ARABIAN SHIELD DEVELOPMENT CO - 10-K Annual Report

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Form 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1996

or

[ ] 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
----- -----
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 17, 1997: 20,656,494.

The aggregate market value on March 17, 1997 of the registrant's
voting securities held by non-affiliates was $23,269,688.

DOCUMENTS INCORPORATED BY REFERENCE

(a) Selected portions of the registrant's Annual Report to
Stockholders for the year ended December 31, 1996.
- Parts II and IV

(b) Selected portions of the registrant's definitive Proxy
Statement for the Annual Meeting to be held May 5, 1997.
- Part III
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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. The Company has
operations in both the United States and Saudi Arabia. The Company is
primarily engaged in the exploration and development of minerals in Saudi
Arabia.

The Company holds a mining lease covering a 44 square kilometer area
in the Al Masane area in southwestern Saudi Arabia. In a 1996 update to the
1994 full bank feasibility study of the Al Masane lease area conducted by an
independent mining consulting firm, the consultants estimate the total capital
costs of the Al Masane project to be $88.6 million. The Company will
diligently pursue the financing of the project so that commercial production
can begin as contemplated in the updated feasibility study. There can be no
assurance that adequate capital for the project can be obtained in order for
commercial production to begin as contemplated. The ultimate recovery of
mineral exploration and development costs of the Company's other mineral
properties cannot presently be determined.

The Company, through its indirect wholly owned subsidiary, South
Hampton Refining Company ("South Hampton"), owns and operates a special
products refinery which is the Company's only significant revenue producing
asset.

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. National Mining Company, a private Saudi company
("National Mining"), which previously had a 50% interest in the joint venture
formed to explore and develop the Al Masane area, relinquished its rights to
the mining lease and assigned them to the Company.

The Company was granted exploration licenses for the Wadi Qatan and
Jebel Harr areas in southwestern Saudi Arabia, approximately 30 kilometers east
of the Al Masane area, in 1971 and 1977, respectively. The exploration
licenses by their terms have expired, and although Saudi Arabian government
officials have orally advised the Company that the licenses will be extended as
long as mineral exploration is being carried out on the areas which they cover,
formal extensions from the government have not been obtained and there can be
no assurance that the Company's license rights will be honored. Although the
exploration licenses were awarded jointly to the Company and National Mining,
the exploration work on the license areas has been carried on exclusively by
the Company. Pursuant to an agreement among the Company, National Mining and
the Petroleum and Mineral Organization ("Petromin"), the official mining and
petroleum company of the Saudi Arabian government, which governed the rights of
the parties if an exploration license was converted into a mining lease,
National Mining's rights in these jointly held expired exploration licenses
entailed responsibilities of joint exploration expenditures which National
Mining did not want to assume. For this reason, National Mining has orally
advised the Company that it has relinquished its rights in all other areas in
Saudi Arabia and assigned them to the Company. No consideration was paid by
the Company to National Mining for the relinquishment of National Mining's
rights in all other areas of Saudi Arabia. The Company remains a party to the
agreement with Petromin notwithstanding National Mining's relinquishment of its
rights. When financing for the Al Masane project is completed, the Company
plans to make an application for an expanded exploration license for an area of
approximately 2,800 square kilometers which includes the original Greater Al
Masane area and the Wadi Qatan and Jebel Herr areas. See Item 2. Properties.

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In May 1993, the Company had discussions with Chevron Chemical Company
regarding the Company's proposal to purchase 5,000 barrels per day of mixed
pentanes from an Aromax(R) petrochemical project to be built in Jubail, Saudi
Arabia by Chevron Chemical in a joint venture with Saudi Venture Capital Group
(SVCS). The Company and some Saudi partners, all of whom are directors and/or
stockholders of the Company, plan to form a Saudi limited liability company
which will build and manage a processing plant located next to the Aromax(R)
plant in Saudi Arabia. The Company would have a 25% interest in the limited
liability company and would manage the plant. The plant will be similar to
the South Hampton refinery in producing purified pentanes from a feedstock of
mixed pentanes obtained from the Aromax(R) plant. Chevron Chemical advised
the Company by letter in July 1993 that Chevron Chemical and SVCS have jointly
agreed to commit to supply the proposed pentane project with up to 5,000
barrels per day of mixed pentane feedstock. Engineering and marketing studies
of the project made in 1994 by outside consultants reflected positive results.
Planning then began toward the construction and operation of the Aromax(R)
plant and the processing plant but was delayed during 1995 because of the
absence of a firm commitment for the feedstock supply to the Aromax(R) plant.
The Aromax(R) plant received final approval from the Saudi Arabian government
in March 1996 and the Company and its Saudi partners, following the
confirmation of their agreement with Chevron Chemical, are preparing an
application for an industrial license from the Ministry of Industry to build
the processing plant. The application will be submitted in the near future.

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

United States Activities. The Company has two direct wholly owned
subsidiaries, American Shield Refining Company (the "Refining Company") and
American Shield Coal Company (the "Coal Company"). The Refining Company owns
all of the capital stock of Texas Oil and Chemical Co. II, Inc. ("TOCCO").
TOCCO owns all of the capital stock of South Hampton, and South Hampton owns
all of the capital stock of Gulf State Pipe Line Company, Inc. ("Gulf State").
South Hampton owns and operates a special products refinery near Silsbee,
Texas. Gulf State owns and operates three pipelines which connect the South
Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The Company also beneficially owns approximately 55%, and directly owns
approximately 46%, of the capital stock of an inactive Nevada mining company,
Pioche-Ely Valley Mines, Inc. ("Pioche").

Al Masane Project

Prior Feasibility Studies. In the years following the granting of the
exploration licenses in August 1971, substantial geological and geophysical
work was accomplished on the Al Masane and Wadi Qatan license areas. Core
drilling on the licensed areas and studies conducted by independent consulting
firms indicated that the copper, zinc, gold and silver prospects at Al Masane
had a chance of being put into production sooner than the nickel prospect at
Wadi Qatan. Metallurgical tests also showed difficulty in separating the
nickel at Wadi Qatan. During 1977, a 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.

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Phase I of the development program recommended by WGM for Al Masane
was completed in April 1981 and involved underground development in the form of
a decline (700 meters) and tunnels (3,100 meters) parallel to the ore bodies
from where extensive underground core drilling was done to prove the ore
reserves. The project was financed for the most part with an $11 million
interest-free loan from the Saudi Arabian government (Ministry of Finance).
After completion of Phase I, the Company's consultants concluded that
sufficient ore reserves had been established to justify a full bank feasibility
study to determine the economic potential of establishing a commercial mining
and ore treatment operation at Al Masane. The study was conducted principally
by WGM, assisted by SNC/GECO of Montreal, Canada in engineering and costing.
The consultants concluded in their 1982 study that the Al Masane deposits would
support commercial production of copper, zinc, gold and silver and recommended
implementation of Phase II of the Al Masane development program, which involves
the construction of mining, ore treatment and support facilities. WGM
reevaluated the Al Masane project in September 1984 and concluded that the
cumulative effect of the factors considered in the reevaluation was positive.

