated two
notes payable by the Company's President and Chief Executive Officer, in the
amounts of $99,000 and $27,000, which matured on December 31, 1993 and January
31, 1994, respectively, into one note for $126,000 having a December 31, 1995
maturity date and bearing interest at the rate of six percent per annum, (4)
received $50,000 from a 1993 sale of shares of its Common Stock to a private
Saudi company controlled by a director of the Company pursuant to a partial
option exercise and (5) offset $30,000 in unpaid compensation due to the
Company's Chairman of the Board against amounts owed to the Company by four
companies owned by the Chairman of the Board.

The exploration licenses jointly held by the Company and National Mining Company
for the Wadi Qatan and Jebel Harr areas in Saudi Arabia, by their terms, have
expired, although officials of the Saudi government have provided verbal
assurance to the Company that the licenses will be extended as long as
exploratory work is being carried out on the areas which they cover. None of the
related projects at Al Masane or the other interests in Saudi Arabia were being
developed at December 31, 1994 and significant additional expenditures will be
necessary before commercial operations are commenced. A substantial portion of
the Company's total assets is comprised of the mineral acquisition, exploration
and development costs in Saudi Arabia. The ultimate recoverability of these
deferred costs cannot be determined at the present time. The Company holds the
mining lease for the Al Masane area exclusively.

The feasibility study shows the estimated total capital cost to bring the Al
Masane project into production to be $81.3 million. The Company does not have
sufficient funds to bring the project into production. Pursuant to the mining
lease agreement, after the profitability of the project is established, as
determined by the Saudi Arabian government, the Company will form a Saudi public
stock company with the Petroleum and Mineral Organization ("Petromin"), the
official mining and petroleum company of the Saudi Arabian government. The
Company will own 50% of the shares of the Saudi public stock company and
Petromin no more than 25% of the shares. The remaining shares will be offered
for sale in Saudi Arabia pursuant to a public subscription. In consideration for
its receiving shares in the Saudi public stock company, the Company intends to
transfer title to the mining lease to the Saudi public stock company, including
responsibility for the repayment of the $11 million loan from the Saudi Arabian
government and the other obligations specified in the mining lease. In December,
1994, the Company received instructions from the office of the Minister of
Petroleum and Mineral Resources stating that it is possible for the Company to
form the Saudi public stock company without Petromin but that the sale of stock
to the Saudi public should occur only after assured profits from commercial
operations of the mine. The

7
<PAGE> 9

instructions added that Petromin will still have the right to purchase shares in
the Saudi public stock company any time it desires.

Pursuant to these instructions, the Company retained Carlyle SEAG ("Carlyle") as
the Company's financial advisor in connection with the Al Masane mining project.
Carlyle's services will include, but not be limited to, (i) advising on the
capitalization structure of the proposed Saudi company to be established for the
project; (2) the raising of capital funds for the project implementation; and
(3) assisting the Company in the filing of all licenses and necessary documents
for regulatory purposes.

While the Company agreed in the mining lease not to request a loan which would
fund 50% of the capital cost of the project from the Saudi Public Development
Fund, the Company intends to apply for a similar loan from the Saudi Industrial
Development Fund. The Saudi Industrial Development Fund makes interest-free
loans to industrial projects in Saudi Arabia and charges a 2.5% service fee. The
Company believes that it may be able to finance the cost of the project through
arrangements with suppliers and equipment manufacturers, custom smelters and
additional debt or equity financing secured by the Company, however, there can
be no assurances to that effect.

On December 31, 1994, the outstanding principal amount under the Amended and
Restated Credit Agreement with Den norske Bank AS was $2,916,951. The entire
balance under the Amended and Restated Credit Agreement facility, including
amounts drawn under the letter of credit facility, was due on December 15, 1994.
The amounts due to Den norske Bank AS were not paid in full on the December 15,
1994 maturity date. The maturity date under the Amended and Restated Credit
Agreement has been extended to June 30, 1995. In connection with the latest
extension of the Den norske Bank AS loan, South Hampton has agreed to make
quarterly principal payments of $200,000, and the Company committed to use its
best efforts to raise and contribute new equity to South Hampton of at least
$1,500,000 by June 30, 1995, such funds to be used by South Hampton to pay
amounts outstanding under the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement is secured by all of the assets of
South Hampton and all of the issued and outstanding shares of Texas Oil and
Chemical Co. II, Inc. ("TOCCO"), South Hampton and Gulf States Pipe Company,
Inc. ("Gulf States"), all of which are indirect wholly-owned subsidiaries of the
Company. In addition to requiring that a substantial part of South Hampton's
cash flow be applied to reduce the amount outstanding, the Amended and Restated
Credit Agreement prohibits the payment of dividends by South Hampton. South
Hampton is also required to collect all receivables through a cash collateral
account at a local bank. Only the amount of funds required to operate South
Hampton's business may be used and weekly reports of cash receipts and
disbursements in the cash collateral account must be provided to Den norske Bank
AS. If South Hampton defaults on the credit agreement, Den norske Bank AS has
the right to freeze the funds in the cash collateral account. South Hampton met
all of the loan covenants throughout 1994. The Refining Company agreed to
subordinate all intercompany notes to the Amended and Restated Credit Agreement.
The letter of credit facility was guaranteed by a stockholder of the Company.
When this guarantee was not renewed, Den norske Bank AS drew down on the
$1,500,000 letter of credit provided by the stockholder as its guarantee. As a
consequence, South Hampton is now indebted to the stockholder for such amount.

The outstanding loan balance exceeded the amount available under the borrowing
base ratio, as defined in the Amended and Restated Credit Agreement, until May
1994. South Hampton expects that its outstanding loan balance will be in excess
of the amount allowed by the borrowing base ratio from time to time during 1995.
South Hampton does not have adequate resources to pay the full amount
outstanding under the Amended and Restated Credit Agreement at maturity on June
30, 1995 (or earlier if accelerated due to default). Management believes that
South Hampton will continue to make interest payments and monthly reductions on
the outstanding principal of this loan as required under the Amended and
Restated Credit Agreement.

The advances totalling $1,363,000 made by the Company through the Refining
Company to South Hampton for various refinery upgrading and expansion projects
are evidenced by a promissory note bearing interest at a varying rate equal to
the interest rate under the Amended and Restated Credit

8
<PAGE> 10

Agreement with Den norske Bank AS for as long as any indebtedness remains
outstanding thereunder and thereafter at the rate of 2% above the prime
commercial rate of NationsBank of Texas, National Association as announced from
time to time. The promissory note is secured by a lien on all the physical
assets of South Hampton and Gulf States which is subordinate to the lien of Den
norske Bank AS under the Amended and Restated Credit Agreement. The note is
payable in monthly installments in an amount equal to the monthly cash flow of
South Hampton in excess of $125,000, not to exceed $25,000 per month, and was
due in full on July 28, 1994. An extension of the note is expected to be made in
1995. Repayments of these advances is prohibited under the Amended and Restated
Credit Agreement since South Hampton is in default in its loan repayments
thereunder.

Although the refinery had net income during 1994, the refinery's historical
operations do not demonstrate adequate cash flow to repay the current portion of
its debt obligations. The refinery had cash flow from operations in 1994 of
approximately $2.4 million. Den norske Bank AS has indicated that, if certain
conditions are met by June 30, 1995, the bank may consider converting a large
portion of the indebtedness to a long-term liability, although there are no
assurances that any such conversion will occur. Assuming South Hampton is able
to renegotiate an extension of the Amended and Restated Credit Agreement with
Den norske Bank AS, management believes that the remaining debt obligations can
be repaid from increased cash flows from the refinery, but acknowledges that
there can be no assurance that such increased cash flows will occur.

If South Hampton is unable to meet its cash needs for debt service from
internally generated funds, it may be necessary for management of the Company to
re-extend or negotiate its debt obligations or attempt to obtain funds to repay
such obligations from the sale of additional Common Stock or through the sale of
all or a portion of its interest in South Hampton. There are no assurances that
such an extension or renegotiation could be obtained, that such sales could be
arranged or that sufficient additional equity financing could be obtained.

The Clean Air Act Amendments of 1990 have had a positive effect on South
Hampton's business as plastics manufacturers are searching for ways to use more
environmentally acceptable solvents in their processes. Plastics manufacturers
have historically used C6 hydrocarbons (hexanes) as coolants and catalyst
carrying agents. There is a current trend among plastics manufacturers toward
the use of lighter and more recoverable C5 hydrocarbons (pentanes) which are a
large part of South Hampton's product line. Management believes that South
Hampton's ability to manufacture high quality solvents in the C5 hydrocarbon
market will provide the basis for growth over the next few years; however, there
can be no assurance that such growth will occur. While South Hampton continues
to manufacture C6 solvents, its manufacturing of these solvents is being phased
out. The AROMAX unit, which was jointly developed by South Hampton and Chevron
Research, has the ability to convert C6 hydrocarbons into benzene and other more
valuable aromatic compounds, which was part of the reason South Hampton
participated in the AROMAX development project initially.

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's current primary source of cash
flow attributable to its indirect wholly-owned subsidiary, South Hampton, is
fully dedicated to the repayment of debt and the funding of refinery operations.
The Company is not presently generating any cash flow from any of its other
activities. Management plans to fund future operations primarily through sales
of its Common Stock and loans, but there is no assurance that sufficient funds
can be obtained. The Company currently has in its treasury approximately
$250,000 from which funds are being used for the implementation plan for the Al
Masane project and for meeting all of the Company's current expenditures in the
United States and Saudi Arabia. This amount should be sufficient until mid-1995
when additional financing will be necessary. In the event that the Company is
unable to complete these sales of its Common Stock, obtain additional financing
or reach a final agreement on the repayment of the $11,000,000 loan from the
Saudi Arabian government, there is substantial doubt about the Company's ability
to continue as a going concern past mid-1995. The Company's financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

9
<PAGE> 11

The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109") in 1993. SFAS No. 109 requires
the Company to compute deferred income taxes based on the amount of taxes
payable in future years, after considering changes in tax rates and other
statutory provisions that will be in effect in those years. The provision for
income taxes includes taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets
and liabilities. The adoption had no significant impact on current period
earnings or cash flow.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS 1994 TO 1993

During the fiscal year ended December 31, 1994, the Company had net income of
$2,852,306 compared to a net loss of $1,338,321 for the fiscal year ended
December 31, 1993.