Additional exploration work conducted at Al Masane and substantial
changes in metal prices and capital and operating costs occurring since 1984
led the Company to request WGM to reevaluate the project in early 1989. The
additional exploration occurring after 1984 in the Al Houra and Moyeath zones
resulted in a better definition of and addition to these zones. Consequently,
the consultants revised their reserve estimates. Some of the reserves
previously defined as possible were reclassified as proven or probable. Based
on its reevaluation of the Al Masane project, WGM again concluded that under
the most realistic scenarios the proposed mining operation was economically
viable and had the potential to provide a satisfactory return on investment.

In May 1992, WGM, at the Company's request, revised its cash flow
projections for the Al Masane project based on then current metal prices. The
cash flow projections were positive.

In both the 1989 reevaluation and the 1992 cash flow projections, WGM
continued to regard Al Masane as having high potential for the discovery of
additional ore zones.

1994 Feasibility Study. Following the granting of the mining lease to
the Al Masane area on May 22, 1993, the Company commissioned WGM to prepare a
new fully bankable feasibility study for presentation to financial institutions
in connection with obtaining financing for the project. The feasibility study
includes more metallurgical work incorporating advances in grinding of the ore;
incorporation of the latest advances in technology and reagents developed
during the past ten years; incorporation of new mill designs and the latest
water recycling methods; investigation into the shipping and marketing of zinc
and copper concentrates; and an economic analysis of the project. The
feasibility study contains specific recommendations to insure that the
construction of the project is accomplished as expeditiously and economically
as possible. Engineering design and costing of the project was done by Davy
International of Toronto, Canada. The feasibility study cost the Company
approximately $1 million and was presented to the Company on July 22, 1994.

The Al Masane ore is located in three mineralized zones known as
Saadah, Al Houra and Moyeath. The following table sets forth a summary of the
diluted minable, proven and probable ore reserves at the Al Masane project,
along with the estimated average grades of these reserves:

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=========================================================================================================================
Reserve Copper Zinc Gold Silver
Zone (Tonnes) (%) (%) (g/t) (g/t)
- -------------------------------------------------------------------------------------------------------------------------

Saadah 3,872,400 1.67 4.73 1.00 28.36

Al Houra 2,465,230 1.22 4.95 1.46 50.06

Moyeath 874,370 0.88 8.92 1.29 64.85
--------- ---- ---- ---- -----

Total 7,212,000 1.42 5.31 1.19 40.20
- -------------------------------------------------------------------------------------------------------------------------

For purposes of calculating, proven and probable reserves, a dilution
of 5% at zero grade on the Saadah zone and 15% at zero grade on the Al Houra
and Moyeath zones was assumed. A mining recovery of 80% has been used for the
Saadah zone and 88% for the Al Houra and Moyeath zones. Mining dilution is the
amount of wallrack adjacent to the ore body which is included in the ore
extraction process.

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

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

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

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

The mining and milling operation recommended by WGM for Al Masane
would involve the production of 2,000 tonnes of ore per day (700,000 tonnes per
year), with a mine life of over ten years. Annual production is estimated to
be 34,900 tonnes of copper concentrate (25% copper per tonne) containing

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precious metal and 58,000 tonnes of zinc concentrate (54% zinc per tonne). Total
output per year of gold and silver is estimated to be 22,000 ounces of gold and
800,000 ounces of silver from the copper concentrate and bullion produced. The
construction of mining, milling and infrastructure facilities is estimated to
take 18 months to complete. Construction necessary to bring the Al Masane
project into production includes the construction of a 2,000 tonne per day
concentrator, infrastructure with a 300 man housing facility and the
installation of a cyanidation plant to increase the recovery of precious metals
from the deposit. Project power requirements will be met by diesel generated
power.

WGM recommended that the Al Masane reserves be mined by underground
methods using trackless mining equipment. Once the raw ore is mined, it would
be subjected to a grinding and treating process resulting in three products to
be delivered to smelters for further refining. These products are zinc
concentrate, copper concentrate and dore bullion. The copper concentrate will
contain valuable amounts of gold and silver. These concentrates are estimated
to be 22,000 ounces of gold and 800,000 ounces of silver and will be sold to
copper and zinc custom smelters and refineries worldwide.

WGM prepared an economic analysis of the project utilizing cash flow
projections. 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.

1996 Update. The Company requested WGM and Davy International to
update the 1994 feasibility study of the project. The update details various
changes required to update the 1994 feasibility study to reflect costs as of
the first quarter of 1996. Capital and operating cost updates to the surface
infrastructure and mill components were done by Davy International of Toronto,
Canada. WGM was responsible for updating mining, mining related activities and
an economic analysis.

The 1996 update shows the estimated capital cost to bring the project
into operation to be $88.6 million, a 9% increase over the $81.3 million
capital cost estimated in the 1994 feasibility study. At a production rate of
700,000 tonnes per year, the operating cost of the project (excluding
concentrate freight, ship loading, smelter charges, depreciation, interests and
taxes) was estimated to be $38.49 per tonne of ore milled compared to $36.86
per tonne of ore milled estimated in the 1994 feasibility study.

WGM prepared an economic analysis of the project utilizing cash flow
projections. A base case was prepared that included those project elements
which are most likely to be achieved. WGM believed that a majority of the base
case assumptions used in the 1994 feasibility study remained valid, including
the ore reserves, mill feed grade, production rate, metal recoveries and
concentrate grade and smelter returns. Metal prices, capital costs, operating
costs and the corporate structure were adjusted to reflect more current
information. Capital and operating costs were adjusted in conformity with the
updated estimates prepared by Davy International.

The base case assumes the corporate structure of the entity to be
formed to operate the project, currently planned to be a Saudi limited
liability company, will be owned 50% by the Company and 50% by Saudi Arabian
investors and that the owners of this entity would contribute an aggregate of
$21.2 million to the cost of the project. The base case further assumes
financing for the project from commercial loans in the aggregate amount of
$21.2 million bearing interest at the rate of 8% per year and a loan in the
amount of $43.8 million from the Saudi Industrial Development Fund ("SIDF")
repayable in equal annual installments

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over the initial life of the mine. The remainder of the project financing
would be contributed by cash generated by the operation of the project. The
base case assumes that the $11 million loan outstanding to the Saudi Arabian
government will be paid by the Company in accordance with a repayment schedule
to be agreed upon with the Saudi Arabian government. Based on these
assumptions, and assuming the average prices of metal over the life of the mine
to be $1.05 per pound for copper, $.60 per pound for zinc, $400 per ounce of
gold and $6.00 per ounce of silver, WGM's economic analysis of the base case
shows the project will realize an internal rate of return of 13.1%, the
Company's and the Saudi Arabian investors' internal rates of return would be
27.3% and 12.1%, respectively, and projected net cash flow from the project of
$95.1 million. The 1994 feasibility study base case showed the project would
realize a 14.05% internal rate of return. Cash flow under the base case is
exclusive of income tax as the base case assumes that any such tax would be
paid by individual investors and not by the project. Assuming a 10% discount
rate, the net present value of the project as shown in the update is $12.16
million compared to the $15.5 million net present value of the project shown in
the 1994 feasibility study. Based on the update, WGM believes that the
economic analysis shows that the project remains viable.

Project Financing and Mining Lease. The 1996 update to the 1994
feasibility study shows the estimated total capital cost to bring the Al Masane
project into production to be $88.6 million. At the present time, the Company
does not have sufficient funds to bring the project into production.

To assist the Company in obtaining financing for the project, on March
27, 1995, the Company retained Carlyle SEAG of Washington, D.C. ("Carlyle") as
the Company's financial advisor. On March 13, 1996, the agreement with Carlyle
was terminated by mutual consent after Carlyle informed the Company that it had
to withdraw as the Company's financial advisor because of a conflict of
interest since the Carlyle Group, which owns Carlyle, advises the Saudi Arabian
government on its offset program.

After the agreement with Carlyle was terminated, on May 20, 1996, the
Company entered into a Financial and Legal Services and Advice Agreement with
Nasir Ali Kadasah, for legal advice, and Dar Al Khaleej, for research and
economic advice. The purpose of this agreement is for the two Saudi Arabian
advisors to assist the Company in obtaining financing for the Al Masane
project. To this end, the agreement contemplates that the Saudi Arabian
advisors will perform the following:

1. The formation of a Saudi limited liability company, "The Saudi
Company for Mining Industries," 50% of which would be owned by the Company and
the remaining 50% of which would be owned by Saudi Arabian investors who will
contribute 25% of the capital cost of the project.

2. Obtain an industrial license for the project from The Ministry of
Industry and Electricity. This license is a necessary prerequisite for
obtaining an interest-free loan from the SIDF to fund 50% of the capital cost
of the project.

3. Finalize the necessary procedures to obtain such loan from the
SIDF, the application for which was submitted on September 30, 1995.

4. Apply for and receive loans from commercial banks necessary to
finance the project.

5. Apply for and obtain the Ministerial Resolution from the Minister
of Petroleum and Mineral Resources approving the transfer of the mining lease
to the Saudi limited liability company.

The agreement provides that the Saudi Arabian advisors are solely
responsible for the performance of the foregoing obligations and that the
Company has no obligation therefor.

As consideration for performing these obligations, the Company has
agreed to pay Mr. Kadasah and Dar Al Khaleej $10,000 each upon the issuance of
the industrial license and Mr. Kadasah $10,000 upon approval of the loan by the
SIDF. The Company has also agreed to issue to Mr. Kadasah and Mr. Tawfiq

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Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, up to 1,025,000 and 975,000
shares of the Company's Common Stock, respectively, and to grant Mr. Kadasah
and Mr. Tawfiq Abdulaziz Al-Sowailim, as agent for Dar Al Khaleej, options to
purchase up to 1,425,000 and 875,000 shares of the Company's Common Stock,
respectively. The Company is obligated to issue such shares and grant such
options in designated amounts upon completion of each of the foregoing
obligations. The issuance of the shares would be for consideration consisting
solely of services rendered to the Company. The options are immediately
exercisable on the date of grant, have a five-year term commencing on the date
of formation of the Saudi limited liability company and an exercise price of
$1.00 per share.

The SIDF makes interest-free loans to industrial projects in Saudi
Arabia and charges a 2.5% service fee. The Company believes that it may also
be able to finance the remaining cost of the project through arrangements with
suppliers and equipment manufacturers, custom smelters and additional debt or
equity financing secured by the Company, however, there can be no assurances to
that effect.

Pursuant to the mining lease agreement, when the profitability of the
project is established, the Company is obligated to form a Saudi public stock
company with Petromin. 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. Title to the mining lease and the other obligations specified in
the mining lease will be transferred to the Saudi public stock company.
Responsibility for the repayment of the $11 million loan from the Saudi Arabian
government will remain with the Company. In December 1994, the Company
received instructions from the office of the Minister of Petroleum and Mineral
Resources stating that it is possible for the Company to form the Saudi public
stock company without Petromin but that the sale of stock to the Saudi public
could occur only after two years of profits from commercial operations of the
mine. The instructions added that Petromin will still have the right to
purchase shares in the Saudi public stock company any time it desires.

As the holder of the Al Masane mining lease, the Company is solely
responsible to the Saudi Arabian government for the rental payments and other
obligations provided for by the mining lease and repayment of the $11 million
loan jointly secured by the Company and National Mining from the Saudi Arabian
government. The mining lease provides that the Company will repay the loan in
accordance with a repayment schedule to be agreed upon with the Saudi Arabian
government. The initial term of the lease is for a period of thirty (30) years
from May 22, 1993, with the Company having the option to renew or extend the
term of the lease for additional periods not to exceed twenty (20) years.
Under the lease, the Company agreed to pay in advance a surface rental at the
rate of ten thousand Saudi Riyals (approximately $2,667 at the current exchange
rate) per square kilometer per year (approximately $117,300 annually) during
the period of the lease. The Company made the rental payments for the first
year of the lease. As of December 31, 1996, the Company has not paid for
rentals of approximately $309,000. It is contemplated that responsibility for
the payment of these arrearages and all future rental payments would be assumed
by the Saudi limited liability company when title to the Al Masane mining lease
is transferred to it. In addition, the Company must pay income tax in
accordance with the income tax laws of Saudi Arabia then in force and pay all
infrastructure costs. Under the Saudi Arabian Mining Code, income tax will not
be due during the first stage of mining operations, which is the period of five
years starting from the earlier of (a) the date of the first sale of products
or (b) the beginning of the fourth year since the issue of the mining lease.
The lease gives the Saudi Arabian government priority to purchase the Company's
whole production of gold or any part thereof from the project. The lease also
gives the Saudi Arabian government the right to purchase up to 10% of the
Company's annual production of other minerals on the same terms and conditions
then available to other similar buyers and at current prices then prevailing in
the free market. The lease contains provisions requiring that preference be
given to Saudi Arabian suppliers and contractors and that the Company employ
Saudi Arabian citizens and provide training to Saudi Arabian personnel.