The gross refined product sales in 1994 of $17,564,226 was an increase of
$2,460,804 from 1993 while the cost of sales in 1994 of $13,750,750 was an
increase of $436,323 from 1993, resulting in a net margin increase in 1994 of
$2,024,481. There is no assurance that the Refining Company can achieve the same
results in 1995. After processing fee income, general and administrative
expenses and depreciation and amortization, the operating income of the Company
in 1994 of $2,305,626 was $3,240,193 more than the operating loss in 1993 of
$934,567. The net income for the refining operations in 1994 of $3,271,625 was
$3,627,740 more than the net loss in 1993 of $356,115. Operating income for 1994
included $975,000 relating to the reversal of a charge in 1992 for potential
expenses relating to litigation that was settled in 1994. The extraordinary item
of $578,150 in 1994 was attributed to the settlement of indebtedness owed to a
vendor.

The Refining Company's net profit in 1994 reflected the growth in the U.S.
economy which began to effect the plastics industry in the last half of 1993.
During mid-year 1993, product sales volumes began to strengthen due to increased
activity in the industries served by the Refining Company. The number of
customers served by the Refining Company grew slightly during 1994, however the
total volume of products sold increased by 15% from 18.6 million gallons in 1993
to 21.4 million gallons in 1994. This was in addition to the 22% increase during
1993. The Refining Company continued the past trend of placing the majority of
its production into the higher priced premium petroleum solvent markets. During
the last six years the Refining Company has raised the percentage sold into
these markets from 53% in 1989 to over 70% for the last four years. The ability
to produce products of the quality sufficient for these higher priced markets
has enabled the Refining Company to remain competitive even during the down
periods in the industry.

The weak economy in 1992 and early 1993 contributed to a lack of toll processing
opportunities. 1994 toll processing revenues were $297,757, an increase of
$133,779, or 82%, over 1993 toll processing revenues. Many in the industry have
turned their focus toward complying with federal and state regulations and are
not actively searching for new opportunities which would require toll processing
services. This is typical of the industry during difficult times and will
improve as the economy improves, although there can be no assurance to that
effect. The Refining Company has experienced an increase in the number of
inquiries relating to toll processing opportunities.

Margins were not good for much of the year 1992 and the early part of 1993. The
Clean Air Act has upset the traditional price and supply relationships of many
materials in the petroleum world. The spot price of natural gasoline, the
primary feedstock for the refinery has in the past normally fluctuated in a
range of $.08 to $.18 per gallon below the spot price of regular unleaded
gasoline. Price fluctuations in the past have depended upon the season of the
year and the demand from other parts of the petrochemical industry which also
might use natural gasoline for feedstock to various operations. In 1992, the
demand from other segments of the petrochemical industry kept the price near the
low end of the range much of the year. Demand was strong because more
traditional alternative feedstocks for the industry were more scarce and higher
priced due to changes brought about in the nationwide gasoline blending pool by
the Clean Air Act. It is anticipated that the price relationships in the
petroleum products markets will continue

10
<PAGE> 12

to find their economic levels, although there can be no assurance to that
effect. During the last half of 1993, due to the oversupply of crude oil and a
stable demand, the prices of all petroleum prices dropped by as much as 25% from
their 1992 levels. The price of natural gasoline also dropped and the Refining
Company enjoyed margins which are greater than those experienced during the
previous 18 months. The favorable feedstock prices continued throughout most of
1994 and began rising slightly toward the end of the year.

General and administrative expenses decreased by $172,122 to $2,036,470 in 1994
from $2,208,592 in 1993. 1993 expenses included the recording of $478,500 for
the value of stock options granted. Without this 1993 expense, the general and
administrative expenses in 1994 would have reflected an increase of $306,378.
This increase was incurred primarily at the refinery and was mostly attributable
to higher payroll, insurance and regulatory expenses. The expenses of regulatory
compliance and reporting continue to increase. Interest expense, which is
practically all attributable to the debt of the refinery, decreased by $228,974
from $576,338 in 1993 to $347,364 in 1994. This decrease in interest expense was
attributable to the reversal of an adjustment made in 1993 for accrued interest
of $155,525 on a note which was settled in 1994. Under the terms of the
settlement, all accrued interest was forgiven. In 1994, there was a reduced
amount of debt. The income tax expense of $39,973 reflects the federal income
tax provision on the Company's net income after the utilization of net operating
loss carry-forwards of $679,536.

The equity in losses of an affiliate in 1994 of $144,460 was applicable to the
cost of maintaining the Nevada mining properties of Pioche-Ely Valley Mines,
Inc. ("Pioche-Ely Valley"). The 1994 loss was higher than usual due to an
increased loss experienced by Pioche-Ely Valley on the write-off of several
unpatented claims that were considered to have no future value. There was no
activity in 1994 and 1993 on the Pioche-Ely Valley properties primarily due to
the lack of financing for claims to be explored and developed. Interest income
in 1994 and 1993 was from the investment of excess cash in Saudi Arabia and time
deposits of the refinery operations. In 1994 and 1993 there was no operating
activity in any of the Saudi Arabia mining properties. Assuming financing can be
obtained, the results of the updated feasibility study contemplate that
construction of an ore treatment plant and all infrastructure for a mining
facility will commence in 1995 and be completed in 1996. The feasibility study
estimates the cost of the mining facility to be $81.3 million.

With one exception, other income represents various items of miscellaneous
income which individually are not significant enough to warrant being separately
disclosed. Other income in 1994 includes $172,737 relating to the write-off of a
contingent liability established in 1992 to provide for possible future expenses
relating to certain indebtedness of the coal company which were completely paid
in 1994. Other items included in other income are tank rentals, building
rentals, cancellation of debt income, commission income and occasional small
asset sale proceeds. In 1994, the refinery collected $101,640 from leasing an
office building, a $11,012 increase from 1993. Tank rentals increased from
$4,600 in 1993 to $97,000 in 1994 since a new lease began in March 1994.

Primarily as a result of the Company's write-off of its total investment in the
coal leases, the Company had net operating loss carry-forwards of approximately
$27.3 million at December 31, 1994, of which approximately $14.8 million is
limited to the net income of the coal company and approximately $1.1 million of
this amount is limited to the net income of TOCCO. These carry-forwards expire
during the years 1994 through 2008. The Company is currently negotiating with a
company toward the possible use of the coal company's amount, although there can
be no assurances that any agreement relating thereto will be reached.

At December 31, 1994, a total of approximately $1,237,000 in accrued salaries
and termination benefits was due to Company employees in Saudi Arabia, which
includes approximately $586,000 due to Hatem El-Khalidi, the Company's President
and Chief Executive Officer. Accrued unpaid salaries and termination benefits to
Company employees in Saudi Arabia and to Mr. El-Khalidi at December 31, 1993
were approximately $676,000 and $507,000, respectively. These unpaid amounts
have been deferred until the Company's working capital position improves.

11
<PAGE> 13

COMPARISON OF THE YEARS 1993 TO 1992

During the fiscal year ended December 31, 1993, the Company had a net loss of
$1,338,321 compared to a net loss of $2,195,861 for the fiscal year ended
December 31, 1992.

The gross refined product sales in 1993 of $15,103,422 was an increase of
$1,783,477 from 1992 while the cost of sales in 1993 of $13,314,427 was an
increase of $1,463,843 from 1992, resulting in a net margin increase in 1993 of
$319,634. After processing fee income, general and administrative expenses and
depreciation and amortization, the operating loss of the Company in 1993 of
$934,567 was $992,246 less than the operating loss in 1992 of $1,926,813. The
net loss for the refining operations in 1993 of $356,115 was $1,410,000 less
than the net loss in 1992 of $1,661,000 (after a charge of $975,000 for possible
litigation expenses). The last five months of 1993 reflected a net profit for
the refining operations.

The reduction in the size of the Refining Company's net loss in 1993 reflected
the improvement in the U.S. economy, primarily over the last half of the year.
Product sales volumes began to strengthen in mid-1993 due to increased activity
in the industries served by the Company. The number of customers served by the
Refining Company increased by 7% during 1993, and the total volume of products
sold increased by 22% from 15.5 million gallons in 1992 to 18.6 million gallons
in 1993. The Refining Company continued the past trend of placing the majority
of its production into the higher priced premium petroleum solvent markets.
During the last five years, the Refining Company has increased the percentage
sold into these markets from 53% in 1989 to over 70% for each of the last three
years. The ability to produce products of the quality sufficient for these
higher priced markets has enabled the Refining Company to remain competitive
even during down periods in the industry.

The weak economy in 1992 and early 1993 contributed to a lack of toll processing
opportunities. In 1992, the Refining Company generated just over $147,879 in
toll processing revenues while 1993 toll processing revenues were $163,977. Many
in the industry have turned their focus toward complying with federal and state
regulations and are not actively searching for new opportunities which would
require toll processing services. This is typical of the industry during
difficult times and will improve as the economy improves, although there can be
no assurance to that effect.

Margins were not good for much of the year 1992 and the early part of 1993. The
Clean Air Act has upset the traditional price and supply relationships of many
materials in the petroleum industry. The spot price of natural gasoline, the
primary feedstock for the refinery, has in the past normally fluctuated in a
range of $.08 to $.18 per gallon below the spot price of regular unleaded
gasoline. Price fluctuations in the past have depended upon the season of the
year and the demand from other parts of the petrochemical industry which also
might use natural gasoline for feedstock to various operations. In 1992, the
demand from other segments of the petrochemical industry kept the price near the
low end of the range much of the year. Demand was strong because more
traditional alternative feedstocks for the industry were more scarce and higher
priced due to changes brought about in the nationwide gasoline blending pool by
the Clean Air Act. It is anticipated that the price relationships in the
petroleum products markets will continue to find their economic levels, although
there can be no assurance to that effect. During the last half of 1993, due to
the oversupply of crude oil and stable demand, the prices of all petroleum
products, including natural gasoline, dropped by as much as 25% from their 1992
levels. As a result, the Refining Company's margins during the last half of 1993
were greater than those experienced during the previous 18 months.

General and administrative expenses increased by $323,176 to $2,208,592 in 1993
from $1,885,416 in 1992. This increase was attributable to the recording of
$478,500 for the value of stock options granted in 1993. Without this expense
amount, the general and administrative expenses would have reflected a decrease
of $155,324 due to the continued cost saving measures initiated at the refinery.
The expenses of regulatory compliance and reporting continue to increase.
Interest expense, which is practically all attributable to the debt of the
refinery, increased by $108,017 from $468,321 in 1992 to $576,338 in 1993. This
increase in interest expense was attributable to accrued interest of $155,525 in
1993 on a note for which a settlement had been expected in 1992, which
settlement would have provided for no

12
<PAGE> 14

interest. This settlement had not yet occurred. Without this adjustment,
interest expense in 1993 would have deceased by $47,508 as debt was being
retired in 1993.