Reference is made to the map on page 12 of this Report for information
concerning the location of the Al Masane project.

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Other Exploration Areas in Saudi Arabia

During the course of the exploration and development of the Al Masane
area, the Company has carried on exploration work in other areas in Saudi
Arabia and is planning to apply for an additional exploration license for these
areas. With respect to these other areas, the Company has an agreement with
Petromin which governs the rights of the parties if the exploration licenses
granted to the Company are converted into a mining lease. Under this
agreement, Petromin is granted an option to acquire, at any time, a 25%
interest in any project to mine minerals in Saudi Arabia the exploration for
which has been conducted under exploration licenses originally granted to the
Company and National Mining. National Mining has relinquished its rights in
these areas and assigned them to the Company.

U.S. Mineral Interests

The Company's mineral interests in the United States include its
equity interest in Pioche and the Coal Company. The Coal Company no longer
owns or holds any mineral interests and is presently inactive. Pioche is also
presently inactive. The future of the Coal Company's and Pioche's operations
is uncertain.

Special Products Refinery

South Hampton owns and operates a special products refinery near
Silsbee, Texas and currently employs 51 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(R) unit; (6) an aldehyde hydrogenation unit;
and (7) a specialty fractionation unit. All of these units are presently in
operation.

The design capacity of the pentane-hexane unit is approximately 2,200
BPD of feedstock. The unit averaged 1,895 barrels per stream day during 1996.
The unit consists of a series of fractionation towers and hydrotreaters capable
of producing high purity solvents which are sold primarily to expandable
polystyrene and high density polyethylene producers. South Hampton purchases
most of its feedstock for this unit on the spot market.

The catalytic reforming unit is a standard industry design using
platinum-rhenium catalyst which produces an aromatics concentrate used as
feedstock for an aromatics extraction unit, as well as hydrogen which is
utilized in other processes. The design capacity of the reformer is 4,000 BPD.
The unit is operated as a source of hydrogen for the pentane-hexane unit and
operates in tandem with the Aromax(R) unit as feedstock balances dictate. The
unit averaged 385 barrels per stream day during 1996.

The aromatics hydrotreating and fractionation unit consists of a
hydrotreating reactor and a single fractionation tower and has a design
capacity of 500 BPD. By-product chemical streams have historically been
processed by this unit into two products, high octane gasoline blendstocks and
heavy aromatic oils sold as fuel oil blending stock. This unit is leased to a
customer for its own use pursuant to a contract providing for the payment of a
minimum daily charge.

The cyclopentane unit consists of three specialized fractionation
towers designed to produce a consistently high quality product which is used in
the expandable polystyrene industry. The design capacity of the cyclopentane
unit is 400 BPD. The unit operates according to the feedstock supplied by the
pentane-hexane unit and averaged 190 barrels per stream day during 1996.

The Aromax(R) unit is the world's first commercial unit using a
proprietary process of Chevron Research Company to produce a high benzene
content product which is sold as feedstock to refiners operating benzene
extraction units. The process converts petroleum naphtha into liquid
hydrocarbons having a higher aromatic hydrocarbon content. The aromax unit
capacity is 400 BPD and uses a by-product of the pentane-

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hexane unit as feedstock. The unit operates according to the feedstock
supplied from the pentane-hexane unit and the other hydrotreaters. The unit
averaged throughput of 150 barrels per stream day during 1996. Chevron
Research has agreed to continue development of the Aromax(R) process. The unit
has continued to successfully operate as designed.

The specialty fractionation unit consists of two fractionation towers
and has a design capacity of 1,000 BPD. This unit is leased to a customer for
its own use pursuant to a contract providing for the payment of a minimum daily
charge.

South Hampton also owns approximately 70 storage tanks with a total
capacity of approximately 250,000 barrels. The refinery is situated on 100
acres of land, approximately 70 acres of which is developed. South Hampton
owns a truck and railroad loading terminal consisting of eight storage tanks, a
rail spur and truck and tank car loading facilities.

As a result of an expansion program of the production capacity of the
South Hampton refinery completed in 1990, essentially all of the standing
equipment at South Hampton is operational. The Company has surplus equipment
in storage on site with which to assemble further processing units, such as a
hydrocracking unit with a 2,000 BPD capacity.

In January 1996, Gulf State acquired an additional five miles of
natural gas pipeline and now owns and operates three 8" pipelines aggregating
approximately 50 miles in length which connect the South Hampton refinery to a
natural gas line, to South Hampton's truck and rail loading terminal and to a
marine terminal owned by an unaffiliated third party. South Hampton leases
storage facilities at the marine terminal.

Revenues and Financing

With the exception of revenues generated by the operations of the
refinery, 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 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 at $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.

In 1995, the Company (1) negotiated an extension until April 30, 1996
of the maturity of the Amended and Restated Credit Agreement with Den norske
Bank AS, (2) borrowed $721,000 in the aggregate from four individuals,
including a stockholder of the Company who is the Vice Chairman of National
Mining Company, a stockholder of the Company, the President and Chief Executive
Officer of the Company and a relative of such executive officer, pursuant to
loans payable on demand two years after their issuance bearing interest at
LIBOR plus 2%, such lenders having the option for a period of five years from
the date of the loan to convert the principal amount of the loan and all
accrued interest into shares of the Company's Common Stock at the rate of $1.00
per share, (3) received $50,000 payment on a stockholder receivable from a 1993
sale of shares of its Common Stock to a private Saudi company controlled by a
director and (4) granted the President and

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Chief Executive Officer of the Company an option to convert at any time
$400,000 of deferred compensation for services rendered to the Company into
shares of the Company's Common Stock at the rate of $1.00 per share.

In 1996, the Company (1) through South Hampton negotiated an Amended
and Restated Credit Agreement with Den norske Bank ASA, amending and restating
the then outstanding credit agreement to provide for a revolving credit
facility in an aggregate principal amount of up to $1,965,000, (2) restructured
certain indebtedness of South Hampton owed to Saudi Fal Co., Ltd., a limited
liability company owned by a stockholder of the Company ("Saudi Fal"), and the
Refining Company pursuant to promissory notes in the original principal amounts
of $1,945,773.49 and $1,694,605.08, respectively, which promissory notes are
subordinated to the Amended and Restated Credit Agreement with Den norske Bank
ASA, (3) approved the sale of up to 1 million shares of the Company's Common
Stock through private placements at a price no less than $1.00 per share, (4)
sold 450,000 shares of the Company's Common Stock at $1.00 per share to a
Saudi Arabian investor who is a stockholder of the Company and approved the
sale of an additional 450,000 shares of the Company's Common Stock at $1.00 per
share to the same investor, the purchase price for such additional shares being
payable in monthly installments of $100,000 and (5) approved the sale of 50,000
shares of the Company's Common Stock to a Saudi Arabian investor.