The equity in losses of an affiliate in 1993 of $59,812 was applicable to the
cost of maintaining the Nevada mining properties of Pioche-Ely Valley. There was
no activity in 1993 and 1992 on these properties primarily due to the lack of
financing for claims to be explored and developed. Interest income in 1993 and
1992 was from the investment of excess cash in Saudi Arabia and time deposits of
the refinery operations. In 1993 and 1992 there was no operating activity on any
of the Saudi Arabia mining properties. Assuming financing can be obtained, the
preliminary results of the updated feasibility study contemplate that
construction of an ore treatment plant and all infrastructure for a mining
facility commence in 1994 and be completed in 1996. The preliminary results show
the estimated cost of the mining facility to be $70 million.

Other income represents various items of miscellaneous income which individually
are not significant enough to warrant being separately disclosed. Such items
include tank rentals, building rentals, cancellation of debt income, commission
income and occasional small asset sale proceeds. In 1993 the refinery began
leasing an office building and collected $90,628. Tank rentals decreased from
$61,200 in 1992 to $4,600 in 1993 since the lessee discontinued leasing the
tanks in early 1993.

Primarily as a result of the Company's write-off of its total investment in the
coal leases, the Company had a tax loss carry-forward of approximately $27.5
million at December 31, 1993, of which approximately $14.8 million is limited to
the net income of the coal company during the years 1994 through 2008.
Additionally, approximately $3 million of this amount is limited to the net
income of TOCCO. The Company will be actively seeking a method of utilizing this
tax loss carry-forward.

At December 31, 1993, a total of approximately $1,183,000 in accrued unpaid
salaries and termination benefits was due to Company employees in Saudi Arabia,
which includes approximately $507,000 due to Hatem El-Khalidi, the Company's
President and Chief Executive Officer. Accrued unpaid salaries and termination
benefits to Company employees in Saudi Arabia and to Mr. El-Khalidi at December
31, 1992 were approximately $625,000 and $455,000, respectively. These unpaid
amounts have been deferred until the Company's working capital position
improves.

13
<PAGE> 15

REPORT OF INDEPENDENT ACCOUNTANTS

To The Stockholders and Board of Directors
of Arabian Shield Development Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Arabian Shield Development Company and its subsidiaries at December 31, 1994
and 1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to
the financial statements, the Company's primary source of cash flow is fully
dedicated to repayment of debt and funding of refinery operations.
Additionally, the Company is not generating cash flow from any of its other
activities. These matters raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

As described in Notes 4 and 6 to the financial statements, a substantial
portion of the Company's total assets is comprised of mineral acquisition,
exploration and development costs relating to its interests in Saudi Arabia
which have been deferred at December 31, 1994. None of the related projects
have been developed for commercial operation as of December 31, 1994, and
significant expenditures, for which the Company must obtain financing, will be
necessary before commercial operations, if any, are commenced.

As described in Note 6 to the financial statements, the Company is in default
on repayment of an $11 million loan from the Saudi Arabian government which was
made to the Al Masane Project. The Company is attempting to negotiate a
restructuring of the loan.

14
<PAGE> 16

As described in Notes 4 and 9 to the financial statements, the Company's
refining subsidiary, South Hampton Refining Company ("South Hampton"), has
short-term notes payable and current portions of long-term obligations
totalling $4.5 million. South Hampton does not have the ability to repay these
current obligations from internally generated funds. Arabian Shield
Development Company has not guaranteed the debt obligations of South Hampton.
The Company's financial statements do not include any adjustments that might be
necessary should South Hampton be unable to satisfy its current obligations in
an orderly manner.

As described in Note 13, in 1993 the Company changed its method of accounting
for income taxes.

PRICE WATERHOUSE LLP

Dallas, Texas
March 27, 1995

15
<PAGE> 17
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------------------
1994 1993
--------------- --------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents in United States $ 1,326,119 $ 118,828
Accounts receivable (net of allowance for doubtful
accounts of $129,617 in 1994 and $117,066 in 1993) 1,402,982 1,504,116
Inventories 471,074 647,039
---------------- ----------------

Total current assets 3,200,175 2,269,983

Cash in Saudi Arabia 430,976 1,688,018

Refinery plant, pipeline and equipment at cost 5,440,208 5,161,086
Less accumulated depreciation (2,187,256) (1,872,386)
---------------- ----------------

Refinery plant, pipeline and equipment, net 3,252,952 3,288,700

Al Masane Project and surrounding properties 30,112,132 29,368,423

Other interests in Saudi Arabia 2,431,248 2,431,248

Investment in and advances to Pioche-Ely Valley
Mines, Inc. 247,052 351,397

Goodwill 678,206 958,510

Other assets (net of allowance for doubtful
accounts of $114,537 in 1994 and 1993) 704,035 734,087
---------------- ----------------

Total assets $ 41,056,776 $ 41,090,366
================ ================
</TABLE>

See notes to consolidated financial statements.

16
<PAGE> 18
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------------------
1994 1993
--------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 944,007 $ 668,300
Accrued liabilities 616,459 1,869,025
Accrued liabilities in Saudi Arabia 785,743 969,940
Notes payable 15,945,393 18,044,099
Current portion of long-term debt 67,968 -
Current portion of long-term obligations 18,805 17,278
---------------- ----------------

Total current liabilities 18,378,375 21,568,642

Long-term debt 195,386 -

Long-term obligations 206,013 224,445

Accrued liabilities in Saudi Arabia 585,918 506,997

Deferred revenue 160,693 176,197

Commitments and contingencies

Stockholders' equity:
Common stock, authorized 40,000,000 shares
of $.10 par value; issued and outstanding,
20,028,494 shares in 1994 and 20,014,494 shares
in 1993 2,002,849 2,001,449
Additional paid-in capital 32,899,119 32,886,519
Receivables from stockholders (276,000) (326,000)
Accumulated deficit (13,095,577) (15,947,883)
---------------- ----------------

21,530,391 18,614,085
---------------- ----------------

Total liabilities and stockholders' equity $ 41,056,776 $ 41,090,366
================ ================

</TABLE>

See notes to consolidated financial statements.

17
<PAGE> 19
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
1994 1993 1992
---------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Refined product sales $ 17,564,226 $ 15,103,422 $ 13,319,945
Processing fees 200,757 163,977 147,879
---------------- ---------------- ----------------

Total 17,764,983 15,267,399 13,467,824

Operating costs and expenses:
Cost of refined product sales and
processing 13,750,750 13,314,427 11,850,584
General and administrative 2,036,470 2,208,592 1,885,416
Depreciation and amortization 647,137 678,947 683,637
Litigation (975,000) - 975,000
---------------- ---------------- ----------------

Total 15,459,357 16,201,966 15,394,637
---------------- ---------------- ----------------

Operating income (loss) 2,305,626 (934,567) (1,926,813)

Other income (expenses):
Interest income 56,491 46,433 8,085
Interest expense (347,364) (576,338) (468,321)
Equity in losses of affiliate (144,460) (59,812) (10,275)
Other income 443,836 185,963 206,588
---------------- ---------------- ----------------

Income (loss) before income taxes
and extraordinary item 2,314,129 (1,338,321) (2,190,736)
Income tax expense (39,973) - (5,125)
---------------- ---------------- ----------------

Income (loss) before extraordinary item 2,274,156 (1,338,321) (2,195,861)
Extraordinary item 578,150 - -
---------------- ---------------- ----------------

Net income (loss) $ 2,852,306 $ (1,338,321) $ (2,195,861)
================ ================ ================

Per common share:
Income (loss) before extraordinary
item $ .11 $ (.08) $ (.14)
Extraordinary item .03 - -
---------------- ---------------- ----------------

Net income (loss) $ .14 $ (.08) $ (.14)
================ ================ ================

Weighted average number of common
shares outstanding 20,027,881 17,532,335 15,660,893
================ ================ ================

</TABLE>

See notes to consolidated financial statements.

18
<PAGE> 20
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Common Stock Additional Receivables
------------------------- Paid-in From Accumulated
Shares Amount Capital Stockholders Deficit Total
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1992 15,595,240 $ 1,559,524 $ 28,223,794 $ (181,000) $(12,413,701) $ 17,188,617
Common stock and common
stock subscriptions 605,000 60,500 544,500 605,000
Stock options issued 189,900 189,900
Offset of stockholder receivables
with unpaid salaries 55,000 55,000
Other (16,996) (1,700) 1,700
Net loss (2,195,861) (2,195,861)
----------- ------------ ------------ ------------ ------------ ------------

December 31, 1992 16,183,244 1,618,324 28,959,894 (126,000) (14,609,562) 15,842,656
Common stock and common
stock subscriptions 3,831,250 383,125 3,448,125 (200,000) 3,631,250
Stock options issued 478,500 478,500
Net loss (1,338,321) (1,338,321)
----------- ------------ ------------ ------------ ------------ ------------

December 31, 1993 20,014,494 2,001,449 32,886,519 (326,000) (15,947,883) 18,614,085
Common stock and common
stock subscriptions 14,000 1,400 12,600 14,000
Payment on stockholder
receivables 50,000 50,000
Net income 2,852,306 2,852,306
----------- ------------ ------------ ------------ ------------ ------------

December 31, 1994 20,028,494 $ 2,002,849 $ 32,899,119 $ (276,000) $(13,095,577) $ 21,530,391
=========== ============ ============ ============ ============ ============

</TABLE>

See notes to consolidated financial statements.

19
<PAGE> 21
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
1994 1993 1992
---------------- --------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 2,852,306 $ (1,338,321) $ (2,195,861)
Adjustments for non-cash transactions:
Depreciation and amortization 647,137 678,947 683,637
Equity in loss of affiliates 144,460 59,812 10,275
Stock options issued - 478,500 189,900
Extraordinary item (578,150) - -

Effects of changes in:
Decrease (increase) in accounts
receivable 101,134 (430,924) 672,836
Decrease (increase) in inventories 175,965 (124,395) 52,117
Decrease (increase) in other assets 30,052 222,466 (8,947)
(Decrease) increase in accounts
payable and accrued liabilities (821,334) 46,659 787,701
(Decrease) increase in deferred
revenue (15,504) (15,504) 21,658
Other 21,922 (4,282) 79,383
---------------- ---------------- ----------------

Net cash provided by (used for)
operating activities 2,557,988 (427,042) 292,699

Investing activities:
Additions to Al Masane Project and
surrounding properties (743,709) (965,162) (661,202)
Additions to other interests in
Saudi Arabia - (41,144) (69,333)
Additions to refinery plant, pipeline and
equipment (279,122) (2,818) (120,860)
(Increase) decrease in cash in Saudi Arabia 1,257,042 (1,674,078) (4,457)
Increase (decrease) in accrued liabilities in
Saudi Arabia (105,276) 104,947 372,108
---------------- ---------------- ----------------

Net cash provided by (used for)
investing activities 128,935 (2,578,255) (483,744)
---------------- ---------------- ----------------

Financing activities:
Common stock issued for cash - 3,131,250 105,000
Decrease in receivables from stockholders (50,000) - -
Additions to notes payable and long-term
obligations - 70,748 495,076
Reduction of notes payable and long-term
obligations (1,429,632) (174,342) (411,077)
---------------- ---------------- ----------------

Net cash provided by financing
activities (1,479,632) 3,027,656 188,999
---------------- ---------------- ----------------

Net increase (decrease) in cash 1,207,291 22,359 (2,046)
Cash and cash equivalents at beginning
of year 118,828 96,469 98,515
---------------- ---------------- ----------------

Cash and cash equivalents at end of year $ 1,326,119 $ 118,828 $ 96,469
================ ================ ================
</TABLE>

See notes to consolidated financial statements.

20
<PAGE> 22
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND OPERATIONS OF THE COMPANY

Since its organization on May 4, 1967, the principal interest of Arabian
Shield Development Company (the "Company" or "ASDC") has been the
exploration and development of mineral deposits in Saudi Arabia (Note 6).
In February 1986, the Company purchased all of the issued and outstanding
capital stock of Dorchester Coal Company, which was subsequently renamed
American Shield Coal Company ("ASCC") and is currently dormant. The
Company, through its wholly-owned subsidiary American Shield Refining
Company ("ASRC"), owns all of the outstanding common stock of Texas Oil
and Chemical Company II, Inc. ("TOCCO"), and its subsidiaries, South
Hampton Refining Company ("South Hampton") and Gulf States Pipeline
Company, Inc. ("Gulf States"). The principal assets of TOCCO and its
subsidiaries are a special products refinery located outside of Beaumont,
Texas, which currently processes light naphtha feedstock, and 45 miles of
natural gas and product pipelines which connect the refinery to supplies
and a marine terminal on the Gulf of Mexico (Note 7). The Company also
has an equity interest in Pioche-Ely Valley Mines, Inc. ("Pioche") which
owns mineral deposits in Nevada (Note 8).

Prior to 1988, the Company was considered a development stage company.
Although the Company has not yet commenced the principal operations for
which it was formed, the significance of the refining operations led
management to conclude that the Company ceased to be a development stage
company effective January 1, 1988.

2. GOING CONCERN

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's
sources of cash flow in 1994 were the operations of South Hampton and the
proceeds from issuance of the Company's stock. The Company is not
currently generating cash flow from any other activities. As described
in Notes 4 and 9, the cash flow attributable to South Hampton is fully
dedicated to repayment of debt and funding of refinery operations. The
cash flow attributable to South Hampton currently is not adequate for
these purposes. As described in Note 9, the Company is liable to the
Saudi Arabian government for an $11,000,000 loan. The Company does not
currently have the financial resources to pay this obligation.

Management plans to fund future operations initially through sales of its
common stock and borrowings (Note 16). Subsequent to the start up of
operations of the Al Masane mine, anticipated in 1996, it is expected
that the operations and obligations of the Company will be funded from
these operations. In the event that the Company is unable to complete
sales of its common stock, obtain suitable financing, and reach an
agreement on the repayment of the loan to the Saudi Arabian government,
there is substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

21
<PAGE> 23
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - All majority-owned subsidiaries are
consolidated and all material intercompany accounts and transactions are
eliminated. Investments in 20 to 50% owned subsidiaries and investments
in subsidiaries for which greater than 50% ownership is deemed temporary
are accounted for on the equity method. Investments in other companies
that are less than 20% owned are accounted for on the basis of the
Company's cost. In 1992, the Company began to fully consolidate the Al
Masane Project (Note 6). Previously, the Company accounted for the Al
Masane Project by the equity method.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

INVENTORIES - Refined products and feedstock are carried at the lower of
cost, determined on the last-in, first-out method (LIFO), or market.

MINERAL EXPLORATION AND DEVELOPMENT COSTS - All costs related to the
acquisition, exploration, and development of mineral deposits are
capitalized until such time as (1) the Company commences commercial
exploitation of the related mineral deposits at which time the costs will
be amortized, (2) the related project is abandoned and the capitalized
costs are charged to operations, or (3) when any or all deferred costs
are permanently impaired. At December 31, 1994, none of the projects
described in Notes 6 and 8 had reached the commercial exploitation stage.
No indirect overhead or general and administrative costs have been
allocated to any of the projects.

REFINERY PLANT, PIPELINE AND EQUIPMENT - Beginning in 1994, all additions
to refinery plant, pipeline, buildings and equipment are being
depreciated on the straight-line method over useful lives of five to
seven years (5 to 15 years prior to January 1, 1994). Maintenance and
repairs are charged to expense. Renewals and betterments are
capitalized.

OTHER ASSETS - Other assets include notes receivable from related
parties, prepaid expenses, certain refinery assets which are being leased
to a third party and a certificate of deposit collateralizing reclamation
work on formerly owned coal leases.

DEFERRED REVENUE - Deferred revenue represents funds advanced by a
supplier and customer for equipment purchases and is being amortized over
a 15 year period.

STATEMENT OF CASH FLOWS - On the statement of cash flows, cash includes
cash held in the United States. Significant noncash changes in financial
position in 1994 include the issuance of 14,000 shares of common stock in
exchange for the cancellation of $14,000 of indebtedness and the
forgiveness of debt and accrued interest (Note 12). Transactions of this
type in 1993 include the issuance of 200,000 shares of common stock in
exchange for the cancellation of $142,099 of notes payable and $57,901 of
accrued interest, and the issuance of 300,000 shares of common stock in
exchange for the cancellation of $300,000 of indebtedness (Notes 9 and
11). Transactions of this type in 1992 include the issuance of 500,000
shares of common stock in exchange for cancellation of $500,000 in
indebtedness.

22
<PAGE> 24
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HEDGING PROGRAM - In July 1994, South Hampton established a hedging
program to help decrease the volatility of the price of fuel gas to the
refinery. South Hampton purchased several commodity based derivative
futures contracts during 1994. Gains and losses related to these
contracts are recognized when the contracts expire. The natural gas
market suffered severe price declines in the third quarter of 1994 which
resulted in a net recognized loss of $117,000 during 1994. This loss is
included as a cost of refined product sales and processing in the
consolidated statement of operations. As of December 31, 1994, South
Hampton has incurred $65,000 of unrecognized losses related to its open
contracts. These contracts expire within the next twelve months.

PER SHARE DATA - Net income (loss) per share has been computed on the
basis of the weighted average number of shares of common stock
outstanding during the year.

FOREIGN CURRENCY - Assets and liabilities denominated in foreign
currencies, principally Saudi Riyals, are translated at rates in effect
at the time the transaction occurred. There has been no change in the
exchange rate for Saudi Riyals to the United States dollar during the
period covered by these financial statements.

INCOME TAXES - In the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the Company to
compute deferred income taxes based on the amount of taxes payable in
future years, after considering changes in tax rates and other statutory
provisions that will be in effect in those years. The provision for
income taxes includes taxes currently payable and those deferred because
of temporary differences between the financial statement and tax bases of
assets and liabilities. The adoption had no significant impact on 1993
earnings or cash flow.

Deferred income taxes in 1992 were provided in accordance with Accounting
Principles Board Opinion No. 11 ("APB Opinion No. 11"). Timing
differences resulted principally from depreciation of property and
equipment.

GOODWILL - Goodwill acquired in connection with the acquisition of TOCCO
is being amortized over ten years. The amounts reflected in the balance
sheet are net of accumulated amortization of $2,104,809 and $1,824,505 at
December 31, 1994 and 1993, respectively. The Company periodically
reviews goodwill for any permanent impairment in value or life.

MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

RECLASSIFICATIONS - Certain prior year amounts have been restated to
conform to the current year presentation.

23
<PAGE> 25
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. CONTINGENCIES

The operations of the Company in Saudi Arabia have been, and may in the
future be, affected from time to time in varying degree by political
developments and laws and regulations, such as forced divestiture of
assets; restrictions on production, imports and exports; price controls;
tax increases and retroactive tax claims; expropriation of property,
cancellation of contract rights and environmental regulations.

A major component of the Company's activities relates to the acquisition,
exploration and development of mineral deposits. There can be no
assurance that the Company will successfully develop any of the
properties described in Notes 6 and 8, and, if developed, whether the
mineral acquisition, exploration and development costs incurred will
ultimately be recovered. The recovery of such costs is dependent upon a
number of future events, some of which are beyond the control of the
Company. The ability of the Company to develop any of these properties
is dependent upon obtaining additional financing as may be required and,
ultimately, its financial success depends on its ability to attain
successful operations from one or more of its projects.

On November 14, 1990, Cajun Energy, Inc. ("Cajun Energy"), a distributor
of refined gasoline to retail stations, filed a lawsuit alleging South
Hampton manufactured and sold defective gasoline and/or failed to
properly test its product prior to sale to Cajun Energy. Prior to
initiation of this lawsuit by Cajun, claims in excess of $906,000 were
paid by South Hampton's insurance carrier under a $1 million liability
policy.

E-Z Mart Stores filed a lawsuit on May 22, 1991 against Cajun Energy and
South Hampton related to the aforementioned manufacture and sale of
alleged defective gasoline. E-Z Mart Stores claimed that defective
gasoline was distributed to its stores in late April and May 1990
resulting in customers suffering damage to their automobiles.

South Hampton filed suit on August 18, 1992 in the 58th Judicial District
Court, in Jefferson County, Texas against National Union Fire Insurance
Company, ("National Union") as the insurance carrier for a second named
party in the Cajun Energy litigation, for failing and refusing to defend
South Hampton in the two causes of action described above. South Hampton
had asserted that it was an additional named insured on the insurance
policy provided to this second named party in the litigation described
above and that the insurer should have provided defense to the claims
asserted.

In May 1994, the E-Z Mart Stores lawsuit went to trial and a judgement
was entered against South Hampton. In consideration of the judgement
and, since the issues were identical to the claims asserted in the Cajun
Energy lawsuit, there has been a dismissal by Cajun Energy of its lawsuit
against South Hampton. At the trial, South Hampton consented to a
settlement agreement whereby E-Z Mart Stores and Cajun were awarded a
judgement against South Hampton for approximately $6 million. E-Z Mart
Stores and Cajun signed a "nonexecution agreement" not to execute the
judgement in return for the assignment by South Hampton of its claims
against National Union. South Hampton has also agreed not to pursue its
1992 lawsuit against National Union. This concluded the claims and
actions against South Hampton in these matters.

24
<PAGE> 26
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

South Hampton is involved as a defendant in other litigation incident to
its activities. The outcome of these matters is not expected to have a
material impact on the Company's financial position or results of
operations.