It may be necessary to secure funds to continue operations through the
sale of portions of the Company's properties, its investments or a portion of
the Company's interest therein. There are no assurances that these sales could
be arranged or that sufficient additional equity or debt financing can be
obtained.

On October 15, 1996, South Hampton entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with Den norske Bank ASA
(the "Bank"), amending and restating the then outstanding credit agreement to
provide for a revolving loan facility in an aggregate principal amount of up to
$1,965,000. The Bank's commitment to make funds available under the credit
facility will be reduced by (i) $75,000 on the last day of each fiscal quarter
commencing December 31, 1996 and (ii) the amount of any distribution by South
Hampton to Saudi Fal, the Company, the Refining Company or TOCCO in excess of
amounts permitted under the Credit Agreement. Advances under the Credit
Agreement may not at any time exceed the lesser of the commitment or a
borrowing base calculated based upon the cash collateral account, eligible
accounts receivable and inventory. Interest is payable monthly in arrears on
all outstanding advances under the credit facility at the Bank's prime lending
rate, as in effect from time to time, plus 1%. Principal and accrued and
unpaid interest are payable on December 31, 1998. Subject to certain
conditions and South Hampton maintaining various financial covenants and
ratios, the Credit Agreement permits South Hampton to make distributions to (i)
Saudi Fal, the Company, the Refining Company and TOCCO for legal, auditing and
accounting fees attributable to the operations of South Hampton in an annual
aggregate amount not in excess of $60,000, (ii) Saudi Fal and the Company in
respect of accrued interest on any debt owned by South Hampton to Saudi Fal or
the Company in an amount not in excess of $17,500 per month and (iii) Saudi Fal
and the Company in respect of principal on any debt owed by South Hampton to
Saudi Fal or the Company. The Credit Agreement is secured by all of the assets
of South Hampton and Gulf State and all of the issued and outstanding shares of
TOCCO, South Hampton and Gulf State. South Hampton is required to collect all
receivables through a cash collateral account at a local bank. South Hampton
was not in compliance with a certain financial covenant as of December 31,
1996, which noncompliance has been waived by the Bank.

In connection with South Hampton's entry into the Credit Agreement
with the Bank, South Hampton issued a Second Lien Promissory Note to Saudi Fal
and a Third Lien Promissory Note to the Refining Company in the original
principal amounts of $1,945,773.49 and $1,694,605.08, respectively, evidencing
certain indebtedness of South Hampton owed to such parties. The promissory
notes bear interest at the Bank's prime lending rate, as in effect from time to
time, plus 1%. Interest only is due and payable monthly on the promissory
notes, and the entire unpaid balance of principal and accrued and unpaid
interest is due on December 31, 1998. The promissory notes are secured by all
of the assets of South Hampton and Gulf State. The promissory notes and
related liens are subordinated to the Credit Agreement. The promissory note
issued to the Refining Company and related liens are subordinate to the
promissory note issued to Saudi Fal.

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The refinery had operating income of approximately $655,000, before
depreciation and amortization of approximately $413,000, on gross refined
product sales of approximately $21,367,000 for the 1996 fiscal year compared
with operating income of approximately $916,000, before depreciation and
amortization of approximately $396,000, on gross refined product sales of
approximately $17,742,000 for the 1995 fiscal year, and operating income of
approximately $3,395,000, before depreciation and amortization of $366,000, on
gross refined product sales of approximately $17,564,000 for the 1994 fiscal
year.

There can be no assurance that the Company will successfully develop
any of its undeveloped mineral properties or, if developed, that they will be
commercially productive. None of the Company's undeveloped mineral properties
currently produces revenues, and such properties will not produce revenues from
operations to the Company unless and until exploration is completed and
successful development is accomplished. Meaningful progress in some of these
efforts is currently hampered by the Company's lack of sufficient operating
funds.

In the case of the Al Masane project, the Company must secure the
financing and construction of the mining and milling facilities before revenues
from that project may be realized. The 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 intends to conduct limited
exploration of the Pioche properties when funds are available.

The Company believes that acceptable financing for the estimated cost
of the Al Masane project can be arranged, although there can be no assurance
that such financing could be obtained. The results of the 1996 update to the
1994 feasibility study show the estimated total capital costs of the project to
be $88.6 million.

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, Jr., 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 28, consist of the office personnel and field crews
conducting core drilling and other exploration activities in Saudi Arabia under
the supervision of Mr. Hatem El-Khalidi, President and Chief Executive Officer
of the Company. South Hampton currently employs 51 persons.

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[map]

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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 has applied for a license covering an area surrounding the
Al Masane mining lease area, which is referred to as the Greater Al Masane
area. The Company and National Mining had previously made a joint application
for a license for this area. If the exploration license for the Greater Al
Masane area is granted, it will be owned solely by the Company. Although a
license has not been formally granted for the Greater Al Masane area, the
Company was authorized in writing by the Saudi Arabian government to carry out
exploration work on the area. Exploration work has been carried on and paid
for exclusively by the Company.

When financing for the Al Masane project is completed, the Company
plans to make an application for an expanded exploration license for an area of
approximately 2,800 square kilometers which includes the original Greater Al
Masane area plus the Wadi Qatan and Jebel Harr areas. If granted, the
exploration license will be owned solely by the Company.

Reference is made to the map on page 12 of this Report for information
concerning the location of the foregoing areas.

The absence of current formal exploration licenses covering the areas
on which the Company has conducted, and is continuing to conduct, exploration
and development work in Saudi Arabia creates uncertainty concerning the
Company's rights and obligations concerning those areas. However, the Company
believes that it has satisfied the government's requirements concerning the
license areas and that the government should honor the Company's claims to
those areas.

In the event of the establishment of commercially exploitable
minerals, exploration licenses granted by the Saudi Arabian government may be
converted into mining leases upon application to the Saudi Arabian Ministry of
Petroleum and Mineral Resources. The Company is a party to an agreement with
Petromin, the official mining and petroleum company of the Saudi Arabian
government, which governs the rights of the parties if an exploration license
granted to the Company is converted into a mining lease. Reference is made to
the discussion concerning the agreement under Item 1. Business.