South Hampton has short-term notes payable and current portions of
long-term obligations totalling $4.5 million, of which $2.9 million
relate to bank financing which has historically been renewed in six-month
intervals and is not guaranteed by the Company. South Hampton does not
currently have the ability to repay these current obligations from the
level of internally generated funds. Any cash flow generated by the
refinery is fully dedicated to the repayment of debt and funding of
refining operations. In order to satisfy these obligations in an orderly
manner, management of South Hampton must: (1) obtain a renewal of the
bank debt (see Note 9) and have continued forbearance by the bank with
respect to debt covenants and provisions, and (2) generate increased cash
flows from refinery operations to service debt obligations and fund other
working capital needs of the refinery.

Should South Hampton not meet its cash flow requirements during 1995,
management believes that it will be able to obtain modifications of the
repayment terms of the debt obligations. Management believes that
additional funds may be obtained from the proceeds of future common stock
sales or the sale of all or a partial interest in South Hampton. On
March 16, 1992, the Company received an offer from a Saudi Arabian
company, also a related party, to purchase all of the issued and
outstanding shares of TOCCO for $2,230,000, which was rejected due to its
unfavorable terms. The Company's financial statements do not include any
adjustments that might be necessary should South Hampton be unable to
satisfy its obligations in an orderly manner.

ASCC has been a responsible party for certain reclamation work on coal
properties which it previously leased. ASCC had provided a letter of
credit secured by a $36,000 certificate of deposit to the Mined Land
Reclamation Division of Colorado in connection with this liability. In
March 1994, the Mined Land Reclamation Division exercised its rights
under the letter of credit and ASCC paid the $36,000. This concluded
ASCC's involvement in the reclamation project.

South Hampton has been spending an increased amount of time and expense
on environmental and regulatory functions and compliance. In mid-1993,
while remediating a small spill area, the Texas Natural Resources
Conservation Commission ("TNRCC") requested the refinery to drill a well
to check the groundwater under the refinery property to ensure that
contamination had not taken place. The well disclosed a pool of
hydrocarbons on top of the groundwater under the loading rack area. An
analysis of the material indicated that the hydrocarbons were produced
over ten years ago when the refinery processed crude oil. Consulting
engineers were hired to determine the size of the pool. Three recovery
wells were utilized and the hydrocarbons are being pumped out and treated
in treatment ponds. The TNRCC has been cooperating in the investigation
and cleanup. Due to the apparent age of the material, no fine or
enforcement action is expected. A site assessment plan is being
developed to determine the extent of the hydrocarbon pool. The costs
through 1994 for this problem totaled approximately $35,000. Future
costs for recovery and remediation should be small as it is primarily a
matter of operating the recovery wells.

25
<PAGE> 27
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 1994, the TNRCC's Air Permit Section proposed a fine of
approximately $46,000 to settle various alleged permit violations
identified in their 1991, 1992 and 1993 inspections. South Hampton
agreed to the proposed settlement with the stipulation that payments be
spread over a twelve month period. The Commission has not yet formally
adopted the agreement. In October 1994, the TNRCC formally adopted an
agreement with South Hampton to settle alleged water violations regarding
monitoring water wells with a fine of $9,600 to be paid over four months
and a deferred fine of $9,600 to be dependent upon the future operation
of a bioremediation site.

In addition to the various Environmental Protection Agency and TNRCC air,
water and solid waste regulations, South Hampton is also subject to the
regulations of the U.S. Department of Transportation, the Occupational,
Health and Safety Administration and the Texas General Land Office, among
others. In response to various regulations from these and other
agencies, South Hampton has developed OPA-90 Emergency Response Plans for
the pipeline and the refinery, and is in the process of meeting the
requirements of the OSHA Process Safety Management rules. By the time
these various agency requirements are met, it is expected that South
Hampton will spend in excess of $100,000 over the eighteen month period
ending May 1995 to develop the procedures and documentation required.

5. INVENTORIES

Inventories include the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
Refinery feedstock $ 226,265 $ 298,928
Refined products 244,809 348,111
---------------- ----------------

Total inventories $ 471,074 $ 647,039
================ ================
</TABLE>

In 1994, a liquidation of LIFO inventory quantities carried at lower
costs prevailing in prior years decreased cost of goods sold and
increased net income by approximately $57,000. At December 31, 1994,
market value exceeded LIFO value by approximately $193,000. At December
31, 1993, LIFO value approximated market value.

6. MINERAL EXPLORATION AND DEVELOPMENT COSTS IN SAUDI ARABIA

In the accompanying consolidated financial statements, the deferred
development costs have been presented based on the related projects'
geographic location within Saudi Arabia. "Al Masane Project and
surrounding properties" primarily pertains to the Al Masane Project (the
"Project"), but also includes costs attributable to the interests in the
Greater Al Masane areas. "Other interests in Saudi Arabia" primarily
pertains to the costs of rentals, field offices and camps, core drilling
and labor incurred at the Wadi Qatan and Jebel Harr properties.

26
<PAGE> 28
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 1971, the Saudi Arabian government awarded exploration licenses to the
Company and National Mining Company ("NMC"), a Saudi Arabian company, for
the Al Masane Project, Wadi Qatan and Jebel Harr areas. Until April
1992, the Company and NMC each held a 50% interest in the exploration
licenses. The Company and NMC also obtained written authority to explore
an area of 1,100 square kilometers surrounding Al Masane ("Greater Al
Masane"). The Saudi Arabian government has verbally indicated that an
exploration license for Greater Al Masane will be granted (unaudited).

Prior to 1979, the Company funded all costs related to these properties.
In 1979, the Company formed a joint venture with NMC related to the Al
Masane Project in which each company held a 50% interest in the
exploration license. The joint venture obtained an $11 million
interest-free loan from the Saudi Arabian government which was scheduled
to be repaid in ten equal annual installments beginning December 1984.
None of the scheduled payments have been made. The proceeds from this
loan were used to fund the costs of the Project. Other than the use of
the proceeds from the loan, subsequent to the formation of the joint
venture with NMC, 100% of the exploration costs of the Project as well as
all exploration costs for the other interests continued to be funded by
the Company.

In 1992, NMC relinquished its rights to the exploration license and the
mining lease in the Al Masane area, and assigned them to the Company.
The Company accepted the conditions set by the Saudi Arabian government
in a letter dated March 30, 1992. In connection with NMC's assignment of
its interest to the Company, the Company agreed to provide for public
subscription in Saudi Arabia of 50% of the capital of the Project at such
time as the Project proves to be commercial. On April 13, 1992, the
Company and NMC signed an agreement dissolving the joint venture and NMC
assigned its rights and obligations to the exploration license and the
mining lease in the Al Masane area to the Company. Subsequently, a
formal Mining Lease Agreement assigning the lease solely to the Company
was initialled by the Company and the Ministry on October 4, 1992.

Prior to April 13, 1992, the Company had accounted for its interest in
the Al Masane Project on an equity basis and its investment in the joint
venture was recorded at the amount of the owners' capital of the joint
venture. When the joint venture was dissolved, the Company consolidated
the Al Masane Project by eliminating the related investment balance
against the owners' capital account of the Project, and by recording the
assets and liabilities of the Project (including the $11 million loan) in
the consolidated balance sheet.

Since NMC assigned its 50% interest in the exploration license and any
resulting mining lease to the Company, the Company is solely responsible
for the repayment of the $11 million loan. Pursuant to Article 15 of the
Mining Lease Agreement which was initialled on October 4, 1992, the loan
is to be rescheduled to be repaid from the profits of the mining
operations after the mining lease is issued to the Company. A
rescheduling of the loan payments has not yet been negotiated. All of
the Company's assets in Saudi Arabia are pledged as collateral for the
loan.

27
<PAGE> 29
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If exploration licenses for Wadi Qatan, Jebel Harr or Greater Al Masane
(which includes Jabal Guyan) are converted to mining leases, NMC will
reimburse the Company for its share of costs (as defined in an agreement
between the parties). The Company has had positive results from its
exploration work at these sites; however, it has directed limited amounts
of time and resources on these sites in recent years while it has
negotiated with the Saudi government for the Al Masane lease. The
Company intends to negotiate agreements for these sites in the near
future, does not intend to abandon these sites, and considers the costs
deferred at December 31, 1994 to be recoverable.

The Company had filed in 1984 with the Council of Ministers of the Saudi
Arabian government for a mining lease for the Al Masane Project based on
the presumption that commercial productibility had been proven. On April
26, 1993, the Council of Ministers passed the resolution granting the
Company the mining lease, and on May 22, 1993, a Royal Decree was issued
by the King. The initial period of the mining lease is 30 years, which
can be renewed for another period or periods, not to exceed 20 years.
The lease area is 44 square kilometers in size. An amendment was made in
the lease agreement which stipulates that, when the profitability of the
project is demonstrated, a Saudi public stock company will be formed and
the Company will contribute its investment in the Al Masane Project in
return for 50% of the stock of the Saudi company. The Petroleum and
Mineral Organization ("PETROMIN"), a company wholly-owned by the Saudi
government, has an option to acquire up to 25% of the stock in the Saudi
company and the remaining interests not owned by the Company or acquired
by PETROMIN are to be put out for public subscription to Saudi citizens.

Phase I of the work on the Project (sinking shaft, tunneling and
drilling) was completed in April 1981. Since that time, there have been
a series of project feasibility studies in 1982, 1984, 1989, 1992, and
1994, conducted by Watts, Griffis and McOuat Limited, consulting
geologist, indicating the commercial viability of the Project. The 1994
report estimates proven and probable reserves of copper, zinc, silver and
gold of 7.2 million tons in the Al Masane area with the potential to
increase these reserves with further exploration. The report projects
production of the proven and probable reserves over a twelve-year period
commencing in 1996. The cash flow projection was made based on the
assumption that 50% of the financing of the project will come from loans
from the Saudi Industrial Development Fund, 25% from bank loans, and 25%
from equity financing in connection with the public subscription in Saudi
Arabia. Revenues were estimated utilizing projected mineral prices from
a third party pricing expert. The report projects positive net cash
flows to the Company of $37 million over the life of the Project. It is
not anticipated that taxes will be paid to the Saudi government in the
first five years of production of the Project. (unaudited)

28
<PAGE> 30
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred development costs of the Al Masane Project and surrounding areas
at December 31, 1994, 1993 and 1992, and the changes in these amounts for
each of the three years then ended are detailed below:

<TABLE>
<CAPTION>
Balance at Activity Balance at Activity Balance at Activity
December 31, for December 31, for December 31, for
1994 1994 1993 1993 1992 1992
------------- --------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Property and equipment:
Mining equipment $ 2,160,206 $ 2,160,206 $ 2,160,206
Construction costs 3,140,493 3,140,493 3,140,493
------------- --------- ------------- ---------- ------------- ---------

Total 5,300,699 5,300,699 5,300,699
------------- --------- ------------- ---------- ------------- ---------

Other costs:
Labor and project
administration
costs 16,023,275 $ 237,908 15,785,367 $ 653,930 15,131,437 $ 564,407
Materials and
maintenance 6,161,684 683 6,161,001 1,232 6,159,769 71,801
Feasibility study 2,626,474 505,118 2,121,356 310,000 1,811,356 24,994
------------- --------- ------------- ---------- ------------- ---------

Total 24,811,433 743,709 24,067,724 965,162 23,102,562 661,202
------------- --------- ------------- ---------- ------------- ---------

$ 30,112,132 $ 743,709 $ 29,368,423 $ 965,162 $ 28,403,261 $ 661,202
============= ========= ============= ========== ============= =========
</TABLE>

The Company has not made all of the surface rental payments due to the
government of Saudi Arabia under the terms of the Al Masane Project
lease. At December 31, 1994, the past due amount of these rent payments
is approximately $74,000. In addition, the Company has not complied with
certain statutory reporting requirements in Saudi Arabia. Management of
the Company believes that the lack of compliance with these license
requirements will not have any effect on the Company's planned operations
in Saudi Arabia.

Since cash in Saudi Arabia is generally intended for the support and
development of the Saudi Arabian projects, a long-term asset, such cash
and certain associated liabilities relating to the Saudi Arabian projects
have been classified as noncurrent.

7. REFINERY OPERATIONS

South Hampton, the Company's only revenue producing asset, sells its
products primarily to companies in the petroleum industry. Downturns in
the petroleum industry could negatively impact refinery operations in the
future. South Hampton does not require collateral on its outstanding
accounts receivable balances. South Hampton's largest customer accounted
for 13%, 16% and 11% of total sales in 1994, 1993 and 1992, respectively.

29
<PAGE> 31
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. INVESTMENT IN PIOCHE-ELY VALLEY MINES, INC.

The Company effectively controls approximately 55% and directly owns
approximately 46% of the outstanding common stock of Pioche. During
1988, approximately 634,000 shares of Pioche stock were deemed acquired
through in-substance foreclosure on a $114,000 note due from the issuer's
estate. The note balance was reclassified to Other Assets and was fully
reserved in 1989. This note is due in 1995; however, management of the
Company intends to postpone the due date indefinitely if the issuer's
estate is unable to repay the note in 1995. At this point, it is not
possible to determine whether the issuer's estate will repay the note and
claim these shares. If it is determined that the note will not be
repaid, the Company will consolidate Pioche as a majority-owned
subsidiary. The principal assets of Pioche are an undivided interest in
48 patented and 84 unpatented mining claims and a 300 ton-per-day mill
located on the aforementioned properties in the Pioche Mining District in
southeastern Nevada. The properties held by Pioche have not been
commercially operated for approximately 35 years. During 1994, Pioche
attempted to drill a core hole on this property. The core hole was
intended to go down to 1,500 feet but encountered formation problems at
700 feet and further drilling had to be abandoned. A new site will be
selected and management expects a second core hole to be drilled in 1995.

In 1991 and 1992, the Company leased its Wide Awake Mine property to a
joint venture under an agreement which called for annual rental payments
of $5,000 and a 7% royalty on net smelter returns. The annual advance
rental was received for 1992 and 1991 but the joint venture did not
commence any operations on the property. In December 1992, the agreement
was terminated. In August 1993, Pioche entered into a new lease of the
Wide Awake mine property with the same joint venture to which it had
previously leased the property. This agreement stipulates a 6% royalty
on net smelter returns with no annual rental required. The lease
commenced on October 1, 1993, for a primary term of twenty-seven months,
and will continue as long as minerals are produced in commercial
quantities or unless terminated by the parties. No royalties were earned
in 1994.

30
<PAGE> 32
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. NOTES PAYABLE, LONG-TERM DEBT AND LONG-TERM OBLIGATIONS

Notes payable, long-term debt and long-term obligations at December 31
are summarized as follows:

<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Notes payable:
Revolving bank note. See (A) $ 2,927,113 $ 3,934,036
Secured note to Saudi Arabian government. See (B) 11,000,000 11,000,000
Unsecured note to a Saudi company. See (C) 1,500,000 1,500,000
Unsecured note to a Saudi investor. See (D) 168,280 168,280
Unsecured note to a Saudi investor. See (E) 350,000 350,000
Unsecured installment note. See (F) - 597,625
Bank note payable. See (G) - 360,702
Other - 133,456
---------------- ----------------

Total $ 15,945,393 $ 18,044,099
================ ================

Long-term debt:
Bank note. See (H) $ 263,354
Less current portion 67,968
----------------

Long-term debt $ 195,386
================

Long-term obligations:
Noninterest-bearing note to a supplier and
customer for capital improvements. See (I) $ 128,683 $ 128,683

Other financing obligations:
Deferred compensation contracts. See (J) 96,135 113,040
---------------- ----------------

Total long-term obligations 224,818 241,723

Less current portion 18,805 17,278
---------------- ----------------

Long-term obligations $ 206,013 $ 224,445
================ ================

</TABLE>

(A) In 1990, South Hampton and a bank entered into an Amended and
Restated Credit Agreement ("the Agreement") in order to modify
certain provisions and embody all amendments of the previous
agreement in one document. Funding under the Agreement was provided
in two facilities: Facility A in the principal amount of
$4,400,000, funded in a lump-sum and used to refinance the previous
note, and Facility B in the principal amount of up to $1,500,000, to
be used by South Hampton for working capital purposes and support of
feedstock purchases. Facility B was fully drawn down in the form of
letters of credit. In 1992, the bank drew on the letters of credit
provided by a related party of the Company (see (C) below.)

The note is collateralized by all of the assets of TOCCO and its
subsidiaries and a pledge of TOCCO stock by ASRC. In addition, the
Company and ASRC have subordinated intercompany accounts receivable
of approximately $1,363,355 at December 31, 1994 to

31
<PAGE> 33
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the bank debt, and no other funds are to be advanced to the Company
or ASRC by TOCCO or its subsidiaries. In the event of an
enforcement by the bank of the security interests on the collateral
under the Agreement, the proceeds from the security interests in the
cash, accounts receivable and inventory of South Hampton will first
be used to repay 60% of the outstanding principal and interest under
the Agreement with any remaining proceeds used to repay any amounts
owed by South Hampton to the related party due to the draw down by
the bank of the letters of credit for Facility B. Any amounts
recovered through other forms of collateral are to be used first to
repay any remaining amounts due to the bank for principal and
interest, and remaining amounts, if any, are to be used to repay any
amounts still owed to the related party. South Hampton was not in
compliance with the borrowing base ratio and was in default in its
loan repayments at various times in 1993 and 1992.

Facility A was to be repaid under the initial agreement by June 30,
1992. South Hampton did not have adequate resources to pay the full
amount outstanding during 1992. The maturity date has been extended
at various times subsequent to default and has currently been
extended to June 30, 1995. In connection with the latest extension,
South Hampton has agreed to make quarterly principal payments of
$200,000, and Arabian Shield Development Company has committed to
use its best efforts to obtain new equity financing of at least
$1,500,000 by June 30, 1995, to be remitted to the bank.
Additionally, South Hampton has agreed to collect all receivables
through a cash collateral account at a local bank. Only the amount
of funds required to operate South Hampton's business may be used
and weekly reports of cash receipts and disbursements in the cash
collateral account must be provided to the creditor. If South
Hampton defaults on the credit agreement, the creditor has the right
to freeze the funds in the cash collateral account. The note is
subject to interest at the London Interbank Eurocurrency Market
(LIBOR) rate 6.0% and 3.21875% at December 31, 1994 and 1993,
respectively, plus 2%.

(B) On January 24, 1979, the Company and NMC jointly obtained an
interest-free loan of $11,000,000 from the Saudi Arabia Ministry of
Finance and National Economy to finance the development phase of the
Al Masane Project. The loan was repayable in ten equal annual
installments of $1,100,000, with the initial installment payable on
December 31, 1984. None of the ten scheduled payments have been
made. On April 13, 1992, NMC agreed to assign all its rights and
obligations in the Al Masane Project (including its 50% obligation
for the $11,000,000 loan) to the Company. The Company is now solely
responsible for the repayment of the loan. Pursuant to the mining
lease agreement, the loan will be rescheduled to be repaid from the
profits of the mining operations when they commence. An agreement
has not yet been reached regarding the rescheduling of these
payments. The loan is secured by all of the Company's assets in
Saudi Arabia.

(C) In 1990, Saudi Fal, a Saudi company owned by a shareholder of the
Company, agreed to issue a guarantee of $1,500,000 securing a letter
of credit facility to enable South Hampton to buy feedstock. In
return for the guarantee, Saudi Fal was given an option to purchase
all of the outstanding stock of TOCCO. The option was not exercised
and has expired. On March 31, 1992, the $1,500,000 guarantee was
not renewed by Saudi Fal. As a result, the bank drew on the letter
of credit provided by Saudi Fal for its guarantee and applied the
$1,500,000 to reduce the principal amount of the bank note. The
$1,500,000 is now owed by South Hampton to Saudi Fal. This note is
collateralized as discussed in (A) above.

32
<PAGE> 34
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(D) Represent noninterest demand loans payable to a Saudi investor.

(E) Represents an advance made by a Saudi investor in 1984 to the Al
Masane Project on behalf of NMC. Prior to 1992, since NMC had no
liability for exploration costs unless the exploration license was
converted to a mining lease, the advance was classified as a
deferred capital contribution on the separate Al Masane balance
sheet. Due to the relinquishment of NMC's rights and obligations in
the license and the mining lease in March of 1992, the advance is
now classified as an unsecured noninterest demand debt.

(F) In 1991, South Hampton issued a note payable to a vendor to
establish payment terms for past-due trade accounts payable. The
note was payable in monthly installments with all amounts owed due
by February 25, 1993. In May 1994 the principal balance and
$156,000 accrued interest payable under the terms of this note was
settled by a $175,000 cash payment. Accordingly, the Company
recorded an extraordinary gain of $578,150 in 1994, for which there
is no tax effect after application of operating loss carryforwards,
which represents the amount of trade payables forgiven.

(G) All unpaid principal and interest related to this bank loan was due
and payable in December 1994. TOCCO was in arrears with its
payments in the prior and current year. Effective December 31,
1994, all unpaid principal and interest was refinanced by another
bank and the Company's obligation under this note was satisfied.
See (H) below.

(H) This note payable is collateralized by land, an office building, and
all equipment and furniture and fixtures of TOCCO. As described in
Note 10, the building collateralized by this note has been leased to
a third party. The original balance of the note was due and payable
on December 31, 1994. This note was refinanced effective December
31, 1994 with principal and interest payments starting in March 1995
and each month thereafter until February 1, 1998. The note bears
interest of 10% from the date of the agreement to February 1, 1996
and at prime rate + 1 1/2% thereafter.