Wadi Qatan and Jebel Harr. The Wadi Qatan area is located in
southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are
approximately 30 kilometers east of the Al Masane area. These areas consist of
40 square kilometers, plus a northern extension of an additional 13 square
kilometers. Geological and geophysical work by the Company and limited core
drilling disclose the existence of massive sulfides containing nickel.
Preliminary core drilling to shallow depths disclosed the existence of massive
sulfides containing an average of 1.2% nickel. Reserves for these areas have
not been classified and more

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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. An
exploration license which includes the Wadi Qatan and Jebel Harr areas will
enable the Company to continue its drilling program to prove enough ore for a
viable mining operation. Although the indications are encouraging there is no
assurance that a viable mining operation could be established.

Greater Al Masane. An application has been made and verbally approved
for an exploration license covering approximately 1,100 square kilometers
around Al Masane, sometimes referred to as Greater Al Masane, which includes an
ancient gold mining prospect at Jubal Guyan, about six miles east of the
original Al Masane prospect and seven miles west of Wadi Qatan. The Saudi
Arabian government has given the Company written authorization to conduct
exploration work on the area, although the license has not been formally
granted. Core samples indicate an average grade of 7 grams of gold per tonne.
Additional sampling is being conducted at Jubal Guyan, and after the results of
the sampling are obtained, an evaluation will be made as to future drilling
locations. Geological, geochemical and geophysical work on the Greater Al
Masane area has disclosed mineralization similar to that discovered at Al
Masane.

Refining Operations

South Hampton owns and operates a special products refinery near
Silsbee, Texas. Gulf State owns and operates three pipelines which connect the
South Hampton refinery to a natural gas line, to South Hampton's truck and rail
loading terminal and to a marine terminal owned by an unaffiliated third party.
The properties owned by South Hampton and Gulf State are more fully described
in Item 1. Business.

Nevada Mining Properties

There are 48 patented and 84 unpatented claims totaling approximately
3,700 acres in the Pioche properties. All the claims are located in the Pioche
District, Lincoln County, in southeastern Nevada. There are prospects and
mines on these claims which formerly produced silver, gold, lead, zinc and
copper. The ore bodies are both oxidized and sulfide deposits, classified into
three groups: fissure veins in quartzite, mineralized granite porphyry and
replacement deposits in carbonate rocks (limestone and dolomites). The Company
intends to conduct limited exploration when funds are available.

There is a 300-ton-a-day processing mill on property owned by Pioche.
The mill is not currently in use and a significant expenditure would be
required in order to put the mill into continuous operation. A lease of the
Wide Awake mine property terminated on December 31, 1996.

Colorado Coal Properties

The Coal Company had a net operating loss carryforward of
approximately $5.9 million at December 31, 1996 which is limited to any future
net income. The Company has had negotiations with several companies toward the
possible use of the Coal Company's carryforward amount, but no agreements have
been 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.

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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 would 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 in
1994. The court ruled in favor of National Union on July 29, 1996. No further
action is planned by South Hampton in this matter.

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 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 entered into a
settlement agreement with one of the plaintiffs on March 13, 1997, by agreeing
to pay such plaintiff the amount of $45,000 in full and final settlement of all
claims by such plaintiff against South Hampton. South Hampton intends to
vigorously defend against the remaining lawsuit.

In mid-1993, while remediating a small spill area, the Texas Natural
Resources Conservation Commission ("TNRCC") requested South Hampton to drill a
well to check the groundwater under the spill area. The well disclosed a pool
of hydrocarbons on top of the groundwater under the truck loading rack area.
An analysis of the material indicated that the hydrocarbons were produced more
than fifteen years ago when the refinery was in the business of processing
crude oil. Consulting engineers were hired to determine the size and location
of the pool. Monitoring wells were drilled around the perimeter of the
refinery property and it was determined that there was no migration of
hydrocarbons off the refinery's property. Two large pools of hydrocarbons were
located, one under South Hampton's historic refinery site and the other under a
neighboring property which was purchased from an independent gas producer in
1981. The acquired property had previously been the site of a natural gas
processing plant. 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 was completed and approved in
November 1995. The costs through 1996 for this problem totaled approximately
$153,500. Estimated costs of $60,000 were accrued as of December 31, 1996 to
cover the recovery and remediation activity expected to take place in 1997.

In November 1996, South Hampton agreed to a proposed settlement with
the TNRCC's Air Permit Section for various alleged violations identified during
the 1991 through 1994 inspections. An agreed fine of $50,000 will be paid over
a period of ten months, $15,000 of which was paid in 1996 and the balance of
which was accrued as of December 31, 1996. South Hampton vigorously denied
many of the allegations in the settlement document, but determined that further
protest of the TRNCC's interpretation and application of the rules would result
in higher expenses.

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On May 15, 1991, the Company filed a complaint with the U.S.
Department of Justice ("DOJ") against Hunt Oil Company of Dallas, Texas
("Hunt"), alleging violations of the Foreign Corrupt Practices Act ("FCPA") by
Hunt in obtaining its Petroleum Production Sharing Agreement ("PSA") in Yemen
in 1981, subsequent to the Company presenting a bid to the Yemen government for
the same area before Hunt made its application. The Company's Washington, D.C.
attorneys opined that, because the PSA of Hunt is still ongoing, and under its
auspices, payments and receipts occur daily, the DOJ still has jurisdiction to
continue its investigation. A letter from the DOJ on December 19, 1995 stated
its interest in receiving additional documentation regarding the Company's
allegations. On February 28, 1996, the Company sent more documents to the DOJ
which it believed further supported its allegations. The Company's Washington,
D.C. attorneys opined also that the Victim Restitution Act provides for
restitution to the Company of monies lost as a result of the alleged wrongdoing
by Hunt, if Hunt is convicted under the FCPA. A letter from the DOJ dated
October 1, 1996 stated that the documents presented did not suggest any
criminal events occurred within the statute of limitations, and that, at that
time, the DOJ did not intend to pursue the investigation. On November 18,
1996, legal counsel retained by the Company, after studying the facts of the
case, sent the DOJ an analysis concluding that while the statute of limitations
of FCPA may have lapsed, the statute of limitations for conspiracy to violate
the FCPA had not lapsed, and that, as a consequence, the DOJ could criminally
prosecute Yemen Hunt for conspiracy to violate the FCPA. The Company's legal
counsel met with the Fraud Section of the DOJ on December 13, 1996 and were
told that the DOJ would take a more aggressive stance if more information of
evidentiary quality were presented to the DOJ. The Company intends to
vigorously pursue obtaining such further information in the United States and
in Yemen.