(I) Balance represents amount due under a note payable to an unrelated
refining company that provided loans to the refinery to fund certain
refining processes. Repayment is to be made when certain feed rate
criteria and number of days of operations have been reached.

(J) In connection with the acquisition of TOCCO, deferred compensation
contracts between TOCCO and certain former employees and one current
employee were restructured, reducing the gross payments due under
the existing contracts. Default on payments due under the
restructured agreements would invalidate the negotiated settlement
amounts resulting in TOCCO being liable for the amounts due under
the original contracts. Currently, all contracts have been fully
satisfied except for the contracts of one current and one former
employee. TOCCO has complied with the terms of these contracts
through 1994. If TOCCO were to default on these contracts, it would
be liable for an additional amount of $458,000. The recorded
liability has been determined utilizing a discount rate of 8.0%.

33
<PAGE> 35
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Scheduled maturities of long-term debt and long-term obligations, which
exclude current notes payable balances aggregating $15,945,393, for the
next five years and thereafter are as follows:

<TABLE>
<S> <C>
1995 $ 86,773
1996 234,008
1997 115,912
1998 30,274
1999 0
Thereafter 21,205
----------------

Total $ 488,172
================
</TABLE>

Interest of $275,561, $472,131 and $343,058 was paid in 1994, 1993 and
1992, respectively.

10. COMMITMENTS

South Hampton entered into an arrangement in July 1991 with a
partnership, in which Silsbee Trading and Transportation Corp. ("STTC",
a company owned by the president and vice president of TOCCO) and M.A.
Bomer (the former owner of the refinery) each owned a 50% interest, to
facilitate the future purchase of feedstock. Feedstock was purchased by
South Hampton from the partnership at a price equal to the cost of the
feedstock to the partnership plus two cents per gallon. Approximately
4,977,000 gallons of feedstock were purchased in 1992 under the terms of
this agreement at a cost of approximately $2,320,000. In June 1992, Mr.
Bomer withdrew from the partnership and it was terminated. On July 1,
1992, South Hampton entered into a new agreement with STTC whereby STTC
financed the feedstock in the pipeline. As a result, South Hampton has a
liability to STTC for the cost of the 453,600 gallons of capacity of the
pipeline. This amount is $215,460 and $217,048 at December 31, 1994 and
1993, respectively. Also in connection with this agreement, South
Hampton pays a one-half cent per gallon fee to STTC on each gallon of
feedstock transported through the pipeline. The agreement is currently
operating on a month to month basis. The fees paid by South Hampton to
STTC pursuant to this agreement were $103,212, $88,974 and $21,525 in
1994, 1993 and 1992, respectively.

South Hampton leases vehicles and equipment for use in operations for
$24,140 per month plus certain reimbursed costs from STTC under a lease
agreement. The lease agreement expired in September 1994 and is
currently continuing on a month-to-month basis. South Hampton incurred
costs (most of which are billed to customers) related to this agreement
of approximately $341,000, $320,000 and $291,000 in 1994, 1993 and 1992,
respectively. Accounts payable to STTC under the leasing arrangement
were $16,917 and $2,431 at December 31, 1994 and 1993, respectively.

The Company incurred rental expenses for office space, one automobile and
other vehicles and equipment of approximately $302,000 in 1994 and 1993,
and $305,000 in 1992.

In February 1993, South Hampton entered into an agreement to lease to a
third party a building with a net book value at December 31, 1994 of
$324,591 which South Hampton does not use in its operations. The lease
provides for an option to the lessee to purchase the building after three
or five years. The lease is being recorded as an operating lease and the
building is

34
<PAGE> 36
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

included in other assets. As described in Note 9, the leased building is
pledged as collateral for a note payable. Other income for 1994 and 1993
includes $102,000 and $87,000, respectively, of rental income pursuant to
this lease.

A provision of the purchase agreement related to the acquisition of TOCCO
by ASRC requires TOCCO to reserve up to 10% of its common stock to be
available for sale to the employees of TOCCO on such terms and conditions
and at such times as determined by TOCCO.

South Hampton has guaranteed a note for $160,000 for a limited
partnership in which South Hampton has a 19% interest.

11. COMMON STOCK AND STOCK OPTIONS

At December 31, 1994, Saudi Arabian investors owned approximately 62% of
the Company's outstanding common stock.

COMMON STOCK - The proceeds from common stock sales are used to finance
mineral exploration and development activities in Saudi Arabia and
general and administrative expenses in the United States. Proceeds from
certain common stock sales were used to finance the acquisitions of ASRC
and to finance the expansion of the refinery. Agreements relating to
certain stock sold to investors provide that shares may not be traded in
United States markets unless registered under the United States
Securities Act of 1933 or unless they are sold pursuant to an available
exemption from registration. Estimates of fair values of the Company's
unregistered common stock are made by management.

Notes receivable from stockholders for the purchase of common stock of
$276,000 in 1994 represent a note from a director and officer for
$126,000 which matures on December 31, 1995 and a note from an entity
controlled by a stockholder for $200,000 with a balance of $150,000 at
December 31, 1994. The note for $200,000 was issued in March 1993 and
was due in October 1994. Payments of $50,000 were received on this note
in 1994 and management of the Company expects to collect the remaining
balance in 1995. Notes receivable from stockholders are classified as a
debit in stockholders' equity.

STOCK OPTIONS - Under the terms of the Company's Employee Stock Option
Plan (the "Employee Plan"), incentive options are granted at the market
price of the stock on the date of grant and nonincentive options are
granted at a price not less than 85% of the market price of the stock on
the date of grant. The Employee Plan was adopted on May 16, 1983 for a
term of ten years. At the Company's annual stockholders meeting on
December 29, 1992, the stockholders approved an extension of the term of
the Employee Plan for another ten years to May 16, 2003 and also approved
an increase in the number of shares reserved for issuance thereunder from
250,000 to 500,000.

To enhance the Company's ability to obtain and retain qualified
directors, it instituted the 1987 Non-Employee Director Stock Option Plan
(the "Non-Employee Director Plan") which provides for each non-employee
director to receive an option for 10,000 shares of common stock upon
election to the board of directors with the exercise price equal to the
fair market value of the stock at the date of grant. The Non-Employee
Director Plan was instituted in 1987 and has

35
<PAGE> 37
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

a duration of ten years. Options granted under this plan become
exercisable in 20% increments each year and are granted for a ten year
period. The number of shares reserved for issuance under this plan is
100,000.

On March 20, 1992, the Compensation Committee of the board of directors
approved an option replacement program which permitted holders of
outstanding options under the Employee Plan to surrender and cancel the
options held by them and to receive in exchange new options covering an
equal number of shares having an exercise price equal to the market price
of the Company's common stock on March 20, 1992. Under the option
replacement program, two officers and directors surrendered for
cancellation the outstanding options held by them and in exchange
received new options covering 70,000 shares having an option exercise
price of $1.38 per share, the market price on the date of grant. On the
same date, another officer was granted an option covering 10,000 shares
in exchange for the surrender and cancellation of an existing option
covering 5,000 shares. On the same date, an officer of TOCCO surrendered
for cancellation an outstanding option and in exchange received a new
option covering 10,000 shares. On the same date, another officer of
TOCCO was granted a new option covering 10,000 shares. These options
also have an exercise price of $1.38 per share, the market price on the
date of the grants.

In 1993, four new directors were elected to the Company's board of
directors. Pursuant to the Company's Non-Employee Director Plan, each
director received on election an option for 10,000 shares of common stock
at an exercise price equal to the fair market value of the stock at the
date of grant. In December 1993, one of the new directors did not stand
for reelection at the Company's annual stockholders' meeting and, by the
terms of the Non-Employee Director Plan, his option expired in July 1994.
In January 1994, another of the new directors resigned from the board and
his option expired in August 1994.

On September 26, 1994, the Compensation Committee of the board of
directors approved the granting of options to purchase a total of 75,000
shares of common stock for $1.75 per share, the market value on the date
of the grant, to four employees of the Company. These options expire in
2004.

A summary of stock option transactions under the Employee Plan and
Non-Employee Director Plan is as follows:

Outstanding December 31, 1991 105,000
Granted ($1.38 per share) 100,000
Expired (85,000)
-------

Outstanding December 31, 1992 120,000
Granted ($2.88 to $3.75 per share) 40,000
-------

Outstanding December 31, 1993 160,000
Granted ($1.75 per share) 75,000
Expired (20,000)
-------

Outstanding at December 31, 1994 215,000
=======

</TABLE>

36
<PAGE> 38
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1994, 161,500 options were exercisable at prices ranging
from $1.38 to $3.75 per share. Under these plans, 385,000 shares are
available for grant. The options for the Employee Plan vest at such
times and in such amounts as is determined by the Compensation Committee
of the board of directors at the date of grant. The options for the
Non-Employee Director Plan vest in cumulative annual installments of 20%
beginning one year from the date of grant. The options for both plans
are exercisable for a period of ten years.

The Company granted a creditor (a company owned by the wife and other
relatives of the Company's president) two, three-year options, which
expired December 31, 1991, to purchase an aggregate of 1,000,000 shares
at $1.00 per share. In January 1992, these options were extended to
March 1992. They were not exercised and the options expired. In March
1992, the Company granted the creditor an option to purchase 200,000
shares of common stock at $1.00 per share to expire in December 1995. In
July 1993, the creditor exercised the option and the shares were issued
in exchange for the cancellation of $200,000 of an outstanding debt.

On May 1, 1992, in consideration for a personal loan of $200,000 from a
Saudi investor who is the president of two Saudi Arabian government
charitable organizations, the Board granted to the organizations an
option to purchase 1,500,000 shares at $1.00 per share by August 8, 1992
provided that these organizations accepted a previous Company offer for
them to purchase 1,500,000 shares at $1.00 per share by May 8, 1992. On
September 17, 1992, in consideration for an additional loan of $50,000
from the investor, the Board of Directors extended both the offer to sell
the shares and the exercise period of the option to December 15, 1992.
In consideration for an additional loan from the investor of $50,000 in
January 1993, the board of directors extended both the sell offer and the
option offer to March 29, 1993. On March 23, 1993, the offers were
further extended without an expiration date. On May 13, 1993, the
organizations elected not to exercise these options and the options were
cancelled. Concurrent with this decision, the board of directors
approved a sale of 3,000,000 shares at $1 per share to the Saudi
investor. The shares were purchased by the payment of $2.7 million in
cash and the cancellation of the $300,000 of indebtedness to the investor
by the Company.

On January 21, 1992, a director and officer of the Company was granted a
two-year option to purchase 14,000 shares at $1.00 per share. In January
1994, the option was exercised and the shares were issued in exchange for
the cancellation of $14,000 of unpaid compensation. In May 1992, a Saudi
investor purchased 35,000 shares of stock at $1.00 per share and was
granted an option until December 31, 1992 to purchase an additional
35,000 shares at $1.00 per share. The option was not exercised and has
expired. On December 29, 1992, the Board approved an extension of an
option to a U.S. investor to buy 46,250 shares at $1.00 per share from
December 31, 1992 to June 30, 1993. In June 1993, the option was
exercised.