Late in 1994, articles were published in two prominent Yemen newspapers
in which Yemen Hunt Oil Company, a wholly owned subsidiary of Hunt Oil Company
of Dallas, Texas ("Yemen Hunt"), was accused of obtaining a petroleum production
sharing agreement in Yemen in 1981 through the corruption of Yemen officials in
order to exclude the application of the Company and its then partner, Dorchester
Gas Company, from consideration for the same area. A letter to the editor of one
of these newspapers, published on December 7, 1994 and signed by the executive
vice president of Yemen Hunt, after explicitly mentioning the Company and
Dorchester Gas Company, stated that "[Yemen Hunt] knows well those suspicious
companies who are mainly engaged in political activities for the purpose of
undermining the economic interest of Yemen..." On December 26, 1995, the Company
filed a complaint of criminal libel with the Yemen Attorney General for
Publications in Sana'a, Yemen against Yemen Hunt, alleging that Yemen Hunt, in
its published letter to the prominent Yemen newspaper, had criminally libeled
the Company, which, if not addressed, could seriously affect the business and
reputation of the Company and its employees in the Middle East. In October 1996,
the Company received the official decision from the Deputy Attorney General for
Publications of Yemen which stated that, after taking the statement of the
President of the Company and the statement of the chief of the legal department
of Yemen Hunt, it was evident that the letter from Yemen Hunt published in the
Yemen newspaper on December 7, 1994 was libelous to the Company. However, since
the four month statute of limitations period under Yemen criminal law had run,
Yemen Hunt could not be prosecuted for criminal libel. The Company intends to
vigorously pursue the matter under the civil libel laws of Yemen.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of 1996.

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 1996
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, 1996, of the
Company's 1996 Annual Report to Stockholders filed herein as Exhibit 13, which
portion of such Annual Report is incorporated herein by reference.

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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 1996 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 1996 Annual Report to Stockholders
filed herein as Exhibit 13, are incorporated herein by reference.

Item 9. Disagreements on Accounting and Financial Disclosure.

On May 6, 1996, Price Waterhouse LLP resigned as the independent
accountants of the Company. The resignation of Price Waterhouse LLP was
previously reported in a Current Report on Form 8-K dated May 6, 1996.

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PART III

Item 10. Directors and Executive Officers of the Registrant.

This information is set forth under the captions "Nominees for
Election as Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Proxy Statement for the
Company's Annual Meeting of Stockholders.

Item 11. Executive Compensation.

This information is set forth under the caption "Executive
Compensation" of the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

This information is set forth under the caption "Outstanding Capital
Stock" of the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders.

Item 13. Certain Relationships and Related Transactions.

This information is set forth under the caption "Other Matters" of the
Company's Proxy Statement for the Company's Annual Meeting of Stockholders.

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PART IV

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.

(a) 1. The following financial statements are
incorporated by reference from the Company's 1996
Annual Report to Stockholders filed herein as
Exhibit 13:

Reports of Independent Accountants.
Consolidated Balance Sheets dated December 31,
1996 and 1995.
Consolidated Statement of Operations for the three
years ended December 31, 1996.
Consolidated Statement of Stockholders' Equity for
the three years ended December 31, 1996.
Consolidated Statement of Cash Flows for the three
years ended December 31, 1996.
Notes to Consolidated Financial Statements.

2. The following financial statement schedules are
filed with this Report:

Schedule II - Valuation and Qualifying Accounts
for the three years ended December 31, 1996.

3. The following documents are filed or incorporated
by reference as exhibits to this Report:

3(a) Certificate of Incorporation of the
Company as amended through the Certificate
of Amendment filed with the Delaware
Secretary of State on January 29, 1993
(incorporated by reference to Exhibit 3(a)
to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).

3(b) Bylaws of the Company, as amended through
July 6, 1994 (incorporated by reference to
Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No.
0-6247)).

10(a) Contract dated July 29, 1971 between the
Company, National Mining Company and
Petromin (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No.
0-6247)).

10(b) Loan Agreement dated January 24, 1979
between the Company, National Mining
Company and the Government of Saudi Arabia
(incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

-19-
22
10(c) Mining Lease Agreement effective May 22, 1993 by
and between the Ministry of Petroleum and Mineral
Resources and the Company, together with English
translation thereof (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30,
1994 (File No. 0-6247)).

10(d) Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(e) 1987 Non-Employee Director Stock Plan
(incorporated by reference to Exhibit 10(f) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II,
Inc. (incorporated by reference to Exhibit 10(g)
to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File
No. 0-6247)).

10(g) Agreement dated March 10, 1988 between Chevron
Research Company and South Hampton Refining
Company, together with related form of proposed
Contract of Sale by and between Chevron Chemical
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(o) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(h) Addendum to the Agreement Relating to AROMAX(R)
Process - Second Commercial Demonstration dated
June 13, 1989 by and between Chevron Research
Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No.
0-6247)).

10(i) Vehicle Lease Service Agreement dated September
28, 1989 by and between Silsbee Trading and
Transportation Corp. and South Hampton Refining
Company (incorporated by reference to Exhibit
10(q) to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).

10(j) Letter Agreement dated May 3, 1991 between Sheikh
Kamal Adham and the Company (incorporated by
reference to Exhibit 10(t) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(k) Promissory Note dated February 17, 1994 from Hatem
El-Khalidi to the Company (incorporated by
reference to Exhibit 10(u) to the Company's
Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(l) Letter Agreement dated August 15, 1995 between
Hatem El-Khalidi and the Company (incorporated by
reference to Exhibit 10(v) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1995 (File No. 0-6247)).

10(m) Letter Agreement dated August 24, 1995 between
Sheikh Kamal Adham and the Company. (incorporated
by reference to Exhibit 10(w) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 0-6247)).

-20-
23
10(n) Letter Agreement dated October 23, 1995 between
Sheikh Fahad Al-Athel and the Company
(incorporated by reference to Exhibit 10(x) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).

10(o) Letter Agreement dated December 6, 1995 between
Ibrahim Khalidi and the Company (incorporated by
reference to Exhibit 10(y) to the Company's Annual
Report on Form 10-K for the year ended December
31, 1995 (File No. 0-6247)).

10(aa) Amended and Restated Credit Agreement dated
October 15, 1996 between South Hampton Refining
Company and Den norske Bank ASA, together with
related Promissory Note, Ratification of Security
Agreement, Ratification of Pledge Agreement,
Ratification of Assignment of Insurance,
Subordination Agreement, Termination Agreement,
Ratification of Subordination Agreement, Renewal,
Extension and Modification Agreement, Second Lien
Promissory Note and Third Lien Promissory Note of
even date therewith.

10(bb) Letter Agreement dated November 30, 1996 between
Sheikh Fahad Al-Althel and the Company.

10(cc) Financial and Legal Services and Advice Agreement
dated May 20, 1996 by and among Nasir Ali Kadasah,
Dar Al Khaleej and the Company, as amended by
Letter Agreement dated March 3, 1997.

13 1996 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 1996 Annual Report to Stockholders
is not to be deemed filed as part of this Report.

21 Subsidiaries (incorporated by reference to Exhibit
21 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994
(File No. 0-6247)).

27 Financial Data Schedule.

(b) The following report on Form 8-K was filed during the last
quarter of the period covered by this Report:

Current Report on Form 8-K dated December 24, 1996.

-21-
24
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 28, 1997

-22-
25
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 28, 1997.

Signature Title
- --------- -----

/s/ HATEM EL-KHALIDI President, Chief Executive
- ----------------------------------- Officer and Director
Hatem El-Khalidi (principal executive officer)

/s/ DREW WILSON, JR. Secretary and Treasurer
- ----------------------------------- (principal financial and
Drew Wilson, Jr. accounting officer)

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

/s/ OLIVER W. HAMMONDS Director
- -----------------------------------
Oliver W. Hammonds

Director
- -----------------------------------
Harb S. Al Zuhair

/s/ MOHAMMED O. AL-OMAIR Director
- -----------------------------------
Mohammed O. Al-Omair

/s/ GHAZI SULTAN Director
- -----------------------------------
Ghazi Sultan

-23-
26

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES

Board of Directors and Stockholders
Arabian Shield Development Company

In connection with our audit of the consolidated financial statements of
Arabian Shield Development Company and Subsidiaries referred to in our report
dated March 14, 1997, which is included in the annual report to stockholders in
Part II of this Form 10-K, we have also audited Schedule II at December 31,
1996 and for the year then ended. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein. Our report on the financial statements referred to above includes an
explanatory paragraph which discusses that there is substantial doubt about the
Company's ability to continue as a going concern.

/s/ GRANT THORNTON LLP
- -----------------------------
Dallas, Texas
March 14, 1997

27
SCHEDULE II

Arabian Shield Development Company and Subsidiaries

VALUATION AND QUALIFYING ACCOUNTS

Three years ended December 31, 1996

Description Charged (credited) Ending
Beginning to earnings Deductions balance
------------ ------------ ---------- ------------

ALLOWANCE FOR
DOUBTFUL ACCOUNTS - (a)

December 31, 1994 $ 231,603 $ 12,551 $ -- $ 244,154

December 31, 1995 244,154 16,092 -- 260,246

December 31, 1996 260,246 27,774 -- 283,020

ALLOWANCE FOR DEFERRED
TAX ASSET

December 31, 1994 11,239,774 (1,450,467) -- 9,789,307

December 31, 1995 9,789,307 2,014,440 -- 11,803,747

December 31, 1996 11,803,747 179,553 (403,182)(b) 11,553,118

(a) Valuation account deducted in the balance sheet from trade accounts
receivable and other assets.

(b) Expiration of carryforwards

28

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

3(a) Certificate of Incorporation of the Company as amended through
the Certificate of Amendment filed with the Delaware Secretary
of State on January 29, 1993 (incorporated by reference to
Exhibit 3(a) to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No. 0-6247)).

3(b) Bylaws of the Company, as amended through July 6, 1994
(incorporated by reference to Exhibit 3(b) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0- 6247)).

10(a) Contract dated July 29, 1971 between the Company, National
Mining Company and Petromin (incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended September 30, 1994 (File No. 0-6247)).

10(b) Loan Agreement dated January 24, 1979 between the Company,
National Mining Company and the Government of Saudi Arabia
(incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(c) Mining Lease Agreement effective May 22, 1993 by and between
the Ministry of Petroleum and Mineral Resources and the
Company, together with English translation thereof
(incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(d) Stock Option Plan of the Company, as amended (incorporated by
reference to Exhibit 10(e) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File
No. 0-6247)).

10(e) 1987 Non-Employee Director Stock Plan (incorporated by
reference to Exhibit 10(f) to the Company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1994 (File
No. 0-6247)).

29

10(f) Phantom Stock Plan of Texas Oil & Chemical Co. II, Inc.
(incorporated by reference to Exhibit 10(g) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0- 6247)).

10(g) Agreement dated March 10, 1988 between Chevron Research
Company and South Hampton Refining Company, together with
related form of proposed Contract of Sale by and between
Chevron Chemical Company and South Hampton Refining Company
(incorporated by reference to Exhibit 10(o) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994 (File No. 0-6247)).

10(h) Addendum to the Agreement Relating to AROMAX(R) Process
-Second Commercial Demonstration dated June 13, 1989 by and
between Chevron Research Company and South Hampton Refining
Company (incorporated by reference to Exhibit 10(p) to the
Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(i) Vehicle Lease Service Agreement dated September 28, 1989 by
and between Silsbee Trading and Transportation Corp. and South
Hampton Refining Company (incorporated by reference to Exhibit
10(q) to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1994 (File No. 0- 6247)).

10(j) Letter Agreement dated May 3, 1991 between Sheikh Kamal Adham
and the Company (incorporated by reference to Exhibit 10(t) to
the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(k) Promissory Note dated February 17, 1994 from Hatem El-Khalidi
to the Company (incorporated by reference to Exhibit 10(u) to
the Company's Quarterly Report on Form 10-Q/A for the quarter
ended September 30, 1994 (File No. 0-6247)).

10(l) Letter Agreement dated August 15, 1995 between Hatem
El-Khalidi and the Company (incorporated by reference to
Exhibit 10(v) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 0-6247)).

10(m) Letter Agreement dated August 24, 1995 between Sheikh Kamal
Adham and the Company. (incorporated by reference to Exhibit
10(w) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).

30

10(n) Letter Agreement dated October 23, 1995 between Sheikh Fahad
Al-Athel and the Company (incorporated by reference to Exhibit
10(x) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).

10(o) Letter Agreement dated December 6, 1995 between Ibrahim
Khalidi and the Company (incorporated by reference to Exhibit
10(y) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-6247)).

10(aa) Amended and Restated Credit Agreement dated October 15, 1996
between South Hampton Refining Company and Den norske Bank
ASA, together with related Promissory Note, Ratification
of Security Agreement, Ratification of Pledge Agreement,
Ratification of Assignment of Insurance, Subordination
Agreement, Termination Agreement, Ratification of Subordination
Agreement, Renewal, Extension and Modification Agreement,
Second Lien Promissory Note and Third Lien Promissory Note of
even date therewith.

10(bb) Letter Agreement dated November 30, 1996 between Sheikh Fahad
Al-Althel and the Company.

10(cc) Financial and Legal Services and Advice Agreement dated May
20, 1996 by and among Nasir Ali Kadasah, Dar Al Khaleej and
the Company, as amended by Letter Agreement dated March 3,
1997.

13 1996 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
1996 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.