In March 1993, the board of directors approved the sale of 75,000 shares
of common stock at $1.00 per share to a company controlled by a director
of the Company, and the grant of an option to such company to purchase
300,000 shares of common stock at $1.00 per share, which was exercisable
on or before September 10, 1993. The option for the 300,000 shares was
exercised in September 1993. For the issuance of the 300,000 shares, the
Company received $100,000 in cash and a receivable from this related
party of $200,000 which has been recorded as a debit in the stockholders'
equity section of the consolidated balance sheet. This receivable
balance is $150,000 at December 31, 1994.

37
<PAGE> 39
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock option transactions with individuals is as follows:

<TABLE>
<S> <C>
Outstanding December 31, 1991 1,746,250
Granted ($1.00 per share) 1,899,000
Expired (1,735,000)
----------

Outstanding December 31, 1992 1,910,250
Granted ($1.00 per share) 300,000
Exercised ($1.00 per share) (546,250)
Expired or forfeited (1,650,000)
----------

Outstanding December 31, 1993 14,000
Exercised (14,000)
----------

Outstanding at December 31, 1994 -0-
==========

</TABLE>

All stock sold to individuals in connection with these options includes a
restriction that it cannot be traded for a three year period.

For stock options granted to employees and directors at an exercise price
below market price on the date of grant, the Company records an expense
equal to the difference between the exercise and market prices. An
expense is also recorded for the difference between sales price and
market price for stock sold to employees and directors not pursuant to
options at below market prices.

12. EXTRAORDINARY ITEM

In May 1994, South Hampton settled its note payable and accrued interest
payable to a vendor for $175,000 cash. An extraordinary gain of
$578,150, for which there is no tax effect after application of operating
loss carryforwards, was recorded, representing the amount of trade
accounts payable and accrued interest forgiven. See Note 9 (F).

13. INCOME TAXES

INCOME TAXES - In January 1993, the Company adopted SFAS No. 109. The
adoption had no significant impact on earnings or cash flow.

The income (loss) before income taxes and extraordinary item was
$2,314,129, ($1,338,321) and ($2,190,736) for the years ended December 31,
1994, 1993 and 1992, respectively.

The Company's provision for income taxes was comprised of the following:

<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Federal
Current $ 522,938 $ - $ 5,125
Deferred - - -
Utilization of operating
loss carryforward (482,965) - -
---------------- ---------------- ----------------

Provision for income taxes $ 39,973 $ -0- $ 5,125
================ ================ ================
</TABLE>

38
<PAGE> 40
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In years prior to 1993, the Company accounted for income taxes in
accordance with APB Opinion No. 11. In 1992, the Company had significant
net operating loss carryforwards to fully offset the effects of the
timing differences (attributable principally to depreciation of property
and equipment) which existed between financial and regular income tax
reporting. However, the Company was required to provide alternative
minimum tax.

Income tax expense (benefit) for the years ended December 31, 1994 and
1993 differs from the amount computed by applying the applicable U.S.
corporate income tax rate of 34% to net income (loss) before income taxes
(excluding the cumulative effect of the change in accounting for income
taxes). The reasons for this difference are as follows:

<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Income taxes at U.S. statutory rate $ 786,804 $ (455,029)
Goodwill 95,303 95,303
Liability reserves (392,700) -
Net operating losses (482,965) 359,726
Alternative minimum tax 39,973 -
Other items (6,442) -
---------------- ----------------

Total tax expense $ 39,973 $ -0-
================ ================
</TABLE>

In 1992, income taxes differed from the statutory tax rate due to
goodwill amortization, equity investment loss and unutilized tax loss
carryforwards.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for 1994
and 1993 were as follows:

<TABLE>
<CAPTION>
December 31, December 31, January 1,
1994 1993 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax liabilities:
Refinery plant, pipeline and
equipment $ (379,668) $ (434,700) $ (407,754)
---------------- ---------------- ----------------

Gross deferred tax liability (379,668) (434,700) (407,754)
---------------- ---------------- ----------------

Deferred tax assets:
Accounts receivable 44,070 40,973 33,888
Mineral interests 196,446 202,224 202,224
Net operating loss carryforwards 9,277,552 9,791,240 9,400,963
Tax credit carryforwards 650,907 1,640,037 1,640,037
---------------- ---------------- ----------------

Gross deferred tax assets 10,168,975 11,674,474 11,277,112
Valuation allowance (9,789,307) (11,239,774) (10,869,358)
---------------- ---------------- ----------------

Net deferred tax assets 379,668 434,700 407,754
---------------- ---------------- ----------------

Net deferred taxes $ -0- $ -0- $ -0-
================ ================ ================
</TABLE>

39
<PAGE> 41
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of current year operations, the Company's net deferred tax
asset decreased by $55,032 to $379,668 at December 31, 1994. However,
there was no change in judgment about the Company's ability to realize
its net deferred tax asset; therefore, the valuation allowance was
decreased by a corresponding amount.

At December 31, 1994, the Company had approximately $27,287,000 of net
operating loss carryforwards and approximately $610,000 of general
business credit carryforwards. These carryforwards expire in 1995 through
2008. In addition, the Company has minimum tax credit carryforwards of
approximately $40,000 that may be carried forward indefinitely.
Approximately $1,100,000 of the net operating loss carryforwards and
$610,000 of the general business credit carryforwards are limited to the
net income of TOCCO. Approximately $14.8 million of the net operating
loss carryforwards are limited to the net income of ASCC.

The Company has no Saudi Arabian tax liability for its activities there.

14. SEGMENT INFORMATION

The Company has operations in two industry segments and geographic
regions. Its refinery operations represent the significant portion of
its current operating results and are exclusively in the United States,
whereas its mining operations, conducted mainly in Saudi Arabia, mostly
relate to costs which have been deferred during the development phase of
these operations. The only mining operations conducted in the United
States relate to the Company's investment in Pioche-Ely Valley Mines,
Inc. for which the related investment and equity income and losses are
shown separately on the balance sheet and statement of operations,
respectively. The Company has no significant corporate activities.

For 1994, 1993 and 1992, essentially all activity on the Company's
consolidated statement of operations relates to the refinery operations
except for equity income and losses from Pioche. The 1994 results include
$74,580 of unallocated costs recorded in general and administrative
expenses related to the Saudi Arabian operations. The 1992 results
include immaterial amounts of interest expense related to the Saudi
Arabian mining operations. All items included in the Company's
consolidated balance sheet related to the Saudi Arabian operations are
specifically identified on the face of the consolidated balance sheet
with the exception of notes payable which have been identified in Note 9.

15. RELATED PARTY TRANSACTIONS

The Company shares office facilities and certain expenses with companies
owned by the chairman of the Company. At December 31, 1994, these
companies did not owe any amounts to the Company. Accounts receivable
from these companies aggregated approximately $16,200 at December 31,
1993.

Noncurrent accrued liabilities in Saudi Arabia in the consolidated
balance sheet represent amounts payable to the Company's president.

Other significant related party transactions have been addressed in the
related notes to the consolidated financial statements. In particular,
see Note 10 for additional information.

40
<PAGE> 42
ARABIAN SHIELD DEVELOPMENT COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. SUBSEQUENT EVENT

On March 27, 1995, the board of directors approved a Letter of Agreement
between the Company and Carlyle SEAG ("Carlyle"), whereby Carlyle has
been retained as the Company's financial advisor in connection with the
Al Masane mining project. Carlyle's services will include, but not be
limited to, (1) advising on the capitalization structure of the proposed
Saudi company to be established for the project; (2) the raising of
capital funds for the project implementation; and (3) assisting the
Company in the filing of all licenses and necessary documents for
regulatory purposes. In addition to compensation for their services,
including the grant of an option allowing Carlyle to purchase 2,000,000
shares of the Company's common stock at $1 per share, Carlyle will
nominate one member to the board of directors at the Company's next board
meeting and will nominate a second board member upon the closing of the
financing for the Al Masane project.

41
<PAGE> 43

DIRECTORS

John A. Crichton
Chairman of the Board
Arabian Shield Development Company
Dallas, Texas

Hatem El-Khalidi
President and Chief Executive Officer
Arabian Shield Development Company
Jeddah, Saudi Arabia

Oliver W. Hammonds
Attorney-at-Law
Dallas, Texas

Harb S. Al Zuhair
Chairman and Chief Executive Officer
TETRAD Development Co. Ltd.
Riyadh, Saudi Arabia
(Investments)

Mohammed O. Al-Omair
Executive Vice President
Saudi Fal Group of Companies
Riyadh, Saudi Arabia
(Investments)

Ghazi Sultan
Chairman
Sultan Group of Companies
Jeddah, Saudi Arabia
(Investments and marble mining)

EXECUTIVE OFFICERS

John A. Crichton
Chairman of the Board

Hatem El-Khalidi
President and Chief Executive Officer

Drew Wilson
Secretary/Treasurer

Nicholas N. Carter
President of Texas Oil and
Chemical Co. II, Inc.

TRANSFER AGENT AND REGISTRAR

KeyCorp Shareholder Services, Inc.

STOCK LISTING

NASDAQ National Market System
Symbol ARSD

FORM 10-K

Single copies of the Annual Report on Form 10-K which the Company has
filed with the Securities and Exchange Commission can be obtained by
stockholders without charge by writing to Arabian Shield Development
Company, Suite 175, 10830 North Central Expressway, Dallas, Texas
75231.

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,326,119
<SECURITIES> 0
<RECEIVABLES> 1,532,599
<ALLOWANCES> 129,617
<INVENTORY> 471,074
<CURRENT-ASSETS> 3,200,175
<PP&E> 5,440,208
<DEPRECIATION> 2,187,256
<TOTAL-ASSETS> 41,056,776
<CURRENT-LIABILITIES> 18,378,375
<BONDS> 0
<COMMON> 2,002,849
0
0
<OTHER-SE> 19,527,542
<TOTAL-LIABILITY-AND-EQUITY> 41,056,776
<SALES> 17,564,226
<TOTAL-REVENUES> 17,764,983
<CGS> 13,750,750
<TOTAL-COSTS> 15,459,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,364
<INCOME-PRETAX> 2,314,129
<INCOME-TAX> 39,973
<INCOME-CONTINUING> 2,314,129
<DISCONTINUED> 0
<EXTRAORDINARY> 578,150
<CHANGES> 0
<NET-INCOME> 2,852,306
<EPS-PRIMARY> .14
<EPS-DILUTED> .14

</TABLE>